U.S. v. Alfano

• Decision Date: 25 January 1999
• Docket Number: No. 96-CV-4372(JS).,96-CV-4372(JS).
• Parties: UNITED STATES of America, Plaintiff, v. Nicholas A. ALFANO, Lisa Marie Alfano, and Long Island Savings Bank, Defendants.
• Court: U.S. District Court — Eastern District of New York

34 F.Supp.2d 827

UNITED STATES of America, Plaintiff, v. Nicholas A. ALFANO, Lisa Marie Alfano, and Long Island Savings Bank, Defendants.

No. 96-CV-4372(JS).

United States District Court, E.D. New York.

January 25, 1999.

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COPYRIGHT MATERIAL OMITTED

Philip J. Berkowitz, United States Department of Justice Tax Division, Washington, DC, for plaintiff.

Robert S. Arbeit, Pinks & Arbeit, Hauppauge, NY, for defendants.

MEMORANDUM AND ORDER

SEYBERT, District Judge.

Pending before the Court are cross-motions for summary judgment in this action brought pursuant to Title 26, United States Code, Sections 7401 and 7403, by the United States of America (hereinafter the "Government" or "Plaintiff"), with the authorization and sanction of the District Counsel of the Internal Revenue Service and the Attorney General of the United States. Plaintiff seeks to foreclose federal tax liens upon certain real property that was conveyed to Nicholas A. Alfano and Lisa Alfano (the "Defendants") by their parents, Nicholas J. Alfano and Rita Alfano (the "parents").

FACTUAL BACKGROUND

Defendants are the current record owners of the residence at 11 Alden Lane, Centereach, New York, where Defendant, Lisa Alfano, presently resides, the subject property at issue (hereinafter the "property"). Plaintiff is seeking to satisfy tax liens against the Defendants' parents through foreclosure sale of the property.

1. The Tax Deficiencies

In tax years 1980 and 1981, Nicholas J. Alfano and Rita Alfano each filed federal income tax returns reporting no taxable income. (Pl.'s Statement of Material Facts (hereinafter "56.1") ¶¶ 1, 2.) Nicholas J. Alfano claimed to be exempt from federal income taxes due to the vow of poverty he took as a member of the "Life Science Church" (the "Church"). (Pl's 56.1 ¶¶ 2, 4.) He filed a federal Form 1040A with the Internal Revenue Service ("IRS") in 1980 reporting earnings of $28,639.41 in wages, but owing no federal income taxes. (Pl's 56.1 ¶ 5.) Nicholas demanded a refund of federal income taxes withheld from his wages in the amount of $1,352.24. (Pl's 56.1 ¶ 5.)

Upon audit, it was determined that each parent owed federal income taxes for tax years 1980 and 1981. (Pl's 56.1 ¶ 3.) After the IRS sent Nicholas Alfano a Notice of Deficiency for income taxes due for tax year 1980, Alfano filed a petition on or about June 7, 1982, for a redetermination of the deficiency with the United States Tax Court (the "Tax Court"). (Pl's 56.1 ¶¶ 6, 8.) On May 28, 1986, the Tax Court decided that a tax deficiency existed for Nicholas J. Alfano's 1980 federal income tax, and the following day, in a similar manner, the Tax Court decided against Rita Alfano, and ordered the payment of the Alfanos' taxes along with penalties and interest. (Pl's 56.1 ¶ 9 & Ex. K.)

The IRS made final assessments against Nicholas J. Alfano and Rita Alfano for unpaid federal income taxes for calendar year 1981 on September 2, 1986 and September 10, 1986, respectively, and for calendar year 1980 on October 14, 1986. (Pl's 56.1 ¶ 10.) The Defendants contend that on October 6 and October 14, 1986, assessments were made against Nicholas J. Alfano for tax deficiencies and statutory additions for the tax years 1981 and 1980 respectively. Further, Defendants contend that assessments were made against Rita Alfano on September 10, 1986, for the 1981 tax year. (Arbeit Affidavit in Support of Summary Judgment (hereinafter "Arbeit Aff. 1") ¶ 7.) These chronological discrepancies are not material to resolution of the instant cross-motions. Notice of Federal Tax Liens were filed with the Suffolk County Clerk's Office on or about December 18, 1987. (Arbeit Aff. 1 ¶ 8.)

2. The Conveyance

During the intervening years, and specifically on October 17, 1983, the parents transferred the property to the Defendants. (Pl.'s 56.1 ¶ 14.) The conveyance was made without the passage of fair consideration, in fact, it is undisputed that the conveyance was made for zero consideration. (Pl.'s 56.1 ¶ 15.) Moreover, the Defendants did not legally assume the property's mortgage, however, they agreed to make the payments. (Pl.'s 56.1 ¶ 15E.)

Plaintiff avers that this conveyance effectively caused the parents to become insolvent. (Pl.'s 56.1 ¶ 18.) Specifically, the parents admitted that they had no assets to offset their liabilities. (Pl.'s 56.1 ¶ 18C.) It is further asserted by the Government that the parents primarily continued to live at the property and continued to deduct the home mortgage interest and real estate taxes on their joint 1984 and 1985 federal income tax returns. (Pl.'s 56. 1 ¶¶ 15-17.) The Alfanos did testify that the payment by the parents of the mortgage and taxes was effectively in lieu of a direct rent payment for occupying the property. (Pl.'s 56.1 ¶¶ 15-17.)

3. The Bankruptcy Proceeding

On or about January 30, 1991, the parents filed a Chapter 13 bankruptcy petition in the United States Bankruptcy Court, Eastern District of New York, under Case Number 091-70163-511. (Arbeit Aff. 1 ¶ 9.) Plaintiff filed a secured claim against the parents asserting an aggregate secured claim in the sum of $53,015.33. (Arbeit Aff. 1 ¶ 10.) Thereafter, the parents moved to reclassify Plaintiff's claim from secured to unsecured. (Arbeit Aff. 1 ¶ 11.) Plaintiff agreed to reduce its secured claim to the sum of $2,000.00, and the balance was reclassified as unsecured, as approved in an Order rendered by United States Bankruptcy Judge Cyganowski, on or about May 9, 1994. (Arbeit Aff. 1 ¶¶ 11, 12.) On December 21, 1994, Judge Cyganowski entered an Order confirming the Chapter 13 plan (hereinafter "Confirmation Order") and discharging Debtors Nicholas and Rita Alfano from "all debts provided for by the plan or disallowed under 11 U.S.C. § 502," except debts irrelevant herein. (Arbeit Aff. 1 Ex. F.) Plaintiff did not appeal either Order of Judge Cyganowski, although the Government was aware of the prior transfer of the property. (Defs.' 56.1 ¶¶ 9, 10.) Because of this discharge, the Defendants submit that the parents were dropped as party defendants to the instant action. (Arbeit Aff. 1 ¶ 14.)

DISCUSSION

I. STANDARDS FOR GRANTING SUMMARY JUDGMENT

Pursuant to Federal Rule of Civil Procedure 56(c), courts may not grant a motion for summary judgment unless "the pleadings, depositions, answers to interrogatories, and admissions on file, together with affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to judgment as a matter of law." Fed.R.Civ.P. 56(c). The burden of proof is on the moving party to show that there is no genuine issue of material fact, Gallo v. Prudential Residential Services, L.P., 22 F.3d 1219, 1223 (2d Cir.1994) (citing Heyman v. Commerce & Indus. Ins. Co., 524 F.2d 1317, 1320 (2d Cir.1975)), and "all ambiguities must be resolved and all inferences drawn in favor of the party against whom summary judgment is sought." Id. (citing Eastway Constr. Corp. v. City of New York, 762 F.2d 243, 249 (2d Cir.1985)). "Factual disputes that are irrelevant or unnecessary will not be counted." Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248, 106 S.Ct. 2505, 2510, 91 L.Ed.2d 202 (1986) (citing 10A Charles A. Wright, Arthur R. Miller & Mary Kay Kane, Federal Practice and Procedure § 2725, at 93-95 (1983)).

A party opposing a motion for summary judgment "`may not rest upon the mere allegations or denials of his pleading, but ... must set forth specific facts showing that there is a genuine issue for trial.'" Id. at 248, 106 S.Ct. at 2510 (quoting First Nat'l Bank v. Cities Serv. Co., 391 U.S. 253, 288-89, 88 S.Ct. 1575, 1592, 20 L.Ed.2d 569 (1968)). Under the law of the Second Circuit, "[w]hen no rational jury could find in favor of the nonmoving party because the evidence is so slight, there is no genuine issue of material fact and a grant of summary judgment is proper." Gallo, 22 F.3d at 1224 (citing Dister v. Continental Group, Inc., 859 F.2d 1108, 1114 (2d Cir.1988)). It is within this framework that the Court addresses the present cross-motions for summary judgment motion.

Defendants move for summary judgment and oppose Plaintiff's motion for summary judgment on the sole ground that Plaintiff's action is barred by the doctrines of res judicata and collateral estoppel. Plaintiff moves for summary judgment under two separate and distinct theories, a pure fraudulent conveyance theory and a lien theory. If Plaintiff triumphs under either theory of recovery, and the property is sold, the Government recognizes that Defendant Long Island Savings Bank, a creditor with a valid security interest, is entitled to priority over the United States in distribution. (Way Aff. ¶ 2.) Plaintiff opposes Defendants' motion for summary judgment by asserting, in effect, that the parents' discharge in bankruptcy has no legal effect on its right to recover under either theory.

II. THE DEFENDANTS' SUMMARY JUDGMENT MOTION

Defendants specifically contend that by agreeing to reclassify its claim in the parents' Chapter 13 bankruptcy proceeding from secured to unsecured, Plaintiff is barred, more than two years later, from foreclosing on the property. Because the Government acknowledged its awareness of the conveyance, and asserted that the liens attached to the property in 1986, Defendants maintain that Plaintiff must concede that the property was property of the bankruptcy estate, and having agreed to a reclassification of its claim, Plaintiff waived its right to aver that the tax lien continued against the property after the parents' bankruptcy was discharged.

Defendants' blanket reliance upon the doctrine of prior adjudication is unpersuasive and misapprehended. It is true that Second Circuit case law clearly recognizes that proceedings conducted in bankruptcy courts are regularly entitled to preclusive effect on subsequent proceedings with respect to issues already litigated. In re Bono, 70 B.R. 339, 342...