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Federal and State Tax Liens Do Not Attach to Fraudulent Conveyance Actions

Richardson v. Green (In re THR & Assocs.), Nos. 12-72022, 14-07008, 2016 Bankr. LEXIS 2121 (U.S. Bankr. C.D. Ill. May 26, 2016).

Debtor THR & Assocs. was in the business of buying and reselling gold, other precious metals, coins, collectibles, art, and other miscellaneous property. Jeffrey A. Parsons was the sole shareholder and president of THR. Defendants Todd Green, Panther 4700, LLC (Panther), United Community Bank (UCB), Jacob Parsons, and Uncle Buck’s Trading Post, LLC (Uncle Buck’s) entered into certain transactions with the Debtor regarding lease of a residence and purchase of a boat for Jeffrey Parsons’ personal use. The Debtor made several monthly and lump-sum payments to Panther towards Jeffrey Parsons’ rent, escrow payments, purchase of a boat etc. These transactions were made with the assets belonging to the Debtor for the benefit of the Defendant. The Trustee brought an adversary proceeding against the Defendants to avoid and recover these transactions as actual fraudulent conveyances pursuant to §548(a)(1)(A) and 548(a)(1)(B).

The Trustee contended that Jeffrey Parsons took money (much of which was booked as shareholder distributions) from the Debtor and paid that money to the Defendant Green and Panther to finance a lease-purchase deal on a house and the purchase of a boat. The Debtor did not receive reasonably equivalent value; that the conveyances were made at a time when the Debtor was insolvent constituting constructive fraud on the one hand; or that the transfers constituted actual fraud, as they were made with the specific intent of defrauding or hindering creditors.
The Defendants alleged that the Trustee’s complaint did not set forth the alleged actual fraud with sufficient particularity and hence should be dismissed. The Trustee lacked standing to bring the action because any potential recovery will be encumbered by liens of the Internal Revenue Service (“IRS”), the Illinois Department of Revenue (“IDOR”), and the Illinois Department of Employment Security (“IDES”). Thus, there will be no potential benefit to the estate from the Trustee’s pursuit of the action and, therefore, the action must be dismissed.

The Court rejected the Defendants first argument and found that the Trustee did allege the existence of several traditional badges of fraud, including that Debtor was insolvent at the time of the transfers and that the Debtor received no consideration for the transfers. Such allegations were sufficient to support the drawing of an inference of fraudulent intent and to avoid dismissal of the complaint.

The Court rejected the Defendant’s next argument as well and found that the validity, priority, and extent of the liens on the Debtor’s assets that were allegedly transferred to the Defendants could not be determined in this case or on the documents before the Court. Further analysis was required to determine, if the transferred assets and their potential proceeds were fully encumbered or not.

The Court next concluded that the Trustee had standing to bring a fraudulent conveyance action and that the potential recovery will be not be encumbered by liens of the IRS, IDR, IDOR because the federal and state tax liens do not attach to a fraudulent conveyance action. Under Sec. 6321 of IRS Code, the property of a taxpayer to which the liens might attach, certainly includes causes of action held by the taxpayer against third parties, it does not include a right to bring a fraudulent conveyance action, as that right is not the property of the person or entity that made the allegedly fraudulent transfer. That right arises by statute for the benefit of creditors and do not come into the estate as property owned by the debtor. So, the IRS, IDOR, and IDES liens did not attach to the fraudulent conveyance actions.

The Court held that the Defendants’ assertions that the liens attached to the fraudulent conveyance causes of action were inaccurate and did not support their motions to dismiss for lack of standing. The Court denied the Defendants’ motion to dismiss the adversary proceeding and granted time to the Defendants until June 16, 2016, to answer or otherwise plead to the Trustee’s Complaint.