In re Callahan

• Decision Date: 08 December 2010
• Docket Number: Civil Action No. 10–10924–WGY.
• Citation: 442 B.R. 1
• Parties: In re Marcia L. CALLAHAN, Debtor.United States of America, Defendant–Appellantv.Marcia L. Callahan, Plaintiff–Appellee.
• Court: U.S. District Court — District of Massachusetts

442 B.R. 1

106 A.F.T.R.2d 2010-7323

In re Marcia L. CALLAHAN, Debtor.United States of America, Defendant–Appellant

v.Marcia L. Callahan, Plaintiff–Appellee.

Civil Action No. 10–10924–WGY.

United States District Court, D. Massachusetts.

Dec. 8, 2010.

Julie C. Avetta, Lisa L. Bellamy, U.S. Department of Justice, Washington, DC, for Defendant–Appellant.

L. Jed Berliner, Berliner Law Firm, Springfield, MA, Vincent J. DiMento, DiMento & Sullivan, Boston, MA, for Plaintiff–Appellee.

MEMORANDUM AND ORDER

YOUNG, District Judge.I. INTRODUCTION

The government appeals the March 18, 2010 Order of the United States Bankruptcy Court (the “Clarification”), Callahan v. United States (In re Callahan II), 425 B.R. 728 (Bankr.Mass.2010), which amended the Bankruptcy Court's opinion of November 2, 2009 (the “Decision”), Callahan v. United States (In re Callahan I), 419 B.R. 109 (Bankr.Mass.2009), pursuant to an Order of Remand from this Court, United States v. Callahan (In re Callahan), No. 09–12129, 2010 WL 1170112 (D.Mass. Feb.11, 2010). In the Decision, the Bankruptcy Court ruled that certain federal tax liens assessed against James C. Callahan (“Callahan”), the non-debtor spouse of Marcia L. Callahan (the “Debtor”), and recorded against property in Falmouth, Massachusetts (“Falmouth Property”), were invalid because the government could not trace tax liens on encumbered funds to the Falmouth Property.

A. Procedural Posture

The Bankruptcy Court entered the Decision against the government and in favor of the Debtor after a one-day bench trial. The government timely filed notice of appeal in accordance with Federal Rules of Bankruptcy Procedure 8001(a) and 8002(a). This Court heard the government's appeal and remanded the matter to the Bankruptcy Court for clarification. Order, Feb. 10, 2010, No. 09–CV–12129, ECF No. 12. This Court specifically requested that the Bankruptcy Court clarify whether it intended to make the factual finding that Callahan had made all the mortgage payments. This Court noted that the government did not necessarily need to produce cancelled checks for each mortgage payment made by Callahan in order distinctly to trace encumbered funds to the Falmouth Property; testimony or other evidence would suffice. After the Bankruptcy Court issued its Clarification,¹ the government again timely appealed in accordance with Federal Rules of Bankruptcy Procedure 8001(a) and 8002(a).

B. Facts²

The Debtor is the wife of taxpayer Callahan. At the time of their marriage Callahan owned substantial assets; the Debtor in contrast entered the marriage with only a few thousand dollars. Callahan testified ³ that it was always their intention that the Debtor would acquire assets “as soon as reasonably possible, meaning houses and real estate.”

In 1989, the Debtor proposed to purchase the Falmouth Property as a second residence for her family. At the time the Debtor already owned property at 269 Chapman Street in Canton, Massachusetts (the “Chapman Street Property”), which was used as the family's primary residence. Callahan was consulted, but the Debtor made the decision on her own to purchase the Falmouth Property.

On June 20, 1989, the Debtor settled the 121 Westwood Road Realty Trust to take title to the Falmouth Property and named herself trustee. Although the trust instrument references a schedule of beneficiaries executed on the same date, no such schedule was ever prepared or executed. On the same date, the Debtor took title to the Falmouth Property as trustee of the 121 Westwood Road Realty Trust.

The $50,000 down payment for the Falmouth Property came from the sale of stock of a company doing business as Strawberries Records. Neither Callahan nor the Debtor could recall in whose name the stock was owned or who contributed to the initial investment. 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. Both Callahan and the Debtor, individually and in her capacity as trustee, signed the note as borrowers. On the same date, the Debtor executed a note and second mortgage in favor of the Crowleys, the sellers of the Falmouth Property. Only the Debtor signed that note.

The Debtor earned no salary from 1990 through 2000. During this period, approximately 1989 to 2001, Callahan made mortgage payments on both the Chapman Street Property and Falmouth Property and paid various other bills. At trial, Callahan explained that he was happy to pay the mortgages from “monies we had” for the benefit of the Debtor and their children. The Debtor later testified that despite all these payments, there was never any understanding or agreement that Callahan would own any interest in either the Chapman Street Property or the Falmouth Property.

On November 2, 1994, the Debtor and Callahan filed a joint voluntary bankruptcy petition under Chapter 11. The Schedule A filed in that case stated that they held “a one hundred percent beneficial interest in the 121 Westwood Road Realty Trust.”

On August 30, 2001, the Debtor, as trustee of the 121 Westwood Road Realty Trust, deeded the Falmouth Property to herself individually for the stated consideration of one dollar for the purpose of refinancing the mortgage that property. The Debtor used funds from the refinancing to pay off the mortgage on her Chapman Street Property, and for school tuition for her children, mortgage payments, and property maintenance costs.

On June 28, 2002, Andrew Callahan, the Debtor's son, settled the A.J. Financial Trust naming himself as the trustee. Less than two months later, by deed dated August 8, 2002, the Debtor transferred the Falmouth Property to Andrew Callahan, as trustee of the A.J. Financial Trust.

On April 1, 2004, Andrew Callahan, as trustee of the A.J. Financial Trust, reconveyed the Falmouth Property to the Debtor for the stated consideration of one dollar. She then again refinanced the mortgage on the Falmouth Property. The Debtor loaned funds received from refinancing to the Blue Hill, a new restaurant primarily run by Callahan. She explained that she “believed in the business and hoped that it would one day provide employment for all four members of her family.” A mere fifteen days later, the Debtor conveyed the Falmouth Property to the A.J. Financial Trust.

Based upon Callahan's unpaid tax obligations from 1991 to 2001, federal tax liens were recorded on October 7, 2005 against “A.J. Financial Trust, and/or, Nominee of Transferee of James C. Callahan” and “Marcia Callahan Nominee and/or, Nominee of Transferee James C. Callahan” on both the Chapman Street Property and the Falmouth Property.

The Debtor filed a voluntary bankruptcy petition under Chapter 11 on October 5, 2006. On March 21, 2007, she filed the present adversary proceeding seeking a determination that those tax liens were invalid.

II. ANALYSIS

On appeal from a judgment in an adversary proceeding, this Court reviews the Bankruptcy Court's “factual findings for plain error ... and conclusions of law de novo.” In re Indus. Commer. Elec., Inc., 319 B.R. 35, 46 (D.Mass.2005). The Supreme Court explained the plain error or clearly erroneous standard:

“[A] finding is ‘clearly erroneous' when although there is evidence to support it, the reviewing court on the entire evidence is left with the definite and firm conviction that a mistake has been committed.” .... If the [trial] court's account of the evidence is plausible in light of the record viewed in its entirety, the [appellate court] may not reverse it even though convinced that had it been sitting as the trier of fact, it would have weighed the evidence differently.

Anderson v. City of Bessemer City, 470 U.S. 564, 573–74, 105 S.Ct. 1504, 84 L.Ed.2d 518 (1985) (quoting United States v. United States Gypsum Co., 333 U.S. 364, 395, 68 S.Ct. 525, 92 L.Ed. 746 (1948)).A. Nominee Theory

A nominee is one who holds bare legal title to property for the benefit of another. Black's Law Dictionary 1076 (8th ed. 2004). The government may collect a taxpayer's unpaid tax liabilities out of property held by a nominee of the taxpayer. See G.M. Leasing Corp. v. United States, 429 U.S. 338, 350–51, 97 S.Ct. 619, 50 L.Ed.2d 530 (1977); Shades Ridge Holding Co. v. United States, 888 F.2d 725, 728–29 (11th Cir.1989).

The government alleges that the Bankruptcy Court erred in concluding that the Debtor, the 121 Westwood Road Realty Trust, and the A.J. Financial Trust did not hold the title to the Falmouth Property as Callahan's nominees. Specifically, it claims the court incorrectly applied the nominee standard as a two-step process looking first to state and then to federal law. The government argues that instead of this two-step test, federal nominee law alone should have been determinative.

The Bankruptcy Court expressed concern that the government had the cart before the horse and rejected the government's argument that United States v. Kimbell Foods, Inc., 440 U.S. 715, 99 S.Ct. 1448, 59 L.Ed.2d 711 (1979), mandates the application of federal standard to tax collection cases. See In re Callahan I, 419 B.R. at 125 & n. 140. Instead, the Bankruptcy Court insisted on the two-step approach to nominee analysis. First, as a threshold matter, the court had to determine whether, under Massachusetts law, Callahan held an existing interest or right in the Falmouth Property, and only then would the court apply the factors developed by federal law to determine whether this interest could be reached for purposes of tax liability. Id. at 126.

At the first step, the Bankruptcy Court relied on two Supreme Court cases and explained that when looking to state law, courts must “consider the substance of the rights state law provides, not merely the labels the State gives these rights or the conclusions it draws from them.” ⁴ In re Callahan I, 419 B.R. at 125 (quoting United States v. Craft, 535 U.S. 274, 279, 122 S.Ct. 1414, 152 L.Ed.2d 437 (2002) (emphasis...