USA. v. Green

• Decision Date: 04 November 1999
• Docket Number: No. 98-1482,98-1482
• Citation: 201 F.3d 251
• Parties: (3rd Cir. 2000) UNITED STATES OF AMERICA, v. HOWARD I. GREEN; MARY GREEN; ROYLAN FINANCE; ERNESTINE WOODMANSEE Howard I. Green; Mary Green, Appellants Submitted Under Third Circuit LAR 34.1(a)
• Court: U.S. Court of Appeals — Third Circuit

Page 251

201 F.3d 251 (3rd Cir. 2000)

UNITED STATES OF AMERICA, v. HOWARD I. GREEN; MARY GREEN; ROYLAN FINANCE; ERNESTINE WOODMANSEE

Howard I. Green; Mary Green, Appellants

No. 98-1482

UNITED STATES COURT OF APPEALS FOR THE THIRD CIRCUIT

Submitted Under Third Circuit LAR 34.1(a) November 4, 1999

Filed January 11, 2000

On Appeal from the United States District Court for the Eastern District of Pennsylvania (D.C. Civ. No. 96-7275) District Judge: Honorable Marjorie O. Rendell Counsel for Appellants: LOUIS C. RICCIARDI, ESQ. Trujillo, Rodriguez & Richards 226 West Rittenhouse Square The Penthouse Philadelphia, PA 19103

Attorneys for Appellee: LORETTA C. ARGRETT WILLIAM S. ESTABROOK SARA ANN KETCHUM Tax Division Department of Justice P.O. Box 502 Washington, D.C. 20044

MICHAEL R. STILES United States Attorney Suite 1250 615 Chestnut Street Philadelphia, PA 19106

BEFORE: BECKER, Chief Judge, and GREENBERG and CUDAHY,^* Circuit Judges

OPINION OF THE COURT

CUDAHY, Circuit Judge.

This case stems from Howard Green's efforts to stay one step ahead of his creditors, including the United States government. During several years of financial struggle, bankruptcy filings, flight from federal prosecution and ultimately jail time, Green underestimated his federal tax liabilities on his income tax returns in 1979, 1980 and 1981. The IRS eventually caught up with Green and in 1992 attempted to foreclose against all of his property, including property in Huntingdon Valley, Pennsylvania. Green responded that he had conveyed the Huntingdon Valley property to his wife in 1981, thus insulating it from foreclosure. The trial court deemed the conveyance fraudulent and set it aside. Green now appeals, and we affirm.

I. Background

In the late 1970s and early 1980s, Green was president and chairman of the board of Fidelity America Financial Corporation and its three subsidiaries. In 1981, he filed for corporate bankruptcy protection for the companies. According to a bankruptcy trustee's complaint against him, Green and other Fidelity officers had been conducting a fraudulent financial scheme with the companies. See Kranzdorf v. Green, 582 F. Supp. 335, 337-38 (E.D. Pa. 1983). Green allegedly persuaded a company employee to prepare financial statements "for use in inducing investments by limited partners and loans by commercial lenders." Id. at 337. Apparently, the loans were used to start new limited partnership syndications, which were not financially viable, in part because of Green's corporate waste. See id. at 337-38.

During the years that Green's business scheme was "collapsing," (Lower Ct. Op. at 4) he was experiencing upheaval in his private life as well. In September 1979, Howard entered into an agreement for separation and property settlement with his first wife, Ina. Two months later, he met Mary Woodmansee, whom he married in April 1980. Throughout this period, in tax years 1979, 1980 and 1981, Howard substantially under reported his federal income tax liabilities.

In 1981, Green transferred an interest in his residence to Mary. The validity of that transfer is the heart of this appeal. For context, however, we outline Howard's subsequent maneuvers. In 1981, Green liquidated a trust worth approximately $1.4 million. In 1983, the federal government indicted Green on charges of conspiracy, securities fraud, mail fraud and the filing of a false income tax return for the 1979 tax year. In June 1983, two months after his federal indictment, Green transferred a portion of his interest in his home to his children. In September 1983, Howard and Mary opened Maryland bank accounts (Mary disguising her appearance by wearing a black wig and glasses) to which they transferred money. Then they fled to Maryland. A year later, officials apprehended Green in Baltimore, where he was redeeming coupons from his bearer bonds. He was carrying two sets of false identification at the time. Later in 1984, Green pleaded guilty to many counts of the indictment. He paid about $1 million restitution and served 30 months in jail. ¹

In 1991, the IRS made assessments totaling $140,297 against Green for the income he failed to report on his 1979, 1980 and 1981 tax returns. Green has not challenged the accuracy of these assessments. A federal tax lien exists against all of a taxpayer's property on the date of the assessment if that assessment is not paid. 26 U.S.C. S 6321, 6322 (1989); see United States v. Vermont, 377 U.S. 351, 352 n.1 (1964). Assessments are presumed to be valid, and establish a prima facie case of liability against a taxpayer. United States v. Vespe, 868 F.2d 1328, 1331 (3d Cir. 1989). Thus, by dint of its 1991 assessments against Green, the federal government had obtained a lien against all of his property, including the Huntingdon Valley property. Green, however, refused to pay the assessments, and in 1992 the IRS recorded a notice of lien against him. Green claims the government has no lien against the Huntingdon Valley property because he conveyed it to Mary and himself as tenants by the entirety in 1981. Courts look to state law to determine what rights a taxpayer has in the property the government seeks to reach. See Drye v. United States, 120 S. Ct. 474, 478 (1999). Under Pennsylvania law, property owned by tenants by the entirety is not subject to the debts of either spouse. See Stauffer v. Stauffer, 465 Pa. 558, 576 (1976).

The government responds, and the district court agreed, that the conveyance was fraudulent and should be set aside under the actual fraud provisions of the Pennsylvania Uniform Fraudulent Conveyances Act (PUFCA). See 39 Pa. Stat. Ann. S 357 (1993) (repealed 1994).² The trial court stated that actual fraud is presumed where a husband transfers property to a wife for inadequate consideration, and that the presumption may be rebutted by a showing that the conveyance was fair. Lower Ct. Op. at 9. The trial judge stated that any evidence of Green's solvency was "irrelevant" to the presumption of actual fraud. Id. at 9 n.7. Green disagrees, arguing that solvency is relevant as "evidence that the transfer was proper and not fraudulent." Appellant's Br. at 5. Specifically, Green contends that under Pennsylvania law, evidence of solvency conclusively rebuts the presumption of actual fraud. Appellant's Br. at 4.

II. Analysis

We review the district court's findings of fact under the clearly erroneous standard. See Moody v. Sec. Pacific Bus. Credit Inc., 971 F.2d 1056, 1063 (3d Cir. 1992). We exercise plenary review of the trial court's legal interpretation and construction of PUFCA. See id. In doing so, we are bound by Pennsylvania law. See id. Thus, our task is to determine whether, by deeming evidence of solvency "irrelevant," the trial court substantially misstated Pennsylvania law on the weight to be given solvency in the actual fraud analysis of interspousal transfers. Among Pennsylvania jurists there have been confusing cross-currents on this question, as we shall see. But the most recent statement of Pennsylvania law grounds the presumption in the inadequacy of consideration, and minimizes any consideration of solvency. The trial judge therefore correctly interpreted and applied that law to this case.

PUFCA, like most fraudulent conveyance statutes, recognizes two distinct types of fraud: actual fraud and constructive fraud. Historically, fraudulent transfer law "addressed transactions in which the debtor, by engaging in a transaction, had a specific intent to prevent or interfere improperly with collection efforts in order to retain some benefit for the debtor." Barry L. Zaretsky, Fraudulent Transfer Law as the Arbiter of Unreasonable Risk, 46 S.C. L. Rev. 1165, 1165 (1995) (emphasis added). However, because courts recognized "the difficulty of proving a transferor's specific intent, [they] developed principles of constructive fraud under which a transaction might be avoidable as fraudulent even in the absence of a showing of actual intent to hinder, delay, or defraud." Id. (emphasis added). Thus, the two bodies of fraudulent transfer law taken together provide that the debtor "may not dispose of his property with the intent (actual fraud) or the effect (constructive fraud) of placing it beyond the reach of creditors." COUNTRYMAN, CASES AND MATERIALS ON DEBTOR AND CREDITOR 127 (2d ed. 1971) (parenthetical phrases added).

PUFCA defines and proscribes actual fraud as follows: "[e]very conveyance made and every obligation incurred with actual intent, as distinguished from intent presumed in law, to hinder, delay, or defraud either present or future creditors, is fraudulent as to both present and future creditors." 39 Pa. Stat. Ann. S 357 (1993).

A. Interspousal Presumption of Actual Fraud

In most actual fraud cases, insolvency is one of several relevant factors or "badges of fraud" the court may consider as evidence of fraudulent intent. See Sheffit v. Koff, 175 Pa. Super. 37, 42 (1953). As early as 1939, however, the Pennsylvania Supreme Court recognized a situation in which solvency was not relevant to the actual fraud inquiry: property transfers between husbands and wives for nominal consideration. See Iscovitz v. Filderman, 334 Pa. 585, 589 (Pa. 1939). In that situation, the court stated, the transfer itself was sufficient to create a presumption of fraud, and only a showing of fair consideration could successfully rebut the presumption. See id. "Where the transaction is between husband and wife actual intent does appear where it is shown that there was a deed given for a nominal consideration. This is but a presumption of fact and places on the wife the burden of showing the fairness of the transaction." Iscovitz, 334 Pa. at 589. Moreover, because "family collusion by a debtor is so easy to execute and so difficult to prove, the evidence to sustain the claim of the wife in such cases must be clear and satisfactory." Id. at 589-90. Thus, in cases of interspousal transfer, whether there is...