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UNITED STATES v. GLENEAGLES INV. CO.

UNITED STATES DISTRICT COURT FOR THE MIDDLE DISTRICT OF PENNSYLVANIA


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

MUIR, District Judge.

 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.

 On October 10, 1980, this Court granted judgment in favor of the United States and against Raymond Colliery and its subsidiaries for assessed and unpaid federal income taxes for fiscal years 1966, 1967, 1968, 1969, and 1971 in the amount of $2,795,795.16 plus interest. United States v. Raymond Colliery Co., Inc., et al., Civil No. 79-1168, slip op. (M.D. Pa. October 10, 1980). On September 17, 1982, this Court granted the motion of the United States for partial summary judgment with respect to its attempt to reduce to judgment its claims against Raymond Colliery for the tax years ended June 30, 1972 and June 30, 1973. Judgment was entered in favor of the United States and against Raymond Colliery and its subsidiaries in the amount of $119,704.08 for unpaid interest for the fiscal year ended June 30, 1972 and in the amount of $16,800.00 for unpaid taxes and $9,462.19 for unpaid interest for the fiscal year ended June 30, 1973. United States v. Tabor Court Realty Corp., et al., Civil No. 80-1424, slip op. (M.D. Pa. September 17, 1982). Thus, the United States presently has judgments against Raymond Colliery and its subsidiaries for all of the involved tax liabilities except those alleged to be due for the fiscal year ended June 30, 1975.

 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.

  II. Findings of Fact.

 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 of Directors of Raymond Colliery.

 17. During the period between 1966 and November 26, 1973, the Raymond Group was engaged primarily in the business of coal production and the sale of its surplus lands.

  18. During the period between 1966 and November 26, 1973, the Raymond Group owned over 30,000 acres of land located in Luzerne and Lackawanna Counties.

 19. Between 1966 and 1973, Blue Coal was either the largest or one of the largest anthracite coal producing companies in the United States.

 20. In 1967, the Department of Environmental Resources of the Commonwealth of Pennsylvania (DER) issued an order directing Blue Coal to reduce the pollutants being pumped into public waterways from its deep mine operations or to close such operations.

 21. As a result of the DER order, Blue Coal began to phase out its deep mining operations and intensify its conversion to strip mining operations.

 22. "Strip mining" is above-ground mining of coal whereby the ground and rock above the coal is stripped off and the coal is removed.

 23. Blue Coal incurred substantial expenses in converting to strip mining because of the cost of new and different equipment required by that process. These expenses depleted the cash reserves of the Raymond Group.

 24. In 1971, the Gillens and Clevelands obtained a loan from the Chemical Bank of approximately $5,000,000 (hereinafter the "Chemical Bank mortgage").

 25. The Chemical Bank mortgage was secured by Blue Coal's lands and bore interest at the rate of two points over prime. The mortgage provided that the Chemical Bank receive one-third of the net proceeds from the sales of Blue Coal's surplus lands. The net proceeds were defined as the balance remaining after deduction from the sales price of the costs of sale and expenses required to make the land marketable.

 26. The Chemical Bank loan was guaranteed by Royal Cleveland.

 27. The proceeds of the Chemical Bank loan were used to pay off the note given Glen Alden in 1966 by Blue Coal and secured by a mortgage on Blue Coal's lands.

 28. During 1973, Blue Coal was technically in default under the working capital provisions of the Chemical Bank mortgage agreement.

 29. In 1971, 1972, and 1973, the Raymond Group had serious and chronic cash flow problems because of the very substantial expenditures required for Blue Coal's conversion to strip mining.

 30. In 1971, 1972, and 1973, the Raymond Group's cash flow problems were compounded by the fact that its expenses were primarily incurred during the warm season when coal production was greatest and its income was received primarily during the winter season after dealers sold coal and then became obliged to pay for coal purchases made earlier in the year.

 31. In 1971, 1972 and 1973, the Raymond Group frequently discounted its accounts receivables to alleviate its cash flow problems.

 32. Between 1969 and 1973, the Raymond Group was frequently, if not always, seriously delinquent in the payment of real estate taxes.

 33. Taxes were often not paid until after the lands were listed for tax sale.

 34. During the five-year period ending November 26, 1973, the trade accounts payable of the Raymond Group were chronically delinquent.

 35. In 1973, Raymond Colliery and Blue Coal together employed between 2,000 and 3,000 employees.

 36. During the five-year period ending November 26, 1973, the coal production business of the Raymond Group operated at a loss.

 37. During the five-year period ending November 26, 1973, the Raymond Group was largely supported by the sales of its surplus lands.

 38. The Raymond Group's consolidated statement of income for the year ended June 30, 1971 showed a net loss of $156,533.61.

 39. The Raymond Group's consolidated statement of income for the year ended June 30, 1972 showed a net loss of $239,540.45.

 40. The Raymond Group's consolidated statement of income for the year ended June 30, 1973 showed a net loss of $2,146,514.96.

 41. The unprofitability of the Raymond Group's coal production business led to disagreements between the Gillens and the Clevelands as to the advisability of continuing the coal production business.

 42. These disagreements led to the decision during 1972 by the Gillens and Clevelands to sell their Raymond Colliery stock.

 43. Thomas J. Gillen, Jr. was charged with finding a buyer for the stock.

 44. On February 2, 1972, Royal Cleveland on behalf of the Gillens and Clevelands executed an option for the sale of the stock of Raymond Colliery to James Durkin, Sr. or his nominee for $8,500,000.

 45. The Gillens and Clevelands executed at least two extensions of the option agreement with Durkin. Twice the option agreements expired because Durkin was unable to purchase the Raymond Colliery stock.

 46. The final option agreement was executed on August 3, 1973 between James Durkin, Sr. and the Gillens and Clevelands.

 47. The August 3, 1973 option agreement provided for the sale of Raymond Colliery's stock for $7,200,000. The reduction in price was the result of further negotiations between the parties after Durkin learned of the Raymond Group's substantial liabilities to the Internal Revenue Service.

 48. The partner of James Durkin, Sr. in the purchase of the Raymond Colliery stock was James Riddle Hoffa, Sr.

 49. Hoffa acted through his counsel, Eugene Zafft.

 50. Sometime prior to June 30, 1973, Durkin incorporated Great American Coal Co. (Great American) and assigned to it his option to purchase the Raymond Colliery stock.

 51. Great American was incorporated as a holding company.

 52. The major asset of Great American at the time of its incorporation was the option to purchase Raymond Colliery's stock.

 53. Fifty percent of Great American's stock was originally owned by Durkin and his wife, Anna Jean Durkin, and 50% was owned by Eugene Zafft as Hoffa's nominee.

 54. Durkin and Hoffa, with the aid of Durkin's accountant and financial advisor, Charles Parente, and Durkin's counsel, Rosenn, Jenkins and Greenwald, sought financing during 1972 and 1973 for the proposed purchase of Raymond Colliery's stock. Durkin approached a series of lenders.

 55. During 1972 and 1973, Rosenn, Jenkins and Greenwald participated in the Raymond Colliery stock purchase transaction in the joint capacity as counsel for Durkin and as the local agent for Chicago Title Insurance Co., the proposed title insurance carrier.

 56. All of Durkin's larger loan requests were predicated on using the assets of the Raymond Group as collateral for the loans requested and repayment of the loans and interest thereon from the income and assets of the Raymond Group.

 57. In March, 1972, Durkin and Hoffa sought a $13,000,000 loan from the Central States Pension Fund and the Mellon Bank to finance the stock purchase.

 58. Rosenn, Jenkins and Greenwald, in their joint capacity as counsel for Durkin and local agent for Chicago Title Insurance Co., had extensive communications with Richard Pollay, Vice President and Divisional Associate General Counsel for Chicago Title Insurance Co., and individuals at the Mellon Bank and the Central States Pension Fund as to the legality of using Raymond Group assets as security for a loan the proceeds of which would be used to finance at least in part the purchase of Raymond Colliery's stock.

 59. Central States Pension Fund made a commitment to finance the purchase of Raymond Colliery's stock. This loan commitment was terminated in part because Durkin failed to pay the required commitment fee and in part because Mellon Bank which was to participate in the loan determined that Blue Coal was financially weak.

 60. A loan request made by Durkin to the Chemical Bank for $10,000,000 was denied after officials at the Bank determined that the Raymond Group would be unable to repay the loan in a reasonable time.

 61. In July, 1973, Durkin proposed to the Gillens and Clevelands that they accept for the sale of the stock $4,000,000 in cash plus a $4,500,000 note secured by Raymond Colliery and Blue Coal assets.

 62. The proposal described in the preceding paragraph was rejected by the Gillens and Clevelands upon the advice of their counsel, Bernard Brown.

 63. Brown advised against the proposal because he was of the view that the transfer to the Gillens and Clevelands of a mortgage of the assets of Raymond Colliery and Blue Coal as security for the purchase price of the stock would be susceptible to a challenge by creditors as a fraudulent conveyance.

 64. Besides serving as counsel to the Gillens and Clevelands during 1973, Bernard Brown was also Chairman of the Board of Raymond Colliery.

 65. As a result of Durkin's difficulties in obtaining financing, Hyman Green, a wealthy entrepreneur, was brought into the transaction by Hoffa in the summer of 1973. Hoffa sought Green's participation because he was of the view that Green would be more adept than Durkin at obtaining financing.

 66. Green became a 10% shareholder in Great American. The remaining shares of Great American were held 50% by Zafft and 40% by Durkin.

 67. During the summer of 1973, the services of Benjamin Levinson, a loan broker, were sought by Green. Levinson put Green and Durkin in touch with Institutional Investors Trust (IIT).

 68. IIT is a real estate investment trust with headquarters in New York City.

 69. IIT is an independent lender and was unrelated to any party to the August 3, 1973 option agreement between Durkin and the Gillens and Clevelands.

 70. Durkin sought $7,000,000 to $8,530,000 from IIT to finance the purchase of Raymond Colliery's stock by Great American.

 71. Durkin, Zafft, and Green concealed from IIT Hoffa's ownership interest in Great American.

 72. On July 24, 1973, Great American received a loan commitment from IIT for a loan in the amount of $8,530,000.

 73. Under the IIT loan commitment as revised in the fall of 1973, separate loans were agreed to be made by IIT to Raymond Colliery, Blue Coal, Glen Nan and Olyphant (hereinafter sometimes collectively referred to as the "borrowing companies") in an aggregate amount of $8,530,000. These loans were to be secured by encumbrances on assets of the borrowing companies.

 74. The borrowing companies as well as Gillen Coal, Moffat, Northwest, Minindu, Gilco, Maple City, Powderly, Olyphant Premium, Clinton and Carbondale (hereinafter the "guarantors") each agreed to execute mortgages guaranteeing payment of the $8,530,000 loan secured by encumbrances on the assets of the guarantors (hereinafter the "guarantee mortgages").

 75. IIT set up an interest reserve of $1,530,000 to relieve the debtors of initial interest payments.

 76. James Hillary, IIT's chief in-house counsel, discussed with Walter M. Strine, Jr., counsel to IIT and a member of the firm Morgan, Lewis and Bockius, Messrs. Gellis and Taub, IIT Trustees, and John Streiker, the IIT loan administrator, the possibility that the proposed loan was structured in a manner that might hinder the collection efforts of the Raymond Group's present and future unsecured creditors.

 77. Rosenn, Jenkins and Greenwald discussed with counsel for IIT the substance of the conversations described in Finding of Fact No. 58.

  78. By letter of September 26, 1973, Walter M. Strine, Jr., advised James Hillary that creditors might challenge IIT's security interest in the property of the borrowing companies because the bulk of the IIT loan proceeds was to be used to pay the selling shareholders for their stock. Mr. Strine further advised IIT that the guarantee mortgages were vulnerable to a challenge by creditors of the guarantors.

 79. On October 13, 1973, using assumptions far more optimistic than those which reasonably could be drawn from Blue Coal's financial statement for the year ending June 30, 1973, John Streiker forecast that, with the imposition of the proposed IIT liability, Blue Coal would have cash deficits of $704,000 by 1976 and of $904,000 by 1977.

 80. In addition to the loan promised by IIT, Durkin obtained approximately $3,452,250 in additional loans to be used for the purchase of Raymond Colliery's stock. These loans were made by lenders either to James Durkin, Sr. and Anna Jean Durkin, who then lent the funds to Great American, or directly to Great American. 81. The following funds used to acquire Raymond Colliery's stock were obtained from loans reflected on Great American's books as payable to James J. and Anna Jean Durkin: Edward & James Durkin, Jr. $400,000 First Valley Bank 85,000 United Penn Bank 100,000 Wyoming National Bank 955,000 Eugene Zafft 188,000 No. 1 Contracting Co. 200,000 Mr. Tedesco and/or individuals 150,000 J. J. Durkin, Sr. 165,020 Thrift Credit 394,230

19830520

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