TMG II v. US, Civ. A. No. 85-2469-LFO.

• Decision Date: 30 September 1991
• Docket Number: Civ. A. No. 85-2469-LFO.
• Citation: 778 F. Supp. 37
• Parties: TMG II, et al., Plaintiffs, v. UNITED STATES of America, Defendant.
• Court: U.S. District Court — District of Columbia

778 F. Supp. 37

TMG II, et al., Plaintiffs, v. UNITED STATES of America, Defendant.

Civ. A. No. 85-2469-LFO.

United States District Court, District of Columbia.

September 30, 1991.

COPYRIGHT MATERIAL OMITTED

Allen I. Mendelsohn, for plaintiffs.

Michael Kearns and Edward Snyder, for defendant.

MEMORANDUM

OBERDORFER, District Judge.

From 1979 to 1983, through a series of limited partnerships that included plaintiffs' TMG Associates and TMG II (the "Partnerships"), Edward Markowitz "created and marketed more than $445 million in false and fraudulent federal income tax deductions through sham, non-existent and pre-arranged transactions in United States Government securities and precious metals forward contracts."¹ Eventually, the Government uncovered the scheme and prosecuted Markowitz as well as several of his associates for filing and conspiring to file fraudulent tax returns.²

This case arises out of a civil action brought against Markowitz. In 1983 and 1984, the Partnerships sued Markowitz for failing to account for partnership property before resigning as general partner. These claims were eventually settled, and in August, 1985, a judgment for nearly $900,000 was entered against Markowitz.³ However, in January of that year, well before the Partnerships obtained their judgment, the Internal Revenue Service (IRS) filed over $5 million dollars in tax liens against Markowitz.⁴ To establish the priority of their claims over the Government's, the Partnerships instituted this action.

Currently before the Court, are crossmotions for summary judgment. For the reasons stated below, the accompanying order will grant the defendant's motion for summary judgment, deny the plaintiffs' motion for summary judgment, and dismiss plaintiffs' claims.

I.

The Partnerships were organized in 1979 and 1980 as limited partnerships under New York law with Markowitz either as the managing general partner or as the controlling stockholder of the corporation acting as the general partner.⁵ Officially, the Partnerships were to operate "as broker-dealer and market maker in commodities and metals, and futures and option contracts therein," and perhaps as well to "trade in exempt securities and currencies."⁶ In private, however, promoters promised that the Partnerships were excellent tax shelters and would produce four dollars in tax losses for every dollar invested.⁷ Attracted by these promises, approximately 130 individuals and firms invested approximately $4.8 million in TMG Associates and TMG II,⁸ and between 1980 and 1982 most of them did, in fact, take 4:1 write-offs on their investments.⁹

There were even then, signs, in addition to the promise of 4:1 write-offs, that Markowitz's activities might be questionable. In 1981, Markowitz, who had few assets before the formation of the limited Partnerships,¹⁰ embarked on a massive buying spree. First, he purchased a home at 2323 Porter Street overlooking Rock Creek Park for $385,000.¹¹ Next, he bought a Rolls Royce.¹² Then, in short order, Markowitz purchased a house at 2329 Porter Street, for his sister, at a cost of nearly a half million dollars, established "Markowitz Stables" which eventually accumulated more than a million dollars in capital, and purchased a minority interest in the Washington Capitals hockey club for a quarter million dollars.¹³

Markowitz appears to have financed this spree at least in part by diverting partnership opportunities to himself. Most of the funds used to exploit the opportunities came from two entities owned by Markowitz: the Monetary Group, N.V. ("N.V."), a Netherlands Antilles corporation, and the Monetary Group Government Securities ("GSI"), an American corporation.¹⁴ These two entities in turn acquired most of their assets from securities transactions with Hillcrest Equities, Inc., an entity that had originally traded with TMG II and perhaps TMG Associates as well.¹⁵ By July, Hillcrest was trading exclusively with N.V. and then with GSI.¹⁶ Markowitz admits that he instigated this switch entirely "for purposes of his own enrichment."¹⁷

Most importantly, from the perspective of the Partnerships' limited partners, Markowitz's transactions failed to produce legitimate tax losses. As early as 1981, Price Waterhouse, TMG Associates' original auditor, suspected that the Partnerships were not engaged in bona fide transactions.¹⁸ In fact, the only thing that Markowitz bought or sold was documentation. The Partnerships paid its so-called trading partners "for the fraudulent documentation ... provided to substantiate the fictitious losses that TMG Associates passed on to its limited partners."¹⁹ Similarly, the Partnerships, as well as N.V. and GSI, received commissions not for trading in securities but rather "for the fraudulent documentation" of "more than $350 million in false interest expenses."²⁰

By 1983, both the Government and the Partnerships were closing in on Markowitz. Early in the year, the IRS opened an investigation of Markowitz.²¹ The partners in TMG II were, however, the first to institute legal action. On November 15, 1983, apparently in response to the IRS investigation, Markowitz resigned as general partner of both TMG Associates and TMG II.²² A little less than a month later, Donald Weil, the remaining general partner in TMG II, sued Markowitz, alleging that Markowitz had breached his fiduciary duties to the Partnership by improperly appropriating the opportunity to trade with Hillcrest, by using Partnership employees for his own benefit, by converting Partnership funds to purchase, among other things, the stables and the houses for himself and for his sister, and by making improper loans to himself from the Partnership. A similar complaint, filed six months later by an ad hoc committee of TMG Associates limited partners, was consolidated with Weil v. Markowitz, and after a four month delay of the proceedings requested by the United States Attorney for the Southern District of New York and several more months of negotiation, the parties reached a compromise embodied in an Order of August 30, 1985.²³ According to the terms of the order, Markowitz and several of his wholly owned corporations agreed to the entry of a judgment against them in the amount of $897,177.96 representing a "full accounting, in equity, for specific Partnership property, including funds, that were entrusted to Mr. Markowitz in his fiduciary capacity as general partner."²⁴ TMG II and TMG Associates agreed in return to release all related claims against Markowitz and his corporations.²⁵ The agreement did not in any way affect the rights of limited partners,²⁶ many of whom would later claim to have lost both the equity they invested in the Partnerships and the tax deductions that they took between 1980 and 1982.²⁷

Although the Partnerships were able to file suit before the Government, the Government drew first blood: After filing its lien against Markowitz in January, the IRS was able, in the next six months, to seize approximately $450,000 from bank accounts owned or controlled by Markowitz.²⁸ After entry of the Order of August 30, 1985 and the filing of the instant complaint, Markowitz voluntarily surrendered to the IRS approximately $270,000, constituting the proceeds from the sale of his home at 2323 Porter Street, the Rolls Royce, the Ford Bronco, and his stock in TMG Securities, as well as $5,000 from a Swiss bank account.²⁹ Finally, in 1988, the IRS received, from an escrow account established in Weil v. Markowitz, over $500,000 from the sale of the house at 2329 Porter Street bought for Markowitz's sister.³⁰

The Partnerships filed the instant action in August of 1985 — after the IRS filed its tax liens and levied upon Markowitz's bank accounts but before the surrender of the other assets. They alleged that their claims against Markowitz for fraud and for breach of fiduciary duty had priority over the IRS's claims against Markowitz for delinquent taxes. Plaintiffs also originally sought to recover any surplus from the tax levies and to estop the United States from denying the priority of their claims.

In the six years since this action was filed, the latter two claims have been abandoned. It is now clear that the tax levies did not produce a surplus; while the IRS claims Markowitz owes over $5 million in back taxes, it has been able to recover less than a third of that amount.³¹ The estoppel claim has also been resolved. The Partnerships contended that the Government should be estopped from denying the priority of their claims because it improperly delayed entry of judgment against Markowitz in Weil v. Markowitz.³² This claim was considered and rejected when the plaintiffs in Weil v. Markowitz sought to enter the Order of August 30, 1985 nunc pro tunc, to before the filing of the Government's liens in January of 1985. See Weil v. Markowitz, 898 F.2d 198, 201-02 (D.C.Cir.1990), cert. denied, ___ U.S. ___, 111 S.Ct. 68, 112 L.Ed.2d 42 (1990); see also Revised Order of March 10, 1988 (consolidating this matter with Weil v. Markowitz for the limited purpose of resolving the motion for entry of the consent order nunc pro tunc).

As a consequence, the only remaining issue in this action is whether the Partnerships' claims against Markowitz have priority over the Government's claims. This issue has also been refined since the filing of the original complaint. The Partnerships now claim that they have superior title to fourteen specific assets seized or recovered by the IRS. Even so limited, resolution of this claim is far from simple.

II.

Before considering the substance of the matter, it is first necessary to determine whether this Court has jurisdiction over all aspects of the claim. Congress has waived its sovereign immunity in suits alleging wrongful levies by the IRS. See 26 U.S.C. § 7426(a)(1) (1988).³³ As a consequence, this Court clearly has jurisdiction over the assets seized by the IRS from Markowitz's bank account during the early part of 198...