United States v. Morgan

• Citation: 554 F. Supp. 582
• Decision Date: 01 November 1982
• Docket Number: Civ. A. No. 80-A-828.
• Parties: UNITED STATES of America, Plaintiff, v. Jerome E. MORGAN and Sue Morgan; Ross and Georgina Brown; State of Colorado, Department of Revenue; Sears Roebuck and Company; and Gudrun E. Gaskill, Defendants.
• Court: U.S. District Court — District of Colorado

554 F. Supp. 582

UNITED STATES of America, Plaintiff, v. Jerome E. MORGAN and Sue Morgan; Ross and Georgina Brown; State of Colorado, Department of Revenue; Sears Roebuck and Company; and Gudrun E. Gaskill, Defendants.

Civ. A. No. 80-A-828.

United States District Court, D. Colorado.

November 1, 1982.

COPYRIGHT MATERIAL OMITTED

Robert S. Horwitz, Trial Atty., Tax Division, Dept. of Justice, Washington, D.C., for plaintiff.

Robert Mendel, Denver, Colo., for Jerome E. Morgan and Sue Morgan.

Kenneth E. Peck of Holland & Hart, Denver, Colo., for Ross and Georgina Brown.

Billy Shuman, Asst. Atty. Gen., Denver, Colo., for State of Colo., Dept. of Revenue.

Richard Rose, Denver, Colo., for Sears Roebuck and Co.

John F. Shafroth, Denver, Colo., for Gudrun E. Gaskill.

MEMORANDUM OPINION AND ORDER

ARRAJ, District Judge.

This action was brought by the United States to reduce to judgment tax assessments against Jerome Morgan, to set aside as fraudulent a conveyance of real property by Jerome Morgan to Sue Morgan, and to foreclose federal tax liens upon the property. I have granted the government's motion for summary judgment against Jerome Morgan on the question of his liability for income taxes assessed for calendar years 1974, 1975, and 1976. A trial to the court was held October 4, 1982 on the issue of whether Jerome's conveyance to his wife of his interest in the family home should be set aside under Colorado's fraudulent conveyance statute. The following shall constitute my findings of fact and conclusions of law pursuant to Fed.R.Civ.P. 52(a). Questions concerning the priorities of liens on the property are reserved for future decision.

The Challenged Conveyance

Jerome and Sue Morgan purchased a house and acreage at 528 Pine Song Trail in Golden, Colorado, in 1973, taking the property in joint tenancy. The following year they bought additional lots adjoining the original acreage, taking these too in joint tenancy. They made the property their home and reared two children there. From the time of their marriage in 1959 until October of 1976, Jerome's employment income was the primary means of support for the family. He became unemployed in October of 1976 and has not worked since.

Jerome incurred substantial income tax liabilities for calendar years 1974, 1975, and 1976 which remain unpaid. He did not file his 1974 and 1975 returns until June of 1977. He signed these on June 14, 1977, the date of the challenged conveyance. He timely filed his 1976 return, but failed to remit payment for the liability reported. Jerome and Sue had filed joint tax returns for years prior to 1974; however, Jerome filed the 1974, 1975, and 1976 returns separately. The Morgans testified at trial that she did not sign the later returns because she did not want to be held responsible for the reported tax liabilities.

In May of 1977, the Internal Revenue Service made a formal assessment and demand for payment of the 1976 taxes. In August of 1977, the I.R.S. made similar assessments and demands for the 1974 and 1975 taxes. By force of 26 U.S.C. § 6321, these assessments created liens against all of Jerome's property. The tax liens of the United States are superior to the interests of all other claimants, except those expressly given priority. 26 U.S.C. § 6323.

On June 14, 1977, roughly one month after the assessment for 1976 taxes and one month before the assessments for 1974 and 1975 taxes, Jerome signed a quitclaim deed conveying his one-half interest in the property to Sue. They admit that she paid him nothing in consideration of the transfer, and that he was insolvent immediately after the transfer.

Jerome met with a revenue officer to discuss his tax liability on December 2, 1977. At the agent's request, he completed a financial statement on which he listed the house as one of his assets. When the agent learned of the conveyance to Sue, he asked why it had been made. Jerome responded that the purpose of the transfer was to prevent attachment by creditors. At some point in the meeting, the possibility that the I.R.S. would foreclose was discussed. The agent requested that Jerome have the property placed back into joint tenancy and provide the I.R.S. with documentary proof of the reconveyance. Jerome agreed in writing to do this. The promise was never kept.

Despite the conveyance of Jerome's interest to Sue, they both continued to represent that Jerome was a part owner. Jerome listed the house as an asset on the personal financial statement he prepared at the revenue agent's request. On or before January 17, 1978, Jerome responded to interrogatories posed by a judgment creditor in a state court action by twice stating that he owned the house with his wife. On two occasions after the conveyance, Jerome and Sue redeemed the property from foreclosure sales, claiming to be its owners.

At the time of Jerome's June 14, 1977 conveyance, he faced massive debts. Collection activities by his creditors had become intense. Foster Lumber Company had caused the house to be sold at foreclosure, and the Morgans narrowly averted the issuance of a public trustee's deed by redeeming the property on June 10, 1977. On October 25, 1977, Ross and Georgina Brown, as holders of the first deed of trust, filed a Notice of Election and Demand for Sale. (This was later withdrawn.) Samuel Frisch commenced foreclosure of a third deed of trust on April 4, 1978. Again the Morgans redeemed the property. In addition, at least six other creditors obtained money judgments against Jerome between July of 1977 and March of 1978, and the suit of yet another creditor was settled out of court. In summary, the circumstances of Jerome's financial position in the summer of 1977 gave him ample reason to anticipate that the forced sale of his interest in the house was imminent.

When a taxpayer disposes of his property prior to the time a federal tax lien arises, the United States may sue to have the conveyance set aside as fraudulent under the laws of the state where the property is located. Commissioner v. Stern, 357 U.S. 39, 78 S.Ct. 1047, 2 L.Ed.2d 1126 (1958). Colorado's fraudulent conveyance statute provides that any conveyance "made with the intent to hinder, delay, or defraud creditors" is void. Colo.Rev.Stat. § 38-10-117 (1973).

A conveyance made with the requisite intent is void as to both present and future creditors. Fish v. East, 114 F.2d 177, 183 (10th Cir.1940); Gregory v. Filbeck, 12 Colo. 379, 21 P. 489, 490 (1889); House v. Johnson, 19 Colo.App. 524, 76 P. 743, 743 (1904). That the transferor did not intend to defraud his creditors will not defeat a suit to void a transfer as fraudulent. If the transferor's intent was merely to hinder or to delay the payment of his creditors, the transfer will be voided. Fish v. East, supra, at 182; Italian-American Bank of Denver v. Lepore, 79 Colo. 466, 246 P. 792, 793 (1926); Mohler v. Buena Vista Bank and Trust Co., 588 P.2d 894, 895-96 (Colo.App.1978). The requisite intent may be shown, of course, by circumstantial evidence. Fish v. East, supra, at 183.

When the transfer in question is between unrelated parties, the courts require more than a showing of fraudulent intent on the part of the transferor. Want of consideration or knowledge of fraud on the part of the transferee must also be shown. Wright v. Nelson, 125 Colo. 217, 242 P.2d 243, 246-47 (1952). However, "where a debtor conveys lands to his wife when he is insolvent, or by the transfer is made insolvent, the husband and wife have the burden to establish by clear and satisfactory proof that the conveyance was for a valuable consideration, and without intent to hinder, delay, or defraud creditors of the husband." Armstrong v. Fishbach, 95 Colo. 64, 67, 32 P.2d 828, 829 (1934). Accord Gutheil v. Polichio, 103 Colo. 426, 431-32, 86 P.2d 972, 974 (1939); Thuringer v. Trafton, 58 Colo. 250, 144 P. 866, 868 (1914).

The Morgans have failed to meet this burden of proof. Indeed, if the burden of proof were on the government, I would still find that the Morgans intended to hinder and delay their creditors generally, and the I.R.S. in particular, by the conveyance. For his own part, Jerome admitted as much to the I.R.S. revenue agent, and the facts could hardly support a contrary conclusion.

Defendants assert the general principle that a transfer cannot be set aside as a fraudulent conveyance unless the transferee knew of, or participated in, the transferor's intent. See Fish v. East, 114 F.2d 177, 183 (10th Cir.1940); Roberts v. Dietz, 86 Colo. 595, 284 P. 337, 338 (1930); Helm v. Brewster, 42 Colo. 25, 93 P. 1101, 1104 (1908). They contend that Sue had no such knowledge or intent. Without conceding that the asserted principle applies to transfers between husband and wife under these circumstances, I find that Sue also intended to hinder or delay creditors by the conveyance.

Sue Morgan testified that she knew Jerome was indebted to several creditors, including the I.R.S.; that she was acutely aware of the possibility of foreclosure by Jerome's creditors; and that this caused her great anxiety. It seems highly unlikely that she did not discuss these matters with her husband and gain privy to his plans for dealing with them. She knew that she would be personally liable for the taxes on Jerome's income for the years 1974 to 1976 unless she withheld her signature from the returns. She knew that Jerome was unemployed and that he was transferring to her the only asset with which he could hope to satisfy the just demands of his creditors. Sue testified that saving the house was foremost on her mind in the summer of 1977. It is no coincidence that the only way to prevent or delay foreclosure involved the actions she cooperated in taking: Jerome's separate filing of his tax returns and the transfer of his one-half interest in the house to her.

Defendants also contend that the conveyance was part of a bona fide loan transaction entered into with Sue Morgan's parents,...