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UNITED STATES v. SCHOFIELD

UNITED STATES DISTRICT COURT EASTERN DISTRICT OF PENNSYLVANIA


June 21, 1957

UNITED STATES of America
v.
Joseph Anderson SCHOFIELD, 3rd, W. Bradley Ward, Administrator, D.B.N.C.T.A. of the Estate of Lemuel B. Schofield, Dec'd., Liberty Real Estate Bank & Trust Co., a Pennsylvania corporation, and Marvin Comisky, Guardians of Joseph Anderson Schofield, 3rd, and Premises in Schuylkill Township, Chester County, Pennsylvania, commonly known as the Anderson Farm, consisting of 131, 452 acres

The opinion of the court was delivered by: DUSEN

In order to satisfy substantial obligations *fn1" arising under the income tax provisions of the Internal Revenue Code, 26 U.S.C.A., for failure of Lemuel B. Schofield (hereinafter referred to as 'decedent' or 'deceased debtor'), who died July 3, 1955, to file any income tax returns or pay any income tax for the years 1947 to 1954, inclusive, plaintiff seeks to recover the alleged cost of improvements made by the decedent during the years 1947 to 1955 on land in which he had a life estate. Alleging that the decedent was insolvent at all times during the period 1947 to 1955, plaintiff contends that the expenditure of $ 136,768.83 for improvements was a fraudulent transfer under the Pennsylvania Fraudulent Conveyances Act. *fn2"

The defendant, Joseph Anderson Schofield, 3rd (hereinafter called 'remainderman'), who is the son of the decedent and whose remainder interest *fn3" in the land vested in possession on July 3, 1955, and his guardians have filed a motion for summary judgment, alleging that plaintiff is entitled to no relief since the remainderman has been confined in institutions since 1943, was adjudicated an incompetent in September 1955, and had nothing whatever to do with these improvements.

 Defendant, personal representative of the deceased debtor's estate, has filed a motion to dismiss on the grounds stated in the motion for summary judgment and on the additional ground that the complaint fails to seek any remedy or relief against him.

 By will and codicils probated shortly after her death on October 15, 1929, Sarah P. Anderson conveyed her entire interest in the improved farm land involved in this case to the decedent, as executor and trustee for Caroline Anderson, for life. Upon the death of Caroline Anderson (which occurred April 17, 1934), this improved farm land was conveyed to the decedent 'for and during the term of his natural life, and at his death then to Joseph Anderson Schofield 3rd * * * and his heirs and assigns forever provided' he survived the decedent. Decedent had 'possession of all and every part' of this improved farm land from October 15, 1929, until his death on July 3, 1955. *fn4"

 The prayers for relief in the complaint are broad and include a prayer for relief 'that is just, proper and equitable in the circumstances.'

 I. Application of Uniform Fraudulent Conveyances Act (39 P.S. §§ 351-363).

 At least part of the relief sought by plaintiff falls within the rights granted to a creditor, such as plaintiff, if the improvements made by the decedent constituted a fraudulent conveyance under the Act's terms. See 39 P.S. § 359(1). *fn5" The allegations of paragraphs 10 to 12 of the complaint *fn6" are sufficient to constitute the making of the alleged improvements fraudulent under this language of § 4 of the Act (39 P.S. § 354):

 'Every conveyance made * * * by a person who is or will be thereby rendered insolvent, is fraudulent as to creditors, without regard to his actual intent, if the conveyance is made or the obligation is incurred without a fair consideration.' *fn7"

 It has been consistently held that a conveyance of assets by an insolvent grantor under conditions providing that it shall be held, directly or indirectly, for his own use is fraudulent as to creditors. See Commonwealth v. Smith, 1942, 344 Pa. 381, 384-385, 25 A.2d 694; Commonwealth Trust Co. of Pittsburgh v. Cirigliano, 1945, 352 Pa. 108, 111, 41 A.2d 863; Toff v. Vlahakis, 1955, 380 Pa. 512, 518, 112 A.2d 340; Clark v. Beltz, 1955, 179 Pa.Super. 456, 460, 116 A.2d 85; Glenn, 'Fraudulent Conveyances and Preferences' (Rev.Ed.), § 277, p. 474. *fn8"

 As Professor Glenn has stated, at page 474 ( § 276) of the above-mentioned treatise, 'When a debtor expends money in exchange for benefits conferred upon a third person, it should be asked whether the debtor's relations with the third person are such, by way of contract or property interest, that the transaction will increase the estate of the debtor rather than diminish it, or at least will leave the debtor's estate substantially as it was.' Although defendants contend that the spending of over $ 136,500 on the life estate converting money into improvements was a substitution of assets which 'were fully as available to his creditors as had been the money with which he paid for the improvements,' *fn9" it is clear from the authorities discussed under II below that the decedent's interest in the sum of $ 136,500 was reduced from an absolute interest in cash to a life interest in improvements, *fn10" which reduction was a substantial diminution of the decedent-debtor's estate.

 II. Right of plaintiff to seek relief after death of decedent.

 Defendants contend that, since the owner of an estate for life cannot voluntarily improve the land in which he has only a limited interest and charge part of the expense against the future interest in land, *fn11" any right which decedent's creditors, including plaintiff, had in the improvements was completely extinguished by his death. *fn12" However, this legal principle is subject to the well-recognized right of creditors to reach any interest conveyed by a decedent for his own benefit, *fn13" particularly at the time he was insolvent, if the exercise of such right does not interfere with the existing rights of others, such as the defendant remainderman, in the property. See Mackason's Appeal, 1862, 42 Pa. 330; In re Mogridge's Estate, 1941, 342 Pa. 308, 311-312, 20 A.2d 307; In re Bowers' Trust Estate, 1943, 346 Pa. 85, 89, 29 A.2d 519. *fn14"

 Also, the fact that a debtor has died has never been held to prevent his creditors from reaching the interest which the debtor had in property which has been fraudulently conveyed the moment before his death in a variety of similar situations. See Mackason's Appeal, supra; United States v. Bess, 3 Cir., 243 F.2d 675, and cases there cited.

 III. Measure of relief to which plaintiff may be entitled.

 In similar, but not identical, situations the creditors of a debtor placing improvements on the land of another have been permitted to reach the value of such improvements. See Curtis & Co. v. Olds, 1915, 250 Pa. 320, 324-325, 95 A. 526; *fn15" People's Nat. Bank of Pittsburg v. Loeffert, 1898, 184 Pa. 164, 38 A. 996. *fn16" Although the extent of the recovery, if any, to which plaintiff is entitled cannot be determined until the evidence has been produced in support of the complaint, it would seem most probable that the plaintiff will not be able to recover any more than the lesser of the following amounts: (1) the amount spent by the decedent for improvements (as opposed to items of ordinary maintenance and repair); (2) the amount of the excess, if any, of the value of the land with all improvements at the time of decedent's death over the value it would have had at that time without the improvement made by the decedent. *fn17"

 It is clear, in any event, that any invasion of the remainder interest of the incompetent defendant in the land without the alleged improvements would be a violation of established property rights. See In re Crawford's Estate, 1949, 362 Pa. 458, 67 A.2d 124; In re Warden's Trust, 1955, 382 Pa. 311, 115 A.2d 159; cf. Datesman's Appeal, 1889, 127 Pa. 348, 17 A. 1086, 1100. A construction of the Uniform Fraudulent Conveyances Act and of the Internal Revenue Code of 1939 invading such rights would raise grave doubts as to their constitutionality and, hence, should be avoided. Richmond Screw Anchor Co. v. United States, 1928, 275 U.S. 331, 346, 48 S. Ct. 194, 72 L. Ed. 303; Jay v. Boyd, 1956, 351 U.S. 345, 357, 76 S. Ct. 919, 100 L. Ed. 1242 (footnote 21).

 IV. Indefinite allegations as to improvements.

 Paragraphs 4 and 5 of the motion for summary judgment complain of the inadequate description in the complaint of the alleged improvements. These paragraphs will be treated as a motion for more definite statement under F.R.Civ.P. 12(e) and plaintiff will be given ninety days within which to amend its complaint accordingly. *fn18"

 V. Decedent's Estate's motion to dismiss.

 Decedent's personal representative contends that this action should be dismissed as to him since the complaint fails to seek any remedy or relief as to him. The complaint asserts a 'right to relief' arising out of the alleged series of transactions, *fn19" even though no judgment for this relief may be entered in this proceeding. In view of (a) the consistent holdings of the earlier federal cases, that the personal representative of a deceased debtor is a proper party defendant in a suit alleging a fraudulent conveyance, where the alleged fraudulent conduct to be investigated is on the part of that deceased debtor, *fn20" and (b) the fact that the defendant remainderman has challenged the allegation of the decedent's insolvency, *fn21" this motion to dismiss will be denied, without prejudice to the right of the personal representative to renew it at the trial or at any time that more facts are placed on the record by discovery proceedings, stipulations, or otherwise.

 Order

 And Now, June 21, 1957, It Is Ordered (a) that the Motion to Dismiss is Denied, without prejudice; (b) that paragraphs 4 and 5 of the Motion for Summary Judgment are Granted as a Motion For More Definite Statement under F.R.Civ.P. 12(e) and that plaintiff is granted ninety (90) days to comply with such Motion; and (c) that in all other respects the Motion for Summary Judgment is Denied.


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