Yost v. Carroll

• Decision Date: 02 August 2022
• Docket Number: 20 C 5393
• Parties: R. DAVID YOST, Plaintiff, v. MORGAN CARROLL, Defendant.
• Court: U.S. District Court — Northern District of Illinois

R. DAVID YOST, Plaintiff,
v.
MORGAN CARROLL, Defendant.

No. 20 C 5393

United States District Court, N.D. Illinois, Eastern Division

August 2, 2022

MEMORANDUM OPINION AND ORDER

Jeffrey Cole, Magistrate Judge

INTRODUCTION

The present diversity case involves a seemingly straightforward attempt by the plaintiff to collect on what the Complaint alleges are two “promissory notes” totaling $8,261,333.79, plus interest, costs, and attorneys' fees. [Dkt. #1 at 2]. One “note” for $2,500,000 was executed in 2015, while the other for $4,500,000 was executed a year later. The “notes” were signed by the defendant and his then wife, Anne Yost Carroll, who is also the daughter of the plaintiff. According to the Complaint, the “notes” were given in connection with what purported to be “loans” from Mr. Yost totaling approximately $7,000,000, made to the then married couple for the purchases of homes by them.^[1] No payments were made on the “notes,” and until recently none were due. The “notes” provided they were to be construed under Illinois law.

In about mid-June 2020, Mr. Carroll and Anne became embroiled in divorce proceedings in the Illinois courts. About two months later, Mr. Yost demanded from Mr. Carroll payment on the ”notes” of over $8 million, which included claimed interest. [Dkt. #1]. No demand was made on

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plaintiff's daughter even though she appeared as a “co-signer” on the “notes.” When Mr. Carroll refused to make payment, this suit followed. Anne was not named as a co-defendant.

Essentially taking the position that “looks can be deceiving,” Heyde v. Pittinger, 533 F.3d 512, 514 (7^th Cir. 2011), Mr. Carroll's original Affirmative Defenses [Dkt. #34] contended that the large transfers of money were gifts, and that the claimed “notes” were not notes in any legal sense, but in form only. It was alleged that, in reality, Mr. Yost had orchestrated a scheme to evade the payment of gift taxes to the United States on large transfers of money to his daughter and her then husband, Mr. Carroll. According to the Amended Pleading, Mr. Yost expressed the view that if outright gifts were made, gift taxes would otherwise be owed to the United States - a result he sought to avoid through the alleged contrivance of the “notes.”

“Contracts” that are entered into for the purpose of evading taxes may be void as against public policy. See Dormeyer v. Haffa, 343 Ill.App. 177, 98 N.E.3d 532 (1951); Heavenly Ham Co. v. HBH Franchise Co., LLC., 2005 WL 331558, at *9 (N.D. Ill. 2005). But, Mr. Carroll's initial pleading also alleged that the “notes” were designed to “avoid” the payment of taxes. [Dkt. 36 at 7, 13, 18, 36, 63 and 73)]. Since evasion is illegal, but avoidance may not be, Northern Indiana Public Service Co. v. CIR, 115 F.3d 506 (7^th Cir. 1997), and since Mr. Carroll's original pleading seemed to mix and match the two, Mr. Carroll's pleading was dismissed without prejudice. See Yost v. Carroll, 2022 WL 185199 (N.D. Ill. 2022) [Dkt. ##65, 66]. This perceived deficiency was sought to be cured by the Amended Affirmative Defenses and Counterclaim. [Dkt. #77].^[2]

The Amended Pleading again charged that the claimed “notes” were not notes in any legal sense; rather, they were thought necessary by Mr. Yost to enable him to make gifts to his daughter

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and her then husband without having to comply with what Mr. Yost said were federal gift tax requirements. The Amended Pleading charged that Mr. Yost's plan was expressly designed to make it appear that the large transfers of money were “loans,” not gifts. [See Amended Affirmative Defenses, Dkt. #77, ¶¶ 1, 8, 14, 20, 24, 32, 40, 42, 47, 50, 51, 56].^[3] See also Amended Counterclaim and Third Party Claim and the Exhibits accompanying them. According to Mr. Carroll's Amended Pleading, the “notes” were thought by Mr. Yost to be necessary to make the transfers appear to be loans so that gift taxes would not have to be paid by Mr. Yost. [Dkt. #77 at ¶ 47]. See also n. 2, supra. It is also alleged that the “notes” were also to serve as a device to help keep track of the money given to Mr. Yost's daughters.

The Amended Pleading charges that Mr. Yost expressly promised that “he would never enforce the notes,” which, according to Mr. Carroll's Amended Pleading, Mr. Yost said would be “forgiven” at the time of his death. See, e.g., Exhibits 5, 7 and 9 to the Amended Pleadings. [Dkt. #77].^[4]

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In support of the overall theme of the Amended Pleadings that the supposed “loans” were fictive and part of a scheme to gull the IRS, the Amended Pleadings asserted that when Anne applied for a loan with Chase Bank, she never mentioned the “notes” in the application to bank officials. The Amended Pleading asserts that either Anne was attempting to defraud the bank by withholding critical information about her financial obligations or, as the plaintiff allegedly wrote to his daughter and the defendant, the “notes” were not true promissory notes and were never to be collected on.

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Rather, the Amended Pleading asserts, that in addition to being necessary to evade gift tax requirements, the “notes” were also a means of keeping financial track of things to aid his daughters, if necessary, at the time of Mr. Yost's death. See n. 4. Hence, according to the Amended Pleading, given the ultimate purposes of the “notes,” the application for a bank loan would not and did not contain any reference to what are now alleged by Mr. Yost to be outstanding “loans.”

The plaintiff has again moved to dismiss - this time the motion is directed to the Amended Affirmative Defenses and Counterclaim - for failure to state a claim on which relief can be granted. [Dkt. #79]. See Rule 12(b)(6). The parties do not dispute the general requirements necessary to state a claim for relief. To survive a motion to dismiss, a Complaint, defense, or counterclaim must “contain sufficient factual matter, accepted as true, to ‘state a claim for relief that is plausible on its face.'” Ashcroft v. Iqbal, 556 U.S.662, 678 (2009)(emphasis supplied); Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 555 (2007). The plausibility standard requires more than a “sheer possibility that a defendant has acted unlawfully.” Id. A court looks to the facts alleged in the challenged pleading and to any appropriate exhibits when deciding a motion to dismiss. All reasonable inferences are to be drawn in favor of the nonmovant. See generally Iain Johnston, The Case for Drawing Reasonable-and Only Reasonable-Factual Inferences in Analyzing Rule 12(b)(6) Motions to Dismiss, 30 The Circuit Rider, (the Journal of the Seventh Circuit Bar Association), 14 (2022). Constrained by these principles, the question of the truth or falsity of Mr. Carroll's allegations do not enter into any assessment of the plaintiff's Motion to Dismiss the Amended Pleading.

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ARGUMENT

A.

Mr. Carroll's Amended Pleading contains two related elements. First, it charges that the plaintiff gave large cash gifts to his daughter and her then husband, Mr. Carroll, and purposefully sought to make it appear they were “loans” in order to deceive the IRS and evade the payment of federal gift taxes, as well as to more easily allow his daughters to tally things up upon Mr. Yost's death. It was allegedly promised by Mr. Yost that no claim would ever be made on the “notes,” which were not to be repaid, according to statements attributed to Mr. Yost by the Amended Pleading. These allegations are not implausible, as that term is used in determining the adequacy of pleadings. In fact, the practice of disguising gifts to relatives and friends as loans is not new. On the contrary, courts have, for years, been faced with such issues. See, e.g., Putnam v. CIR., 352 U.S. 82, 91 (1956); Est. of Maxwell v. Comm'r, 3 F.3d 591, 597 (2^nd Cir. 1993)(“After carefully considering the record, we think that the notes executed by the daughters were not intended to be enforced and were not intended as consideration for the transfer by the petitioner, and that, in substance, the transfer of the property was by gift.”); Storey v. Storey, 214 F. 973 (7^th Cir. 1914); Drapkin v. Mjalli, 441 F.Supp.3d 145 (M.D. N.C. 2020)(Claimed debtor allowed to show that purported $1 million loan was really a gift, and that the promissory note was a “sham.”); In re: Ledstrom, 2017 WL 1239144 at *4 (D.Nev.2017)(certain transactions amongst family members were structured in ways that did not necessarily correspond to how things functioned in reality); In re Kraus, 386 BR. 785, 835 (D.Kan. 2008); Martin v. Commissioner of Internal Revenue, 1969 WL 1635 (Tax Court 1969). See also Howard M. Zaritskyal, Tax Court Reviews What Constitutes a Real Loan, 38 Estate Planning 47 (2011)(“Many relevant factors [go into] determining whether a loan is a bonafide extension of

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credit or really a disguised gift.... The distinguishing characteristic of a loan is the intention of the parties that the money advanced be repaid.”); Est. of Buring v. Comm'r, 51 T.C.M. (CCH) 113 (T.C. 1985)(“Where, however, the evidence suggests that a purported loan is a disguised gift and the taxpayer's attempt to camouflage his actions indicates an intentional or conscious failure, or a reckless indifference to the duty to file a return, we will not hesitate to uphold the Commissioner's determination of the section 6651(a)(1) addition to tax.”). See also 6B Part 1, Anderson UCC, § 3110: 17 [rev.] (3^rd ed).^[5]

The common law has long recognized the defense that precludes a plaintiff from prevailing in a suit against a defendant when the two have acted in pari delicto - i.e. that is, when the plaintiff and defendant share equal or mutual fault in the very transaction at issue. See, e.g., Bateman Eichler, Hill Richards, Inc. v. Berner, 472 U.S. 299, 306-07 (1985). See also 1 J. Story, Equity Jurisprudence 304-305 (13th ed. 1886).^[6] McMullen v. Hoffman, 174 U.S. 639, 654 (1899) explained the doctrine this way:

‘The

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