Biogenesis Church, Inc. v. United States
| Decision Date | 13 November 2017 |
| Docket Number | Civil Action No. 16-11628 |
| Parties | BIOGENESIS CHURCH, INC., Plaintiff, v. UNITED STATES OF AMERICA, Defendant. |
| Court | U.S. District Court — District of Massachusetts |
Plaintiff Biogenesis Church, Inc. ("Biogenesis Church") has filed this lawsuit against Defendant the United States of America (the "United States") alleging a wrongful levy and seeking declaratory and injunctive relief, as well as damages under 26 U.S.C. § 7426(a)(1) and (b)(2). D. 1. The United States has moved for summary judgment on Count II of the complaint.1 D. 22. For the reasons stated below, the Court ALLOWS the motion.
The Court grants summary judgment where there is no genuine dispute as to any material fact and the undisputed facts demonstrate that the moving party is entitled to judgment as a matter of law. Fed. R. Civ. P. 56(a). "A fact is material if it carries with it the potential to affect the outcome of the suit under the applicable law." Santiago-Ramos v. Centennial P.R. Wireless Corp., 217 F.3d 46, 52 (1st Cir. 2000) (quoting Sanchez v. Alvarado, 101 F.3d 223, 227 (1st Cir. 1996)). The movant bears the burden of demonstrating the absence of a genuine issue of material fact. Carmona v. Toledo, 215 F.3d 124, 132 (1st Cir. 2000); see Celotex Corp. v. Catrett, 477 U.S. 317, 323 (1986). If the movant meets its burden, the non-moving party may not rest on the allegations or denials in her pleadings, Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 256 (1986), but "must, with respect to each issue on which she would bear the burden of proof at trial, demonstrate that a trier of fact could reasonably resolve that issue in her favor." Borges ex rel. S.M.B.W. v. Serrano-Isern, 605 F.3d 1, 5 (1st Cir. 2010). "As a general rule, that requires the production of evidence that is 'significant[ly] probative.'" Id. (quoting Anderson, 477 U.S. at 249) (alteration in original). The Court "view[s] the record in the light most favorable to the nonmovant, drawing reasonable inferences in his favor." Noonan v. Staples, Inc., 556 F.3d 20, 25 (1st Cir. 2009).
The following facts are taken from the parties' Rule 56.1 statements and accompanying documents and are undisputed unless otherwise noted. Daniel H. George, Jr. ("George") is a self-taught chemist who has created his own health supplements. D. 29, ¶ 1.2 On April 3, 2003, George was indicted on four counts of tax evasion for tax years 1996-1999 and four counts of using a false social security number. D. 29, ¶ 3. George was found guilty on all four counts of tax evasion. D. 29, ¶ 4.
On May 14, 2003, George established the Biogenesis Foundation, Inc. ("Biogenesis Foundation"). D. 29, ¶ 8. George was the sole incorporator and, as of its 2016 annual report, was still listed as the president, treasurer, clerk, and director of the Biogenesis Foundation. D. 29, ¶¶ 8, 13. George was also the only person with signatory authority for the Biogenesis Foundation's checking account. D. 29, ¶ 15. George transferred $7.7 million3 of his own money into a Biogenesis Foundation bank account, for which George received no consideration (the "2003 transfer"). D. 29, ¶¶ 9-10. After the 2003 transfer, George did not own any assets except for a house at 1 Warren Court, Rockport, Massachusetts (the "Warren Court property"), which in 2016 had a tax value of $281,900 and social security disability payments he has received since 1976. D. 29, ¶ 11. The Biogenesis Foundation's address was the Warren Court property. D. 29, ¶ 14.
George has control over Biogenesis Foundation's funds and responsibility for distributing them. D. 29, ¶ 40. While operating the Biogenesis Foundation, George paid his own legal fees out of funds held in its bank account. D. 29, ¶ 16. Between 2003 and 2008, Biogenesis Foundation spent $1,504,564 on George's legal fees. Id. In 2008, George also used funds from the Biogenesis Foundation account to pay for improvements to the Warren Court property, structured as a loan to George with a balance of $218,205, as well as utility bills and property taxes. D. 29, ¶¶ 17-18.
After George was released from prison in 2007, and while he was on supervised release in 2010, the United States alleged that George violated the terms of his supervised release due to a failure to pay the fine that was a part of his sentence and his continuing lack of cooperation with the IRS. D. 29, ¶¶ 19-20. On November 4, 2010, George's counsel stated at a supervised release revocation hearing that the IRS was reviewing George's tax records to issue an assessment. D. 29, ¶ 21. On October 10, 2012, the IRS issued a statutory notice of deficiency (the "Notice of Deficiency") to George, informing him that the IRS had determined that he owed $2,165,892 for tax years 1995-2002, and $1,624,419 in tax penalties. D. 29, ¶ 23.
On June 20, 2012, George founded Biogenesis Church as the sole incorporator. D. 29, ¶ 25. George is Biogenesis Church's president and its business address is the Warren Court property. D. 29, ¶¶ 26-27. On October 11, 2012, George transferred $7,559,861.16 from Biogenesis Foundation's account to a new Biogenesis Church account, for which there was no consideration (the "2012 transfer"). D. 29, ¶¶ 28-29. Except for $10 remaining in its account, after the 2012 transfer, Biogenesis Foundation had no property and essentially ceased operations as Biogenesis Church took over, in George's own words, "the exact same work." D. 29, ¶¶ 30-31. George has control over Biogenesis Church's funds and responsibility for distributing them. D. 29, ¶ 40. George is the only signatory for Biogenesis Church's bank account. D. 29, ¶ 38. George used funds from the Biogenesis Church account to make payments on behalf of the Biogenesis Foundation. D. 29, ¶ 32. Biogenesis Church, similarly to Biogenesis Foundation, paid utility bills for the Warren Court property owned by George and does not pay rent for using the house. D. 29, ¶¶ 41-43.
George challenged the Notice of Deficiency in the tax court and, after a trial, the court upheld the assessment. D. 29, ¶¶ 33-34. George paid for his legal fees in the tax case out of Biogenesis Foundation and Biogenesis Church accounts from 2014-2015. D. 29, ¶ 37. On June 27, 2016, the IRS issued a notice of levy to East Boston Savings Bank, attaching funds held in Biogenesis Church's name, for George's 1995-2002 tax liability. D. 29, ¶¶ 44-45. The parties agree that the IRS received $7.8 million, and that as of September 12, 2016, George's tax liability was $8,082,607.24. D. 29, ¶¶ 44, 46.
Biogenesis Church instituted this action on August 10, 2016. D. 1. The parties proceeded with discovery. The United States has now moved for summary judgment. D. 22. The Court heard the parties on the pending motion and took it under advisement. D. 32.
There appears to be no First Circuit precedent establishing the burden of proof in a wrongful levy case. The Court therefore adopts the burden-shifting approach applied by other circuits: (1) the plaintiff must show that the IRS filed a levy against property in which the plaintiff has some interest; (2) the burden then shifts to the United States to prove a nexus between the property and the taxpayer4; and (3) the burden then shifts back to the plaintiff, who must show that the levy was wrongful, e.g., that the levied property did not belong to the taxpayer. See Oxford Capital Corp. v. United States, 211 F.3d 280, 283 (5th Cir. 2000); LiButti v. United States, 107 F.3d 110, 113 (2d Cir. 1997); Sec. Counselors, Inc. v. United States, 860 F.2d 867, 869-70 (8th Cir. 1988); PBV, Inc. v. Rossotti, 178 F.3d 1295 (6th Cir. 1999) (unpublished opinion). To establish a nexus, the United States "may assert fraudulent conveyance as a defense in a wrongful levy action." Towe Antique Ford Found. v. IRS, 791 F. Supp. 1450, 1457 (D. Mont. 1992), aff'd, 999 F.2d 1387 (9th Cir. 1993); see Hatchett v. United States, 330 F.3d 875, 886 (6th Cir. 2003) (unpublished opinion) (collecting cases). Biogenesis Church's interest in the property is conceded. D. 23 at 12. The IRS may also assert a defense to a wrongful levy claim by showing a fraudulent nominee relationship with the taxpayer. See Berkshire Bank v. Town of Ludlow, Mass., 708 F.3d 249, 251-53 (1st Cir. 2013); Dalton v. Commissioner, 682 F.3d 149, 157 (1st Cir. 2012). The United States asserts both theories. Therefore, the burden shifts to the United States to establish a nexus through a fraudulent transfer or fraudulent nominee relationship; and if that burden is met, it shifts back to Biogenesis Church to show that in spite of the nexus, the levy was wrongful.
The United States argues that the transfers by Biogenesis Foundation to Biogenesis Church, effectuated by George, were constructively fraudulent. Massachusetts law has codified the Uniform Fraudulent Transfer Act ("UFTA"), Mass. Gen. L. c. 109A, which provides two similar bases upon which a transfer can be constructively fraudulent.
Under § 5(a) of Chapter 109A, in relevant part, "[a] transfer made or obligation incurred by a debtor is [constructively] fraudulent as to a creditor, whether the creditor's claim arose before or after the transfer was made or the obligation was incurred, if the debtor made the transfer or incurred the obligation . . . (2) without receiving a reasonably equivalent value in exchange for the transfer or obligation, and the debtor . . . (ii) intended to incur, or believed or reasonably should have believed that he would incur, debts beyond his ability to pay as they became due." Mass. Gen. L. c. 109A, § 5(a). Section 5(a)(2) ...
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