U.S. v. Porath

• Citation: 764 F.Supp.2d 883
• Decision Date: 03 February 2011
• Docket Number: Case No. 08–10166.
• Parties: UNITED STATES of America, Plaintiff and counter-defendant,v.Gordon H. PORATH and Georgina M. Porath, Defendants and counter-plaintiffs.
• Court: United States District Courts. 6th Circuit. United States District Court (Eastern District of Michigan)

764 F.Supp.2d 883

UNITED STATES of America, Plaintiff and counter-defendant,

v.Gordon H. PORATH and Georgina M. Porath, Defendants and counter-plaintiffs.

Case No. 08–10166.

United States District Court, E.D. Michigan, Southern Division.

Feb. 3, 2011.

Douglas W. Snoeyenbos, Christine Hooks, U.S. Department of Justice, Washington, DC, for Plaintiff and counter-defendant.Andrew S. Campbell, Michele L. Halloran, Naima I. Manley, Michigan State University, East Lansing, MI, for Defendants and counter-plaintiffs.

OPINION AND ORDER DENYING MOTION FOR JURY TRIAL AND DETERMINATION FOLLOWING TRIAL BY THE COURT WITHOUT A JURY

DAVID M. LAWSON, District Judge.

The United States has filed a complaint against defendants Gordon and Georgina Porath to foreclose a tax lien on the Poraths' house in Brighton, Michigan, currently titled in Mrs. Porath's name. An assessment was made against defendant Gordon Porath on October 28, 1991 for unpaid income and Social Security taxes withheld from Mr. Porath's company. The government contends that in 1991, Mr. Porath transferred his interest in the house to his spouse in order to avoid his tax obligations to the Internal Revenue Service (IRS). The government claims that despite the formalities of the title transfer, a tax lien attached to half of Mrs. Porath's interest in the house either because she acted as Mr. Porath's nominee, or because Mr. Porath's 1991 transfer to Mrs. Porath may be set aside under the Michigan Fraudulent Conveyance Act. The Poraths, on the other hand, contend that the transfer occurred in 1987 by virtue of a hand-written postnuptial agreement they both signed, and therefore, the government's contentions are without merit.

The defendants filed a motion for a jury trial. The Court verbally denied that motion, promising a written opinion to follow, and the case proceeded to trial before the Court sitting without a jury. Trial began on April 7, 2009, and the proofs concluded the same day. The Court heard the testimony of three witnesses (one by video deposition) and received 16 exhibits. The parties filed post-trial briefs and proposed findings. The following constitutes the Court's ruling on the motion for jury trial and its findings of fact under Federal Rule of Civil Procedure 52(a)(1), followed by its application of the governing law.

I. Background

The case stems from an assessment made against Gordon Porath as a result of the failure of the U.S. Computer Corporation to remit to the IRS income and Social Security taxes that had been withheld from the wages of its employees under the Federal Insurance Contributions Act (FICA). Gordon Porath was the majority shareholder of the U.S. Computer Corporation and learned about the unpaid tax withholding before the corporation ceased operating in July 1989. On February 5, 1990, Gordon Porath was interviewed by IRS revenue officer Anthony Cipparone as part of Cipparone's trust fund recovery penalty investigation. On October 28, 1991, the IRS assessed unpaid taxes and penalties of $66,932.66 against the U.S. Computer Corporation for failing to pay employee income taxes for the last three quarters of 1988 and for the first two quarters of 1989. The IRS sought to hold Dominic Morinelli, a co-owner of U.S. Computer Corporation, and Gordon Porath jointly liable as “responsible parties” under 26 U.S.C. § 6672, and on March 17, 1994, a judge of this Court entered a judgment against Gordon in the amount of $66,932.66. Morinelli v. United States, No. 92–73941 (E.D.Mich. Mar. 17, 1994).

A Notice of Federal Tax Lien on the Brighton property was recorded in Livingston County, Michigan against Gordon on August 21, 1995 and against Georgina on June 1, 2004. The government seeks to collect the judgment amount by foreclosing on the house in Brighton that once belonged to the Poraths as husband and wife, but has since been transferred into sole ownership of Georgina Porath.

In an attempt to fight the government's collection effort, Georgina Porath filed an action to quiet title in this Court on September 21, 2007. In turn, the government filed the present foreclosure action on January 11, 2008, naming both Georgina and Gordon Porath as defendants. Georgina dismissed her quiet title action voluntarily and filed it as a compulsory counterclaim in the present action.

The parties filed cross motions for summary judgment, which the Court denied because of unresolved fact issues surrounding the purported transfer of the property to Georgina in 1987. The Court scheduled the case for trial.

II. Motion for Jury Trial

The defendants sought a jury trial in their answer to the complaint and by motion filed on March 17, 2009. The Seventh Amendment to the United States Constitution states: “In Suits at common law, where the value in controversy shall exceed twenty dollars, the right of trial by jury shall be preserved....” For nearly two centuries, the Supreme Court has construed the “Suits at common law” phrase to mean “suits in which legal rights were to be ascertained and determined, in contradistinction to those where equitable rights alone were recognized, and equitable remedies were administered.” Parsons v. Bedford, 28 U.S. (3 Pet.) 433, 447, 7 L.Ed. 732 (1830). The right to a jury trial does not extend to litigants filing claims seeking equitable relief. Tull v. United States, 481 U.S. 412, 417–18, 107 S.Ct. 1831, 95 L.Ed.2d 365 (1987).

The same right to trial by jury is preserved in Rule 38(a) of the Federal Rules of Civil Procedure, which declares that “[t]he right of trial by jury as declared by the Seventh Amendment to the Constitution—or as given by a federal statute—is preserved to the parties inviolate.” Fed.R.Civ.P. 38(a). To ascertain one's eligibility for jury trial, courts analyze whether the action would be addressed in courts of law or courts of equity in 18th Century England before the merger of law and equity; whether the relief sought by the plaintiff in the case is legal or equitable in nature; and “the practical abilities and limitations of juries.” Ross v. Bernhard, 396 U.S. 531, 533, 538 n. 10, 90 S.Ct. 733, 24 L.Ed.2d 729 (1970). “[W]here equitable and legal claims are joined in the same action, there is a right to jury trial on the legal claims which must not be infringed either by trying the legal issues as incidental to the equitable ones or by a court trial of a common issue existing between the claims. The Seventh Amendment question depends on the nature of the issue to be tried rather than the character of the overall action.” Id. at 537–38, 90 S.Ct. 733; see also Tull, 481 U.S. at 417–18, 107 S.Ct. 1831 (“First, we compare the statutory action to 18th-century actions brought in the courts of England prior to the merger of the courts of law and equity. Second, we examine the remedy sought and determine whether it is legal or equitable in nature.”).

In the present case, the plaintiff seeks to foreclose a lien, and the defendants seek to quiet title in real property. It is beyond dispute that these actions have their historical origins in courts of equity. Damsky v. Zavatt, 289 F.2d 46, 53 (2d Cir.1961) (observing that “[f]oreclosure of the mortgagor's equity of redemption was an established head of equity jurisdiction well before 1791”) (citing How v. Vigures, 1 Rep. Ch. 32, 21 E.R. 499 (1923), and Emanuel College v. Evans, 1 Rep. Ch. 18, 21 E.R. 494 (1625)); Sackett v. Atyeo, 217 Mich.App. 676, 680, 552 N.W.2d 536, 538 (1996) ( “Actions to quiet title are equitable in nature....”). If there were a claim by the government for a money judgment for unpaid taxes against either of the defendants, a jury trial would be in order. Damsky, 289 F.2d at 48–53; see also United States v. Anderson, 584 F.2d 369, 373 (10th Cir.1978); United States v. McMahan, 569 F.2d 889, 892 (5th Cir.1978) (holding that the defendant, who was alleged by the United States to be responsible for collection of taxes under sections 6671(b) and 6672 of Title 26, has the right to demand jury trial even where the government in the same action seeks equitable relief from the defendant's wife and others to set aside conveyances and to foreclose its lien against property formerly owned by him and subsequently conveyed to others); cf. Farmers–Peoples Bank v. United States, 477 F.2d 752, 756 (6th Cir.1973) (calling “well-reasoned” the Second Circuit opinion in Damsky, in which the court held that a defendant in an in personam action to recover federal income taxes was entitled to trial by jury). No such remedy is sought in this case, however.

Nonetheless, the defendants contend that what the government seeks at its base is to set aside a fraudulent conveyance, and the Supreme Court in Granfinanciera, S.A. v. Nordberg, 492 U.S. 33, 109 S.Ct. 2782, 106 L.Ed.2d 26 (1989), held that the Seventh Amendment requires a jury trial in such actions. Not necessarily, however. In Granfinanciera, a trustee in bankruptcy sued a third party to recover a specific sum of money, which the trustee contended had been paid over to the defendant by the debtor within a year of the bankruptcy proceedings. The lower courts held that no jury trial was allowed because suits to set aside fraudulent conveyances were equitable in nature, the action to set aside the fraudulent transfer was a core bankruptcy proceeding to which no right to a jury trial attached, and bankruptcy proceedings historically were equitable in nature. The Supreme Court took a different view. It cited 18th-Century English cases demonstrating that suits to set aside fraudulent transfers were often bought in law courts, and concluded “that courts of equity had concurrent jurisdiction with courts of law over fraudulent conveyance actions.” Id. at 43, 109 S.Ct. 2782. Where the relief “sought [was] the recovery of a fixed sum of money without the need for an accounting or other equitable relief,” id. at 45–46, 109 S.Ct. 2782, as in the case then before the Court, the Court determined that the action...