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Arlin Geophysical Co. v. United States

United States District Court, D. Utah, Central Division

September 26, 2018

ARLIN GEOPHYSICAL COMPANY and LAURA OLSON, Plaintiffs,
v.
UNITED STATES OF AMERICA, Defendant & Counterclaim Plaintiff,
v.
JOHN E. WORTHEN and FUJILYTE CORPORATION, Counterclaim Defendants.

          MEMORANDUM DECISION AND ORDER GRANTING [487] MOTION FOR SUMMARY JUDGMENT AND DENYING [486] MOTION FOR SUMMARY JUDGMENT

          David Nuffer, District Judge.

         This case involves multiple parties' efforts to quiet title to, or foreclose upon, fifteen parcels of real property that were encumbered by federal tax liens. Following a series of rulings and stipulations, including a remand order from the Tenth Circuit Court of Appeals, the only remaining issues in the case relate to the properties identified in the United States' Fifth Amended Counterclaim[1] as Property 14 and Property 15 (collectively, the “Properties”).[2]

         The Properties were sold at foreclosure of the federal tax liens, and the funds from the sale were deposited in the court registry.[3] Based on a stipulation of the United States and Counterclaim Defendants, [4] the sale of the Properties was confirmed.[5] The United States now seeks summary judgment authorizing the funds on deposit in the court registry to be distributed to the United States.[6] Counterclaim Defendants seek summary judgment declaring that (a) Counterclaim Defendant Fujilyte Corporation (“Fujilyte”) did not hold title to the Properties as the nominee of Counterclaim Defendant John E. Worthen (“Worthen”); (b) Fujilyte is entitled to damages for the taking and sale of the Properties; and (c) Worthen has the right to redeem the Properties, and may do so within 120 days from a favorable decision permitting redemption.[7]

         Because the undisputed material facts demonstrate that Fujilyte held title to the Properties as Worthen's nominee, the United States had valid and enforceable tax liens on the Properties. The United States was entitled to sell the Properties at foreclosure to satisfy its judgment against Worthen, and the United States is entitled to the funds on deposit in the court registry. Fujilyte is not entitled to damages for the taking and foreclosure sale of the Properties. And Worthen has no right to redeem the Properties as a matter of law. Therefore, the United States' Motion for Summary Judgment[8] is GRANTED, and Counterclaim Defendants' Motion for Summary Judgment[9] is DENIED.

         Contents

         UNDISPUTED MATERIAL FACTS ............................................................................................ 3

         DISCUSSION ............................................................................................................................... 10

         The United States had valid and enforceable federal tax liens on the Properties .................................. 10

         The Properties were subject to resulting and constructive trusts in favor of Worthen ............................... 12

         Fujilyte held title to the Properties as Worthen's nominee ..................................................................... 15

         Worthen's bankruptcy discharge did not preclude enforcement of the federal tax liens on the Properties .................... 18

         Worthen has no redemption rights in the Properties ......................................................... 20

         ORDER ......................................................................................................................................... 22

         UNDISPUTED MATERIAL FACTS [10]

         1. Worthen has a long criminal history, including obstruction of justice, securities fraud, and tax fraud.[11]

         2. Some of Worthen's criminal schemes involved manipulation of the market for certain penny stocks. One of these schemes, known as the “Western Pacific Scheme” involved the use of nominees to conduct “wash trades” and the creation of artificial public demand in shares in Western Pacific stock, driving the price from 3 cents per share to $1 per share in a twelve-day time period, netting Worthen over $200, 000. Worthen conducted a similar scheme in shares in a company known as Nordic Ltd.[12]

         3. In connection with his various criminal activities, Worthen “has a history of buying, selling and managing shell corporations and other business entities.” Beginning at least as early as 1990, Worthen diverted personal income into various “corporate bank accounts and then used the money as he desired.” The “majority of the funds deposited” into these corporations' accounts “came from Mr. Worthen.”[13]

         4. Worthen “used these corporate bank accounts to pay many of his personal living expenses . . . in order to hide his control over the use of the money” all in an effort to evade “income tax due and owing to the United States[.]”[14]

         5. Worthen first formed Fujilyte in 1989 with his brother Gerald and son McKeen.[15]

         6. Over the course of its existence, Fujilyte did not respect corporate formalities, and frequently allowed its business filings to lapse.[16]

         7. Fujilyte was one of multiple entities established by Worthen, who frequently transferred funds among entities he had established without regard to corporate formalities.[17]

         8. During 1990, Worthen earned approximately $495, 000 which he diverted into “five other corporations over which [he] exercised substantial control, ” including Fujilyte, and then “used the money as he desired.”[18]

         9. In September 1990, Worthen deposited at least $25, 000 of the funds (referred to in ¶ 8) into an account in the name of Fujilyte at the Cottonwood branch of First Security Bank of Utah, N.A.[19]

         10. This $25, 000 deposit into Fujilyte's bank account formed, in part, the factual predicate for Worthen's conviction (based upon a guilty plea) for attempted income tax evasion.[20]

         11. Worthen, testifying as Fujilyte's designee under Fed. R. Civ. P. 30(b)(6), could not identify any Fujilyte bylaws, records of shareholder votes, or other corporate documents.[21]

         12. In his deposition testimony given in his personal capacity, Worthen could not recall any Fujilyte annual meetings.[22]

         13. Worthen testified that Fujilyte had no income and did not file federal income tax returns for the years 1990-1996. Worthen had no recollection of Fujilyte ever having any employees or paying anyone a salary.[23]

         14. Fujilyte struggled to pay its bills.[24]

         15. Fujilyte acquired the Properties on February 12, 1993, from Melville Construction Company (“MCC”).[25]

         16. Worthen provided at least a portion of the money that Fujilyte used to purchase the Properties.[26]

         17. In order to obtain funds, Fujilyte borrowed from the Cipra Non-Revocable Trust (“Cipra”) in April 1994 and used part of the proceeds to pay off the MCC mortgage.[27]

         18. Fujilyte remortgaged the Properties in July 1996 through John F. Green (“Green”) for $145, 264.00.[28]

         19. A large portion of the $145, 264.00 was used to pay off the Cipra mortgage.[29]

         20. In connection with Fujilyte's paying off the Cipra mortgage with the loan from Green, Worthen in his individual capacity pledged as collateral $145, 000 worth of stock in a company called “Synfuel Technology, Inc.” that was owned by San Pedro Securities, Inc., a nominee corporate entity controlled by Worthen.[30]

         21. Fujilyte failed to repay the Green loan, and Green and his counsel, Stephen G. Homer (“Homer”), threatened foreclosure. Throughout their interactions, Worthen indicated that the Properties were in fact his. In his deposition, Homer testified, for example, that Worthen had a personal affinity for the Properties that he called the “eagle's nest.” Worthen attempted to avoid foreclosure by offering to “trade” other property he owned for the Properties:

[He] was always saying, ‘Hey, don't, don't foreclose on me. Leave Properties 14 and 15.' He didn't use that, but he was referring to the secured properties. ‘I have got some property out in Herriman,' which is a suburb on the southwest corner of Salt Lake County, ‘and I'll trade you that property in exchange.'[31]

         22. In or about 1997, Worthen reported to his probation officer that he had a financial interest in certain parcels of real estate in Utah County and Salt Lake county that were held in the name of Fujilyte.[32]

         23. In addition to the Properties, Fujilyte also held title to Worthen's personal residence located on Abinadi Road.[33]

         24. Fujilyte last renewed its corporate registration with the Utah Division of Corporations on April 8, 1994.[34]

         25. Fujilyte was involuntarily dissolved by the Utah Division of Corporations on February 1, 1996.[35]

         26. A delegate of the Secretary of the Treasury made assessments against Worthen for unpaid federal income tax, penalties, interest, and other statutory additions in the amounts and for the periods indicated:[36]

TAX YEAR

ASSESSMENT DATE

UNPAID BALANCE OF ASSESSMENT

1981

10/9/2000

$1, 535, 233.54

1982

9/4/2000

$1, 304, 674.47

1983

9/11/2000

$1, 523, 938.35

1984

9/11/2000

$2, 243, 894.89

1985

10/16/2000

$997, 780.47

1986

9/18/2000

$748, 723.84

1987

9/25/2000

$413, 125.18

1989

10/2/2000

$234, 691.80

1992

10/23/2000

$360, 359.13

1994

10/2/2000

$530, 667.08

1995

10/2/2000

$698, 957.12

1996

10/2/2000 & 10/23/2000

$717, 434.90

1997

10/2/2000

$577, 504.75

1998

10/2/2000

$384, 802.25

1999

10/2/2000

$134, 576.08

2003

6/28/2004

$594.68

2007

11/24/2008

$5, 311.96

         27. The United States filed a Notice of Federal Tax Lien concerning Worthen's outstanding tax liabilities for tax years 1982, 1983, 1984, 1986, 1987, 1989, 1994, 1995, and 1998 with the Salt Lake County Recorder's Office on December 29, 2000.[37]

         28. The United States filed a Notice of Federal Tax Lien concerning Worthen's outstanding tax liabilities for tax years 1981, 1985, 1992, 1996, 1997, and 1999 with the Salt Lake County Recorder's Office on February 14, 2001.[38]

         29. The United States filed a Notice of Federal Tax Lien concerning Fujilyte's status as an alter ego, nominee and/or transferee of Worthen with the Salt Lake County Recorder's Office on February 14, 2008.[39]

         30. On March 26, 2012, judgment was entered against Worthen and in favor of the United States in the amount of $18, 000, 000, plus interest accruing from the date of judgment, based on Worthen's unpaid federal income tax liabilities for tax years 1981-1987, 1989, 1992, 1994-1999, 2003, and 2007 (the “Judgment”).[40]

         31. The United States' federal tax liens were the basis for the judicial foreclosure of the Properties.[41]

         32. At the time of the Properties' foreclosure, the Properties were owned and title was held by Fujilyte.[42]

         33. Worthen filed for Chapter 7 bankruptcy in the United States Bankruptcy Court, District of Utah on December 29, 2015, case no. 15-31861.[43]

         DISCUSSION

         Summary judgment is appropriate if “there is no genuine dispute as to any material fact and the movant is entitled to judgment as a matter of law.”[44] A factual dispute is “genuine” if “there is sufficient evidence on each side so that a rational trier of fact could resolve the issue either way.”[45] A fact is “material” if, under the substantive law, “it is essential to the proper disposition of [a] claim.”[46] In determining whether summary judgment is appropriate, the factual record and all reasonable inferences drawn therefrom are view in a light most favorable to the nonmovant.[47]

         The United States had valid and enforceable federal tax liens on the Properties

          The United States seeks summary judgment authorizing the funds on deposit in the court registry arising from the foreclosure sale of the Properties to be distributed to the United States.[48]The United States argues that it is entitled to the funds to satisfy its judgment against Worthen because it had valid and enforceable tax liens on the Properties.[49] Though title to the Properties was held by Fujilyte, the United States argues that Worthen retained a beneficial interest in the Properties through a resulting trust or constructive trust, [50] and that Fujilyte held title to the Properties as Worthen's nominee.[51] Thus, the federal tax liens against Worthen properly attached to the Properties.

         Counterclaim Defendants argue that because the Properties were directly acquired by Fujilyte, title to the Properties was not held by Fujilyte as Worthen's nominee.[52] Counterclaim Defendants also assert that the United States' judgment against Worthen was discharged in bankruptcy.[53] Counterclaim Defendants therefore argue that the United States' tax liens on the Properties were invalid and Fujilyte is entitled to damages for the taking and sale of the Properties.[54]

         Under 26 U.S.C. § 6321, a lien arises in favor of the United States “upon all property and rights to property, whether real or personal, ” belonging to a taxpayer who refuses or neglects to pay tax after demand.[55] This language “is broad and reveals on its face that Congress meant to reach every interest in property that a taxpayer might have.”[56] The taxpayer's property rights are analogized to the classic “bundle of sticks.”[57] And while “[s]tate law determines . . . which sticks are in a person's bundle[, w]hether those sticks qualify as ‘property' for purposes of the federal tax lien statute is a question of federal law.”[58]

         Therefore, the determination of whether the Properties were held by Fujilyte as Worthen's nominee involves a two-step inquiry. First, Utah law is applied to determine the nature of Worthen's interest in the Properties.[59] And second, if Worthen had a property interest under Utah law, federal law is applied to determine whether that property interest constitutes “property” or “rights to property” to which a federal tax lien attaches.[60]

         The Properties were subject to resulting and constructive trusts in favor of Worthen

          The United States argues that Worthen retained a beneficial interest in the Properties under resulting trust and constructive trust theories.[61] Utah law recognizes both resulting and constructive trusts.

         “[A] purchase money resulting trust is an equitable remedy designed to implement what the law assumes to be the intentions of the putative trustor.”[62] “Where a transfer of properties is made to one person and the purchase price is paid by another, a resulting trust arises in favor of the person by whom the purchase price is paid[.]”[63] “The fact which must be proven in the case of a purchase money resulting trust is that one party paid the purchase price for property and another party was given legal title.”[64] And “it is the intention ‘at the time of the transfer and not at some subsequent time which determines whether a resulting trust arises.'”[65] Evidence indicating the payor's intent to retain the beneficial interest in the property includes:

(1) ‘that the circumstances are such that the payor would have a reason for taking title in the name of another other than an intention to give him the beneficial interest . . .; as, for example, where the payor had reasons for wishing that it should not be known that he was purchasing the property;' and (2) ‘that the payor manages the property, collects rents, pays taxes and insurance, pays for repairs and improvements, or otherwise asserts ownership, and the acquiescence by the transferee in such assertion of ownership.'[66]

         A constructive trust, on the other hand, “is an equitable remedy to prevent unjust enrichment[.]”[67] A constructive trust arises “where there has been (1) a wrongful act, (2) unjust enrichment, and (3) specific property that can be traced to the wrongful behavior.”[68] “To establish a wrongful act under Utah law, an entity must have obviously received funds by mistake or participated in active or egregious misconduct.”[69] And “[u]njust enrichment occurs when the moving party has an ‘equitable interest' in the property it seeks a constructive trust over.”[70]

         “[I]n most cases involving constructive or resulting trusts, [courts] are called upon to alter a deed or other writing which is regular in form and is presumed to convey a clear and unambiguous title.”[71] “When such a deed or document is attacked, the party alleging the variance must prove the claim by clear and convincing evidence.”[72] “Parol evidence may be introduced to prove a constructive or resulting trust since these trusts arise by operation of law and are expressly excluded from the statute of frauds.”[73]

         The undisputed material facts clearly and conclusively demonstrate that Worthen retained a beneficial interest in the Properties under a resulting trust theory. Starting in 1990, Worthen diverted personal funds into Fujilyte, and then used the money as he desired.[74] Fujilyte had no income and struggled paying its bills.[75] Yet it was able to obtain sufficient funds to acquire the Properties from MCC in February 1993.[76] Worthen provided at least a portion of the money that Fujilyte used to purchase the Properties.[77] And Worthen individually pledged collateral to pay off the debts on the Properties.[78] Worthen also exercised control over the Properties and represented to others the Properties were his.[79] Under these facts, although Fujilyte ostensibly held title to the Properties, Worthen was the beneficial owner. Therefore, a purchase money resulting trust arose in favor of Worthen.

         The requirements for a constructive trust are also clearly and conclusively shown by the undisputed material facts. At the time of Fujilyte's formation, and in the years Fujilyte purchased and borrowed against the Properties, Worthen failed to pay his federal income taxes.[80] Rather than paying his taxes, Worthen funneled his money into corporate entities, including Fujilyte, in effort to hide his control over the money's use and to evade his tax obligations.[81] These transfers were made without regard to corporate formalities.[82] And during this time, Fujilyte failed to respect corporate formalities, failed to file federal income tax returns, and allowed its corporate filings to lapse.[83] Worthen then used the funds as he desired, including to pay personal living expenses.[84] Indeed, Worthen's diversion of money to Fujilyte formed, in part, the factual predicate for Worthen's conviction for attempted income tax evasion.[85]

         Under these facts, the United States was deprived the money it was due for Worthen's federal income taxes, and Fujilyte was unjustly enriched by its retention and use of Worthen's money. Additionally, Fujilyte's acquisition of the Properties is clearly traced to its and Worthen's wrongful behavior because the Properties were the fruit borne of Fujilyte's failure to follow corporate formalities and Worthen's tax evasion.[86] Therefore, Worthen retained a beneficial interest in the Properties through a constructive trust.

         Fujilyte held title to the Properties as Worthen's nominee

          Having determined that Worthen retained a beneficial interest in the Properties under Utah law, the inquiry turns to federal law to determine whether Worthen's interest in the Properties constitutes “property” or “rights to property” to which a federal tax lien attaches.[87]The United States argues that its federal tax liens attached to the Properties because Fujilyte held title to the Properties as Worthen's nominee.[88]

         A federal tax lien will attach to the right to alienate or encumber property, even where that right is not held unilaterally.[89] A federal tax lien will also attach to “property held by a third party if it is determined that the third party is holding the property as a nominee of the delinquent taxpayer.”[90] “A third party holds the property as a nominee if ‘the taxpayer has engaged in a legal fiction by placing legal title to property in the hands of a third party while actually retaining some or all of the benefits of true ownership.'”[91]

         “Although in many instances the delinquent taxpayer will have transferred legal title to a third party, an actual transfer of legal title is not essential to the imposition of a nominee lien.”[92]“A delinquent taxpayer who has never held legal title to a piece of property but who transfers money to a third party and directs the third party to purchase property and place legal title in the third party's name may well enjoy the same benefits of ownership of the property ...


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