U.S. v. G & T Enterprises, L.C.

• Decision Date: 24 September 1997
• Docket Number: No. C 96-3053-MWB.,C 96-3053-MWB.
• Citation: 978 F.Supp. 1232
• Parties: UNITED STATES of America, Plaintiff, v. G & T ENTERPRISES, L.C., d/b/a Papa's American Cafe, Defendant.
• Court: U.S. District Court — Northern District of Iowa

978 F.Supp. 1232

UNITED STATES of America, Plaintiff, v. G & T ENTERPRISES, L.C., d/b/a Papa's American Cafe, Defendant.

No. C 96-3053-MWB.

United States District Court, N.D. Iowa, Central Division.

September 24, 1997.

Nanci S. Bramson, Trial Attorney, U.S. Dept. of Justice, Tax Div., for U.S.

James P. McGuire, Mason City, IA, for G & T Enterprises.

MEMORANDUM OPINION AND ORDER REGARDING TRIAL ON THE MERITS

ZOSS, United States Magistrate Judge.

I. INTRODUCTION

On June 10, 1996, the United States filed a civil complaint against the defendant, G & T Enterprises, alleging failure to surrender to the Internal Revenue Service property in G & T's possession belonging to delinquent taxpayers. A bench trial commenced on August 13, 1997. Trial Attorney Nanci S. Bramson, U.S. Department of Justice (Tax Division), appeared on behalf of the United States. Attorney James P. McGuire appeared on behalf of the defendant, G & T Enterprises. The court took the case under advisement following the bench trial and considered the parties' oral arguments and briefs, and the testimony of the witnesses. Now, being fully advised of the premises, the court renders its decision.

II. FINDINGS OF FACT

In the mid-1980s, Thomas ("Thomas Sr.") and Kathryn Barlas ("the Barlases" or "the taxpayers") owned several parcels of real estate in Mason City, Iowa. On August 29, 1985, they consolidated several notes and mortgages at First Interstate Bank of Mason City (later the Boatmen's Bank of North Iowa) ("the Bank") into a single note in the amount of $853,163.38, secured by a mortgage on three parcels in Mason City. The note was originally for a three-year term, but was extended several times, with the last extension agreement between the Bank and the Barlases dated September 5, 1991. Under the terms of this extension agreement, the principal balance of $472,017.95 was payable in monthly installments of $12,250, with the remaining balance due and payable on September 5, 1994. The real estate mortgage provided the Bank with a security interest in the three parcels "together with ... the rents, issues, uses, profits and income therefrom...."

On May 12, 1987, the Barlases, as "Assignor," and the Bank, as "Assignee," entered into an Assignment of Leases and Rents (the "Assignment"). (See Ex. A, Assignment of Leases and Rents [hereinafter Assignment].) The Assignment provided that the assignor —

does hereby sell, transfer, and assign to said Assignee, its successors and assigns, all of the right, title, and interest of Assignor in and to that particular lease between Assignor as lessor and Italiano Ltd.¹ as lessee ... TOGETHER with all rents, issues, profits, revenues, rights and benefits arising from any said leases and tenancies and any and all extensions, modifications and renewals thereof and replacements therefor, and together with all rents, issues, profits, revenues, rights and benefits from, or for the use and occupancy of the real estate herein described....

The Assignment then stated that it —

is given as security for the payment of and the performance of all covenants and agreements of Assignor in that certain note (and any modifications of or replacements for said note) dated August 29, 1985 and made and delivered to Assignee for the sum of [$]853,163.38, and all other indebtedness of Assignor due Assignee whether now existing or hereinafter incurred. The term of this Assignment shall be until all indebtedness of Assignor to Assignee is paid in full and satisfied, at which time this Agreement is to be fully satisfied, cancelled and released.

The Assignment then recited as follows:

It is understood and agreed between Assignor and Assignee herein, that until the occurrence of any act or omission which is determined by Assignee in its sole discretion to constitute a default in the covenants, terms or conditions of the note or this Assignment, the rents, issues, profits, revenues, rights and benefits as they become due may be paid to Assignor to retain, use, and enjoy the same. After the occurrence of a default as aforesaid, Assignee may enforce this Assignment by notifying Assignor by regular mail sent to the address hereinafter prescribed for sending notices. Whereupon, Assignee may direct any or all of the tenants of the real estate herein described to pay to Assignee, its agents or attorneys, such rents, issues, profits, revenues, rights and benefits as may now be due or shall hereinafter become due, and Assignee may collect the same. The affidavit or written statement of an officer, agent or attorney of Assignee stating that there has been a default shall constitute conclusive evidence thereof, and any tenant or other person is authorized and directed to rely thereon without liability for the determination of the actual existence of any default under the note or this Assignment and Assignor shall have no recourse against any tenant for rents paid to Assignee.

After mailing notice to Assignor as aforesaid, Assignee may, with or without entry upon the real estate herein described, at its option, cancel all leases and take over and assume the management, operation and maintenance of the real estate herein described and perform all acts necessary and proper and expend such sums out of the amounts collected as may be needful in connection therewith, in the same manner and to the same extent as Assignor might do.

The Assignment was signed by the Barlases, and by a representative of Italiano Ltd., who agreed to the following:

The undersigned, Italiano Ltd., Lessee, in the lease referred to in the above Assignment, hereby accepts the terms thereof as they apply to the tenancy, acknowledges receipt of a copy of said Assignment, and agrees that all notices to be given to Lessor under said Lease shall also be given to assignee, and that Lessee will not assign or transfer its interest in said lease without the prior written consent of assignee.

Notwithstanding the detailed requirements of the Assignment, the Barlases and their banker, Larry Gray, immediately implemented the assignment of rent without any written notice or formality. Gray arranged for Italiano Ltd. to begin making rent payments directly to the Bank. The Bank accepted these rent payments and applied them to the Barlases' note. On occasion, Italiano Ltd. was delinquent in its payments, and Gray would go to Italiano to collect the rent in person. The Bank and the Barlases also agreed that the Bank would collect rent under the Assignment from the tenants of the two other parcels, Pheasant Run² and The Back 40, and the Bank did so. Rent payments by these tenants were sent to the Bank, where they were applied to the Barlases' note.

In the early 1990s, the Barlases encountered serious problems with the Internal Revenue Service ("the IRS"). These problems resulted in the filing of federal tax liens against the Barlases totaling in excess of $1 million. The liens were filed with the Cerro Gordo County recorder between March 22, 1993, and July 16, 1993.

In the summer of 1993, two of the Barlases' children, George Barlas and Thomas Barlas, Jr. ("Tom Jr."), were forced by the family's financial difficulties to leave college and return to the Mason City area. George and Tom Jr. decided to open a new restaurant in Mason City, and asked their father to lease them one of his properties. Thomas Sr. agreed to lease them one of the parcels mortgaged to the Bank. George and Tom Jr. began looking for financing. After several failures, they convinced a banker in Clear Lake to lend them $50,000 to start their restaurant. George and Tom Jr. jointly borrowed the $50,000, and persuaded a friend, Douglas Brown, to contribute an additional $25,000 to start the business. With this $75,000, and an additional $75,000 they scraped together, George, Tom Jr. and Douglas Brown formed G & T Enterprises, L.C. ("G & T"), as equal shareholders.

When George and Tom Jr. met with their father to discuss the terms of the proposed lease, Thomas Sr. told them that the lease would have to be for $3,000 per month so that the Barlases would be able to make their $12,250 monthly payments on the mortgage.³ Thomas Sr. also told his sons that the rent payments would go directly to the Bank, and that none of the money would be retained by him.

On August 15, 1993, G & T entered into a lease with the Barlases for the lease of 2960 — 4th Street, SW, Mason City, Iowa. Paragraph 5 of the lease agreement provided:

QUIET ENJOYMENT. Landlord covenants that its estate in said premises is fee owner and that the Tenant on paying the rent herein reserved and performing all the agreements by the Tenant to be performed as provided in this lease, shall and may peaceably have, hold and enjoy the demised premises for the term of this lease free from molestation, eviction or disturbance by the Landlord or any other persons or legal entity whatsoever.

Landlord shall have the right to mortgage all of its right, title and interest in said premises at any time without notice, subject to this lease.

The lease between the Barlases and G & T provided for monthly rental payments of $3,000, with the first payment due upon the execution of the lease, and subsequent payments due on the 15th day of each month thereafter. In early September 1993, G & T opened for business as "Papa's American Cafe," a family-oriented sports bar and grill. The restaurant was an immediate success, but bad news loomed on the horizon.

On October 2, 1993, G & T gave Thomas Sr. the first and only rent check under the lease, a check for $6,000 to cover the August and September rent payments. Tom Jr. wrote the check on the "Papa's American Cafe" account opened by G & T at Boatmen's Bank of North Iowa in Mason City.⁴ The check was payable to Thomas Barlas Sr. as payee. In the memo section of the check, Tom Jr. wrote "for rent." Tom Jr. gave the check to Thomas Sr., who gave it to his wife, who in turn wrote the words "apply to loan Boatmans" following the word "r...