Opinion ID: 2828819
Heading Depth: 2
Heading Rank: 2

Heading: The Federal Priority Statute

Text: The Federal Priority Statute provides that: (a)(1) A claim of the United States Government shall be paid first when— (A) a person indebted to the Government is insolvent and— (i) the debtor without enough property to pay all debts makes a voluntary assignment of property; (ii) property of the debtor, if absent, is attached; or (iii) an act of bankruptcy is committed; or (B) the estate of a deceased debtor, in the custody of the executor or administrator, is not enough to pay all debts of the debtor. ... (b) A representative of a person or an estate (except a trustee acting under title 11) paying any part of a debt of the person or estate before paying a claim of the Government is liable to the extent of the payment for unpaid claims of the Government. 31 U.S.C. § 3713. Hilliard and E. Pierce Jr. argue that the district court committed several errors in holding them liable for distributions from the Living Trust and Stevens’s Estate in violation of the Federal Priority Statute. First, they argue that the Government did not prove that they knew about Stevens’s potential liability for the unpaid gift tax, and, therefore, they cannot be found to have violated the Federal Priority Statute. Next, they argue there was insufficient evidence for the district court to find them personally liable for: (1) the 22 Case: 12-20804 Document: 00513161978 Page: 23 Date Filed: 08/19/2015 No. 12-20804 charitable set-aside; (2) the distribution of personal property and apartment rent from Stevens’s Estate; or (3) the payment of legal and accounting fees from the Living Trust. Last, E. Pierce Jr. claims the district court erred in finding that he breached his fiduciary duty under Texas law. 1. E. Pierce Jr. and Hilliard’s knowledge of Stevens’s gift tax liability E. Pierce Jr. and Hilliard argue that the Government failed to show that they knew about the potential liability to the Government. They acknowledge that, under United States v. Renda, 709 F.3d 472, 484–85 (5th Cir. 2013), erroneous legal advice as to the validity of a claim is not an excuse under the Federal Priority Statute. But, they argue that Renda only applies when the claim has actually been made, and therefore does not apply here where they allegedly had knowledge of the potential claim while the Government delayed in making the claim. They also point to Little v. Commissioner, 113 T.C. 474 (1999) to argue that advice of legal counsel is a defense under the Federal Priority Statute with regard to potential claims. The Government flatly rejects any argument about E. Pierce Jr.’s and Hilliard’s lack of knowledge because they both admitted during depositions that they knew of the potential donee gift tax liability to the Government in excess of $35 million. Liability under the Federal Priority Statute requires that (1) a fiduciary (2) distributed the estate’s assets before paying a claim of the Government and (3) knew or should have known of the Government’s claim. See Renda, 709 F.3d at 480–81. The only dispute in this case is whether E. Pierce Jr. and Hilliard met the knowledge requirement. Actual knowledge is not required; “[t]he knowledge requirement of [31 U.S.C. § 3713] may be satisfied by either actual knowledge of the liability or notice of such facts as would put a reasonably prudent person on inquiry as to the existence of the unpaid claim of the United States.” Leigh v. Comm’r, 72 T.C. 1105, 1110 (1979) (citations omitted). 23 Case: 12-20804 Document: 00513161978 Page: 24 Date Filed: 08/19/2015 No. 12-20804 We hold that Hilliard and E. Pierce Jr. knew of the potential liability to the Government, and thus, the Federal Priority Statute applies. In Renda, this Court held that “a representative’s actual knowledge of a federal claim is sufficient, notwithstanding that representative’s reliance on the erroneous advice of counsel as to how to address the claim.” Renda, 709 F.3d at 484. We are unpersuaded by E. Pierce Jr.’s and Hilliard’s reliance on Little to distinguish their case from Renda based only on the fact that the Government had not made an actual claim against Stevens’s Estate when they received the erroneous legal advice. This Court has already declined to follow Little to the extent that its analysis of the effect of erroneous legal advice “is inconsistent with the weight of authority on this issue.” Renda, 709 F.3d at 484 n.15. The same considerations that, in Renda, led us to refuse to read an exception due to erroneous legal advice into the Federal Priority Statute apply with equal force here: (1) “the statute does not provide for an attorney-reliance exception,” and (2) “a contrary interpretation would create an exception to the Priority Statute that might swallow the rule.” Id. at 485. Thus, because erroneous legal advice as to the validity of a claim is not an excuse for violating the Federal Priority Statute and E. Pierce Jr. and Hilliard both admitted in depositions that they had knowledge of the potential claims against Stevens’s Estate, we hold that the Federal Priority Statute applies. 2. E. Pierce Jr. and Hilliard’s personally liability E. Pierce Jr. and Hilliard argue that the district court erred in granting the Government’s motion for summary judgment in two ways. First, they claim E. Pierce Jr. should not have been held personally liable for the I.R.C. § 642(c) charitable set-aside. Second, they argue that the evidence was insufficient to support the claims against them related to (1) distribution of personal property from Stevens’s Estate, (2) rent payments on Stevens’s 24 Case: 12-20804 Document: 00513161978 Page: 25 Date Filed: 08/19/2015 No. 12-20804 apartment, and (3) legal and accounting fees paid from the Living Trust to other charitable organizations. i. Personal liability for the charitable set-aside E. Pierce Jr. points out that, under Treasury Regulation § 1.642(c)-2(d), funds permanently set aside for a charitable purpose are subject to invasion. So if the Government disallows the set-aside, he argues, the funds will be available to pay the Government. Thus, he should not be personally liable for the charitable set-aside. The Government responds that by arguing that the charitable set-aside funds are subject to invasion, E. Pierce Jr. and Hilliard are trying to have things both ways. The Government says that, when the Government tried to disallow the charitable set-aside, E. Pierce Jr. filed a petition in tax court challenging the disallowance. In response, E. Pierce Jr. claims that it is not inconsistent to challenge the attempt to disallow the charitable set-aside. He argues that his position in the petition before the tax court was that the money will be spent on charity because, after he succeeds in the case before the panel (and is not required to pay that money to the Government), the money will go to charity. We hold that the district court did not err in finding E. Pierce Jr. and Hilliard jointly liable for the charitable set-aside. First, although E. Pierce Jr. claims that the Government can disallow the charitable set-aside, it is far from clear that is the case. In fact, the Government has tried and failed to disallow the charitable deduction in this case. Further, the Federal Priority Statute does not appear to limit liability even if we assume that the distribution can be returned. See 31 U.S.C. § 3713(b) (“A representative of a person or an estate . . . paying any part of a debt of the person or estate before paying a claim of the Government is liable to the extent of the payment for unpaid claims of the Government.”). Thus, Hilliard and E. Pierce Jr. are liable under the Federal Priority Statute for the amount of the charitable set-aside. 25 Case: 12-20804 Document: 00513161978 Page: 26 Date Filed: 08/19/2015 No. 12-20804 2. Sufficiency of the evidence E. Pierce Jr. argues that the Government did not present enough evidence to hold him personally liable for distributing personal property from Stevens’s Estate. He claims that the district court wrongly discredited his statement that had he not sold the personal property, Stevens’s Estate would have been charged to store it. E. Pierce Jr. further claims the Government proffered insufficient evidence for the district court to find him liable for disbursing funds from Stevens’s Estate to pay for rent on her vacant apartment. According to E. Pierce Jr., the Government failed to prove conclusively that his payments on the apartment exceeded an amount that was reasonable and necessary. Finally, Hilliard argues the evidence did not support holding him personally liable for the accounting and legal fees he paid to other charitable organizations from the Living Trust, as trustee. Hilliard claims he did not cause any damage in paying the fees because Stevens told him to pay them, he could have reclaimed the fees under Louisiana law, and all the funds that were disbursed have already been repaid. Turning first to E. Pierce Jr.’s liability for selling personal property from Stevens’s Estate, we hold that the district court did not err in finding him personally liable. E. Pierce Jr.’s primary argument—that he had to sell the property in order to avoid having to make expenditures to store it—does not change his liability under § 3713. As the district court correctly observed, “the proceeds from the sale of [Stevens’s] car did not require storage . . . [and] could have been held in [Stevens’s] Estate’s account.” E. Pierce Jr. was not found liable under the Federal Priority Statute merely because he sold the personal property; instead, he was found liable for distributing the personal property to others before paying the debt to the Government. Thus, we hold E. Pierce Jr. is individually liable for the value of the personal property he distributed from Stevens’s Estate. 26 Case: 12-20804 Document: 00513161978 Page: 27 Date Filed: 08/19/2015 No. 12-20804 We turn next to E. Pierce Jr.’s claims regarding his liability for the rent he paid on Stevens’s vacant apartment, and we again hold that the district court did not err in finding him personally liable for those payments. Before the district court, E. Pierce Jr. argued that he paid the rent to allow a “Quakerstyle memorial service in [Stevens’s] home.” The district court accepted that argument as true, as it should have. Texas law limits the amount of funeral expenses that can be characterized as debts of the estate—and, as such, payable before paying the Government—to $15,000. See Tex. Est. Code Ann. § 355.103. 6 The district court found that E. Pierce Jr. was not liable for the first $15,000 that he spent on rent for the funeral service but that he was liable for the amount he spent above the $15,000 allowed under Texas law. See id. We find no error in the district court’s analysis, and so we hold E. Pierce Jr. is personally liable for the amount above the $15,000 allowed under Texas law that he, as executor, caused Stevens’s Estate to pay in rent on Stevens’s apartment. Finally, we hold that Hilliard is personally liable for the amount he caused the Living Trust to pay for accounting and legal services on behalf of other charitable organizations. Texas law allows accounting and legal fees to be classified as expenses of the estate (and therefore payable before debts to the Government) if they were “incurred in preserving, safekeeping, and managing the estate.’” See Tex. Est. Code Ann. § 355.103 (emphasis added). Hilliard does not dispute that he paid accounting and legal fees that were the benefit of other organizations, not for the management of the estate. In spite 6On January 1, 2014, the Texas Probate Code was repealed and the Texas Estates Code became effective. The district court relied on former Texas Probate Code § 322 in making its decision. Texas Estates Code § 355.103 includes the portions of Texas Probate Code § 322 on which the district court relied. Thus, the repeal of the Texas Probate Code and the enactment of the Texas Estates Code does not impact our decision to affirm the district court. 27 Case: 12-20804 Document: 00513161978 Page: 28 Date Filed: 08/19/2015 No. 12-20804 of Hilliard’s arguments that he should not be held liable because the funds could be reclaimed, we have not found, nor does Hilliard cite, any law to show that this impacts his liability under the Federal Priority Statute. See also supra Part IV(C)(2)(i). Thus, the district court did not err in holding Hilliard personally liable for paying the accounting and legal fees. 3. E. Pierce Jr.’s fiduciary duty Finally, E. Pierce Jr. argues that the district court erred in finding he breached his fiduciary duty under state law. He claims that under Texas law, advice of counsel is a factor to be considered in determining whether there was a breach of fiduciary duty. See Griffin v. Box, No. 94-10348, 1996 WL 255296, at  (5th Cir. May 2, 1996) (unpublished) (“Under Texas law, advice of counsel is a factor to be considered in determining whether a breach of fiduciary duty has occurred.” (citation omitted)); see also Gearhart Indus., Inc. v. Smith Int’l, Inc., 741 F.2d 707, 722–23 (5th Cir. 1984) (directors’ reliance on professional advice supported judgment that directors did not breach fiduciary duty). Further, he claims that under Texas law, an executor does not owe a fiduciary duty to an estate’s creditors, including the Government. The Government argues that Texas case law supports holding that E. Pierce Jr. owed a fiduciary duty to the estate’s creditors as executor, but the Government did not respond to his claim that advice of legal counsel can be a defense for breach of fiduciary duty under Texas law. We hold that E. Pierce Jr. did not breach his fiduciary duty under state law because he did not owe a fiduciary duty to Stevens’s Estate’s creditors. Texas case law appears to conflict regarding whether an executor owes a fiduciary duty to an estate’s creditors. Compare FCLT Loans, L.P. v. Estate of Bracher, 93 S.W.3d 469, 481–82 (Tex. App.—Houston [14th Dist.] 2002, no pet.) (“However, no such formal recognition [of a fiduciary duty as a matter of law] exists for the relationship between an independent executor and the 28 Case: 12-20804 Document: 00513161978 Page: 29 Date Filed: 08/19/2015 No. 12-20804 estate’s creditors.”) with Ertel v. O’Brien, 852 S.W.2d 17, 20–21 (Tex. App.— Waco 1993, writ denied) (describing the relationship between the executor and a creditor as fiduciary). It appears that the Supreme Court of Texas has not addressed this issue, and so we must make an “Erie guess” and “determine as best [we] can” what the Supreme Court of Texas would decide. See Howe v. Scottsdale Ins. Co., 204 F.3d 624, 627 (5th Cir. 2000) (citations and internal quotation marks omitted). We hold that the district court erred in finding E. Pierce Jr. breached his fiduciary duty under Texas law. Bracher provides useful guidance in reconciling this seemingly contradictory Texas case law. As the Bracher court explained, the two Texas intermediate appellate court cases that suggested an executor owes a fiduciary duty to an estate’s creditor, Ertel and Ex parte Buller, 834 S.W.2d 622 (Tex. App.—Beaumont 1992, orig. proceeding [pet. denied]), are distinguishable from a situation like the one presented in the instant case. See Bracher, 93 S.W. 3d at 481. In the Bracher court’s view, Ertel held that an executor had a statutory duty to pay a claim against the estate and was “held to the same fiduciary standards as a trustee”; but, the Ertel court did not provide any “analysis or explanation why an independent executor’s fiduciary duty to the estate should be expanded to include a duty to the estate’s creditors.” See id. at 481 (discussing Ertel). And the cases on which Buller based its holding do not discuss whether an independent executor, like E. Pierce Jr., owes a fiduciary duty to the estate’s creditors. See id. (discussing Buller). So, we agree with Bracher’s view that “under [Texas’s] statutory scheme,” it seems unlikely that “an independent executor automatically holds the estate assets in trust for the benefit of the estate creditors.” See id. Thus, because we conclude that E. Pierce Jr. did not owe Stevens’s Estate’s creditors a fiduciary duty under Texas law, we hold that E. Pierce Jr. did not breach his state law fiduciary duties. 29 Case: 12-20804 Document: 00513161978 Page: 30 Date Filed: 08/19/2015 No. 12-20804 PRISCILLA R. OWEN, Circuit Judge, writing for the court:  One of the principal issues in this appeal is whether a donee’s liability for a donor’s unpaid gift tax and interest on that tax is limited under 26 U.S.C. § 6324(b) to the value of the gift of the donee. We hold that a donee’s liability for the donor’s unpaid gift tax and interest is capped by the amount of the gift. Accordingly, we reverse the district court’s judgment to the extent that it imposed liability upon the donees beyond the value of the gifts.