U.S. v. Park Towers, Inc.

• Decision Date: 08 December 1993
• Docket Number: No. 93-3021,93-3021
• Citation: 8 F.3d 306
• Parties: -423, 94-1 USTC P 50,066 UNITED STATES of America, Plaintiff-Appellant, v. PARK TOWERS, INC., et al., Defendants, Charles I. Denechaud, III and the Roman Catholic Church of Archdiocese of New Orleans, Defendants-Appellees.
• Court: U.S. Court of Appeals — Fifth Circuit

Page 306

8 F.3d 306

73 A.F.T.R.2d 94-423, 94-1 USTC P 50,066

UNITED STATES of America, Plaintiff-Appellant, v. PARK TOWERS, INC., et al., Defendants Charles I. Denechaud, III and the Roman Catholic Church of Archdiocese of New Orleans, Defendants-Appellees.

No. 93-3021.

United States Court of Appeals, Fifth Circuit.

Dec. 8, 1993.

Rehearing Denied Jan. 7, 1994.

Gilbert S. Rothenberg, U.S. Dept. of Justice, Tax Div., Gary R. Allen, Chief, Appellate Section, and Bridget M. Rowan, Tax Div., U.S. Dept. of Justice, Washington, DC, for plaintiff-appellant.

Jerome J. Reso, Jr. and Jeannie M. Randazzo, Baldwin & Haspel, New Orleans, LA, for Denechaud and Roman Catholic Church.

Appeal from the United States District Court for the Eastern District of Louisiana.

Before POLITZ, Chief Judge, REAVLEY and EMILIO M. GARZA, Circuit Judges.

REAVLEY, Circuit Judge:

The United States initiated suit to reduce its tax assessments against Park Towers, Inc. ("Park Towers") to judgment and to foreclose on federal tax liens against that corporation's interest in the assets of the Park Tower Apartments Partnership ("The Louisiana Partnership"). The Archdiocese of New Orleans claimed to be a creditor of the Louisiana Partnership, however, and thus to enjoy priority over the United States, a creditor only of the general partner Park Towers. The district court held that the United States was the primary lienholder entitled to Park Towers' distributive share of the assets of the Partnership, but it further held that the Archdiocese was a creditor of the Partnership entitled to be paid in preference to creditors of individual partners. The United States appeals and now prevails.

BACKGROUND

Incorporation of Park Towers, Inc.

In 1964 state Senator Michael O'Keefe and Ben Bridgeman approached the Archbishop of New Orleans about property owned by the Archdiocese in the City of New Orleans. O'Keefe and Bridgeman wanted to build an apartment complex on a site that they hoped would be subsidized by the U.S. Department of Housing and Urban Development ("HUD"). A tentative agreement was reached whereby the Archdiocese would sell the property to them for $1,100,000.

Park Towers was incorporated in Louisiana in September 1965 to obtain and later develop and manage the land which was located in New Orleans. Although the transfer documents recited that the real estate was sold to Park Towers for consideration totaling $1,100,000, no money changed hands and no mortgages or promissory notes were recorded or issued. Cash advances were also presumably made to the corporation.

The Archdiocese offers no explanation for these unusual commercial transactions, but we note that HUD regulations require that property which is security for a mortgage be free and clear of all liens other than the HUD mortgage. 24 C.F.R. § 207.18 (1992). A HUD approved mortgage must also contain a covenant by the mortgagor against creation of liens against the property that are superior or inferior to the HUD mortgage. 24 C.F.R. § 207.9 (1992).

Formation of the Louisiana Partnership

On November 16, 1973, Park Towers entered into an agreement for Multi-Family Housing Projects with the Federal Housing Administration of HUD to obtain federally insured financing in the amount of $9,753,000 for construction of the apartments. The In 1975, Park Towers formed the Louisiana Partnership which was debt free and unconnected with the original sale and transfer of land by the Archdiocese. Park Towers immediately contributed the property it had acquired from the Archdiocese to the Louisiana Partnership at its formation. HUD's requirements that the mortgaged property be free of other liens and obligations appeared to be satisfied.

                funds were borrowed from the Bank of New Orleans and Trust Company, evidenced by a promissory note and mortgage assigned to the Federal National Mortgage Association.   The mortgage was assigned to the Secretary of HUD on August 6, 1974.   The Park Esplanade Apartments were constructed on the land obtained from the Archdiocese
                

Park Towers was designated the general partner when the Louisiana Partnership was originally formed, holding a 91 per cent interest. This interest was later reduced to 72 per cent by subsequent amendments to the articles of partnership.

Formation of Park Esplanade, Inc.

The Louisiana Partnership, in order to stay in compliance with HUD requirements, proposed an arrangement where an entity other than the Partnership would sign a promissory note of indebtedness to the Archdiocese. Park Esplanade, Inc., was apparently created to further this task, and a note and agreement evidencing the debt to the Archdiocese was executed. Park Esplanade and the Archdiocese entered into an unrecorded agreement on July 12, 1978, which acknowledged the Archdiocese's loan, including the land transfers and monetary advances plus interest. The note was secured by Michael O'Keefe and Ben Bridgeman as accommodation endorsers and by the pledge of 160 shares of Park Towers stock.

HUD Foreclosure action and subsequent sale of the property

The Louisiana Partnership defaulted on its payments to HUD in 1982. The United States brought a foreclosure action on behalf of HUD in November 1982 against the Louisiana Partnership and its general partners. The Louisiana Partnership found a purchaser for the developed property, however, and HUD agreed to accept satisfaction of the mortgage claim through the sale. The foreclosure action was dismissed.

On March 16, 1984, the Louisiana Partnership conveyed the land and improvements to the buyer, a Boston investment group which formed Park Esplanade Limited Partnership to acquire the property. The property was purchased subject to the balance on the HUD mortgage and 25 promissory notes in the total amount of $8,500,000 payable to the order of the Louisiana Partnership over a period of years. The escrow agreement is the only agreement of all the sale-related documents that refers to the Archdiocese. The agreement explicitly refers to the Archdiocese as a creditor of Park Towers, Inc., however, and not as a creditor of the Louisiana Partnership. The Archdiocese was also a party to a private agreement between the Archdiocese and five parties known collectively as "Park Towers," ¹ which was executed two months prior to the closing of the sale and recites that the Archdiocese is a creditor of "Park Towers."

Following the sale, on June 12, 1984, a Fourth Amendment to the Articles of the Louisiana Partnership was executed on behalf of the Partnership. This Amendment was designed "to reflect a restructure in the method of distribution of cash from sale of the property of the Partnership with regard to certain partners." The Amendment recited that creditors of the Louisiana Partnership were entitled to priority over creditors of individual partners and sought to change the priority of distribution of the proceeds from the sale of the Partnership's property to allow outstanding debt of Park Towers to be paid. The amendment further stated that "[a]ll distributions received by the General Partners pursuant to this Article ... shall be used to reduce the debt owed by Park Towers, Inc., a general partner, to the New Orleans Catholic Archdiocese." Park Towers' distributive share of payments on the Federal tax liens against Park Towers

promissory notes from the Park Esplanade Limited Partnership was allocated to the Archdiocese, evidenced by the distribution schedule of payments on the notes.

Park Towers, a general partner of the Louisiana Partnership, realized a capital gain in 1984 as a consequence of the sale of the apartment complex. Park Towers also realized a distributive share of interest from the promissory notes in 1985 and 1986. The United States assessed the amount of federal corporate income tax Park Towers' owed due to the realization of this income and demanded payment. Park Towers failed to pay and federal tax liens arose which were recorded in the mortgage records of Orleans Parish on March 18, 1986, September 22, 1986, and November 24, 1987.

Ensuing litigation over priority of claims

The United States brought suit to foreclose its liens on Park Towers' interest in the Louisiana Partnership. Specifically, the United States sought satisfaction of its federal tax claim from Park Towers' distributive share of the payments on the notes from the Park Esplanade Limited Partnership to the Louisiana Partnership. The promissory notes were sold while the case was pending for $2,590,000 and the proceeds of that sale were deposited into the registry of the district court.

The Archdiocese served the United States with a motion to dismiss, or alternatively, a motion for summary judgment, maintaining that the United States could not enforce its lien against the Louisiana Partnership assets. The Archdiocese claimed to be a secured creditor entitled to priority over the United States' claim. The Archdiocese also argued that upon completion...