United States v. Sterkowicz
| Citation | 266 F. Supp. 703 |
| Parties | UNITED STATES of America, Plaintiff, v. Walter STERKOWICZ, a/k/a Walter Stark a/k/a Leonard Sterkowicz, Metropolitan Life Insurance Company, American National Insurance Company, Equitable Life Assurance Society of the United States, Jacob I. Grossman appointed as Guardian ad litem herein for Michael Sterkowicz and Gene Sterkowicz and all other living children of Walter Sterkowicz whose names are unknown, Christine Sterkowicz a/k/a Christine Stark, Leonard Sterkowicz a/k/a Leonard Stark. |
| Decision Date | 19 March 1967 |
| Court | U.S. District Court — Northern District of Illinois |
COPYRIGHT MATERIAL OMITTED
L. J. Weiner, Asst. U. S. Atty., Chicago, Ill., for plaintiff.
Burton E. Glazov and Miles G. Seeley, of Mayer, Friedlich, Spiess, Tierney, Brown & Platt, Chicago, Ill., for the defendant, Equitable Life Assurance Society of the U. S.
Wendell J. Brown and James T. Otis, of Spray, Price, Townsend & Cushman, Chicago, Ill., for defendant, American Nat. Ins. Co.
William P. Hurley, New York City, for defendant, Metropolitan Life Ins. Co.
Froelich, Grossman, Teton & Tabin, Chicago, Ill., for defendant, Jacob I. Grossman.
This is an action brought by the United States pursuant to 26 U.S.C. § 7403(a)1, to foreclose certain tax liens upon life insurance policies issued upon the life of the defendant-taxpayer Walter Sterkowicz by the defendant life insurance companies. The liens arose, pursuant to Section 6321 of the Internal Revenue Code,2 upon nonpayment of a marijuana transfer tax.
All of the defendant life insurance companies are authorized to, and do business within the judicial district of this court. The defendant taxpayer formerly resided with the judicial district of this court, but he has become a fugitive from justice and has left no forwarding address. The premiums on the policies are being automatically paid by periodical deductions from the cash surrender value of the policies, under an extended term insurance provision in the policies.
Under the policies, defendant-taxpayer Sterkowicz reserved the right to apply for and receive policy loans, to make demand for and receive the cash surrender value of all the policies, and to revoke and change the designated beneficiaries. The designated beneficiary of all policies was taxpayer's first wife, who died in 1958. In the Metropolitan and American policies, there were no alternate beneficiaries. Pursuant to a provision in the Equitable policies, the beneficiaries in default of designation are the children of the assured. Also named as defendants, therefore, are the two adult children of taxpayer, Leonard and Christine, his two minor children, Michael and Gene, and also any unknown children of Walter Sterkowicz. Jacob Grossman is guardian ad litem, representing the minor children and unknown children of Walter Sterkowicz.
Taxpayer and the adult children were served by publication pursuant to 28 U.S.C. § 16553. The adult children were also served personally outside this district. Default judgment was entered against these defendants over a year ago. Pursuant to 28 U.S.C. § 1655, judgment against them must be regarded as final in all respects. This court having found that the minor children had no interest in the Metropolitan or American policies, the government's motion for summary judgment of foreclosure has already been granted as to these policies. Before the court today is a motion for summary judgment by the government against Equitable and the minor children. The government asks that ten Equitable policies on the life of Walter Sterkowicz be cancelled, that all rights of his children be foreclosed, and that defendant Equitable be required to surrender to the government the cash surrender value of the policies, which are worth about $5,000, in partial satisfaction of the taxpayer's deficiency of over $165,000.
The guardian ad litem resists the motion for summary judgment, asserting that service by publication was insufficient to give this court jurisdiction in rem because there is no res in this district over which this court has exclusive dominion and control; that a lien cannot attach to an unmatured insurance policy, and that this court cannot foreclose the interest of an absent defendant served by publication under 28 U.S.C. § 1655, since such a defendant may as of right vacate such a judgment by appearing within a year of judgment and paying costs. The guardian ad litem contends that cancellation of the policies would prejudice this right and be an irreparable injury to the children, especially because the defendant has been absent almost seven years. Under Illinois law, where a person disappears from his last known residence and remains absent for seven years without communicating with those with whom he would naturally communicate, and where inquiry is made about such person without avail, a presumption arises that he is dead. Tegtmeyer v. Tegtmeyer, 348 Ill. 434, 181 N.E. 297 (1932); Eddy v. Eddy, 302 Ill. 446, 134 N.E. 801 (1922). If the assured is in fact dead, or presumed dead, of course, the government would not be entitled to the relief it seeks here, since the policies would then have become payable at their face value to the beneficiaries. The guardian ad litem contends that a factual issue is present here, namely whether or not Sterkowicz is living, that the government has the burden of proof on this issue, and that summary judgment must therefore be denied.
A taxpayer's right to demand the cash surrender value of a life insurance policy is a sufficient property right, or res, to justify publication notice under Section 1655. United States v. Brody, 213 F.Supp. 905 (D.C., 1963); affirmed sub. nom. Equitable Life Assurance Society of the United States v. United States, 331 F.2d 29 (1 Cir., 1964). The defendant insurance company does business in this district. The taxpayer himself could have demanded the cash surrender value in this district. "The court is not so impotent that it cannot apply to the satisfaction of tax liens property interests of a taxpayer held by corporations within its jurisdiction." United States v. Metropolitan Life Insurance Company, 256 F.2d 17, at 25, (1958, 4th Cir.).
The guardian ad litem next raises the question of whether a lien can attach to an unmatured life insurance policy. It is of course a question of federal law whether the bundle of rights possessed by an insured is to be properly characterized as "property and rights to property" within the meaning of section 6321 of the Internal Revenue Code, so that a lien will attach upon demand for and nonpayment of taxes owed by the insured. Equitable Life Assurance Society of the United States v. United States, 331 F.2d 29 (1964, 1st Cir.). It has been authoritatively held that a tax lien will attach to rights of an insured under a life insurance policy, where insured reserves the right to cancel the policy and receive the cash surrender value. United States v. Metropolitan Life Insurance Company, 256 F.2d 17 (1958, 4th Cir.).
But because an insurance contract is a tri-partite arrangement with rights thereunder being possessed by both the insured and the beneficiaries, attachment of the Section 6321 lien has been held insufficient to allow the government by levy alone to assert the insured's right to cancel a policy and to demand the cash surrender value. Consequently the government has always been unsuccessful where it has attempted to collect a statutory penalty from an insurance company which refused to comply with a demand for cancellation of the policy and payment of the cash surrender value, United States v. Massachusetts Mutual Life Insurance Company, 127 F. 2d 880 (1942, 1st Cir.); United States v. Sullivan, 333 F.2d 100 (1964, 3rd Cir.); or against an insurance company which, without notice of the lien, made a policy loan to the insured after attachment of the lien, United States v. Miroff, 353 F.2d 481 (1964, 7th Cir.). Language in these and other cases cited by the guardian ad litem, to the effect that a tax lien will not attach to an unmatured life insurance policy, when read in context, merely means that existence of the lien alone does not put the government in the shoes of the insured, with the power to demand the cash surrender value, on the theory that a life insurance policy is no more than an ordinary chose in action.
However, it is settled law that the government may, by a proper foreclosure proceeding under Section 7403 of the Internal Revenue Code, wherein all parties having an interest in a life insurance contract are named defendants and properly served with process, upon proving the existence and validity of their tax lien, exercise the right of the insured delinquent taxpayer to cancel the policies and receive the cash surrender value in partial satisfaction of a tax deficiency. United States v. Metropolitan Life Insurance Company, 256 F.2d 17 (1958, 4th Cir.); Equitable Life Assurance Society of the United States v. United States, 331 F.2d 29 (1964, 1st Cir.) ()
This court therefore finds that the government may, by the action it now takes, foreclose its tax lien upon the unmatured life insurance policies covering the life of the delinquent taxpayer, foreclose the rights of the beneficiaries, and exercise the option of the insured to cancel the policies, in exchange for the cash surrender values. A decree of this court directing that the cash surrender value of the policies be paid to the United States will protect the insurance companies from further liability under the policies. United States v. Metropolitan Life Insurance Company, 256 F.2d 17 (1958, 4th Cir.).
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