Opinion
No. 6:00cv595
September 25, 2001
ORDER
Came on this day to be considered the Defendant Hugh Lee Morris's Original Answer and Rule 12(b)(6) Motion to Dismiss for Failure to State a Claim Upon Which Relief Can Be Granted (Docket No. 13).
BACKGROUND
The taxpayer in this action is the Estate of Mrs. Jimmie Lee Morris (hereinafter "Ms. Morris"). Ms. Morris died testate on March 23, 1992. Ms. Morris was predeceased by her husband, Ghenie W. Morris who passed on October 19, 1990. Mr. Ghenie Morris left his entire estate, which was valued at just under one million dollars, to his spouse, Mrs. Morris.
After the death of his father, the Defendant Hugh Morris obtained power of attorney regarding his mother's (Mrs. Morris) affairs. Her will provided that her entire estate would pass to him. Defendant Hugh Morris also acted as executor of the estate of Mrs. Morris.
On April 28, 1992, Defendant Hugh Morris filed with the Harrison County Court an "Inventory, Appraisement, and List of Claims" for her estate. This document reflected that her estate had an asset value of $579,059.81. Over the course of one year, the $1 million estate of Mr. Ghenie Morris was passed to Mrs. Morris and falsely depleted through evasion to under $600,000 to avoid federal estate taxes. According to the Plaintiff, the United States of America (hereinafter "Government"), Defendant Hugh Morris tried to hide the true value of the $1 million dollar estate from the Government by reducing it by bogus gifts to others, which they returned to him at a later date.
Defendant Hugh Morris admitted to fraudulently reducing the value of the estate of Mrs. Morris and he pled guilty to one count of federal tax evasion. After agreeing to the federal estate tax liability, Mr. Morris and the Internal Revenue Service (hereinafter "IRS") signed a Form 890 agreement to assessment. These taxes remain unpaid and the Government has sued to recover them from Mr. Morris, individually.
Defendant Hugh Morris now moves the Court to dismiss the complaint of the Government asserting, for purposes of the Federal Priority Statute and the Federal Debt Collection Procedures Act, that the Government has not established the element of insolvency, therefore the acts complained of do not rise to recoverable events. The Defendants' motion to dismiss under 12(b)(6) is now ripe for discussion.
ANALYSIS
When considering a motion to dismiss under FED. R. Civ. P. 12(b)(6), the Court accepts as true all well-pleaded allegations in the complaint, and views them in a light most favorable to the plaintiff. See Malina v. Gonzales, 994 F.2d 1121, 1125 (5th Cir. 1993). Unlike a motion for summary judgment, a motion to dismiss should be granted only when it appears "without a doubt" that the plaintiff can prove no set of facts in support of his claims that would entitle him to relief. Conley v. Gibson, 355 U.S. 41, 45-46, 78 S.Ct. 99, 102, 2 L.Ed.2d 80 (1957); Tuchman v. DSC Communications Corp., 14 F.3d 1061, 1067 (5th Cir. 1994). The United States Court of Appeals for the Fifth Circuit has noted that dismissal for failure to state a claim is disfavored and will be appropriate only in rare circumstances. Mahone v. Addicks Util. Dist. of Harris County, 836 F.2d 921, 926 (5th Cir. 1988).
The Government asserts that Defendant Hugh Lee Morris is liable to it pursuant to 31 U.S.C. § 3713(b). This section imposes personal liability on a "representative" of an insolvent debtor or a debtor's estate if the representative pays any debt of the person or estate without first paying the debt owed the United States. King v. United States, 379 U.S. 329 (1964). The burden of this statute is placed on the representative or the person in control of the assets to see that the United States is paid first. King, supra, 379 U.S. at 340.
The federal insolvency statute, 31 U.S.C. § 3713, enacted in 1982 as the successor to 31 U.S.C. § 191 provides that when a person is insolvent or an estate has insufficient assets to pay all of its debts, priority must be given to debts due the United States. See United States v. Moore, 423 U.S. 77, 81, (1975).
By the statute's express terms, liability is imposed on a representative of a debtor, including an executor of an estate, who pays a debt of the estate to another in derogation of the priority of debts owed to the United States, thereby rendering the estate insolvent. In order for liability to attach, the executor must have knowledge of the debt owed by the estate to the United States or notice of facts that would lead a reasonably prudent person to inquire as to the existence of the debt owed before making the challenged distribution or payment. United States v. Coppola, 85 F.3d 1015 (2d. Cir. 1996); In re Gottheiner, 703 F.2d 1136, 1140 (9th Cir. 1983); Want v. Commissioner, 280 F.2d 777, 783 (2d Cir. 1960).
In recognition of the federal insolvency statute's broad purpose of securing adequate revenue for the United States Treasury, courts have interpreted it liberally. See Moore, 423 U.S. at 81-82; United States v. Key, 397 U.S. 322, 324 (1970). There is no question that taxes owed to the United States fall within the scope of a "claim of the Government" under the statute's broad terms. See Massachusetts v. United States, 333 U.S. 611, 625-26 (1948).
Courts have also taken an expansive view of the type of payments or "distributions" from the estate for which an executor may be held liable. Other Circuits have held that a fiduciary, e.g., an executor, may be held liable under the federal insolvency statute "for a distribution of funds [from the estate] that is not, strictly speaking, the payment of a debt." See Want, 280 F.2d at 783.
Here, Defendant Hugh Morris alleges that he cannot be held liable because the estate had assets at the time of his transfers, therefore the estate was not "insolvent." Defendant Morris cites the Fifth Circuit case of United States v. Lutz, 295 F.2d 736 (5th Cir. 1961). however, this was a case dealing with insurance coverage, and not the depletion of an estate by the estate's executor. The case of United States v. Coppola, 85 F.3d 1015 (2d Cir. 1996) is an estate tax case that directly addresses the contention made by Defendant Huge Morris. In Coppola, the Second Circuit held:
[w]hile we acknowledge that the division of the estate's assets under the 1977 Agreement does not constitute an actual payment of a "debt" of the estate, we find — consistent with other courts' broad interpretation of § 3713 — that James Jr.'s participation in the Agreement without payment of debts owed to the United States renders him liable under the insolvency statute. While James Jr. did not defeat the Government's tax claim against the estate by paying a debt of the estate, he depleted the assets of his father's estate by distributing them to himself and his family, thereby preventing payment of the tax debt. Such conduct certainly falls within the broad prohibitions of the federal insolvency statute. See Want, 280 F.2d at 783; see also In re Gottheiner, 703 F.2d at 1138-40 (finding insolvent corporation's sole shareholder liable under federal insolvency statute for loans and payments made to himself at a time when the corporation was insolvent and had not satisfied its debt to the United States); United States v. Coyne, 540 F. Supp. 175, 180 (D.D.C. 1981) (corporate officer liable under federal insolvency statute where his "assignment" of corporation's assets to himself to avoid payment of corporate debt to the United States rendered the corporation insolvent).Coppola, 85 F.3d at 1020.
After reviewing the relevant case law and allegations by the Government, it is abundantly clear to the Court that the Defendant has failed to prove "without a doubt" that the Plaintiff can prove no set of facts in support of his claims that would entitle him to relief on its Federal Priority Statute Claim. The Defendants' motion should be denied on this point.
Next, the Defendant moves to dismiss the remaining claims with equally unimpressive logic. After a careful review of the remaining contentions of the Defendants, the Court finds that they have also failed to meet the heavy burden established by the Fifth Circuit pertaining to motions to dismiss under FED. R. CIV. P. 12(b)(6) with regard to the remaining claims of the Government. The Court, in this initial stage of litigation, cannot determine whether the Government will be able to prove facts in support of their claims that would entitle them to relief. The Defendants, of course, will be free to re-urge their arguments after the close of the Plaintiff's case when the record is more fully developed. It is therefore
ORDERED that the Defendant Hugh Lee Morris's Original Answer and Rule 12(b)(6) Motion to Dismiss for Failure to State a Claim Upon Which Relief Can Be Granted (Docket No. 13) is hereby DENIED.