Opinion ID: 782142
Heading Depth: 3
Heading Rank: 5

Heading: The Government's Alternative Theories

Text: 39 The Government argues that the district court erred in refusing to allow it to present three alternative theories of defense to the Hatchetts' wrongful levy action. The Government argues that if there is sufficient evidence to support these three theories, it would be allowed to retain a higher percentage of the proceeds from the sale of the entireties property.
40 In 1996, pursuant to Federal Rule of Civil Procedure 15(a), the Government filed a motion to amend its answer to the Hatchetts' wrongful levy complaint in order to assert the affirmative defense of fraudulent conveyance. Under this theory, the Government argued that Elbert, while insolvent, used his individual funds to purchase and enhance property that he placed in entireties ownership in order to prevent his creditors from attaching it. A magistrate judge issued an order granting the Government's motion to amend its answer. However, in a February 28, 1997 Memorandum and Opinion, the district court reversed the order of the magistrate judge and refused to allow the Government to present its theory of fraudulent conveyance. The district court also ruled on the Hatchetts' Motion to Strike Fraudulent Conveyance Defense and for Summary Judgment and granted the Motion to Strike and the Motion for Summary Judgment as to the fraudulent conveyance issue. The court discussed three reasons for its holding: (1) the Government lacked standing to bring the theory; (2) introduction of the theory was barred by res judicata; and (3) introduction of the theory was barred by laches. 41 We review a denial of a motion to amend the pleadings for abuse of discretion. Fisher v. Roberts, 125 F.3d 974, 977-78 (6th Cir.1997); LRL Props. v. Portage Metro Hous. Auth., 55 F.3d 1097, 1104 (6th Cir.1995). However, if the court denies the motion on grounds that the motion would be futile, the denial is reviewed de novo. Parry v. Mohawk Motors of Mich., Inc., 236 F.3d 299, 306 (6th Cir.2000); LRL Props., 55 F.3d at 1104; see also Dubuc v. Green Oak Township, 312 F.3d 736, 743-44 (6th Cir.2002). Because the district court's disposition of this issue is equivalent to a denial based on futility, we review the decision de novo. We disagree with all three of the reasons set forth by the district court and remand with instructions to grant the Government's motion to amend its answer. 42
43 The district court, relying in part on Nat'l Tax Credit Partners, L.P. v. Havlik, 20 F.3d 705, 708-09 (7th Cir.1994), held that the Government lacked standing to assert the fraudulent conveyance defense. The court held that the bankruptcy trustee, appointed in September, 1990, had the exclusive authority to pursue a claim of fraudulent conveyance under 11 U.S.C. § 548 (2002) of the Bankruptcy Code. We disagree. 44 In September, 1992, the bankruptcy trustee filed a complaint against Elbert based upon a theory of fraudulent conveyance. However, on February 25, 1993, the trustee filed a motion to abandon its fraudulent conveyance action after determining that the liens filed in favor of the IRS and the State of Michigan exceeded the Hatchett's equity in the properties at issue. The trustee determined that because no funds would be available from the liquidation of properties for unsecured creditors, he should abandon the claim. In March, 1993 the trustee's fraudulent conveyance action was officially abandoned and the matter was settled in the Bankruptcy Court in April, 1993. 45 Section 548 of the Bankruptcy Code provides 46 (a)(1) The trustee may avoid any transfer of an interest of the debtor in property, or any obligation incurred by the debtor, that was made or incurred on or within one year before the date of the filing of the petition, if the debtor voluntarily or involuntarily — 47 (A) made such transfer or incurred such obligation with actual intent to hinder, delay, or defraud any entity to which the debtor was or became, on or after the date that such transfer was made or such obligation was incurred, indebted... 48 11 U.S.C. § 548(a) (1993). Though the trustee has the exclusive right to bring an action for fraudulent conveyance during the pendency of the bankruptcy proceedings, the Bankruptcy Code does not extinguish the right of the Government to bring a state law action for fraudulent conveyance after the debtor receives a discharge in bankruptcy. In Havlik, the Seventh Circuit held that the right to recoup a fraudulent conveyance is exclusive to the trustee, and specifically noted that this right only attached once a bankruptcy is under way. 20 F.3d at 709. The court said nothing about the right of individual creditors to pursue state law claims for fraudulent conveyance once the bankruptcy was discharged. In Klingman v. Levinson, 114 F.3d 620, 629 (7th Cir.1997), the court held that bankruptcy proceedings only have the effect of imposing a temporary stay of a fraudulent conveyance action by the Government. The court in Klingman held that once the bankruptcy court issued findings on the matter, the Government could proceed on a state law fraudulent conveyance action in the district court. See also Nat'l Am. Ins. Co. v. Ruppert Landscaping Co., Inc., 187 F.3d 439, 441 (4th Cir.1999) (noting that an individual creditor can pursue fraudulent conveyance claims only after such a claim has been abandoned by the trustee); Kathy B. Enter., Inc. v. United States, 779 F.2d 1413, 1415 (9th Cir.1986) (holding that once the bankruptcy proceedings are over, the IRS is able to pursue a collection action because such an action would not interfere with rights of other creditors); Fed. Deposit Ins. Corp. v. Davis 733 F.2d 1083, 1085 (4th Cir.1984) (Once a bankruptcy case has been closed, creditors having unavoided liens on fraudulently conveyed property can pursue their state law remedies independently of the trustee in bankruptcy.). Accordingly, because the bankruptcy proceedings are over, the Government has standing to assert its fraudulent conveyance theory. 49
50 The district court also held that the Government's fraudulent conveyance claim was barred by the doctrine of res judicata. With a cursory explanation, the district court held that the Bankruptcy Court's approval of a settlement regarding the fraudulent conveyance issue bars any further litigation on the matter. We disagree. A claim in a second action is barred under the doctrine res judicata if: (1) the first action resulted in a final judgment on the merits; (2) both actions are between the same parties; (3) the issue in the second action should have been litigated in the first action; and (4) the claim is identical in both actions. Wilkins v. Jakeway, 183 F.3d 528, 532 (6th Cir.1999). The action at issue here does not even meet the first requirement of the doctrine of res judicata. The bankruptcy trustee abandoned any action to recover the properties based on a theory of fraudulent conveyance. Accordingly, there was no final judgment on the merits regarding the issue of fraudulent conveyance and the doctrine of res judicata does not apply. 51
52 Finally, the district court held that the Government's fraudulent conveyance defense was barred by laches. In its summary disposition of the issue, the district court relied on S.E.R., Jobs for Progress, Inc. v. United States, 759 F.2d 1 (Fed.Cir.1985) and 11 U.S.C. § 546 (2002). This reliance was misplaced. It is well established that the Government generally is exempt from the consequences of its laches. See United States v. Summerlin, 310 U.S. 414, 416, 60 S.Ct. 1019, 84 L.Ed. 1283 (1940) (It is well settled that the United States is not bound by state statutes of limitation or subject to the defense of laches in enforcing its rights.); Guar. Trust Co. v. United States, 304 U.S. 126, 132, 58 S.Ct. 785, 82 L.Ed. 1224 (1938) (noting the continuing vitality of the rule that the sovereign is exempt from its own laches); United States v. Peoples Household Furnishings, Inc., 75 F.3d 252, 254 (6th Cir.1996) (The ancient rule ... `that the sovereign is exempt from the consequences of its laches, and from the operation of statutes of limitations' — has enjoyed continuing vitality for centuries.) (citation omitted); United v. Weintraub, 613 F.2d 612, 618 (6th Cir.1979) (The principle [that the Government is exempt for the consequences of its own laches] is well established in this country.). However, the Government may be subject to laches in certain types of action. See S.E.R., 759 F.2d at 6-7. The court in S.E.R. merely held that the doctrine of laches may be applicable against the Government in the limited exception of contract cases, saying nothing regarding any other type of action involving the Government. Id. at 8. Accordingly, there is no precedent holding that the Government is subject to its own laches in tax collection actions. 53 Under § 546, a fraudulent conveyance action must be commenced within two years of the appointment of the Chapter 7 trustee. Because the bankruptcy trustee was appointed on September 10, 1990, the court reasoned that the Government's fraudulent conveyance action is untimely. However, the statute of limitations in § 546 applies only to actions by trustees. See Weintraub, 613 F.2d at 618 (While the general rule ... is that the sovereign is exempt from the operation of statutes of limitations, an exception to that general rule exists when the sovereign (through the legislature) expressly imposes a limitation period upon itself.). As we have discussed, this state law action by the Government for fraudulent conveyance commenced after the discharge of the bankruptcy and has nothing to do with the rights of the trustee. Accordingly, the statute of limitation set forth in § 546 is irrelevant to the Government's action and the general rule that the Government is exempt from the doctrine of laches applies in the instant case. 54 Furthermore, we reverse the district court's decision to grant the Hatchett's Motion to Strike Fraudulent Conveyance Defense. We review the grant of a motion to strike a pleading for abuse of discretion. See, e.g., Fisher, 125 F.3d at 977-78 (6th Cir.1997); LRL Prop., 55 F.3d at 1104. For the reasons stated above, we find that the district court abused its discretion in granting the Hatchett's motion to strike.
55 The Government also wanted to argue at the trial level that its levies were proper under both a nominee theory and a lien tracing theory, and sought to introduce evidence in support of these theories. Under the nominee theory, the Government argues that other individuals are holding three properties and rights to the mortgage payments as nominees of Elbert. The Government argues that Elbert shielded the properties and payments from his tax liabilities with these title arrangements. Under the lien tracing theory, the Government argues that since it had a lien on Elbert's money, it is entitled to place a lien on the properties improved or purchased with that money. 56 In a March 31, 2000 Order Denying Defendants' Motion for Recusal and Granting in Part and Denying in Part Cross-Motions for Summary Judgment, Hatchett v. Internal Revenue Serv., 126 F.Supp.2d 1038 (E.D.Mich.2000), the district court ruled that the Government's nominee and lien tracing theories were unpersuasive. The court based its decision on the fact that, under Craft I, we held that taxpayers did not hold any separate interest in property held as a tenancy by the entirety to which a lien can attach. 57 This Court reviews the district court's summary judgment decision de novo. See Watkins, 273 F.3d at 685. In light of the Supreme Court decision in Craft, both theories are relevant in determining the Government's interest in the entireties properties and mortgage payments at issue. Accordingly, the Government is entitled to present its nominee and lien tracing theories on remand in order to determine the exact value of the Government's interests.