In re Callahan

• Decision Date: 02 November 2009
• Docket Number: Adversary No. 07-1141.,Bankruptcy No. 06-13513-WCH.
• Parties: In re Marcia L. CALLAHAN, Debtor. Marcia L. Callahan, Plaintiff, v. United States of America, Defendant.
• Court: United States Bankruptcy Courts. First Circuit. U.S. Bankruptcy Court — District of Massachusetts

419 B.R. 109

In re Marcia L. CALLAHAN, Debtor Marcia L. Callahan, Plaintiff, v. United States of America, Defendant.

Bankruptcy No. 06-13513-WCH.

Adversary No. 07-1141.

United States Bankruptcy Court, D. Massachusetts, Eastern Division.

November 2, 2009.

COPYRIGHT MATERIAL OMITTED

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L. Jed Berliner, Berliner Law Firm, Springfield, MA, Vincent J. DiMento, Di-Mento & Sullivan, Boston, MA, for Plaintiff.

Julie C. Avetta, U.S. Dept. of Justice-Tax Division, Lisa Bellamy, Wendy J. Kisch, U.S. Department of Justice, Tax Division, Civil Trial, Washington, DC, for Defendant.

MEMORANDUM OF DECISION

WILLIAM C. HILLMAN, Bankruptcy Judge.

I. INTRODUCTION

The matter before the Court is the Complaint filed by Marcia L. Callahan (the "Debtor") against the United States of America (the "United States") seeking a declaration that certain federal tax liens for taxes assessed against James C. Callahan ("Callahan"), the non-debtor spouse of the Debtor, and recorded against property solely owned by the Debtor as the purported nominee and/or transferee of Callahan are invalid. The United States asserts that the Debtor, the 121 Westwood Road Realty Trust, and the A.J. Financial Trust held title to certain real property prior to a Court approved sale as the nominee and/or alter ego of Callahan, and as such, the United States is entitled to the sale proceeds currently held in escrow. Alternatively, the United States contends that the down payment used to purchase the property, which was purported funded by Callahan, constituted a fraudulent transfer with respect to taxes due and owing to the United States, and/or that funds used to make the mortgage payments by Callahan were encumbered by federal tax liens, enabling it to trace the funds to those held in escrow. For the reasons set forth below, I will enter judgment in favor of the Debtor.

II. BACKGROUND

In their Joint Pre-Trial Statement, the parties stipulated to only fifteen facts.¹ Nonetheless, it appears that the facts are not largely in dispute.² Instead, the inferences which may be drawn from the factual circumstances and their legal significance are the focus of this adversary proceeding.

The Debtor is the wife of taxpayer Callahan.³ The Debtor and Callahan were married on February 26, 1979 and have continuously lived together in a marital state ever since.⁴ They have two children, Andrew and Jill, born on June 26, 1980 and October 19, 1984, respectively.⁵

At the time the Debtor and Callahan were married, Callahan had a net worth of approximately $1,500,000, consisting of a fifty percent interest in the Red Boot, Inc., a restaurant company in Canton, Massachusetts, and a twenty-five percent interest in Rocky Point Amusements, Inc., a company which, among other things, operated an amusement park in Rhode Island called Rocky Point Park.⁶ In contrast, the Debtor entered the marriage with only a few thousand dollars.⁷ Prior to the marriage, Callahan asked the Debtor to sign a prenuptial agreement, to which she did not object so long as there was some provision for her; namely, a $100,000 life insurance policy.⁸ Despite the prenuptial agreement, Callahan testified that it was always their intention that the Debtor would acquire assets "as soon as reasonably possible, meaning houses and real estate."⁹

After the Debtor and Callahan were married, they lived in a rented apartment in Quincy, Massachusetts.¹⁰ On November 16, 1981, they purchased their first home on 6 Wildewood Drive in Canton, Massachusetts (the "Wildewood Drive Property") for $89,900.¹¹ The deed reflects that they took title to the property as joint tenants.¹² Callahan testified that they paid an initial down payment of $9,900 and financed the remaining $80,000 of the purchase price.¹³ The Debtor testified that they both contributed to the initial down payment.¹⁴

On December 24, 1982, Callahan deeded his interest in the Wildewood Drive Property to the Debtor for the stated consideration of $1.00.¹⁵ During the trial, Callahan testified that he transferred his interest because he wanted his wife to own the Wildewood Drive Property for the security of her and her son.¹⁶ This sentiment was later echoed by the Debtor.¹⁷ While Callahan conceded liquor service liabilities and amusement park liabilities arising from his business ventures were always in the back of his mind, he credibly stated that the Debtor's security was the primary reason for the conveyance.¹⁸

Four years later, the Debtor purchased a new home on 269 Chapman Street in Canton, Massachusetts (the "Chapman Street Property") for $350,000.¹⁹ Callahan testified that he was consulted about the purchase, but that it was the Debtor's decision.²⁰ The deed, dated August 20, 1986, reflects that the Debtor was the sole owner of the Chapman Street Property.²¹ The full amount of the purchase price was financed by two mortgages, with the second satisfied several months later from the $150,000 in sale proceeds of the Wildewood Drive Property.²² Although only the Debtor signed the mortgages on the Chapman Street Property, both the Debtor and Callahan signed the note to Rhode Island Hospital Trust National Bank as obligors for $200,000.²³ Both the Debtor and Callahan testified that Callahan signed the note simply because it was a requirement of the bank.²⁴ Since the purchase in 1986, the Debtor and Callahan have lived at the Chapman Street Property as their primary residence.²⁵

On January 22, 1988, Callahan established the 279 Chapman Realty Trust, naming himself as trustee and his children the beneficiaries for the purpose of acquiring the vacant lot adjacent to the Chapman Street Property, namely 279 Chapman Street.²⁶ After acquiring 279 Chapman Street, Callahan, as trustee, delivered a mortgage to Wollaston Credit Union to secure a loan in the amount of $157,500, the proceeds of which went to the Debtor.²⁷ Notably, the mortgage describes both 279 Chapman Street and the Chapman Street Property as the collateral.²⁸ Ultimately, 279 Chapman Street was sold for $266,000, which Callahan paid to the Debtor.²⁹ Callahan testified that once the trust property was sold, he believed the trust was "no more."³⁰ Nonetheless, Callahan maintained that the children ultimately received the benefit of the proceeds through payment of school tuition and other child related expenses.³¹

In 1989, the Debtor proposed the purchase of yet another property on 121 Westwood Road in Falmouth, Massachusetts (the "Falmouth Property") for $500,000 as a second residence for her family.³² Again, Callahan was consulted, but the Debtor made the decision to purchase the Falmouth Property.³³ On June 20, 1989, the Debtor settled the 121 Westwood Road Realty Trust to take title to the Falmouth Property and named herself as trustee.³⁴ The trust instrument was drafted by Callahan's business partner's attorney. Callahan testified that he could not recall the exact circumstances leading to the selection of this attorney, but explained that he had prior dealings with this attorney and that he and the Debtor were comfortable with him.³⁵ Moreover, he could not recall whose idea it was to place the Falmouth Property in a trust, but the Debtor testified unequivocally that it was her idea in consultation with an attorney.³⁶ Although the trust instrument references a schedule of beneficiaries executed on the same date, no such schedule was ever prepared or executed.³⁷ On the same date, the Debtor took title to the Falmouth Property as trustee of the 121 Westwood Road Realty Trust.³⁸

After an initial down payment of $50,000, the remainder of the $500,000 purchase price of the Falmouth Property was financed with two mortgages. The $50,000 down payment came from the sale of stock of a company doing business as Strawberries Records.³⁹ Although the initial investment in that company was approximately $20,000, neither Callahan nor the Debtor could recall in whose name the stock was owned or who contributed to the initial investment.⁴⁰ The Debtor, as trustee of the 121 Westwood Road Realty Trust, granted a first mortgage on the Falmouth Property in favor of Bay State Federal Savings Bank ("Bay State") in the amount of $250,000.⁴¹ Both Callahan and the Debtor, individually and in her capacity as trustee, signed the note as borrowers.⁴² Again, Callahan testified that he signed the note simply because the bank required it.⁴³ He went on to dispute the United States' contention that he had to sign the note because the Debtor's income was insufficient, stating that the substantial value of the Falmouth Property in relation to the mortgage amount rendered the bank adequately protected.⁴⁴ On the same date, the Debtor also executed a note and second mortgage in the amount of $200,000 in favor of the Crowleys, the sellers of the Falmouth Property.⁴⁵ Only the Debtor signed that note.

As a result of the Strawberries Records stock sale, Callahan was assessed substantial tax liabilities, including penalties for failure to make estimated tax payments during the quarter prior to the purchase of the Falmouth Property.⁴⁶ Despite the IRS's determination, the assessment was the result of an error in Callahan's tax return made by his accountant.⁴⁷ Ultimately, the error was discovered and years later much of the tax was abated and Callahan received a refund for substantial overpayments arising from assets which the IRS had forcibly collected. Nonetheless, Callahan testified that he considered himself solvent in June, 1989, based upon his ability to pay his bills as they became due and the fact that his assets exceeded his liabilities.⁴⁸

The Debtor testified that she worked full time up until 1980, when she gave birth to her son.⁴⁹ Throughout the 1980s the Debtor worked part-time at the Red Boot with no fixed job description.⁵⁰ The Debtor earned no salary from 1990 through 2000.⁵¹ During this period, approximately 1989 to 2001, Callahan made all mortgage payments on both the...