United States v. Green ( 2000 )

Opinions of the United
2000 Decisions States Court of Appeals
for the Third Circuit
1-11-2000
United States v Green
Precedential or Non-Precedential:
Docket 98-1482
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Filed January 11, 2000
UNITED STATES COURT OF APPEALS
FOR THE THIRD CIRCUIT
No. 98-1482
UNITED STATES OF AMERICA
v.
HOWARD I. GREEN; MARY GREEN;
ROYLAN FINANCE; ERNESTINE WOODMANSEE
Howard I. Green; Mary Green,
Appellants
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
Submitted Under Third Circuit LAR 34.1(a)
November 4, 1999
BEFORE: BECKER, Chief Judge, and GREENBERG
and CUDAHY,* Circuit Judges
(Filed: January 11, 2000)
LOUIS C. RICCIARDI, ESQ.
Trujillo, Rodriguez & Richards
226 West Rittenhouse Square
The Penthouse
Philadelphia, PA 19103
Counsel for Appellants
_________________________________________________________________
* Honorable Richard D. Cudahy, United States Circuit Judge for the
Seventh Circuit, sitting by designation.
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
Attorneys for Appellee
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, hefiled 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
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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 underreported 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 theyfled 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
_________________________________________________________________
1. Howard was released from prison in 1987, but his machinations
continued. The next year, he received an examination report letter from
the Internal Revenue Service (IRS) proposing adjustments for the 1979,
3
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.
_________________________________________________________________
1980 and 1981 tax years. He wrote a letter to the IRS contesting the
adjustments. The next day, he granted a $300,000 mortgage on his
residence to Roylan Finance Company. Howard had created Roylan, and
installed Mary's mother, Ernestine Woodmansee, as its sole owner.
Ernestine did not pay $300,000 for the mortgage, which was allegedly
given in exchange for Ernestine's parental support to Mary over the
years. In 1989, Howard and Mary executed a UCC-1financing statement
that gave Roylan a security interest in all of their personal property.
Lower Ct. Op. at 6. The statement was filed just two months before a
judgment was entered against Howard in the Kranzdorf lawsuit. The trial
court found as a matter of fact that the financing statement was filed in
anticipation of this debt arising.
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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
_________________________________________________________________
2. Pennsylvania replaced the Uniform Fraudulent Conveyances Act with
the Uniform Fraudulent Transfers Act in 1994. However, PUFCA is still
applicable to transfers that occurred before the February 1, 1994
effective date of the new act, 12 Pa. C.S.A. S 5101 et seq. See United
States v. Kudasik, 21 F. Supp. 2d 501, 506 n.2 (W.D. Pa. 1998).
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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
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wife in such cases must be clear and satisfactory." Id. at
589-90. Thus, in cases of interspousal transfer, whether
there is a factual presumption of actual intent to defraud
depends on whether there is adequate consideration for the
transfer. The principle has been restated and applied
numerous times in the past sixty years. See, e.g., County of
Butler v. Brocker, 455 Pa. 343, 347-48 (1974); United States
v. Klayman, 736 F. Supp. 647, 648 (E.D. Pa. 1990); United
States v. Kudasik, 21 F. Supp. 2d 501, 507 (W.D. Pa. 1998).
This Court recently discussed the continuation of the
principle under Pennsylvania's new fraudulent transfer
statute. See In re Blatstein, 192 F.3d 88, 97-98 (3d Cir.
1999). Blatstein also highlights the more significant role
solvency plays in constructive fraud, stating that under
PUFCA's successor statute, when constructive fraud is at
issue, the spouse may defeat the fraud claim by proving
either fair consideration or solvency. See id. at 99.
The trial court here specifically stated that it was
reviewing this transaction for actual fraud, not constructive
fraud. Lower Ct. Op. at 9. The trial judge found as a matter
of fact that the conveyance was between husband and wife,
and found as a matter of fact that consideration for the
conveyance was not fair. The Greens do not challenge either
of these findings, and the evidence suggests they are quite
correct. Thus, the judge correctly construed PUFCA and
correctly determined that the facts gave rise to a
presumption of actual fraud regardless of whether Howard
was solvent.
B. Relevance of Solvency in Rebutting Presumption of
Actual Fraud
Green contends that even if the trial court correctly
applied the presumption, under Pennsylvania law he can
wholly rebut it by presenting evidence of solvency. But in
its most recent pronouncement on interspousal transfers
and the application of the fraud presumption in actual
fraud cases, the Pennsylvania Supreme Court grounded its
analysis on the question of fair consideration. See County of
Butler, 455 Pa. at 348. County of Butler minimized any
significance of solvency in the analysis of interspousal
transfers for inadequate consideration. See id. at 347-48.
The trial court reviewing the Greens' predicament correctly
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followed suit, as have other federal courts. See, e.g.,
Klayman, 736 F. Supp. at 648; Kudasik, 21 F. Supp. 2d at
507.
Resisting the implications of County of Butler, Green cites
dictum from a 1957 case stating that a wife may rebut the
presumption of actual fraud arising from an interspousal
transfer alternatively by showing fair consideration or by
showing "that the husband's liabilities did not exceed his
then remaining assets." Smith v. Arrell, 388 Pa. 117, 118
(1957). Green's argument here is not frivolous, because
Smith does illustrate that Pennsylvania courts have
occasionally equivocated on the relationship between
solvency and actual fraud in interspousal transfers. For
instance, the court in Smith cited three cases to support its
statement that solvency is a defense to the interspousal
presumption of actual fraud. First, the court cited to
Iscovitz, which mandated review of "the entire course of
conduct of the grantor," including insolvency. Iscovitz, 334
Pa. at 589. But Iscovitz then directed that, if this review
revealed a conveyance between husband and wife for
nominal consideration, the court should presume actual
intent to defraud, and dismiss the presumption only on a
showing that the transaction was fair. Id. Second, the Smith
court cited to People's Savings & Dime Bank & Trust Co. v.
Scott to support the notion of a "solvency defense" to the
interspousal presumption of actual fraud. 303 Pa. 294, 297
(1931). But People's Savings dealt with constructive fraud,
and not actual fraud, so its application here is doubtful. Id.
at 296. Finally, the Smith court cited to dicta in Queen-
Favorite Building & Loan Ass'n v. Burstein, suggesting that
a presumption of actual fraud arising from an interfamily
transfer may be offset by evidence, conjointly, of fair
consideration and solvency. See 310 Pa. 219, 223 (1933).
But the outcome of Queen-Favorite did not turn on a
showing of solvency, thus diminishing the authority of the
language used in the opinion. Moreover, the Queen-Favorite
court cited in support of its "solvency" language People's
Savings and Shaver v. Mowry, 262 Pa. 381, 386 (Pa. 1918),
both of which dealt with constructive fraud, a distinct legal
concept in which solvency is relevant as a defense.
In short, Smith captures the vacillation of the
Pennsylvania courts in seeking to evaluate the significance
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of solvency to the presumption of interspousal fraud.
Green's citation of Smith shrewdly highlights strands of
Pennsylvania law that have suggested that solvency may be
a defense to the presumption of interspousal fraud. But his
effort fails here for two reasons. First, County of Butler
overruled sub silentio the Smith dicta that Green cites.
County of Butler stated that for purposes of actual fraud, a
debtor "does not have to render himself insolvent. . . in
order to establish a fraudulent intent. . . . [The creditor]
need only show an intent to hinder, delay or defraud on the
part of the [debtor] to make the conveyance fraudulent. Our
cases have established the principle that as between
husband and wife fraud is presumptively present when the
conveyance is for a nominal consideration and is challenged
by creditors . . . ." County of Butler, 455 Pa. at 347 (internal
quotation and citations omitted). Put another way, a debtor
may remain solvent and still face a presumption of actual
fraud by making an interspousal transfer for nominal
consideration. Further, Smith's congruence with the present
case is questionable. In Smith, a wife who received a
$25,000 judgment note from her husband after loaning him
$10,000 protested application of the interspousal transfer
presumption on the ground that she was still single at the
time of the transaction. The Smith court mentioned in
passing that solvency was a possible defense, but the
debtor did not rely on it there and the court did not apply
it. Thus, despite the existence of Smith, the trial judge did
not err in following the teachings of County of Butler, the
more recent and more analogous case. In light of County of
Butler, the judge was certainly not incorrect to deem
solvency substantially "irrelevant" in evaluating the
presumption that Howard's transfer to Mary was
fraudulent. The present facts are that the transfer was to a
spouse for a wholly inadequate consideration. No matter
how healthy Howard Green's balance sheet might have
been, the factual presumption of actual fraud would
survive. We therefore regard the trial court's assessment of
Pennsylvania law as applied here to be substantially
accurate. On the present facts, particularly where there is
clear and convincing evidence of inadequate consideration,
solvency is an inconsequential factor.
Under PUFCA, "[f]air consideration is given for property
or obligation: (a) [w]hen, in exchange for such property or
9
obligation, as a fair equivalent therefor and in good faith,
property is conveyed or an antecedent debt is satisfied; or
(b) [w]hen such property or obligation is received in good
faith to secure a present advance or antecedent debt in
amount not disproportionately small as compared with the
value of the property or obligation obtained." 39 Pa. Stat.
Ann. S 353 (1993). The trial court found as a matter of fact
that Mary did not give fair consideration, and the Greens do
not challenge this finding of fact. Thus, Mary did not
successfully rebut the presumption of actual intent.
C. The Presumption is in Accord with Subsequent Events
Moreover, the judge did not wear blinders in presuming
that Howard acted with actual fraudulent intent. The court
took account of the totality of the circumstances, an
approach clearly endorsed by Godina v. Oswald, which
states that "[s]ince fraud is usually denied, it must be
inferred from all facts and circumstances surrounding the
conveyance, including subsequent conduct." 206 Pa. Super.
51 (1965) (quoting Sheffit, 175 Pa. Super. at 41.). Howard's
subsequent conduct included creating the Roylan Finance
Company and installing Mary's mother as its owner solely
for the purpose of granting a mortgage on the property, just
days after contesting the IRS's claim for taxes owed.
Subsequent conduct also involved granting Roylan a
security interest in all of his personal property shortly
before the $17 million judgment was entered against him in
the bankruptcy trustee's lawsuit. These facts reinforce the
trial court's ultimate conclusion that, all things considered,
Howard's proffered evidence of solvency was "irrelevant" to
the question of his intent to defraud creditors.
D. Howard's Solvency
Finally, we note that despite his doggedness on this
issue, Howard likely cannot prove that he was solvent as of
April 13, 1981, the date he transferred the property to
Mary. A person is insolvent under the Uniform Fraudulent
Conveyance Act when "the present, fair, salable value of his
assets is less than the amount that will be required to pay
his probable liability on his existing debts as they become
absolute and matured." 39 Pa. Stat. Ann. S 352(1) (1993).
"Debts" are defined as "any legal liability whether matured
10
or unmatured, liquidated or unliquidated, absolute,fixed,
or contingent." 39 Pa. Stat. Ann. S 351 (1993). The United
States is considered a creditor "from the date when the
obligation to pay income taxes accrues," essentially on April
15 of the year following the tax year in question. United
States v. St. Mary, 334 F. Supp. 799, 803 (E.D. Pa. 1971).
Further, the Pennsylvania Supreme Court has found that
awareness of a probable legal action against a debtor
amounts to a debt for purposes of determining solvency.
See Baker v. Geist, 457 Pa. 73, 76-77 (1974).
As of April 15, 1980, Howard was in debt to the United
States for the underreported amount of his 1979 federal
income taxes, $51,845. And Howard transferred the
property to Mary just two months after Fidelity filed for
bankruptcy protection. It was this filing, and the
appointment of a bankruptcy trustee, that led to the 1983
complaint against Howard and the eventual $17 million
judgment against him. Thus, at the time Howard conveyed
the property, he was on notice of a possible suit by the
bankruptcy trustee. Howard could reasonably estimate that
the tax debt and bankruptcy debt together would reach
several million dollars. These looming debts, when
compared with his "collapsing" portfolio, suggest that
Howard was insolvent at the time of the transfer to Mary.
So even if solvency were relevant to the question of actual
fraud in this case -- we repeat that it is not -- Howard's
arguments are still unavailing.
III. Conclusion
Evidence of solvency was not a barrier to applying the
presumption of actual fraud arising from Howard's transfer
of property to Mary for nominal consideration. Evidence of
solvency would not have been enough to rebut that
presumption once applied. Moreover, the evidence suggests
that Howard was not solvent at the time of the transfer.
Therefore, we AFFIRM the district court's interpretation of
PUFCA, the presumption that the conveyance was
fraudulent and the finding that the Greens did not rebut
the presumption.
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A True Copy:
Teste:
Clerk of the United States Court of Appeals
for the Third Circuit
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