United States v. Schroeder

• Decision Date: 08 April 1964
• Docket Number: Civ. No. 2-422.
• Citation: 242 F. Supp. 430
• Parties: UNITED STATES of America, Plaintiff, v. Harry SCHROEDER, Amanda Schroeder, Schroeder Packing Company, Metropolitan Life Insurance Company, et al., Defendants.
• Court: U.S. District Court — Southern District of Iowa

242 F. Supp. 430

UNITED STATES of America, Plaintiff, v. Harry SCHROEDER, Amanda Schroeder, Schroeder Packing Company, Metropolitan Life Insurance Company, et al., Defendants.

Civ. No. 2-422.

United States District Court S. D. Iowa, W. D.

April 8, 1964.

COPYRIGHT MATERIAL OMITTED

Donald A. Wine, U. S. Atty., Des Moines, Iowa, for plaintiff.

Leland White, Harlan, Iowa, for defendants.

HANSON, District Judge.

This is an action by the United States as a creditor of Harry Schroeder to set aside legal title to certain tracts of land held by Richard Schroeder and Bert Colwell.

The court will first deal with the three tracts of land in which Richard Schroeder holds legal title and which the United States is seeking to have set aside. These three tracts are known as the Adams County Farm, the Treynor Farm, and the Allen-Otis Farm. Richard Schroeder obtained legal title to the Adams County farm in 1951. There is evidence that the total purchase price of this farm was $57,500.00, that a mortgage of $35,200.00 was assumed, and that Richard Schroeder paid $10,000.00 of the remaining $22,300.00. The evidence on this point while not very contradictory was somewhat unclear because the lapse of time between trial and the transaction was about twelve years. Part of Richard Schroeder's $10,000.00 came from bonds he held.

Richard Schroeder also obtained legal title to the Treynor farm in 1951. When this farm was purchased a mortgage of $19,000.00 to Metropolitan Life Insurance Company was assumed. Also a large number of debts of the grantor were assumed. At the time Richard Schroeder took these two farms, he was 21 years old.

The third tract of land was called the Allen-Otis farm. It was an unimproved 40 acres which Richard Schroeder obtained from Ed Allen in 1947. In 1948 an additional 1½ acres was obtained from Alice Otis. Richard Schroeder was then 17 years old. The money to buy the farm was a gift obtained from his father. The amount paid out for this tract of land was about $2,500.00.

The testimony was that Richard Schroeder had always worked for his father, Harry Schroeder, and when he became 21 years old, his father, wanting to do something for him, helped him obtain the Adams County farm and the Treynor farm. It appears that Harry Schroeder may have invested between $15,000.00 and $25,000.00 for the two farms exclusive of mortgages and debts assumed. Harry Schroeder testified it was $15,000.00 and that at that time he was worth over $1,000,000.00.

Shortly after Richard Schroeder obtained the Treynor and the Adams County farms, he went into the Armed Services. His father, Harry Schroeder, managed the farms. The idea was that the farms would pay for themselves. The profits from the farms were used for that purpose. The years 1952 and 1953 were not very profitable years. The tenants and farm workers testified that most of their dealings were with Harry Schroeder, but that they were also in part with Richard Schroeder. Richard Schroeder was not financially capable of the management.

In general, the United States is attempting to use two theories to set aside the legal title in Richard Schroeder as to these three tracts of land. The first is resulting trust theory and the second is fraud theory based at least in part upon insolvency, lack of consideration, and other badges of fraud.

At the pretrial conference, when the United States was asked to elect between whether they were going to try to prove insolvency or actual fraud or actual trust, counsel for the United States stated that they believed that they could show that Harry Schroeder was close to insolvency, but they indicated that because of this, that it was not the theory they were primarily relying on. The basis for any attempt to show insolvency is to show the large unassessed income tax liability. Evidence was offered which would show Harry Schroeder at least as of December 31, 1958, had realty and personalty worth $1,458,000.00 and debts of $237,977.00. This left an amount in excess of the tax liability.

The resulting trust theory is based upon the presumed intent that the payor of the purchase price and not the person receiving legal title is to be the actual owner thereof. It is an intent enforcing trust. Bogert on Trusts, Sec. 463; 89 C.J.S. Trust § 102(b), p. 947. A resulting trust must be established by clear and convincing evidence. Hopp v. Rain, 249 Iowa 891, 88 N.W.2d 39. The proof must be clear and unequivocal. It is not to leave the existence of any element to conjecture or to uncertain inference. Cunningham v. Cunningham, 125 Iowa 681, 101 N.W. 470; Ross v. Ross, Iowa, 126 N.W.2d 369.

Under some situations where one person pays the purchase price for a property and another takes title, a resulting trust is said to have presumptively arisen. This is not the rule where the father pays the consideration and his child takes title. In that instance, a gift is presumed instead of a resulting trust. Ross v. Ross, supra; Barth v. Severson, 191 Iowa 770, 183 N.W. 617; Olsen v. Best, 167 Neb. 198, 92 N.W.2d 531 (Neb.); Luckhart v. Luckhart, 120 Iowa 248, 94 N.W. 461; Bird v. Stein, 258 F.2d 168 (5th Cir.); Restatement of Trust 2d, Sec. 442.

Viewing this case in the light of events at the time of vesting title, that is to say from 1947 to 1951, and taking into consideration the evidence offered, the government falls far short of the clear and convincing evidence commensurate with the establishment of a resulting trust. True it is that subsequent events are permitted to cast a light in hindsight, but even here there is only doubtful inference and it is far from illuminating. Even the tax situation of the father, Harry Schroeder, was not the huge and staggering obstacle that was so apparent in subsequent years. The government's attack upon these titles did not take place until 1961. The government has pressed its claim that the deeds were in substance a part of a fraudulent scheme. Subsequent adjudications by the Tax Court and other courts and the course of conduct and activity of Harry Schroeder subsequent to 1951 were far from exemplary but it is difficult to relate them back to the events of 1947. It is especially difficult to relate them with the degree of certainty necessary to disrupt titles created in 1947 and 1951.

A resulting trust must come into existence, if at all, at the instant the transfer is made and legal title vested. Bosworth v. Hagerty, 78 S.D. 157, 99 N. W.2d 334; 89 C.J.S. Trusts § 102(e) pgs. 950-951; Sec. 102(b) p. 948; Shaw v. Addison, 239 Iowa 377, 28 N.W.2d 816. The subsequent developments are relevant only to the extent that they throw light upon the parties at the time title was transferred.

Harry Schroeder and Richard Schroeder both testified that Richard Schroeder was to be the absolute owner of the land and that Harry Schroeder retained no interest. There was nothing to attack their credibility. No evidence introduced made their testimony unreliable.

The alternative theory of the United States is that if gifts were made, they were purely voluntary and part of a program to hinder and defraud creditors. A sum of money was transferred by Harry Schroeder to Richard Schroeder which was used as part of the downpayment in purchasing the Adams County land and as the downpayment for the Allen-Otis and Treynor land.

Either actual fraud or constructive fraud could possibly be proven by showing badges of fraud, the badges being circumstantial evidence of intent. It is claimed that the transfers were voluntary. While there was no legal consideration for the money given by Harry Schroeder to Richard Schroeder, they did have an air of being bona fide in that it was in return for services of his son and an attempt to do something for him on his 21st birthday. The minor son's services are not legal considerations, but they are evidence here tending to show a bona fide transaction.

The United States has not really claimed that they showed that Harry Schroeder was insolvent at the time of the transfers in question. The United States does claim that the defendants have not shown Harry Schroeder to be solvent at the time of the transfers. Their strongest contention centers around the valuation of certain stock owned by Harry Schroeder. The evidence shows that as of December 31, 1958, Harry Schroeder had real property in the amount of approximately $882,000.00. This amount did not include the value of the land in question. He had personalty worth $572,000.00. This included the Schroeder Packing Company stock worth approximately $500,000.00. He had debts of approximately $238,000.00. This left his net worth at about $1,216,000.00. This was a net worth in excess of his tax liability later to be assessed. The United States argues that the $500,000.00 of stock was apparently not at market value. The United States did not offer any evidence or call the court's attention to any evidence tending to show that this valuation was not substantially correct. It was corroborated by Harry Schroeder himself who testified that he was worth in excess of $1,000,000.00 in 1951. The balance sheet which shows the above figures was made as of December 31, 1958.

In 1961, a tax liability of $1,133,949.39 was assessed. This included $329,062.96 for interest and $362,186.35 for fraud and delinquency penalties. What part of this had matured by 1951 is not too clear.

The burden of proving insolvency may be different under the Iowa law than under the Uniform Fraudulent Conveyance Act. The court in In Re Liquimatic Systems, Inc., D.C., 194 F.Supp. 625, using the Uniform Act, stated that as a general rule, it is solvency and not insolvency which is to be presumed. See also Miller v. Lange, 234 Wis. 460, 290 N.W. 618; Dean v. Torrence, 299 Mich. 24, 299 N.W. 793. In Iowa, there is authority indicating that where there is a family relation and grossly inadequate or lack of reasonable consideration, the burden is upon the person claiming under the transfer to...