United States District Court, D. Massachusetts
September 30, 2014
UNITED STATES OF AMERICA
SCOTT G. BAKER AND ROBYN BAKER
MEMORANDUM AND ORDER ON PLAINTIFF UNITED STATES OF AMERICA'S MOTION FOR SUMMARY JUDGMENT
RICHARD G. STEARNS, District Judge.
The United States filed this Complaint on May 1, 2013, seeking a monetary judgment against defendant Scott Baker for $4.4 million in unpaid federal income taxes assessed by the Internal Revenue Service (IRS) in 2009 and 2010. The United States also sought to enforce related tax liens against real property located at 667 Main Street, Hingham, Massachusetts (the Hingham Property), and sought a judgment against defendant Robyn Baker, individually and as trustee of the C&S Realty Trust and the S&R Realty Trust, for tortious conversion of encumbered assets.
The individual claim against Scott Baker is stayed, pending resolution of his bankruptcy petition (Case No. 13-13618 (Bankr. D. Mass), filed in June of 2013), but the claims against the real property (and against Robyn Baker) are not subject to the bankruptcy stay as the affected assets are not part of Scott Baker's bankruptcy estate. The United States now moves for summary judgment on the non-stayed claims.
The IRS has assessed Scott Baker more than $4 million in unpaid income tax liabilities (consisting of $2, 476, 526 in tax assessments for income tax years 1997-2002, and $1, 960, 924 in accrued penalties and interest as of May 1, 2013). Baker is a self-employed construction manager who currently earns over $80, 000 per year. He was previously involved (beginning in 1997) in the construction of various Planet Fitness gyms as part of his business. Robyn Baker (nee Robyn Gauthier) is Scott Baker's ex-wife. (The couple married on December 12, 1998, and they have two teenage children. They divorced in 2008). They filed joint income tax returns for tax years 1999, 2000, and 2001. They filed separate income tax returns for tax year 2002.
2001 Tax Return
In October of 2002, the Bakers jointly filed their 2001 federal income tax return, reporting an Adjusted Gross Income (AGI) of over $1 million. The Bakers were taxed on roughly a quarter of that income, significantly less than what would have been due, because of reported "paper" losses that reduced their taxable income from $1, 114, 449 to $289, 688. The losses were generated by a "Son-of-Boss" tax shelter scheme.
2002 Tax Return
In December of 2002, Scott Baker, together with a college friend, sold eight Planet Fitness gyms to Bally Fitness for approximately $15 million. Scott Baker received roughly $4, 600, 000 in Bally Fitness stock, which he eventually sold for $3.4 million. See Adv. Proc., Compl. ¶ 5. As noted, Scott and Robyn Baker filed separate tax returns for tax year 2002. Scott Baker, resorting to a second abusive tax shelter to avoid income tax on the gains from the Planet Fitness sale, reported a negative $2.5 million in income on his 2002 return, which he filed on September 23, 2003. He thus claimed a tax refund of $42, 655 for income taxes he had already paid that year, and then amended the couple's joint 1997-2001 tax returns to claim (and receive) additional refunds by carrying-back the uncredited portion of the 2002 losses. As a result, the IRS refunded the Bakers roughly all of the tax amounts they had paid for these earlier years. Scott Baker deposited the Planet Fitness sale proceeds and the tax refunds into an account in the name of the "Scott Baker Family Trust."
The Scott Baker Family Trust
On June 30, 2003, Scott Baker established and became the settlor of the "Scott Baker Family Trust, " a Cayman Island Trust, with a Royal Bank of Canada account in the Cayman Islands. Baker granted himself a one-third beneficial interest in the Trust. The remaining beneficial interests were divided among Robyn Baker and the Bakers' minor children. Scott Baker created the Trust for the purpose of engaging in the tax sheltering transaction used in his 2002 return to offset the $3.4 million gain. See Adv. Proc., Compl. ¶ 7. The entire corpus of the Trust was invested in a fund called "IMA." According to Robyn Baker, at some point in late 2005, the Bakers learned that the investment in IMA was essentially worthless, as it proved to be a Ponzi scheme. See C&S Trustee Dep., 40:1-10.
IRS Examines Scott Baker's 2002 Return and Related Carrybacks
On December 6, 2004, the Bakers signed an agreement with the IRS, pursuant to a Global Settlement Initiative, resolving the claims arising from the use of the 2001 Son-of-Boss tax shelter. See Adv. Proc., Dkt. #41-4. On August 22, 2005, the Bakers purchased the Hingham Property as tenants by the entirety for $1, 622, 500. Also in August of 2005, the IRS opened an examination of Scott Baker's (individually filed) 2002 tax return. While Scott Baker initially elected to participate in a second IRS Global Settlement Initiative, agreeing to pay $1.2 million, he was ultimately removed from the program at some point after the IRS requested disclosure of his assets in 2007, because of a professed inability to pay the promised amount.
The IRS Requests Disclosure of Assets, and the Bakers Transfer the Hingham Property to a Realty Trust
In early February of 2007, the IRS requested that Scott Baker complete a Form 433-A, by March 1, 2007, listing all of his assets. It is undisputed that the Bakers were then aware of the probability of a looming multi-million dollar tax assessment. On February 22, 2007, the Bakers established the S&R Realty Trust, with Robyn Baker as Trustee. They then transferred the title to the Hingham Property, by way of a quitclaim deed, to the new Trust. That same day, before the transfer was recorded, the Bakers remortgaged the Hingham Property, naming Scott Baker as the sole mortgagor.
Also on February 22, 2007, the Bakers established a second realty trust, the C&S Realty Trust. (S&R stands for Scott and Robyn, and C&S stands for the first letters of the first names of the Bakers' minor children). Robyn Baker was also the sole trustee for C&S Trust. The beneficiaries of the C&S Realty Trust were at least the Baker's two minor children (neither party attached the schedule of beneficiaries, while Robyn Baker, the Trustee of the S&R and C&S Realty Trusts was unclear in her deposition as to whether she was also a beneficiary of the S&R or C&S Realty Trusts). The Bakers then transferred a property located at 253 Humarock Beach Road in Scituate, Massachusetts (Humarock Property) into the C&S Trust.
Robyn Baker (who was deposed at least three times in this case (once in her personal capacity, once in her capacity as the Trustee of the S&R trust, and once in her capacity as the Trustee of the C&S Trust), testified that the S&R Realty Trust had no other purpose than holding title to the Hingham Property, which was the Trust's only asset, S&R Trustee Dep., 14:4-15, and that the C&S Realty Trust was formed "to protect a beach house at 253 Humarock Beach Road from any potential construction people that may have had an issue with Scott." C&S Dep., 9:1-6. She also testified that Scott Baker did not receive any consideration for transferring his half interests in property into Trusts for which only Robyn was a Trustee, and for which he was not a beneficiary. See S&R Dep., 16:17-18:3.
Robyn Baker was aware that Scott Baker had an outstanding federal tax liability,  and while she was concerned about the IRS tax debt at the time the S&R and C&S Trusts were created, she does not believe that the Trusts were established to avoid that debt. Robyn Baker also testified that another reason that she and Scott Baker placed these properties in trust was because they were "contemplating separating and dividing assets." C&S Dep., 9:6-7.
On March 5, 2007, the Bakers recorded the deeds transferring the Hingham Property to the S&R Realty Trust and transferring the Humarock Property to the C&S Realty Trust. On March 6, 2007, the Bakers completed and signed the IRS Form 433-A. The Bakers listed the Hingham Property and the Humarock Property under the "real estate" section of the Form. See Dkt. #22-34.
In January of 2008, shortly before the Bakers filed for divorce, a $258, 801 payment was made from the C&S Realty Trust account to IndyMac Bank to pay down the mortgage on the Hingham Property.
Divorce Decree/Settlement Agreement
On January 11, 2008, the Bakers filed for divorce. One day prior, on January 10, 2008, the Bakers signed a Separation Agreement that was later incorporated into the divorce judgment. See Dkt. #40-3 at 5-14. The Agreement stated that "irreconcilable differences [had] arisen and continue to exist between the parties with no chance of reconciliation since March 1, 2007, " and that the Agreement was made "in order to settle all claims of the parties and all other matters which should be settled in view of the pending complaint for divorce." Id. at 5. The Agreement provided that the Bakers would retain joint physical and legal custody of their children. See id. at 5-6 ("The parties agree to consult with each other concerning the daily living needs and schedule of the children."). Article II of the Agreement, titled "Financial Arrangements, " contained various provisions regarding health insurance and other expenses, while explicitly noting that the Agreement obligated neither party to pay child support or alimony Id. at 6.
Article III of the Agreement, titled "Real Estate, " divided the Bakers' various property holdings. It gave Robyn Baker the sole ownership of the Hingham Property, while noting that the property "is presently held by S & R Realty Trust for the benefit of the minor children, " as well as two parcels of land in New Hampshire. Article III further required that Scott Baker assume the Hingham Property mortgage and make all monthly payments (while waiving "all rights in the Marital Home"). Notwithstanding, the Agreement gave Scott Baker permission to reside on the Hingham Property, while Robyn Baker was to be responsible for utility payments and routine repairs. Scott Baker also assumed the "marital credit card debt, " all liabilities for his business, and received sole ownership of his business ventures,  while "[Robyn] agree[d] to help [Scott] be successful in any business ventures he may wish to pursue." Id. at 11. Lynn Erickson, the attorney who drafted the Separation Agreement, ostensibly acted as Robyn Baker's lawyer, but without her avowed knowledge. RB Dep., 59:16.
On February 28, 2008, the Probate Court entered a judgment incorporating the Separation Agreement and giving it "the full force and effect of an order of this Court." Dkt. #30-3 at 2. The divorce became final on May 29, 2008. Since the entry of the divorce decree, Scott Baker has paid the monthly $6, 200 mortgage on the Hingham Property. Most of the household bills, including the gas and electrical utilities, are in his name. The current equity in the Hingham Property is approximately $300, 000.
Summary judgment is appropriate when "the movant shows that there is no genuine dispute as to any material fact and the movant is entitled to judgment as a matter of law." Fed.R.Civ.P. 56(a). "Even in cases where elusive concepts such as motive or intent are at issue, summary judgment may be appropriate if the nonmoving party rests merely upon conclusory allegations, improbable inferences, and unsupported speculation." Medina-Munoz v. R.J. Reynolds Tobacco Co. , 896 F.2d 5, 8 (1st Cir. 1990). However, the non-moving party is given the benefit of all favorable inferences, Oliver v. Digital Equip. Corp. , 846 F.2d 103, 105 (1st Cir. 1988), and "when the facts support plausible but conflicting inferences on a pivotal issue in the case, the judge may not choose between those inferences at the summary judgment stage." Coyne v. Taber Partners I , 53 F.3d 454, 460 (1st Cir. 1995).
The United States alleges that the IRS tax liens relating to the 2009 and 2010 assessments attach to the Hingham Property. It seeks a forced sale to collect the proceeds, or any portion, that are subject to the tax lien. The Bakers allege (in separate oppositions) that Robyn Baker holds title to the Hingham Property free and clear of any tax liens because the property does not constitute "property or rights to property" attributable to Scott Baker (because the transfer of the property to Robyn Baker preceded the attachment of any tax liens on property of Scott Baker). Scott Baker's counsel also suggested at oral argument that this case might well be mooted by the Bankruptcy Court's determination on dischargeability, which is still pending.
Relevance of Dischargeability Adversary Proceeding
Scott Baker alleges that the United States' motion "fails because Mr. Baker's tax debt to the United States is dischargeable and should be discharged, " Dkt. #29 at 2. While this court takes no position on the dischargeability of Scott Baker's tax debt under 11 U.S.C. § 523(a)(1)(C), it is important to note that a bankruptcy discharge would have no legal effect on the United States' lien enforcement counts against the Hingham Property and/or Robyn Baker. See 11 U.S.C. § 524(e) ("[D]ischarge of a debt of the debtor does not affect the liability of any other entity on, or the property of any other entity for, such debt."); see also In re Witkowski , 176 B.R. 114 (Bankr. D. Mass. 1994) (same). This is not only because the Bankruptcy Court explicitly abstained from adjudicating these matters, noting that they were not "property of the estate, " but also because "a discharge extinguishes only the personal liability of the debtor.'" Johnson v. Home State Bank , 501 U.S. 78, 83 (1991), quoting 11 U.S.C. § 524(a)(1) (emphasis in original); see also id. at 84 (noting that the Bankruptcy Code, at section 522(c)(2), codified the rule of Long v. Bullard , 117 U.S. 617 (1886), and thus "a bankruptcy discharge extinguishes only one mode of enforcing a claim-namely, an action against the debtor in personam - while leaving intact another - namely, an action against the debtor in rem. "); Dewsnup v. Timm , 502 U.S. 410 (1992) (noting that "a lien on real property pass[es] through bankruptcy unaffected"). While it remains to be determined whether and to what extent the United States' tax liens attached to the Hingham Property, that determination would neither be "moot" nor "void" as a result of a bankruptcy discharge.
The United States seeks first to establish that the transfer of the Hingham Property to Robyn Baker was fraudulent and should be set aside. "State law creates legal interests and rights, " even though federal law "must prevail no matter what name is given to [an] interest or right by state law." Morgan v. Comm'r , 309 U.S. 78, 80-81 (1940). Thus the inquiry begins with the Massachusetts Uniform Fraudulent Transfer Act (UFTA). The UFTA, Mass. Gen. Laws ch. 109A, § 5 (emphasis added), states:
(a) A transfer made or obligation incurred by a debtor is fraudulent as to a creditor, whether the creditor's claim arose before or after the transfer was made or the obligation was incurred, if the debtor made the transfer or incurred the obligation:
(1) with actual intent to hinder, delay or defraud any creditor of the debtor; or
(2) without receiving a reasonably equivalent value in exchange for the transfer or obligation, and the debtor... intended to incur, or believed or reasonably should have believed that he would incur, debts beyond his ability to pay as they became due.
The First Circuit has acknowledged "that it is often impracticable, on direct evidence, to demonstrate an actual intent to hinder, delay or defraud creditors.' Thus, courts frequently infer fraudulent intent from the circumstances surrounding a transfer, placing particular emphasis on certain indicia or badges of fraud." F.D.I.C. v. Anchor Props. , 13 F.3d 27, 32 (1st Cir. 1994) (internal citations omitted). Moreover, the phrase "to hinder, delay, or defraud" is to be read in its natural disjunctive sense. Thus, proof of an "intent to defraud is not [always] necessary, but rather an intent to hinder or delay is sufficient for a finding of liability." Davis v. United States , 869 F.Supp. 49, 52 (D. Mass. 1994), citing Joseph P. Manning Co. v. Shinopoulous , 317 Mass. 97, 99 (1944). In fashioning remedies under the UFTA, a court must also be sensitive to the strong Massachusetts public policy of protecting the interests of a nondebtor spouse. Bakwin v. Mardirosian , 467 Mass. 631, 638 (2014).
It is impossible to view the convoluted and tax-convenient shuffling of the Bakers' assets with anything but a healthy dose of skepticism. The United States has come forward with evidence from which a fact-finder could infer that the transfer of Scott Baker's half-interest in the Hingham Property was fraudulent or that Robyn Baker holds title to the property as a nominee for Scott Baker. Aside from any inference of an intent to hinder or delay creditors, it is undisputed that in 2007, when Scott Baker transferred the Hingham Property to the S&R Trust and assumed the new mortgage, both he and Robyn Baker knew that a ruinous tax assessment was likely imminent. It is also undisputed that Scott Baker transferred his interest in the Hingham Property to the Trust for no tangible consideration. If the United States was simply seeking to set aside this first transfer of the Hingham Property in its entirety to the S&R Realty Trust as a fraudulent conveyance, the issue might well be resolved on summary judgment. It is beyond peradventure that "a settlor cannot place property in trust for his own benefit and keep it beyond the reach of creditors." United States v. Murray , 217 F.3d 59, 65 (1st Cir. 2000) (internal citation omitted).
The second transfer, the surrender of Scott Baker's half-interest in the Hingham Property to Robyn Baker pursuant to the Separation Agreement, is more problematic. Although the second transfer boasts many of the badges of fraud in its own right,  Robyn Baker maintains that she gave adequate consideration for her husband's half-interest at the time of the divorce, namely by giving up any right to Scott Baker's interest in the last of his Planet Fitness gyms. Because a material dispute of fact exists regarding the actual value of Scott Baker's business interests at the time the Separation Agreement was adopted by the Probate Court, the entry of summary judgment under § 5(a)(1) or § 5(a)(2) is precluded. While it is true, as the government notes, that a "fraudulent intent... may be inferred from the facts and circumstances of a particular case, " Davis , 869 F.Supp. at 52, citing Citizens Bank & Trust Co. v. Rockingham Trailer Sales, Inc. , 351 Mass. 457 (1966), this rule is pertinent to a finder-of-fact, and not a court sitting in brevis review.
The Nominee Theory
In the alternative, the United States alleges that Robyn Baker holds the Hingham Property as Scott Baker's nominee, and that there was, in reality, no conveyance effectuated at all, because Scott Baker still exercises control over the property and derives a benefit from it. The United States is permitted to collect a taxpayer's unpaid tax liabilities from property in the possession of a nominee because the taxpayer's continued domination and control over property is powerful evidence that there was "in truth and fact  no transfer at all." Higgins v. Smith , 308 U.S. 473, 357-358 (1940); see also G.M. Leasing Corp. v. United States , 429 U.S. 338, 350 (1977) ("If petitioner was [taxpayer's] alter ego, it had no countervailing effect for purposes of his federal income tax... [and the IRS] could properly regard petitioner's assets as [taxpayer's] property subject to the lien under § 6321."). For the same reason that the court is unable to enter summary judgment on the bona fides of the second transfer, it is similarly unable to enter a brevis judgment on this theory as well.
The Lien Tracing Theory
The United States offers a third theory to justify enforcement of the lien that focuses solely on assets allegedly transferred subsequent to the first tax assessment date in May of 2009 (which was after the Bakers' divorce agreement and corresponding property transfer). When an assessment is recorded against a "person liable to pay any tax" who "neglects or refuses to pay the same after demand, " a lien arises in favor of the United States against "all property and rights to property, whether real or personal, belonging to such person." 26 U.S.C. § 6321. Once the lien attaches to the taxpayer's property, it stays with the property, even if the property is transferred or converted. See, e.g., United States v. Bess , 357 U.S. 51, 57 (1958) ("The transfer of property subsequent to the attachment of the lien does not affect the lien, for it is of the very nature and essence of a lien, that no matter into whose hands the property goes, it passes cum onere. '") (internal citation omitted).
Thus, to the extent it is possible to "trace" the lien, that is, to follow the trail of the taxpayer's property to subsequently acquired substitute assets or proceeds, the lien attaches to the after-acquired property and may be enforced against the property no matter whose hands it is in. See, e.g. , In re Callahan , 442 B.R. 1, 7 (D. Mass. 2010), quoting Phelps v. United States , 421 U.S. 330, 334-335 (1975) ("Once a tax lien attaches to property, [t]he lien reattaches to the thing and to whatever is substituted for it.... The owner and the lien holder, whose claims have been wrongfully displaced, may follow the proceeds wherever they can distinctly trace them.") (emphasis in original).
The United States alleges that, since the date of the initial assessment, the Hingham Property has been paid for and maintained by assets and earnings under the control of Scott Baker, thereby rendering the property subject to the tax lien to the extent such earnings and assets subject can be traced. Scott Baker used approximately $6, 200 per month of his personal funds (which, after May 14, 2009, were subject to the tax liens arising from assessment) to make mortgage and property tax payments on the Hingham Property. Robyn Baker does not dispute this, noting that the mortgage has been paid from Scott Baker's personal funds "for as long as she can remember." RB Dep., 8:14-9:5. The United States argues that, even if the conveyances are not set aside (on the nominee or fraudulent conveyance theories), the United States has the right to enforce the federal tax liens on the Hingham Property to the extent it can trace Scott Baker's personal property to the maintenance of the mortgage on the property.
It is unlikely that the disputes of fact the Bakers have alleged with regard to the fraudulent conveyance and nominee theories would be relevant to defeat summary judgment on the lien tracing theory. Unlike an attempt to enforce a lien on property allegedly fraudulently conveyed prior to attachment to a lien, an attempt to enforce a lien on property that was transferred or conveyed after a section 6321 lien attached, entails no factual inquiry into matters of intent or state of mind (and is also definitively a matter of federal, not state, law). See Bess , 357 U.S. at 57 (noting that "state law is inoperative to prevent the attachment of liens created by federal statutes in favor of the United States"); see also Don King Prods., Inc. v. Thomas , 945 F.3d 529 (2d Cir. 1991) ("Only those persons specifically listed in the statute are entitled to priority over unrecorded federal tax liens.").
The obstacle to summary judgment on this theory, however, is the fact that the mortgage payments on the Hingham Property are being made by Scott Baker pursuant to a divorce decree entered by the Probate Court (which adopted the Bakers' prior Separation Agreement). While "it is not debatable that a tax lien imposed by a law of Congress, cannot, without the consent of Congress, be displaced by later liens imposed by authority of any state law or judicial decision, " State of Mich. v. United States , 317 U.S. 338, 340 (1943), the divorce decree was entered prior to the assessments that gave rise to the liens at issue. The United States has not addressed the implications of this fact, and thus, any entry of summary judgment on this theory would be premature on the record now before the court.
Finally, the United States seeks summary judgment on its claim against Robyn Baker personally for the tortious conversion of assets subject to a federal tax lien, for the amount of Scott Baker's property that she has appropriated for her own use in "derogation, diminution, and destruction of the superior interests of the United States." Compl. ¶ 49. The court cannot grant summary judgment on this count without making inappropriate determinations of disputed facts, including issues of credibility.
For the foregoing reasons, the motion of the United States for summary judgment is DENIED. The Clerk is directed to set the case for trial on the issues identified by the court in this decision.