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UNITED STATES v. GLENEAGLES INV. CO.

May 20, 1983

UNITED STATES OF AMERICA, Plaintiff
v.
GLENEAGLES INVESTMENT CO., INC., et al., Defendants



The opinion of the court was delivered by: MUIR

 I. Introduction.

 This action was commenced by the United States on December 12, 1980, by the filing of a complaint and a motion for a temporary restraining order. Subsequently, four amended complaints have been filed. In the fourth amended complaint, filed May 17, 1982, the United States (1) seeks to reduce to judgment alleged delinquent federal income taxes, interest, and other penalties assessed and accrued against Defendant Raymond Colliery Co., Inc. (Raymond Colliery) and its subsidiaries for the fiscal years ended June 30, 1972 and June 30, 1973, and against Defendant Great American Coal Co., Inc. (Great American) and its subsidiaries, including Raymond Colliery, for the fiscal year ended June 30, 1975; and (2) seeks to collect these tax claims and tax claims previously reduced to judgment in United States of America v. Raymond Colliery Co., Inc., et al., Civil No. 79-1168, slip op. (M.D. Pa. October 10, 1980), from surface and coal lands presently owned by Raymond Colliery as well as from lands formerly owned by Raymond Colliery but which, as a result of allegedly illegal and fraudulent county tax sales, are now owned by Defendant Gleneagles Investment Co., Inc. (Gleneagles). Jurisdiction of this Court is invoked pursuant to 28 U.S.C. §§ 1340 and 1345 as well as 26 U.S.C. §§ 7402(a) and 7403.

 The United States contends that as a result of its judgments and other claimed taxes it has substantial liens against properties now held or once held by Raymond Colliery and its subsidiaries. In addition to the liens held by the United States, many other persons hold liens against these properties. One purpose of the United States in instituting this lawsuit is to assert the priority of its liens over liens held by other persons. Those lienors named as additional Defendants in this lawsuit are General Electric Credit Corporation, the Commonwealth of Pennsylvania, the Borough of Olyphant, John J. Gillen, Thomas J. Gillen, Robert W. Cleveland & Sons, Inc., William T. Kirchoff, J. W. Cleveland, the Estate of Royal E. Cleveland, the City of Scranton Sewer Authority, the Lackawanna River Basin Authority, the Borough of Taylor, Lackawanna County, William R. Hinkelman, and McClellan Realty Co., Inc. (McClellan). Also named as Defendants are Jeddo Highland Coal Co., Pagnotti Enterprises, Inc., Loree Associates, Blue Coal Company, Gillen Coal Mining Co., Carbondale Coal Co., Moffat Premium Anthracite, Northwest Mining, Inc., Maple City Coal Co., Powderly Corporation, Clinton Fuel Sales, Inc., Olyphant Premium Anthracite, Inc., Olyphant Associates, Minindu Corporation, Glen Nan, Inc., Gilco, Inc. and Joseph Solfanelli, individually and as trustee. Blue Coal and Glen Nan went into bankruptcy in December of 1976 and the interests of those companies are asserted herein by James Haggerty, the trustee in bankruptcy (the Trustee). See In re Blue Coal Corp. -- Bankrupt, BK 76-1311 (M.D. Pa., petition filed Dec. 16, 1976); In re Glen Nan, Inc. -- Bankrupt, BK 78-604 (M.D. Pa., petition filed Dec. 16, 1976).

 In order to collect its judgments for delinquent tax liability, the United States seeks in this lawsuit to foreclose its tax liens against and to sell the property owned by Raymond Colliery and its subsidiaries (hereinafter sometimes called the "Raymond Group") at the time the tax assessments were made. This property falls into two categories, lands presently owned by the Raymond Group and lands formerly owned by the Raymond Group. According to the complaint, as to the second category, because of the failure of Raymond Colliery and Blue Coal to pay certain delinquent real estate taxes, Lackawanna County and Luzerne County scheduled tax sales for December 17, 1976 of certain Raymond Colliery and Blue Coal real properties. Substantially all of the Raymond Colliery properties advertised for sale were purchased by Defendant Tabor Court Realty Corp. (Tabor Court) for the upset bid of $385,000.00. The United States contends that the Lackawanna County Tax Claim Bureau failed to give adequate notice of the 1976 tax sale to the Internal Revenue Service. Accordingly, the United States claims, pursuant to 26 U.S.C. § 7425, that even if the 1976 tax sale was a bona fide tax sale it would have no effect on the federal tax liens filed prior to the date of the sale. Because thereafter Tabor Court did not pay certain real estate taxes on the Raymond Colliery properties, Lackawanna County scheduled a second tax sale of the Raymond Colliery properties for December 16, 1980. At the December 16, 1980 tax sale, Joseph Solfanelli, a Defendant in this action, purchased the properties for $612,239.56. In January of 1981, Gleneagles was incorporated in Pennsylvania with Joseph Solfanelli as its sole shareholder. The properties were subsequently transferred directly to Gleneagles by the Lackawanna County Commissioners by deed of April 15, 1981. The United States challenges both the December 17, 1976 and December 16, 1980 tax sales in this lawsuit.

 In addition, the United States seeks to set aside as fraudulent conveyances under Pennsylvania's Uniform Fraudulent Conveyances Act, 39 Pa.Cons.Stat. § 351 et seq., certain mortgages purporting to encumber the lands of Raymond Colliery and its subsidiaries. These mortgages were delivered on November 26, 1973 to Institutional Investors Trust (IIT) to secure certain loans made by IIT allegedly to finance the purchase of the stock of Raymond Colliery by Great American, the newly formed parent of Raymond Colliery. The mortgages were assigned to McClellan on January 26, 1977. The United States asserts that the mortgages are void in the hands of McClellan because McClellan had knowledge that the mortgages were fraudulent conveyances.

 In addition to the claims of the United States, certain Defendants in this lawsuit, the Commonwealth of Pennsylvania, and the Trustee in Bankruptcy of Blue Coal and Glen Nan have substantial claims against the other Defendants. Indeed, while the Commonwealth and the Trustee are nominal defendants, their interests are largely aligned with those of the United States and this case has been tried so far almost as if the Commonwealth and the Trustee in Bankruptcy were co-plaintiffs. The Commonwealth claims to have liens in the amount of $1.8 million against the properties now held or once held by Raymond Colliery and its subsidiaries. Like the United States, the Commonwealth seeks a judgment declaring void the IIT mortgages so that the Commonwealth may also foreclose on its liens and sell the properties free and clear of the mortgages. The Trustee also seeks to have the IIT mortgages set aside and has filed a cross-claim against some of the other Defendants in this lawsuit. The Trustee, of course, under the Bankruptcy Act can assert the rights and powers of any actual creditor of the bankrupt corporations in challenging any transfer or obligation incurred by those companies. 11 U.S.C. § 110(c) (1970). The Trustee desires to liquidate Blue Coal and Glen Nan assert free and clear of the IIT mortgages for the benefit of the creditors of those corporations.

 This case was placed on the Court's November 1982 trial list to be tried without a jury on the liability issues which were claimed to be interrelated. Trial commenced on November 3, 1982. By order of December 30, 1982, when no evidence had been presented on the second liability issue, the undersigned directed that only the first issue of liability, denominated as the validity of the 1973 mortgages, be tried at that time. Trial on the first issue of liability concluded on March 17, 1983 for a total of 68 trial days. The Court is now trying the second liability issue. Subsumed in the first issue are the questions of whether the IIT mortgages were fraudulent conveyances and whether the IIT mortgages were otherwise void because they were executed for illegal and ultra vires purposes. Also included within the first issue is whether the selling shareholders are liable for breaching any duty to creditors of the Raymond Group of corporations or to the corporations themselves by participating in a transaction whereby the corporations immediately used the IIT loan proceeds to finance the purchase of the Raymond Colliery stock and whether the payment of the loan proceeds to the selling shareholders was a fraudulent conveyance. All other issues in this case are to be tried subsequent to the Court's decisions on the first and second issues.

 Following are the Court's findings of fact, discussion, and conclusions of law with regard to the first issue of liability. Issuance of this decision was delayed approximately one month because additional briefing was required on questions relating to the liability of the selling shareholders of the Raymond Colliery stock.

 1. Raymond Colliery was incorporated in approximately 1962 as a Pennsylvania corporation.

 2. Raymond Colliery owned the stock of other corporations engaged in coal mining and sales. Raymond Colliery also owned land and tangible assets in Lackawanna County, Pennsylvania.

 3. The stock of Raymond Colliery was owned or controlled between 1962 and 1973 by the following persons, all of whom are Defendants: Thomas J. Gillen, John J. Gillen, Robert W. Cleveland, Robert W. Cleveland, Jr., Jay W. Cleveland, Royal Cleveland, and William T. Kirchoff (hereinafter "the Gillens and Clevelands").

 4. Sometime prior to 1973, Robert W. Cleveland and Robert W. Cleveland, Jr. transferred their stock in Raymond Colliery to Defendant Robert W. Cleveland & Sons, Inc.

 5. Royal E. Cleveland died after this action was instituted and Jay W. Cleveland, the administrator of the Estate of Royal E. Cleveland, has been substituted in his stead.

 6. Prior to 1962, Thomas J. Gillen and John J. Gillen had been in the business of coal mining, doing business primarily under the name of Gillen Coal Co. or its successors.

 7. In addition to their involvement with Raymond Colliery, Jay W. Cleveland, Robert W. Cleveland, Robert W. Cleveland, Jr. and Royal Cleveland were in the business of earth-moving equipment sales and land development, doing business as Cleveland Brothers Equipment, Inc.

 8. Raymond Colliery acquired most of its lands and other tangible assets from the Glen Alden Corporation (Glen Alden). (Undisputed, hereinafter "U")

 9. Glen Alden was a corporation engaged in coal production located in the Wilkes-Barre-Scranton area of Pennsylvania.

 10. Glen Alden owned Blue Coal Corporation (Blue Coal), a company engaged in coal production.

 11. The bulk of Blue Coal's land and other assets was located in Luzerne County. (U)

 12. In 1966, Glen Alden sold all the stock and assets of Blue Coal to Raymond Colliery for $6,000,000. Raymond Colliery paid Glen Alden $500,000 in cash with the balance of the purchase price to be paid pursuant to a note secured by a mortgage on Blue Coal's lands.

 13. In 1966 Raymond Colliery had the following wholly-owned subsidiaries: Blue Coal, Gillen Coal Mining, Inc. (Gillen Coal), Carbondale Coal Co., Inc. (Carbondale), Moffat Premium Anthracite, Inc. (Moffat), Olyphant Premium Anthracite, Inc. (Olyphant Premium) and Gilco, Inc. (Gilco). In addition, Raymond Colliery controlled Minindu Corporation (Minindu) and Glen Nan, Inc. (Glen Nan), which were wholly-owned subsidiaries of Blue Coal, Maple City Coal Co., Inc. (Maple City), Northwest Mining, Inc. (Northwest), Powderly Machine Corp. (Powderly Machine), and Clinton Fuel Sales, Inc. (Clinton), which were wholly-owned subsidiaries of Carbondale, and Powderly Corporation (Powderly) which was owned by Blue Coal and Carbondale.

 14. Sometime prior to November 26, 1973, the Gillens and Clevelands incorporated Olyphant Associates, Inc. (Olyphant) and became Olyphant's sole shareholders. The "Raymond Group" includes Olyphant as well as those corporations described in the last preceding Finding of Fact.

 15. During the period between 1966 and November 26, 1973, Thomas J. Gillen, Jr. and John J. Gillen were the managing officers of the Raymond Group of companies and were members of the Board of Directors of Raymond Colliery.

 16. During the period between 1966 and November 26, 1973, Robert W. Cleveland and Royal Cleveland were members of the Board ...


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