United States v. Weathers

• Decision Date: 08 February 2022
• Docket Number: 3:18-cv-5189-BHS
• Parties: UNITED STATES OF AMERICA, Plaintiff, v. THOMAS WEATHERS, et al., Defendants.
• Court: U.S. District Court — Western District of Washington

UNITED STATES OF AMERICA, Plaintiff, v. THOMAS WEATHERS, et al., Defendants.

No. 3:18-cv-5189-BHS

United States District Court, W.D. Washington, Tacoma

February 8, 2022

FINDINGS OF FACT, CONCLUSIONS OF LAW, AND DECISION

BENJAMIN H. SETTLE, UNITED STATES DISTRICT JUDGE

THIS MATTER came before the Court on a bench trial on the United States of America's (“the Government”) remaining claim against Thomas^[1] and Kathy Weathers (“Weathers”) and Precision Property Management Corporation (“Precision”).

I. INTRODUCTION

The Government brought this action against the Weathers and Precision claiming: (1) that the Weathers fraudulently transferred property located at 605 Academy Street, Kelso Washington, (“the 605 Academy Property”) to Precision; (2) that Precision is the Weathers' alter ego; and (3) that Precision is the Weathers' nominee. The Weathers denied these claims. Precision asserted a counterclaim for reimbursement for improvements it made to the 605 Academy Property, and to other properties owned by entities that have been determined by this Court in earlier proceedings to be owned by the Weathers, and not by those entities, because the entities were the alter egos and nominees of the Weathers and, therefore, subject to federal income tax liens. A two-day trial to the Court was held on the claims and counterclaim on November 2-3, 2020. The Court finds for Defendants on Plaintiff's claims and for Plaintiff on Defendants' counterclaim.

It is apparent that the Weathers received considerable benefits from their relationship with Precision and undoubtedly had substantial influence over those who owned, managed, and directed Precision's operations. Even so, these benefits, which were generally reasonable payments for the rental use of portions of the Weathers' residence and services performed for Precision by Thomas, and the Weathers' influence did not amount to the control and possession required to rise to a level that rendered Precision as Weathers' alter ego or nominee. Further, the transfer of the 605 Academy Property was not fraudulent. Neither Thomas nor Kathy had any interest of value in that property when Thomas assigned to Precision his purchaser's interest in a Real Estate Purchase and Sale Agreement involving the 605 Academy Property.

Precision's Sixth Counterclaim seeks “reimbursement for the taxes and other expenditures paid for the preservation, maintenance and improvement of the properties.” Dkt. 33 at 18 (emphasis added). Precision also contends that it is entitled to a superior, equitable lien^[2] on the other Properties it manages for T&K Limited Partnership (“T&K”) and TKW Limited Partnership (“TKW”), to the extent its efforts preserved those properties from condemnation, property tax liens and potential foreclosure on such liens, and from foreclosure by the lenders. Dkt. 205 at 9. Precision primarily relies upon Sumpter v. United States, 302 F.Supp.2d 707 (E.D. Mich. 2004). The Government correctly points out that Sumpter only permitted reimbursement for property tax payments, which is not what Precision seeks here, and further that Sumpter appears to be an outlier, inconsistent with Ninth Circuit law on the subject. See Dkt. 215 at 10 n.4 (citing United States v. Christensen, 269 F.2d 624, 629 (9th Cir. 1959) (mortgagee's payment of state taxes on mortgaged property after federal tax liens were recorded did not give mortgagee a lien for such local taxes superior to the United States' tax liens)).

Precision also conditionally claimed reimbursement for similar expenses paid for the benefit of the 605 Academy Property, if the Court were to conclude that the Weathers own that property. Because the Court finds for Precision on this issue, this counterclaim is DISMISSED as moot.

II. DISCUSSION

The Government commenced this civil action to reduce tax assessments to judgment and to foreclose federal tax liens in March 2018. It sought to recover taxes owed by the Weathers, and alleged that three entities owned or controlled by the Weathers were their nominees or alter egos, and that certain properties owned by the Weathers were transferred fraudulently, for the purpose of avoiding the Government's tax liens. The entities are T&K, TKW, and Precision.

The Government alleged that these entities between them owned nine properties for the benefit of the Weathers. See generally Dkt. 1. The government sought and obtained summary judgment as to the nature of eight of these properties (called “Properties 1-8” throughout this case), and the Court's Order Granting in part and denying in part the Government's Motion for Summary Judgment, Dkt. 159, details the factual and procedural history of the Government's claims regarding those properties.

That Motion and that Order did not address Precision's interest in the ninth property, the 605 Academy Property. The Government's claims and Precision's defenses and counterclaims regarding the 605 Academy Property were the subject of the November 2021 bench trial.

The Government correctly argues that in the context of federal tax liens, the nominee and alter ego doctrines are analyzed similarly. Dkt. 213 at 16 (citing United States v. Smith, No. C11-5101, 2012 WL 1977964, at *6 (W.D. Wash. June 1, 2012) (“The factors to be considered in determining whether an entity is an alter-ego of a taxpayer are similar to the nominee factors.”)); see also United States v. Black, 725 F.Supp.2d 1279, 1289-90 (E.D. Wash. 2010) (applying nominee and alter ego doctrines); Sharp Mgmt. LLC v. United States, No. C07-402-JLR, 2007 WL 1367698, at *3 & n.3 (W.D. Wash. May 8, 2007) (“[T]he alter ego doctrine [is] a close kin of the nominee theory . . . .”).

Courts in this District have considered the following factors in making this determination:

1. the nominee paid no or inadequate consideration for the property at issue;

2. the property was placed in the name of the nominee in anticipation of litigation or liabilities;

3. a close relationship exists between the transferor and the nominee;

4. the parties to the transfer failed to record the conveyance;

5. the transferor retained possession; and

6. the transferor continued to enjoy the benefits of the transferred property.

Smith, 2012 WL 1977964, at *5 (citing Black, 725 F.Supp.2d at 1291-92; Sharp Mgmt., 2007 WL 1367698, at *3). Precision argues that the Government is obligated to prove its case by clear and convincing evidence, but the Government accurately cites to authority holding that both nominee and alter ego claims are subject to the preponderance of evidence standard. Dkt. 215 at 6 (citing Sequoia Prop. & Equip. Ltd v. United States, No. 97-cv-5044-LJO, 2002 WL 31409620, at *12 (E.D. Cal. Sept. 19, 2002) (“The Government has the burden to prove by a preponderance of the evidence its nominee/alter ego claims.”).

The government is obligated to prove its Uniform Fraudulent Transfer Act claim by “clear and satisfactory” evidence. Dkt. 213 at 23 (citing United States v. Allahyari, 980 F.3d 684, 692 (9th Cir. 2020)). The elements of that claim are:

(a) With actual intent to hinder, delay, or defraud any creditor of the debtor; or

(b) Without receiving a reasonably equivalent value in exchange for the transfer or obligation, and the debtor:

(i) Was engaged or was about to engage in a business or a transaction for which the remaining assets of the debtor were unreasonably small in relation to the business or transaction; or (ii) Intended to incur, or believed or reasonably should have believed that he or she would incur, debts beyond his or her ability to pay as they became due.

Dkt. 213 at 23 (citing RCW 19.40.041(1)).

In addition to the foregoing, the Court makes the following findings of fact and conclusions of law.

III. FINDINGS OF FACT

1. Beginning in 1990, Thomas and Kathy bought several properties in Longview, Washington. These properties are described as “Properties 1-8” in the United States' Complaint.

2. In March 1996, Thomas formed T&K and TKW.

3. At first, Thomas and Kathy each held 1% of T&K's shares. The Thomas D. Weathers and Kathy J. Weathers Family Trust held 92%. The remaining shares were equally split among trusts set up in the names of each of the Weathers' children.

4. TKW had a different structure. Thomas held 1% of TKW as a general partner and “First Fidelity Trust Ltd., Nevis” held 99% of TKW as a limited partner.

5. From March 1996 through July 1996, Thomas purported to transfer his and Kathy's interests in Properties 1-6 and 8 to T&K. In its prior Order on Summary Judgment, the Court held that T&K is the Weathers' nominee and alter ego. In addition, it held that the transfers of Properties 1-6 and 8 to T&K were fraudulent under Washington law. These findings are law of the case. Dkt. 159 at 32.

6. In May 1996, Thomas purported to transfer his and Kathy's interests in Property 7 to TKW. The Court has held that TKW is Weathers' nominee and alter ego. In addition, it held that the transfer of Property 7 to TKW was fraudulent under Washington law. These findings are also law of the case.

7. In September 2004, Thomas and Kathy went to trial on criminal charges of tax evasion related to the 1996 tax year and failure to file tax returns for 1998-2002. A jury found Thomas and Kathy guilty on all counts. The Court sentenced Thomas to 60 months of incarceration followed by three years of supervised release, and Kathy to two years of probation.

8. In September 2009, the U.S. District Court, District of Oregon, held that 911 Management LLC was Thomas Weathers' nominee or alter ego. This Court takes judicial notice of this fact. Because of that decision, 911 Management dissolved in 2010.

9. On March 16, 2009, Precision was incorporated in Nevada. Precision was formed to take over management of the...