Wren Alexander, LLC: Of Tax Liens and Fraudulent Transfers - PDF document

Wren Alexander, LLC: Of Tax Liens and Fraudulent Transfers committees.abi.org /committees/bankruptcy-taxation/posts/2014/wren-alexander-llc-of-tax-liens-and-fraudulent- transfers David N. Crapo Gibbons P.C.; Newark, New Jersey A 30-year friendship and business association between Charles Pircher and Wren Alexander ultimately cost one of Alexander’s companies, Wren Alexander Investments, L.L.C. (Wren LLC), its interest in certain real property in Medina County, Texas (Medina Property). On June 14, 2013, in a per curiam opinion, In re Wren Alexander Investments, LLC ,[1] the U.S. Court of Appeals for the Fifth Circuit affirmed the affirmation of the U.S. District Court for the Western District of Texas of the allowance by the U.S. Bankruptcy Court for the Western District of Texas of the IRS’s claim against Wren LLC based on a lien for taxes owed by a third party, United Capital Investment Group, Inc. (UCIG). On its face, the case appears to be a federal tax lien case. In reality, however, it was really a fraudulent transfer case. UCIG purchased the Medina Property in 1999 and developed it into a horse ranch for Pircher, who was a manager o UCIG and several other business owned by UCIG’s owner, George Walker.[2] Pircher and Alexander had known and had extensive business dealings with each other since the late 1980s.[3] For example, Alexander had arranged for UCIG between 2001 and 2004, which was secured by the Medina Property.[4] During that period, however, UCIG and other entities that Walker owned failed to pay millions of dollars in payroll taxes.[5] By 2004, the IRS had begun to file tax liens against those entities.[6] In December 2004, UCIG sold the Medina Property to Medina Heritage, Ltd. (MHL), which was owned by Pircher and his family, for the assumption of $2 million in debt encumbering the Medina Property.[7] However, the deed to MHL was not recorded until one month after the IRS had filed a Notice of Federal Tax Lien against UCIG. For that reason, the transfer of the Medina Property to MHL bore the taint of a fraudulent transfer. After the sale of the Medina Property to MHL, Pircher continued what appeared to be a long-standing pattern of not paying his creditors. By 2007, MHL fell behind on the mortgage on the Medina Property, as well as the property taxes.[8] What followed was a textbook example of a fraudulent transfer. Pircher and Alexander entered into an agreement whereby Wren LLC (which had been formed to acquire the Medina Property) would purchase the Medina Property for $2,275,000 and lease it back to Pircher at below-market rent .[9] In other words, Pircher remained in possession and control of the Medina Property. The purchase price did not reflect the fair market value of the Medina Property, but rather the amount necessary to pay off the mortgage and the property taxes.[10] Meanwhile, the IRS had been unsuccessfully attempting to collect the payroll taxes owed by UCIG and its affiliates. [11] Concluding that the Medina Property had been the subject of two ill-concealed fraudulent transfers between affiliates, the IRS filed an “Alter Ego, Nominee or Transfer” lien in the amount of $23,385,778.91 against the Medina Property on April 14, 2008.[12] In what appears to have been an attempt to strip the Medina Property of the tax lien, Wren LLC filed a chapter 11 petition.[13] The IRS filed a proof of claim for more than $173 million in payroll taxes owed by UCIG and its affiliates, thereby asserting a lien on the Medina Property.[14] Wren LLC objected to the claim and the lien.[15] The Medina Property was sold in the bankruptcy, and the net proceeds, $1,192,612, were deposited into the registry of the bankruptcy court pending the resolution of Wren LLC’s objection to the IRS’s claim.[16] The bankruptcy court overruled Wren LLC’s objection, allowed the IRS’s claim as to UCIG, and determined that the tax lien attached to the Medina property.[17] In determining that the tax lien attached to the Medina Property, the bankruptcy court

concluded that the transfer of the Medina Property first from UCIG to MHL and then from MHL to Wren LLC were fraudulent transfers. Id . The bankruptcy court further, and correctly,[18] concluded that because the payroll tax liability underlying the tax lien had been assessed against UCIG, Wren LLC lacked standing to challenge the assessment.[19] Wren LLC appealed the bankruptcy court’s decision, particularly the bankruptcy court’s conclusion that Wren LLC lacked standing to contest the IRS’s assessment against UCIG and the resulting tax lien on the Medina Property.[20] The district court affirmed the bankruptcy court.[21] On further appeal, the Fifth Circuit found it unnecessary to determine whether Wren LLC had standing to challenge the IRS’s assessment and the resulting lien. Relying on Stallard v. United States [22] and United States v. Lochamy , [23] the Fifth Circuit found that Wren LLC had failed to offer competent evidence to overcome the presumption of correctness enjoyed by the IRS’s tax assessments against UCIG.[24] To be sure, Wren LLC contended at oral argument before the Fifth Circuit that because of the bankruptcy court’s conclusion that Wren LLC lacked standing to challenge the assessment, Wren LLC was unable to present such competent evidence.[25] The Fifth Circuit responded that by failing to make an offer of proof or proffer on the issue, Wren LLC failed to preserve the issue for appeal.[26] With the Fifth Circuit’s ruling on that point, Wren Investments simply became a fraudulent transfer case. Wren LLC also failed to challenge on appeal the bankruptcy court’s conclusion that the transfers of the Medina Property constituted fraudulent transfers.[27] The only issue remaining for the Fifth Circuit to decide, therefore, was whether Wren LLC was a “good faith purchaser for reasonably equivalent value.”[28] Because the transfer of the Medina Property involved a transfer to Wren LLC, a debtor, the parties agreed that the issue was controlled by the Texas Uniform Fraudulent Transfer Act (TUFTA).[29] Wren LLC argued that the bankruptcy court erred in treating it as an “initial transferee” under Tex. Bus. & Comm. Code § 24.009(a) rather than as a “subsequent transferee” under Tex. Bus. & Comm. Code 24.009(b)(2). The Fifth Circuit concluded that whether Wren Alexander was an initial or subsequent transferee did not matter. Under both statutes, the transferee must prove good faith.[30] The Fifth Circuit concluded that Wren LLC had failed to demonstrate that it acquired the Medina Property in good faith. Focusing on the 30-year business relationship among Alexander, Pircher and Pircher’s wife, the Fifth Circuit easily determined that Wren LLC was an insider of MHL.[31] The court also noted that the purchase price for the Medina Property did not reflect its value and that Pircher retained possession thereof after the sale to Wren LLC without a written lease.[32] It was, therefore, clear to the Fifth Circuit that the sale of the Medina Property was not conducted a arm’s length.[33] It also could not be disputed that Wren LLC knew that MHL was insolvent and unable to pay its debts as they came due.[34] As an insider that knew of MHL’s insolvency, Wren LLC, as a matter of Texas law, was not a good-faith transferee of the Medina Property.[35] Although this issue was not addressed by the Fifth Circuit, Wren LLC’s lack of good faith was underscored by an apparent lack of due diligence in acquiring the Medina Property. The deed from UCIG to MHL was not recorded until after the IRS had filed its Notice of Federal Tax Liens as to UCIG. Were Wren LLC a good-faith purchaser that conducted due diligence before purchasing the property, a title search should have picked up the tax lien and put Wren LLC on notice of a potential claim by the IRS against the Medina Property. In any event, Wren Investments provides little guidance on tax law, but a lot on fraudulent transfer law. [1] 2013 WL 2421945 (5th Cir. June 4, 2013). [2] Id . *2. [3] Id .

[4] Id . [5] Id . [6] Id . [7] Id . [8] Id . [9] Id . [10] Id . [11] Id . at 2. [12] Id . [13] Id . [14] Id . [15] Id . [16] Id . [17] Id . [18] See Myers v. United States, 657 F.3d 591, 604 (5th Cir. 1981) (“We do not believe due process requires that ... a third person ... be allowed to challenge the tax liability of the former owner of the property.”). [19] 2013 WL 2421945 *2. [20] Id . [21] Id . [22] 12 F.3d 489, 493. [23] 724 F2d 494, 497-98 (5th Cir. 1984). [24] Id ., *3. [25] Id . [26] Id . [27] Id . [28] Id . [29] Texas Bus. & Comm. Code § 24.001, et seq . [30] 2013 WL 242195 *3, citing Flores v. Robinson Roofing & Constr. Co ., 161 S.W.3d 750, 756 (Tex. App.--Fort Worth 2005, pet. denied. ).

[31] 2013 WL 242195 *4. [32] Id. [33] Id . [34] Id . [35] Id ., *3, citing Flores, supra, at n.28, 161 S.W.3d at 756. Committees: Bankruptcy Taxation *This article was originally published in the American Bankruptcy Institute's Bankruptcy Taxation Newsletter (Volume 11, � Number 1; June 2014). The reprint permission is only valid for firm newsletters and not for reprinting in other publishing avenue.