Hyde Properties v. McCoy

• Decision Date: 05 November 1974
• Docket Number: No. 73-2095,73-2095
• Citation: 507 F.2d 301
• Parties: 75-1 USTC P 9470 HYDE PROPERTIES, Plaintiff, v. Clyde McCOY, Defendant-Appellant, Will Luck, Trustee, Defendant, United States of America, Defendant-Appellee, and Commissioner of Revenue for Tennessee, George M. Tidwell, Intervenor.
• Court: U.S. Court of Appeals — Sixth Circuit

Page 301

507 F.2d 301

75-1 USTC P 9470

HYDE PROPERTIES, Plaintiff, v. Clyde McCOY, Defendant-Appellant, Will Luck, Trustee Defendant, United States of America Defendant-Appellee, and Commissioner of Revenue for Tennessee, George M. Tidwell, Intervenor.

No. 73-2095.

United States Court of Appeals, Sixth Circuit.

Nov. 5, 1974, Order Oct. 24, 1974, Opinion Nov. 5, 1974.

Ronald Lee Gilman, Farris, Hancock, Gilman, Branan & Lanier, Memphis, Tenn., Scott P. Crampton, Asst. Atty. Gen., Meyer Rothwacks, Myron C. Baum, Ernest Brown, crombie J.D. Garrett, David English Carmack, Tax Div., Dept. of Justice, Washington, D.C., for defendant-appellant.

W. Michael Richards, Donald A. Malmo. Heiskell, Donelson, Adams, Williams, & Wall, Memphis, Tenn., Thomas F. Turley, Jr., U.S. Atty., David M. Pack, Atty. Gen. of Tennessee, William B. Hubbard, Asst. Atty. Gen. of Tennessee, Nashville, Tenn., Joseph R. Buchignani, Asst. Atty. Gen., Memphis, Tenn., for defendant-appellee.

Before WEICK, MILLER and LIVELY, Circuit Judges.

WILLIAM E. MILLER, Circuit Judge.

International House of Pancakes of Tennessee, Inc. (IHPT) was a corporation formed by and owned in equal shares by Clyde McCoy and his two brothers-in-law, Allin Means and Frank Means. The corporation was organized in 1963 for the purpose of franchising pancake houses throughout Tennessee. All three men were officers of the corporation, but the management of the business was conducted by the Means brothers. McCoy contributed most of the original capital investment, but because he traveled a great deal as a musician, his only other contact with the corporation was to attend the directors' meetings.

In addition to its franchising activities, IHPT constructed the Oak Hall Building, an office and commercial structure located in East Memphis. At the same time, the corporation was having difficulty in meeting its financial obligations to various creditors. Specifically, it was delinquent in paying taxes owed both to the state and to the federal government. As these tax delinquencies increased, IHPT decided to sell the Oak Hall Building in an effort to increase the corporation's liquidity. The company began to look for a purchaser in 1968 and finally negotiated a sale to Hyde Properties on June 16, 1969. As part payment, Hyde Properties executed two promissory notes, each for a principal sum of $25,000. Both notes were to mature two years later on June 16, 1971. ¹ Two days after the sale, on June 18 1969, IHPT transferred these same two notes to McCoy as a redemption of all of his interest in the business. Subsequently, in October and November of 1969 and in October of 1970, the Internal Revenue Service (IRS) filed notices of tax liens against IHPT. ² Finally, on June 8, 1971, only a few days before the notes were due, the IRS served a notice of levy upon Hyde Properties. Because of the conflicting claims of the Government and McCoy, Hyde Properties brought this suit in the nature of interpleader, depositing with the court the funds representing its entire obligation on the notes. The United States maintained that the redemption of McCoy's stock with the notes was a fraudulent conveyance as to it as a tax lien creditor. McCoy contended that the transfer was a legal redemption of the stock by a solvent corporation.

On the ground that this was an equitable proceeding, the Government moved to strike the jury demand made by McCoy. This motion was overruled by the district court, and the case was submitted to the jury on interrogatories. ³ In essence, the jury determined that IHPT was solvent at the time of the transfer and that the conveyance was not a fraudulent one. Upon motion, the district court granted a judgment notwithstanding the verdict (j.n.o.v.) and a conditional new trial in favor of the Government. On the basis of its own independent consideration of the evidence, it directed that the fund, less various expenses and a setoff, be awarded to the United States as partial satisfaction of its tax liens. From this ruling McCoy appealed.

The threshold issue in this case is whether McCoy was entitled to jury trial under the Seventh Amendment. This question must be first answered because it bears directly upon the district court's rulings subsequent to the verdict.

In Farmers-Peoples Bank v. United States, 477 F.2d 752 (6th Cir. 1973), this Court dealt with the right to jury trial in civil lawsuits in federal court. There we noted that this right adhered not only to traditional common law proceedings but also to other cases requiring the ascertainment and determination of legal rights. Id. at 756. Suits involving solely equitable rights and remedies are outside the ambit of the Amendment. Yet, the precise demarcation between legal and equitable claims is frequently difficult to discern. Id. at 756. Because of the nature of the present case, we must analyze any claim to a right to jury as it applies both to interpleader suits and to fraudulent conveyance actions.

Although interpleader traces its origins to the common law courts, it soon became the exclusive province of the English chancellors, and today it is regarded as a traditional remedy of equity. 7 C. Wright & A. Miller, Federal Practice and Procedure, 1701, at 351- 52 (1972). In a case decided before the merger in the federal system of law and equity, the Supreme Court indicated that the Seventh Amendment did not provide for a right to jury in interpleader actions. Liberty Oil Co. v. Condon Nat'I. Bank, 260 U.S. 235, 244, 43 S.Ct. 118, 67 L.Ed. 232 (1922). This view prevailed even after merger, but today its support has eroded because 'numerous courts and commentators have now come to the conclusion that the right to a jury should not turn on how the parties happen to be brought into court.' Ross v. Bernhard, 396 U.S. 531, 542 n. 15, 90 S.Ct. 733, 740, 24 L.Ed.2d 729 (1970). For the purpose of evaluating this constitutional right, it is important to distinguish between a device used to prosecute a case and the underlying issue to be resolved by the litigation. The historical characterization of the former is no longer determinative of the jury claim. 'The Seventh Amendment question depends on the nature of the issue to be tried rather than the character of the overall action.' Ross, 396 U.S. at 538, 90 S.Ct. at 738. Interpleader is analogous to the stockholder derivative action considered in the Ross case. Even though the derivative action was an equitable device, the right to a jury turned on the character of the corporation's cause of action. The same rationale we believe applies to interpleader-- an equitable remedy to resolve conflicting claims to a single fund. While the remedy may be considered as traditionally an equitable device, the Seventh Amendment's applicability should depend upon the classification of the controlling issue between the adverse parties.

In this case, the underlying controversy was whether or not there had been a fraudulent conveyance of two promissory notes. To distinguish between legal and equitable claims, this Court has looked to the three factors set forth in the Ross decision-- 'first, the pre-merger custom with reference to such questions; second, the remedy sought; and, third, the practical abilities and limitations of juries.' Farmers-Peoples Bank, 477 F.2d at 756.

Questions involving fraud cannot be classified from custom as solely legal or solely equitable and, as a result, the nature of the remedy sought becomes considerably more important in resolving the right to jury trial. 5 J. Moore, Federal Practice P38.20, at 175 (2d ed. 1974). If a fraudulent conveyance action is brought to set aside a transfer, such a remedy is cognizable only in equity. Damsky v. Zavatt, 289 F.2d 46, 53 (2d Cir. 1961); see Senchal v. Carroll, 394 F.2d 797 (10th Cir.), cert. denied,393 U.S. 979, 89 S.Ct. 448, 21 L.Ed.2d 440 (1968). However, where the legal relief is adequate, it is an action at law and the right to jury adheres. See 9 Wright & Miller, 2311, at 52-53 (1972).

The second element takes into account the various types of relief available. A creditor under Tennessee law has two possible remedies for a fraudulent conveyance-he can have the transfer set aside or annulled, or he can ignore the conveyance and levy an execution upon the property. ⁴ The first alternative is exclusively within the power of equity. Damsky, 289 F.2d at 53; Baker v. Penecost, 171 Tenn. 529, 534, 106 S.W.2d 220, 222 (1937). The second option is a legal remedy based on the theory that a fraudulent conveyance, though valid between the parties, is void as to creditors. Covington v. Murray, 220 Tenn. 265, 271, 416 S.W.2d 761, 764 (1967). Because such a transfer is void, a court of law may grant a creditor either a levy of attachment or execution. Baker, 171 Tenn. at 534, 103 S.W.2d at 222 (1937). Although a creditor has a choice of proceeding either at law or in equity, we are of the view that for the purposes of determining a right to jury trial the creditor must proceed at law unless such remedy is inadequate. Without this requirement, it is clear that a creditor could decide to pursue his relief in equity and, thereby, deny to his adversary the right to a jury under the Seventh Amendment. To prevent a party from thus controlling the constitutional rights of his opponent, the legal remedy must be inadequate before the equitable means of redress can be employed. See Beacon Theatres, Inc. v. Westover, 359 U.S. 500, 79 S.Ct. 948, 3 L.Ed.2d 988 (1959); Dairy Queen, Inc. v. Wood, 369 U.S. 469, 82 S.Ct. 894, 8 L.Ed.2d 44 (1962).

This case is a hybrid one because the subject matter of the suit is a fund on deposit with the district court while the notes are in the hands of the transferee. The legal remedies of attachment or execution levied against promissory notes would generally be inadequate because of the ease with which these items can be concealed or otherwise placed beyond the reach of the levy. ⁵ In...