Opposition Brief — Peck v. United States

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In the Supreme Court of the United

OCTOBER TERM, 1993

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ROBERT M. PECK, TRUSTEE FOR THE ROBERT M. PECK,

M.D., INc., DEFINED BENEFIT PENSION TRUST, ET AL..

PETITIONERS

Vv.

UNITED STATES OF AMERICA

ON PETITION FOR A WRIT OF CERTIORARI

TO THE UNITED STATES COURT OF APPEALS

FOR THE NINTH CIRCUIT

BRIEF FOR THE UNITED STATES IN OPPOSITION

DREW S. DAYS, III

Solicitor General

LORETTA C. ARGRETT

Assistant Attorney General

WILLIAM S. ESTABROOK

PATRICIA M. BOWMAN

Attorneys

Department of Justice

Washington, D.C. 20530

202) 514-2217

QUESTION PRESENTED

Whether, on the facts of this case, the claim of the

United States for taxes owed on income received from

embezzlement has priority under 31 U.S.C. 3713 in the

assets assigned by the embezzler for the benefit of his

creditors.

(I)

TABLE OF CONTENTS

Page

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LE LE SOL COC 2

SUITE sili hidiccsngdithiadiindsdiimiseiahdlbasdeubenienbbbeneertoeqsoneceteensoceetoons 4

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TABLE OF AUTHORITIES

Cases:

Armstrong v. United States, 364 U.S. 40 (1960) ........... s

Barclay & Co. v. Edwards, 267 U.S. 442 (1924) ........... 4,7

Bramwell v. United States Fidelity & Guaranty Co., 269

I eos sesieainadintiodéooceveoes 5

Brown v. Coleman, 566 A.2d 1091 (Md. 19839) ............... 5

Bull v. United States, 295 U.S. 247 (1935) ..............006 7

Cohen v. United States, 297 F.2d 760 (9th Cir.), cert.

ee Df crcntdnsnnonereonecs 5

Commissioner v. Wilcox, 327 U.S. 404 (1946) ............... 4-5

Dames & Moore v. Regan, 453 U.S. 654 (1981) ............. ~

James v. United States, 366 U.S. 213 (1961) ........... 3, 4, 5, 6

United States v. Gilbert Associates, Inc., 345 U.S. 361

ESSERE SSIS PEC Sno De On oR 7

United States v. Gotwals, 156 F.2d 692 (10th Cir.), cert.

8: een 5

United States v. Moore, 423 U.S. 77 (1975) .........0cccce00 7,8

United States v. Security Industrial Bank, 459 U.S.

as J eandduodsionminanoonceres 8

United States v. State Bank of North Carolina, 31

I I crc diemansepentnneneny 7

United States v. Waddill, Holland & Flinn, Inc., 323

EES Re On ae Soe 7

Westmoreland v. Westmoreland, 716 F. Supp. 217 (D.S.C.

i 0 ealesimngsinnenseninedtonins 8

Constitution and statutes: Page

0 Me Se i eee arn enone 4,7,8

Act of Mar. 3, 1797, ch. 20, § 5, 1 Stat. 515 ................. 7

Act of Mar. 2, 1799, ch. 22, § 65, 1 Stat. 676 ................ 7

Oe TE te ced enicininactccdnsuheiseetnencisenieaiaanaveemenabaie 2

Oe UE is MIE acdtide vcnctddedutabuntenincebusiecaimnnemapicios 3, 4, 5, 6, 7,8

PR Tee ) |) eon eee 5

Oe OE ERATED caccscccessceracseeceeseseuetoureimenteuents 3, 5

Oe EE A, CE vcsccsvtnccencovsvibecesencnseintieretteminditaeemann 5

In the Supreme Court of the Giuted States

OCTOBER TERM, 1993

No. 93-1315

ROBERT M. PECK, TRUSTEE FOR THE ROBERT M. PECK,

M.D., INc., DEFINED BENEFIT PENSION TRUST, ET AL.,

PETITIONERS

Vv.

UNITED STATES OF AMERICA

ON PETITION FOR A WRIT OF CERTIORARI

TO THE UNITED STATES COURT OF APPEALS

FOR THE NINTH CIRCUIT

BRIEF FOR THE UNITED STATES IN OPPOSITION

OPINIONS BELOW

The opinion (Pet. App. D1-D10) and amended opinion

(Pet. App. F1-F 11) of the court of appeals are unreported,

but the judgment is noted at 9 F.3d 1550 (Table). The

opinion of the district court (Pet. App. A1l-A22) is unre-

ported.

JURISDICTION

The judgment of the court of appeals was entered on

September 22, 1998. The amended opinion of the court of

appeals was filed on November 2, 1993. The petition for

rehearing was denied on that same day (Pet. App. G1-G2).

The petition for a writ of certiorari was filed on January

(1)

2

28, 1994. The jurisdiction of this Court is invoked under

28 U.S.C. 1254(1).

STATEMENT

1. An investment advisor named Stephen Henry em-

bezzled funds from petitioners. “On October 1, 1986,

[petitioners], weary of Henry’s excuses for not return-

ing their money, sued Henry and attached his real prop-

erty” (Pet. App. D3). Petitioners commenced this action

in state court. Due to petitioners’ allegations of civil

RICO violations (18 U.S.C. 1964) by Henry, the case was

removed to federal district court.

On November 18, 1986, Henry made a general assign-

ment of his assets for the benefit of his creditors to

Earle Hagen (Pet. App. D3-D4):

Henry’s assets were worth approximately $1,000,000

and his clients claimed the entire estate. In addition,

Henry’s wife held a promissory note signed by Henry

for $305,000, and First Professional Bank had sued to

collect a loan for $320,000 on which Henry had de-

faulted. After Henry was charged with and pleaded

guilty to grand theft, the IRS asserted a claim for

payment of unpaid taxes exceeding $4,000,000, and the

Franchise Tax Board of California sought approxi-

mately $1,000,000 in unpaid state taxes.

Hagen interpled the property that Henry transferred to

him under the assignment for the benefit of creditors.

The United States was joined in the litigation as an

additional party in interest.

2. On cross-motions for summary judgment, the dis-

trict court concluded that the United States’ claim for

the taxes owed by Henry had priority over petitioners’

3

unsecured claim in the funds (Pet. App. D4).’ 31 U.S.C.

3713 provides that “[{a] claim of the United States

Government shall be paid first” when “a person indebted

to the Government is insolvent” and “the debtor without

enough property to pay all debts makes a voluntary

assignment of property” (31 U.S.C. 3713(a)(1)(A)(i)). The

court concluded that the assignment for the benefit of

creditors by Henry was an act of insolvency by him and

that the tax claim of the United States therefore has

priority in the property transferred by Henry on that

date under 31 U.S.C. 3713 (Pet. App. A5).

On the date of insolvency, petitioners had only a pre-

judgment attachment lien, not a judgment lien or other

perfected security interest. The court held that the sub-

sequent perfection of petitioners’ lien—by obtaining a

judgment and execution levy—did not divest the claim of

the United States of the priority it obtained under 31

U.S.C. 3713 on the date the property was transferred by

the assignment for the benefit of creditors (Pet. App. A5,

A15-A19).

3. The court of appeals affirmed (Pet. App. D1-D10).

In James v. United States, 366 U.S. 213 (1961), this

Court held that funds obtained by embezzlement repre-

sent taxable income to the embezzler. The court of ap-

peals concluded that the government’s claim for the

payment of these taxes has priority in the distribution of

Henry’s assets under 31 U.S.C. 3713(a)(1)(A)(G) because

Henry was insolvent at the time he made a voluntary as-

signment of his property. The court stated that, to de-

1 The parties entered into a stipulation of facts for the purpose

of determining the priorities of their claims in the interpled funds

(Pet. App. A3). Petitioners made no attempt to establish that these

funds were in fact their money or could be traced to an account in

which their money had been deposited.

4

feat the priority established for government claims un-

der 31 U.S.C. 3713, the competing lien must be perfected

and must have divested the debtor of title to the property

before the debtor became insolvent and made the volun-

tary assignment of assets. Because petitioners did not

have title to the property, or possession of it, on the rele-

vant date, the court concluded that the federal claim was

entitled to priority under 31 U.S.C. 3713 (Pet. App. D5-

D9).

4. In an amended opinion (Pet. App. F1-F 11), the court

of appeals additionally rejected petitioners’ claim that

the federal priority statute violates the Fifth Amend-

ment to the Constitution. The court noted that the Fed-

eral Insolvency Statute is almost as old as the Constitu-

tion and “is rooted in the English common law” (Pet.

App. F10). The statute “reflects the prerogative of the

sovereign to require that debts owed to it be paid before

the debts owed to other creditors” (ibid.). The court

concluded that the statute does not violate due process

because, “{aJlthough its application may work hardship

on creditors other than the United States, § 3713 is not

_ ‘merely arbitrary and capricious’” (Pet. App. F10,

quoting Barclay & Co. v. Edwards, 267 U.S. 442, 450

(1924)). Furthermore, since “the original version of

§ 3713 was enacted over two hundred years ago, its enact-

ment did not result in a ‘taking’ of [petitioners’] lien

interest” (Pet. App. F10-F 11).

ARGUMENT

The decision of the court of appeals is correct and does

not conflict with any decision of this Court or any other

court of appeals. Further review is therefore not war-

ranted.

1. In James v. United States, 366 U.S. 213 (1961), this

Court overruled Commissioner v. Wilcox, 327 U.S. 404

5

(1946), and held that embezzled funds represent taxable

income to the embezzler in the year of embezzlement.

Under 31 U.S.C. 3713, the claim of the United States for

the payment of taxes has a first priority when a taxpayer

who is “without enough property to pay all debts makes a

voluntary assignment of property.” 31 U.S.C.

3713(a)(1)(A)(i). See Bramwell v. United States Fidelity

& Guaranty Co., 269 U.S. 483, 490 (1926).?

In this case, the court of appeals correctly held that

Henry owed federal income taxes on the funds he embez-

zled. See James v. United States, 366 U.S. at 218-220;

Cohen v. United States, 297 F.2d 760, 769 (9th Cir.), cert.

denied, 369 U.S. 865 (1962). The court also correctly

concluded that Henry was insolvent on November 18,

1986, when he made a voluntary assignment of his prop-

erty for the benefit of his creditors (Pet. App. D3-D4).

Under the plain language of 31 U.S.C. 3713, the claim of

the United States is therefore entitled to “be paid first”

from the assets transferred by Henry’s “voluntary as-

signment of property” (31 U.S.C. 3713(a)(1)(A)(i)).

Petitioners do not contend that the decision in this

case conflicts with the decision of any other court of ap-

peals. To the contrary, other courts have reached the

same conclusion in similar factual circumstances. See,

e.g., United States v. Gotwals, 156 F.2d 692, 695 (10th

Cir.), cert. denied, 329 U.S. 781 (1946); Brown v. Cole-

man, 566 A.2d 1091, 1095-1096 (Md. 1989).

2. Petitioners urge the Court (Pet. 7-12) to modify its

decision in James v. United States, supra, in such a

manner as to ensure that victims of embezzlement,

rather than the United States, will be “paid first” (31

U.S.C. 3713(a)(1)) from the embezzler’s assets. Their de-

2 This priority provision is expressly inapplicable “to a case un-

der title 11” of the United States Code. 31 U.S.C. 3713(a)(2).

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sire to alter the statutory collection scheme that

Congress adopted almost 200 years ago should, of course,

be directed to the Legislature, not to the courts. More-

over, contrary to petitioners’ contention (Pet. 8), the

Court was fully aware of the consequences that its deci-

sion in James would have in the distribution of the em-

bezzler’s assets under 31 U.S.C. 3713. The partial dis-

sent of Justice Black in that case noted those specific

concerns (366 U.S. at 229):

All of us know that with the strong lien provisions of

the federal income tax law an owner of stolen funds

would have a very rocky road to travel before he got

back, without paying a good slice to the Federal Gov-

ernment, such funds as an embezzler who had not

paid the tax might, perchance, not have dissipated.

An illustration of what this could mean to a defrauded

employer is shown in this very case by the em-

ployer’s loss of some $700,000, upon which the

Government claims a tax of $559,000.

See also id. at 252 (Whittaker, J., concurring in part and

dissenting in part). The majority in James, however,

viewed taxation of illegal gains as essential “to remove

the incongruity of having the gains of the honest laborer

taxed and the gains of the dishonest immune.” Jd. at 218.

See also id. at 241 (Harlan, J., concurring in part and dis-

senting in part).

In short, as the court of appeals correctly concluded,

nothing in James or in 31 U.S.C. 3713 permits a distinc-

tion to be made between the collection of taxes owed from

legal or illegal activities. Nor is there any conflict

among the courts of appeals on the issue that petitioners

request this Court to address.

3. Petitioners further contend (Pet. 12-21) that appli-

cation of 31 U.S.C. 3713 to the facts of this case violates

7

the Fifth Amendment to the Constitution. As the court

of appeals recognized, however, petitioners held only an

unperfected claim against the debtor’s estate at the time

the federal claim arose (Pet. App. D8-D9). See United

States v. Gilbert Associates, Inc., 345 U.S. 361, 365-366

(1953); United States v. Waddill, Holland & Flinn, Inc.,

323 U.S. 353, 355-360 (1945). Application of the federal

priority statute to this case does not deprive petitioners

of due process of law—every statute regulating the pri-

orities of competing claimants necessarily places some

claims ahead of others. As the court of appeals noted, be-

cause “taxes are the life-blood of government, and their

prompt and certain availability an imperious need” (Bull

v. United States, 295 U.S. 247, 259 (1935)), the priority

established by federal law for the collection of taxes is

not “merely arbitrary and capricious” (Barclay & Co. v.

Edwards, 267 U.S. 442, 450 (1924)) and does not violate

due process (Pet. App. F'10).

Moreover, the Federal Insolvency Statute did not ef-

fect a “taking” of petitioners’ pre-judgment attachment

lien interest. This priority statute “is almost as old as

the Constitution, and its roots reach back even further

into the English common law” (United States v. Moore,

423 U.S. 77, 80 (1975)). The substantive rights conferred

by the statute have remained virtually unchanged since

1797. See, e.g., Act of March 3, 1797, ch. 20, § 5, 1 Stat.

515, as amended by Section 65 of the Act of March 2, 1799,

ch. 22, 1 Stat. 676; United States v. Moore, 423 U.S. at 81.

The priority statute advances the public policy of

“secur[ing] an adequate revenue to sustain the public

burthens and discharge the public debts.” United States

v. Moore, 423 U.S. at 81, quoting United States v. State

Bank of North Carolina, 31 U.S. (6 Pet.) 29, 35 (1832).

Application of this ancient priority statute to this case

does not effect a “taking” of petitioners’ lien. Under 31

8

U.S.C. 37138, the government’s lien arose before

petitioners perfected their lien by judgment. In view of

the fact that the federal statute was enacted in 1797,

petitioners obviously cannot claim that their lien was

impaired by the subsequent enactment of a statute. See

United States v. Security Industrial Bank, 459 U.S. 70,

78-82 (1982); Westmoreland v. Westmoreland, 716 F.

Supp. 217, 222 (D.S.C. 1988).’

CONCLUSION

The petition for a writ of certiorari should be denied.

Respectfully submitted.

DREW S. Days, III

Solicitor General

LORETTA C. ARGRETT

Assistant Attorney General

WILLIAM S. ESTABROOK

PATRICIA M. BOWMAN

Attorneys

APRIL 1994

3 Petitioners assert that their pre-judgment attachment lien was

a property interest within the meaning of the Fifth Amendment.

Cf. Dames & Moore v. Regan, 453 U.S. 654, 689-690 (1981);

Armstrong v. United States, 364 U.S 40, 44-46 (1960).

Nevertheless, their lien had not been perfected by judgment and

remained contingent at the time of the assignment for the benefit

of creditors when the priority of the United States was established

under 31 U.S.C. 3713. See United States v. Moore, 423 U.S. at 85

n.5 (obligations of insolvent debtor are determined “on the facts as

they exist at the time of the assignment for the benefit of credi-

tors; subsequent events cannot defeat the obligation”).