The opinion of the court was delivered by: MUIR
The first issue of liability in this case was tried beginning November 2, 1982 and ending March 17, 1983. That issue was whether the IIT mortgages given in substantial part to finance the purchase of Raymond Colliery and its affiliates (hereinafter the Raymond Group) were fraudulent conveyances. In an earlier opinion of this Court, United States of America v. Gleneagles Investment Co., Inc., et al., 565 F. Supp. 556 (M.D. Pa. 1983), we concluded that the IIT mortgages were fraudulent.
Trial of the 2nd, 3rd and 4th liability issues started April 18, 1983 and concluded June 28, 1983. This opinion deals with those issues which were tried in series. The 2nd liability issue was whether the 1976 Lackawanna County tax sale of lands subject to the mortgages was valid. The 3rd liability issue was whether a similar 1980 Lackawanna County tax sale was valid. The 4th liability issue was whether the purchaser of the IIT mortgages was a bona fide purchaser.
On June 15, 1983, during the trial on the 2nd liability issue the parties stipulated that the Lackawanna County Tax Claim Bureau had failed to post tax sale notices on those Raymond Colliery properties which the county had purported to sell at the December 17, 1976 and the December 16, 1980 tax sales, that the tax sales were invalid and that no title passed by the tax sales and resultant tax deeds. Defendant Tabor Court Realty was the purchaser of Raymond Colliery's lands at the 1976 tax sale. On the date of the 1976 tax sale, Defendant Pagnotti Associates was the equitable owner of the stock of Tabor Court Realty and became the actual owner in January, 1977. At the December 16, 1980 tax sale, Defendant Joseph Solfanelli purchased the properties for $612,239.56. In January of 1981, Defendant Gleneagles Investment Co., Inc., was incorporated with Joseph Solfanelli as its sole shareholder. Mr. Solfanelli was on December 16, 1980 and is now counsel to the Pagnotti-Tedesco interests. The Lackawanna County Commissioners purported to convey the Raymond Colliery properties to Gleneagles by deed of April 15, 1981. As a result of the June 15, 1983 stipulation, the lands of Raymond Colliery which were ostensibly sold at the tax sales are still owned by Raymond Colliery and its subsidiaries.
The fraudulent mortgages were assigned by IIT to Defendant McClellan Realty Co. on January 26, 1977. On the same date Defendant Pagnotti Enterprises purchased the stock of McClellan Realty. The United States asserts that the mortgages are void in the hands of McClellan Realty because, inter alia, McClellan Realty knew or had reason to know that the mortgages were fraudulent.
Following are the Court's findings of fact, discussion and conclusions of law with respect to the fourth issue of liability.
1. Prior to 1972, James Tedesco had numerous contacts with the Raymond Group and particularly with Raymond Colliery and Blue Coal.
2. In 1965, James Tedesco unsuccessfully attempted to purchase the coal lands of Blue Coal.
3. In 1971, James Tedesco and Louis Pagnotti, II, unsuccessfully attempted to purchase the Loree Colliery culm bank which was owned by the Raymond Group.
4. In 1972, Pagnotti Enterprises and the Raymond Group were the two top producers of anthracite coal in the United States.
5. Pagnotti Enterprises, Inc. is owned 34/60 by the Pagnotti Family, 13/60 by Tedesco Corp. and 13/60 by Henry Ventre, Inc.
6. James Tedesco is an experienced coal operator and businessman.
7. James Tedesco has known James Durkin for more than 40 years.
8. In early 1972, James Durkin obtained an option to purchase the stock of Raymond Colliery.
9. Subsequently, James Durkin incorporated Great American Coal Co. and assigned to it his option to purchase the stock of Raymond Colliery.
10. James Durkin financed Great American's purchase of the stock of Raymond Colliery in part through loans obtained from the Old Forge Bank and No. 1 Contracting Co.
11. From 1966 through the present, James Tedesco has been president of Old Forge Bank.
12. James Tedesco and Louis Pagnotti, II are minority shareholders and directors of the Old Forge Bank.
14. James Tedesco and Louis Pagnotti, II are shareholders of Tedesco Corporation and Louis Pagnotti, Inc., respectively.
15. At the time James Durkin sought financing from the Old Forge Bank and No. 1 Contracting, he revealed to James Tedesco that he had reached an agreement for the acquisition of Raymond Colliery and its subsidiaries, including Blue Coal.
16. On July 16, 1973, the Old Forge Bank lent James and Anna Jean Durkin $100,000 towards the purchase of Raymond Colliery's stock without the submission by the Durkins of a loan application or financial statements.
17. On July 16, 1973, No. 1 Contracting Co. entered into a transaction framed as a loan whereby No. 1 Contracting Co. ostensibly lent James and Anna Jean Durkin $200,000 towards the purchase of Raymond Colliery's stock and accepted $300,000 in cash as "collateral".
18. James Riddle Hoffa, Sr. supplied the $300,000 used as "collateral" for the $200,000 loan made by No. 1 Contracting Co.
19. James Riddle Hoffa, Sr. was a silent partner of James Durkin in his negotiations to purchase the stock of Raymond Colliery.
20. The $300,000 "collateral" was kept in a safe deposit box in the Old Forge Bank used by companies dominated by James Tedesco and drew no interest.
21. James Durkin obtained a written receipt for the cash collateral signed not by the "lender" but by Mr. Sebastianelli, an officer of the Old Forge Bank.
22. James Tedesco, was president of both Old Forge Bank and No. 1 Contracting Co. James Tedesco as president of the bank did not request loan applications from the Durkins because of his belief that Anna Jean Durkin was wealthy.
23. On August 13, 1973, Old Forge Bank lent Great American $105,000 without submission by Great American of a loan application or financial statements.
24. Because James Tedesco looked to James and Anna Jean Durkin for repayment of the Old Forge Bank loan to Great American, he did not request financial statements for Great American or for the Raymond Group.
25. James Tedesco was not shown any financial statements of the Raymond Group on July 16, 1973 or on August 13, 1973.
26. In the summer of 1973, Hyman Green became a joint venturer with James Durkin and James Riddle Hoffa in the negotiations to purchase Raymond Colliery.
27. Prior to 1973, representatives of several anthracite coal companies, including Joseph Frank a direct assistant of Mr. Tedesco on behalf of Pagnotti Enterprises and Carl Tomaine on behalf of the Raymond Group, entered into agreements to fix prices and control production of anthracite coal.
28. On October 11, 1973, Henry Greenwald, counsel for James Durkin, sought from James Tedesco information regarding the amount of counsel fees and expenses paid by Blue Coal or for which it had become obligated with respect to the antitrust litigation which arose out of the price fixing and production control activities set forth in the last preceding finding of fact. Henry Greenwald explained that this information was needed to resolve a dispute which had arisen in the course of James Durkin's negotiations to purchase Raymond Colliery.
29. On or about October 31, 1973, James Tedesco provided Henry Greenwald with an appraisal of a Bucyrus-Erie Electric Walking Dragline owned by a member of the Raymond Group valuing the dragline at $2,500,000.
30. This appraisal was used by James Durkin to support his efforts to obtain financing from Institutional Investors Trust (IIT) for the purchase of the stock of Raymond Colliery.
32. In January of 1974, James Tedesco had discussions with James Durkin and Hyman Green regarding the possibility that Pagnotti Enterprises might acquire a "lease to exhaustion" of all coal lands of the Raymond Group.
33. The proposal discussed among James Tedesco, Hyman Green, and James Durkin contemplated that Pagnotti Enterprises would have the use of the mining equipment owned by the Raymond Group.
34. James Tedesco did not see any financial statements or data on the financial condition of the Raymond Group at this time.
35. During the January, 1974 negotiations, James Durkin advised James Tedesco that the Raymond Group was losing money on its coal production business and intended to cease operation of the same.
36. No agreement on the lease to exhaustion proposal was reached between James Tedesco, James Durkin, and Hyman Green.
37. Later in 1974, James Durkin and Hyman Green entered into a lease to exhaustion with Lucky Strike Coal Corp. of certain Raymond Group coal lands.
38. Lucky Strike Coal was operated by Louis Beltrami.
39. Prior to April 1974, James Tedesco offered James Durkin $2,500,000 for the Bucyrus-Erie Electric Walking Dragline which was the subject of the appraisal provided by James Tedesco to Henry Greenwald in October of 1973.
40. This offer was not accepted by James Durkin and subsequently the dragline was sold for $3,000,000 to W.R. Grace & Co.
41. On July 18, 1974, James Durkin, Anna Jean Durkin and Hyman Green pledged their Raymond Colliery and Great American stock to IIT as additional collateral for the 1973 loans.
42. In accordance with the pledge agreement, in the event of default IIT had the right to vote the pledged stock and to exercise all powers of an owner with respect to the pledged stock.
43. The Durkins became seriously delinquent in the payment of interest on the Old Forge Bank loan and on the "loan" from No. 1 Contracting Co. obtained by the Durkins on July 16, 1973 in connection with the purchase of Raymond Colliery stock.
44. On May 6, 1975 the interest payable on the $200,000 "loan" from No. 1 Contracting Company to James and Anna Jean Durkin was paid by Blue Coal for the period July 1, 1973 through December 31, 1973.
45. On June 26, 1975, James and Anna Jean Durkin sold their stock in Great American to Hyman Green.
46. After the Durkins sold their stock, James Millard became president of both Raymond Colliery and Blue Coal.
47. James Millard was counsel to Hyman Green at least between 1973 and 1976.
48. In September 1975, James Tedesco negotiated on behalf of Loree Associates to lease a coal breaker to the Durkins for the processing of certain culm banks.
49. In 1975, Raymond Colliery negotiated an agreement with the Lackawanna Tax Claim Bureau to pay its delinquent real estate taxes.
50. Upon signing this agreement, Raymond Colliery paid $95,000 towards its taxes and agreed to pay the balance of $885,000 in installments during 1976.
51. By early 1976, Raymond Colliery was in default under this agreement.
52. In January, 1976, James Durkin accompanied by Eugene Zafft met with James Tedesco and repaid the $200,000 No. 1 Contracting Co. loan and James Tedesco delivered to them the $300,000 "cash collateral." At this time, James Durkin stated he had assigned his interest in the "cash collateral" to Eugene Zafft.
54. At the time the "cash collateral" was returned, James Durkin and James Tedesco exchanged receipts.
55. In February, 1976 Blue Coal negotiated an agreement with the Luzerne County Commissioners to pay its delinquent real estate taxes.
56. Under the agreement, Blue Coal paid $50,000 towards its taxes with further payments to be made from the proceeds of its real estate sales.
57. The $50,000 so paid by Blue Coal was advanced to Blue Coal by IIT and was added to the principal amount of the IIT mortgages. The advance was secured by a promissory note executed by Blue Coal and guaranteed by James Millard.
58. In early 1976, L. Robert Lieb was retained by IIT as special counsel to advise IIT with respect to the Raymond Group loans.
59. L. Robert Lieb was not told about the background or origin of the IIT loans.
60. By mid-1976, Blue Coal was in default under its agreement with the Luzerne County Commissioners.
61. On September 15, 1976, IIT sent notices to Raymond Colliery, Olyphant Associates, Blue Coal and Glen Nan (the borrowing companies) declaring that the mortgage notes under the Note Purchase and Loan Agreement of November 26, 1973 were in default. IIT further advised the borrowing companies that it was accelerating the balances due under the Note Purchase and Loan Agreement and demanded payment of the loan balances. Similar notices of default were sent to the corporate guarantors.
62. On September 15, 1976, IIT made demands upon Lucky Strike to pay to IIT all rents payable by Lucky Strike to the Raymond Group under the lease to exhaustion held by Lucky Strike.
63. On September 29, 1976, IIT confessed judgments against Blue Coal, Raymond Colliery, Olyphant Associates and Glen Nan in the amounts of $3,075,438, $1,865,430, $50,417 and $50,417 respectively.
64. In the fall of 1976, Lawrence Sullivan of IIT approached James Tedesco to discuss the sale of IIT's mortgages to Pagnotti Enterprises.
65. At the meeting with Lawrence Sullivan, James Tedesco indicated a willingness to consider purchasing IIT's mortgages and requested that copies of the mortgages and other data be provided to Pagnotti Enterprises.
66. Pursuant to this request, Lawrence Sullivan sent James Tedesco copies of the four mortgages, one relating to each borrowing company, and an index of the items in the twelve closing binders created by IIT's counsel, Morgan, Lewis and Bockius, after the November 26, 1973 closing of the IIT loans.
67. By October 20, 1976, James Tedesco and his counsel, Morris Gelb of the Scranton law firm of Gelb & Myers, had received the above documents from Lawrence Sullivan.
68. Also during October 1976, James Tedesco was approached by Hyman Green, owner of record of the stock of Raymond Colliery, who represented to James Tedesco that the IIT mortgages could be purchased at a substantial discount.
69. Hyman Green and James Millard used the threat of bankruptcy and the possible county tax sales in an attempt to get IIT to modify or extend the maturity date of the loans.
70. IIT advised Mr. Green that it would not modify the terms or extend the maturity date of the loans.
71. Hyman Green was attempting to find a buyer of IIT's loans and security because he wanted the mortgages to be held by someone who would be more cooperative with the Raymond Group than IIT had been and because IIT had indicated that it would not extend the December 31, 1976 maturity date of the loans or refinance the loans past that date.
73. Attorney Morris Gelb and his associate, Richard Bishop, as counsel to Pagnotti Enterprises, and James Millard, president of Blue Coal and Raymond Colliery, were also present at the above meeting.
74. James Tedesco and Hyman Green discussed the possible sale of the Raymond Group to Pagnotti Enterprises but James Tedesco lost interest in the possibility of a stock purchase after he and his counsel reviewed the financial information concerning the Raymond Group.
75. The Raymond Group was unable to pay its delinquent and current real estate taxes through December 1976 which aggregated approximately $980,000 for Lackawanna County alone.
76. In the fall of 1976, Luzerne and Lackawanna Counties scheduled real estate tax sales of the bulk of the lands of Raymond Colliery and Blue Coal.
77. On or after October 5, 1976, IIT made efforts to pay Raymond Colliery's and Blue Coal's delinquent real estate taxes. IIT unsuccessfully attempted to negotiate an agreement with the taxing authorities to pay the taxes on an installment basis.
78. Between November 9, 1976 and November 12, 1976, L. Robert Lieb and Allen Katz, counsel for IIT, met with and retained Norman Harris and Merton Jones of Nogi, O'Malley and Harris, a Scranton area law firm, as local counsel to IIT and discussed with them and various county personnel the alternatives available to IIT to protect its mortgages in light of the scheduled county tax sales and the fact that the mortgages were in default.
79. In November, 1976, IIT's counsel visited the Luzerne and Lackawanna County Tax Claim Bureaus.
80. L. Robert Lieb learned during his visit to the County Tax Claim Bureaus that certain real estate taxes owed by Blue Coal and Raymond Colliery pre-dated the November 26, 1973 mortgages. L. Robert Lieb was surprised that real estate taxes which pre-dated the mortgages had not been paid prior to the November 26, 1973 closing, but understood that non-payment of real estate ...