Bailey v. United States

• Decision Date: 23 June 1976
• Docket Number: Civ. No. 902-73.
• Citation: 415 F. Supp. 1305
• Parties: Shirley E. BAILEY et al., Plaintiffs, v. UNITED STATES of America, Defendant, v. Robert L. VESCO and Patricia J. Vesco, Defendants on Cross-claim, v. INTERNATIONAL CONTROLS CORP., Intervenor. Shirley E. BAILEY and Ralph P. Dodd, Trustees, et al., Plaintiffs, v. INTERNATIONAL HEALTH SCIENCES, INC., et al., Defendants, v. Robert L. VESCO and Patricia J. Vesco, Defendants on Cross-claim, v. INTERNATIONAL CONTROLS CORP., Intervenor.
• Court: U.S. District Court — District of New Jersey

415 F. Supp. 1305

Shirley E. BAILEY et al., Plaintiffs, v. UNITED STATES of America, Defendant, v. Robert L. VESCO and Patricia J. Vesco, Defendants on Cross-claim, v. INTERNATIONAL CONTROLS CORP., Intervenor.

Shirley E. BAILEY and Ralph P. Dodd, Trustees, et al., Plaintiffs, v. INTERNATIONAL HEALTH SCIENCES, INC., et al., Defendants, v. Robert L. VESCO and Patricia J. Vesco, Defendants on Cross-claim, v. INTERNATIONAL CONTROLS CORP., Intervenor.

Civ. No. 902-73.

United States District Court, D. New Jersey.

June 23, 1976.

Hannoch, Weisman, Stern & Besser by James J. Shrager, Newark, N. J., for plaintiffs and cross-claim defendants.

Jonathan L. Goldstein, U. S. Atty. by Maryanne T. Desmond, Asst. U. S. Atty., Newark, N. J., Richard F. Mitchell, Dept. of

Justice, Washington, D. C., for defendant U. S.

Kasen & Kraemer by Waldron Kraemer, Newark, N. J., for intervenor.

COOLAHAN, Senior District Judge.

This case comes before the Court on motion of the plaintiffs (trustees for the children of Robert L. and Patricia Vesco) and by Patricia Vesco, one of the cross-claim defendants (Robert L. Vesco is the other cross-claim defendant) to stay the action in the United States District Court until the United States Tax Court may first redetermine the tax liability of cross-claim defendants,¹ or in the alternative, that the Government's counter- and cross-claims for determination of the amount of taxes due and for foreclosure be stricken.²

Plaintiffs originally filed suit in this court under 26 U.S.C. § 7426(a)(1)³ to have tax liens on property held in trust for the Vesco children set aside. This property consisted of certain stocks, trust and savings accounts, and land.⁴ The trustees claimed that this property belonged to the Vesco children and should not have been subject to the Government's tax liens. The United States filed a counterclaim charging that this property was fraudulently conveyed to the Vesco children with the intent to defraud Vesco's creditors. The Government filed a cross-claim against the Vescos for a determination of the tax and for foreclosure of the liens. International Controls Corp. (ICC), a judgment creditor of Robert L. Vesco, intervened in the suit in an attempt to execute on this property held in trust for the Vesco children.

Robert L. Vesco, who is a fugitive from justice (three warrants are outstanding for his arrest in New York, 73 Cr. 439, 73 Cr. 518, 73 Cr. 707; see also T 12:2-7) living in Costa Rica (T 13-T 14), engaged in a series of illegal corporate transactions which gave him control of several corporations. ICC, one of the Vesco dominated corporations, claims that Vesco looted it of several million dollars.

The S.E.C. initiated a suit against Robert L. Vesco in the United States District Court for the Southern District of New York in 1972, S.E.C. v. Vesco, D.C., 58 F.R.D. 182, charging 10b and 10b(5) violations. It was claimed that Vesco defrauded ICC and its stockholders. Through various manipulations, Vesco transferred assets of ICC to mutual funds which he controlled. Under the mandate of the court in the S.E.C. v. Vesco case, special counsel was appointed to permit ICC to recover wasted assets.

On June 7, 1973 ICC filed a complaint in the United States District Court for the Southern District of New York (73 Civ. 2518) charging Vesco and 31 other individuals and corporations with defrauding, selfdealing, wasting of corporate assets, breaching fiduciary duty to and looting ICC. International Controls Corp. v. Robert L. Vesco, et al., 73 Civ. 2518. On October 5, 1973 the Southern District entered a default judgment in favor of ICC against Vesco. Subsequently, on July 12, 1974, the court determined the amount of the judgment to be $2,188,354.98, plus interest at the rate of 6% per annum to run from March 1, 1973. Pursuant to 28 U.S.C. § 1963, that judgment was entered in this Court on August 29, 1974 (Docket No. Misc. 74-73).

ICC maintains that in 1971 Vesco, who was then a present and future debtor of ICC, gratuitously transferred securities and other property to defraud and hinder his creditors, including ICC.⁵ On or about October 22, 1971 Robert L. Vesco and his wife Patricia executed four trust instruments naming their four children as beneficiaries. At the same time Vesco transferred three parcels of land in Morris County, New Jersey, to his children. The parcels contained respectively 45, 9, and 2.93 acres of land, which has a value of $365,000. Complaint; Answer of ANBT; Answer, Counter- and Cross-claim of the United States.

Vesco on July 14, 1973, two days after the Southern District determined the amount of ICC's judgment against him, opened four trust accounts for his children in the American National Bank and Trust Company in Montclair, New Jersey.⁶ He also opened another account for the management of the Vesco children's trust funds.

On March 2, 1973 Vesco allegedly transferred 60,000 shares of stock in International Health Sciences, Inc., to his children's trusts. He also transferred that year 96,882 shares of Fairfield General Corporation, a corporation that was spun off ICC, to his wife as custodian for his children and to the trustees of his children's trust funds. A report to the Southern District indicated that Vesco had only an airplane, a boat, and a small checking account as well as the assets in the name of trust accounts for his children.

On August 10, 1973 the District Director of the Internal Revenue Service made a jeopardy assessment against Mr. and Mrs. Robert L. Vesco for their 1971 taxes of a deficiency of $875,537.40.⁷ Robert L. Vesco's individual indebtedness for 1972 totaled some $78,298.07 plus interest. IRS filed a notice of levy for $1,126,811.21 on August 15, 1974. The levy was addressed against the "Vesco Children Trust" and "Patricia Vesco, Custodian under Unif. Gift Minor Act, N.J." "as Nominees for Robert and Patricia Vesco."⁸See, Plaintiffs' Amendment to Supplemental Complaint, Fifth Count, ¶¶ 5 and 6, October 29, 1975; Claim in Intervention, April 4, 1975. The United States claims that the transfers from Vesco to his children were made at a time when the United States was both a present and future creditor of Robert L. Vesco.

Both the United States and the intervenor, ICC, have asked by way of cross-claim against Robert and Patricia Vesco and by way of counterclaim against the trustees of the Vesco children's trusts that these conveyances be set aside as fraudulent.⁹

Plaintiffs'¹⁰ application to this Court for a stay of its own proceedings is based on several grounds. First, as to the United States, plaintiffs argue that the Government does not have standing to challenge the conveyances to Vesco's children as fraudulent until Vesco's tax liability is redetermined. Movants argue that only if the United States is adjudged a creditor of Vesco can it maintain its cross-claim against Vesco and its counterclaim against plaintiffs, the trustees of Vesco's children's trusts. Further, movants argue that this Court cannot make that determination of tax liability because the Court lacks jurisdiction to do so, or, in the alternative, because to do so would violate principles of equity and comity.

Movants' argument is that there are only two alternatives open to a taxpayer to adjudicate his tax liability: (1) a suit for refund in the district court¹¹ after the taxpayer has paid his tax, 28 U.S.C. § 1346(a)(1), or (2) a petition in the United States Tax Court for a redetermination of his tax liability before he pays his tax, 26 U.S.C. § 6213(a). Vesco did not pay his tax but chose instead to file a petition with the Tax Court after the litigation in this case began and after the tax issues were raised in the Government's counter- and cross-claims.¹² Since Vesco chose that that forum, movants argue, the district court is without jurisdiction to adjudicate Vesco's tax liability, which is a prerequisite to a finding that the United States is Vesco's creditor for purposes of both declaring the conveyance fraudulent and void, and foreclosing on the Government's liens.

With respect to ICC, movants argue that ICC cannot challenge these conveyances as fraudulent because ICC is only a creditor of Robert L. Vesco and not a creditor of his wife, who conveyed much of the property at issue in this case.¹³ Movants contend that since neither the United States nor ICC has standing to challenge these conveyances as fraudulent until Vesco's tax liability is established by the Tax Court, this action should be stayed until such an adjudication can be made.

Movants' first contention, that unless the Vescos owe the Government taxes in excess of their assets,¹⁴ the Government cannot challenge the conveyances here as fraudulent because it would not be a creditor, is totally without merit. Disregarding the Government's cross-claims for the moment and their effect on the Court's jurisdiction, it is certainly clear that the United States has standing to challenge the conveyances here as fraudulent.¹⁵ Section 7426(a)(1) of the Internal Revenue Code,¹⁶ under which this action was originally commenced, specifically grants district courts jurisdiction to determine if a Government levy is wrongful, that is, if the levy is made on property which does not belong to the taxpayer against whom the tax, which gave rise to the lien, is assessed. See, Sylk v. United States, 331 F.Supp. 661, 664 (E.D.Pa. 1971).

"Section 7426(c) specifically states that for purposes of an adjudication under this section, the assessment of tax upon which the interest or lien of the United States is based shall be conclusively presumed to be valid."¹⁷

Since the validity of the underlying tax assessment is not in issue,¹⁸ the Government's position as a creditor is guaranteed. It appears that the Vesco assets remaining in this country and subject to creditors' rights are less than the amount of tax assessed against the Vescos for the year 1971.¹⁹ Certainly, if the Vescos by transferring...