Markham v. Fay, 95-1631

CourtUnited States Courts of Appeals. United States Court of Appeals (1st Circuit)
Writing for the CourtBefore TORRUELLA, Chief Judge, BOWNES, Senior Circuit Judge, and STAHL; BOWNES
Citation74 F.3d 1347
Parties-732, 96-1 USTC P 50,118 Paul F. MARKHAM, Trustee, Plaintiff, v. Claire M. FAY, as Trustee of Highland Avenue Nursing Home Trust, Parker Hill Nursing Home Trust, and Green Pastures Nursing Home Trust, Defendant, Appellant, and United States, Defendant, Appellee. . Heard
Docket NumberNo. 95-1631,95-1631
Decision Date04 December 1995

Page 1347

74 F.3d 1347
77 A.F.T.R.2d 96-732, 96-1 USTC P 50,118
Paul F. MARKHAM, Trustee, Plaintiff,
v.
Claire M. FAY, as Trustee of Highland Avenue Nursing Home
Trust, Parker Hill Nursing Home Trust, and Green
Pastures Nursing Home Trust, Defendant, Appellant,
and
United States, Defendant, Appellee.
No. 95-1631.
United States Court of Appeals,
First Circuit.
Heard Dec. 4, 1995.
Decided Feb. 7, 1996.

Richard H. Gens, East Dennis, MA, for appellant.

Annette M. Wietecha, Washington, DC, with whom Donald K. Stern, United States Attorney, Of Counsel, Loretta C. Argrett, Assistant Attorney General, Gary R. Allen, Washington, DC, and Jonathan S. Cohen, Attorney, Tax Division, United States Department of Justice, were on brief for appellee.

Page 1351

Before TORRUELLA, Chief Judge, BOWNES, Senior Circuit Judge, and STAHL, Circuit Judge.

BOWNES, Senior Circuit Judge.

Appellant Claire M. Fay ("Fay"), in her capacity as trustee of three trusts, appeals the magistrate judge's ruling that a federal tax lien upon her individual property extends to the entire assets of the trusts. Fay contends that the magistrate judge erred because the property of the trusts would not be considered her own under Massachusetts law. Fay also raises federal statutory and constitutional issues, contending that Appellee Internal Revenue Service ("IRS") does not have a valid lien upon the trust property because it failed to comply with statutory notice and limitations requirements as to the trusts, and also that the trust beneficiaries were indispensable parties who were not joined and were deprived of property without due process of law. We hold that there was no statutory or constitutional error and that the magistrate judge correctly held that the lien attached to the entire property of the Green Pastures and Parker Hill Nursing Home Trusts. We also hold that the magistrate judge erred in holding that the lien attached to the entire property of the Highland Avenue Nursing Home Trust. Thus, we affirm in part, reverse in part, and remand for a new judgment.

I. BACKGROUND AND PROCEDURAL HISTORY

In a published opinion, the magistrate judge made extensive findings of fact, Markham v. Fay, 884 F.Supp. 594 (D.Mass.1995), none of which are in dispute in this appeal. We recount those necessary to provide context to the issues before us.

During the 1960s and 1970s, Fay and others created a number of legal entities for the purpose, inter alia, of owning and operating nursing homes in Massachusetts. Three of those entities--the Green Pastures Nursing Home Trust, the Parker Hill Nursing Home Trust and the Highland Avenue Nursing Home Trust--are involved in this appeal. Fay created the trusts in 1974, conveying to herself as trustee of each trust the nursing home for which the trust was named. A fourth entity, Regina Nursing Home, Inc. ("the corporation"), was incorporated in 1961. Fay became its president and sole stockholder in 1967, then assigned all of her stock to her sister Theresa Dzialo (Dzialo) sometime during the 1970s. The corporation owned the Chester Manor Nursing Home. At no time were the trusts and the corporation organized or operated as one entity, and each owned different property.

In June of 1976, Fay, as trustee of the trusts and president of the corporation, sold the Parker Hill, Green Pastures, Highland Avenue and Chester Manor Nursing Homes to trusts owned by Louis Almeida ("Almeida"), in exchange for mortgages and other consideration. Almeida filed for bankruptcy in 1978. By then, the only assets owned by the trusts and the corporation were the mortgages, and Almeida had defaulted on them. On October 2, 1990, the bankruptcy court awarded the trusts and the corporation, as secured creditors, the proceeds from the bankruptcy trustee's sale of the nursing homes, amounting to $67,809.89.

On October 10, 1990, the IRS filed a derivative claim with the bankruptcy court "for the purpose of obtaining any dividend which may become payable to Claire M. Fay." The IRS's claim was premised on Fay's individual tax liability. In 1979, in view of Almeida's bankruptcy, the IRS had assessed Fay individually as a "responsible person" under 26 U.S.C. Secs. 6671 and 6672 for income and F.I.C.A. taxes Almeida failed to pay for the nursing homes' employees during the tax years 1976 through 1978. 1 On October 31, 1979, IRS filed a notice of federal tax lien for $200,213.45 against Fay individually, and refiled it on January 27, 1986. In 1984, the IRS sued Fay individually, and on December 30, 1990, judgment was entered against her in the amount of $699,142.21, including penalties and interest.

On October 31, 1990, the IRS delivered to the bankruptcy trustee (but not to the corporation)

Page 1352

a notice of levy on the corporation as alter ego and/or nominee of Fay. The IRS did not file any liens, lawsuits or notices thereof against the trusts, Fay as trustee of the trusts, or the beneficiaries of the trusts.

On February 12, 1991, Paul F. Markham ("Markham"), the bankruptcy trustee who held the proceeds of the sale of the nursing homes, filed an interpleader action in Massachusetts Superior Court seeking a determination of the rights of the various claimants to the interpled fund. Markham named as defendants Fay individually and as trustee of the trusts, the corporation, the United States, and two attorneys seeking payment for litigating the claims of the trusts and the corporation before the bankruptcy court. On March 14, 1991, the IRS removed the case to the United States District Court for the District of Massachusetts. On May 5, 1993, the court denied summary judgment to the IRS, the corporation and the trusts, granted summary judgment in favor of the attorneys (awarding them $16,970), and then referred the case to the magistrate judge for all purposes including trial and entry of judgment.

After a bench trial, the magistrate judge issued an opinion, holding that the IRS was entitled to the entire proceeds of the sale of the Parker Hill, Green Pastures and Highland Avenue Nursing Homes because Fay had reserved to herself such significant powers in the trusts that their assets would be considered her own under Massachusetts law. 884 F.Supp. at 607, 609. The magistrate judge also held that the government had failed to prove that the trusts or the corporation were Fay's alter egos, and found that the IRS had not established that Fay used the trusts for a fraudulent purpose or for her own individual benefit. Id. at 604. Judgment was entered for the IRS in the amount of $27,732.85 plus 55% of the accumulated interest, and for the corporation in the amount of $23,107.04 plus 45% of the accumulated interest. 2 Fay, in her capacity as trustee of the three trusts, then filed this appeal.

Before we proceed to the legal issues, we clarify the present status of the trusts and the proceeds of the sale of the nursing homes. Since 1978, the trusts have not held any property other than the mortgages on the nursing homes, and have not engaged in any transaction or business other than pursuing their claims against Almeida's bankrupt estate and defending the bankruptcy court's award. Although dormant, the trusts continue to exist. They were in no way terminated by the bankruptcy trustee's sale of the nursing homes. Rather, the bankruptcy court awarded the sale proceeds to the trusts in satisfaction of the mortgages. We refer to the sale proceeds as trust property, although not yet paid to the trusts, because the proceeds will become trust property unless paid to the IRS.

II. STATUTORY AND CONSTITUTIONAL ISSUES

Fay first contends that the IRS does not have a valid lien against the trust property because it did not comply with statutory notice and statute of limitations requirements as to the trusts. It gave no notice of assessment as to the trust property in 1979, did not join the trusts, Fay as trustee, or the trust beneficiaries as defendants in its 1984 suit against Fay individually, and did not proceed against them by separate suit, assessment, demand, lien or levy. Second, Fay contends that because the IRS sought in the interpleader action to collect from the trust property as such, the beneficiaries were indispensable parties who were required to be joined in their own right. Finally, Fay argues that because the beneficiaries were given no opportunity to appear and defend their rights in the interpleader action, the magistrate judge's ruling deprived them of property without due process of law.

The IRS responds first that it is only Fay's own property from which it seeks to collect and all notice and limitations requirements were met with respect to her. The IRS concedes that if it had sought to hold the

Page 1353

trustee, the trusts or the beneficiaries personally liable as Fay's transferees, it would have had to institute a collection action directly against them within six years from the assessment of the tax. See United States v. Updike, 281 U.S. 489, 493, 50 S.Ct. 367, 368, 74 L.Ed. 984 (1930); 26 U.S.C. Sec. 6901. The IRS, however, asserts that it sought to collect the taxes out of property that would be considered Fay's own under Massachusetts law. Notice and limitations requirements with respect to the trusts therefore were not implicated. As to Fay's joinder and due process arguments, the IRS responds that the bankruptcy trustee named Fay as trustee in the interpleader action, she has represented the interests of the beneficiaries throughout this litigation, and at no time have the beneficiaries as such sought to intervene. Furthermore, the IRS argues, the beneficiaries' exclusive remedy is a suit for wrongful levy brought pursuant to 26 U.S.C. Sec. 7426(a), which is now time-barred because no such suit was brought within nine months from the date of levy, as required by 26 U.S.C. Sec. 6532(c).

Although the magistrate judge did not precisely resolve these issues, 3 we will review them de novo as matters of federal law. Horton...

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