Lester Associates v. Commonwealth

DISSENTING OPINION BY

Judge PELLEGRINI.

I respectfully dissent from the majority’s holding that Lester Associates is entitled to a refund of the real estate transfer tax (transfer tax)1 because the March 20, *4001995 deed was void ab initio. I disagree because:

• The common pleas court’s order did not determine that the deed was void ab initio for the purpose of a deed transfer tax and, in any event, because it was a default judgment, it can have no preclu-sive effect.
• A deed cannot be void ab initio and this deed was not because the parties presented a deed for recording, warranting that it was a proper deed.
• Even if the deed was void ab initio, it is of no matter because what is taxed is not the deed but the recording of a document or deed, and once recorded, the tax is owed regardless of whether the deed is determined to be ineffective.

Lester Associates is a general partnership registered as a fictitious name with the Pennsylvania Department of State, Corporations Bureau. By deed dated August 19, 1992, and recorded on October 23, 1992, it took title to certain commercial property (Property) located in Cumberland County, Pennsylvania. Lester Associates subsequently prepared a deed purporting to convey the Property to “Lester Associates, L.L.C.” (Lester, L.L.C.) for nominal consideration. The deed was recorded on March 20, 1995, and was accompanied by a Statement of Value that claimed exemption from the transfer tax on the grounds that the deed was a deed of correction. At no time relevant hereto was “Lester Associates, L.L.C.” registered as a fictitious name, corporation, partnership, limited liability company or any other form of legal entity in Pennsylvania or in any other jurisdiction. On August 23, 1995, a third deed was recorded wherein “Lester Associates, L.L.C.” conveyed the Property to “Gateway Square Associates, L.L.C., a limited liability company” (Gateway) for nominal consideration. Gateway is a Tennessee limited liability company that was formed on December 18, 1994. This deed was accompanied by a Statement of Value which claimed exemption for the transfer tax on the grounds that it also was a correctional deed for the March 20, 1995 deed.2 The partners of Lester Associates are also the partners of Gateway.

On December 8, 1995, the Department of Revenue (Department) notified Lester Associates that a transfer tax of $110,692.32 plus interest had been assessed with regard to the March 20, 1995 conveyance based upon the Property’s value of $11,069,232.00. The notice indicated that the transfer tax was assessed because “[tjransfers to or between corporations or partnerships are fully taxable.” (Realty Transfer Tax Notice, 12/9/95). The Board sustained the Department’s determination of the tax assessment, and Lester Associates then filed an appeal with the Board of Finance and Revenue. It likewise upheld the tax assessment.

*401Along with filing a petition for redeter-mination with the Department’s Board of Appeals (Board), Lester Associates also filed an action with the Cumberland County Court of Common Pleas (trial court) seeking a declaratory judgment against Gateway and the Department. Note that the principles/partners in Lester Associates and Gateway are the same. Lester Associates sought an order declaring that the deeds, recorded on March 20, 1995, and August 23,1995, had no legal effect on the title to the Property. After preliminary objections were filed by the Office of Attorney General, the complaint was amended to delete the Department as a defendant. On October 7, 1996, the trial court entered a default judgment against Gateway and found that title to the Property was still in Lester Associates. In the order, the trial court specifically stated that it made no opinion as to the effect the default judgment had on issues of deed transfer tax liability.

On appeal from the Board of Finance and Revenue, this Court first affirmed the imposition of the transfer tax in Lester Associates v. Commonwealth of Pennsylvania, 751 A.2d 253 (Pa.Cmwlth.1999) (Lester I), and on appeal, the Supreme Court remanded Lester Associates v. Board of Finance and Revenue, 563 Pa. 519, 762 A.2d 1084 (2000) (Lester II), asking for a determination whether Lester Associates offered sufficient evidence to prove that the deed of March 20,1995, was void ab initio. This Court, in a panel decision dated July 22, 2002, found that sufficient evidence was lacking. Lester Associates filed exceptions to that order, and this case was heard before our Court en banc.

In reversing the Board, the majority concludes that the deed is void ab initio for several reasons. One reason is that it concludes that the Department and this Court are bound by the decision of the trial court that title is vested in Lester Associates rather than in Lester, L.L.C. or Gateway, and that that somehow impacts on whether the deed transfer tax needs to be paid. It-does so because the interests of the Department were adequately represented, even though the Department, as found by the trial court, was not a party to the transaction.

First, I disagree that the trial court’s order should be given any preclusive effect. For any order to have any preclusive effect on any subsequent litigation, the matter has to have been actually litigated. McNeil v. Owens-Coming Fiberglas Corp., 545 Pa. 209, 680 A.2d 1145 (1996). Because the trial court’s default judgment was not litigated, the order cannot have any preclusive effect on whether the transfer tax was due and owing either before the Board of Finance and Revenue or this Court. Not only can it have no legal effect, but the trial court specifically said it had no effect. All that the trial court found was that title to the property was vested in Lester Associates; it did not find that the deeds conveying to Lester, L.L.C. and Gateway were void ab initio. Moreover, it specifically found that it made no findings as to transfer tax liability.3

What is most troubling about the majority’s determination is that it allows a sham action where two parties, both controlled by the same individuals, get some sort of preclusive effect by obtaining a collusive *402default judgment. Not only does it sanction collusive behavior by giving it preclu-sive effect, but the majority’s holding frustrates the statutory scheme that matters related to state taxes which are to be handled exclusively by the Board of Finance and Revenue and ultimately this Court. Even though title had been vested in Lester, at this point, separate and apart from other issues, we have two recorded deeds upon which transfer taxes have not been paid.

Second, I disagree that the deeds can ever be declared void ab initio. The majority finds that the March 1995 deed transferring property to a nonexistent entity, namely Lester, L.L.C., was void ab initio; therefore, it concludes that there was never a legal transfer to justify the imposition of the transfer tax. The majority also concludes that the parties’ stipulations do not establish that Lester, L.L.C. was an assumed name for Gateway or that the March 1995 deed intended to convey the Property to Gateway through that instrument. I disagree because while “[a] deed that purports to convey real estate to a nonexistent corporation has no effect,” Borough of Elizabeth v. Aim Sher Corporation, 316 Pa.Super. 97, 462 A.2d 811, 812 (1983), this holding only stands for the principle that the transaction may be of “no effect;” the deed itself is not void because it was filed with the intent to place a transaction on the record. When the office of the Recorder of Deeds (Recorder) accepts a deed, it has no power not to record the deed if it is properly presented; it does not warrant that the grantor has title, that grantor or grantee exists; rather, it simply records the deed to fix any rights that may exist on the public record that day, and the deed itself can never be void ab initio; only the transaction can be found so.

Third, the tax is due and owing. The March 20, 1995 deed was presented for recording, subjecting that entity to the transfer tax. Section 8102-C of the Tax Code, 72 P.S. § 8102-C, states that every person who presents for recording a deed “shall be subject to pay ... for or in respect of the vellum parchment or paper upon which such document is written or printed, a State tax at the rate of one per cent of the value of the real estate represented by such document ...” The transfer tax is levied on the “parchment or paper,” and the measure of that tax is the “value of the real estate.” Section 8102-C does not look beyond the document to see if the transaction is valid or whether the parties actually exist, because the levying of the transfer tax does not rely on the validity of the deed; it only looks to see if a document was recorded. In the case before us, the deed between Lester Associates and Lester, L.L.C. and the deed between Lester, L.L.C. and Gateway were both presented for recording, and the person or entity presenting the deed for recording is required to pay the transfer tax.

Fourth, even if I agreed that recorded deeds could be deemed void ab initio and wiped off the deed blotter, and also assuming that we have jurisdiction in a tax case to determine that the deeds were void ab initio, thereby affecting title, these deeds do not fall within that category because the parties, which, in this case happen to be the same entity, presented the deeds to the Recorder and there was nothing to say that with the recordation of those deeds that the parties did not do what they intended to do. Lester Associates has the “burden of proving to the satisfaction of the Commonwealth Court, as trier of fact, in the de novo proceeding, that the deed, in fact, was void ab initio.” Sabatine v. Commonwealth of Pennsylvania, 497 Pa. 453, 442 A.2d 210, 212 (1981). Lester Associates treated Lester, L.L.C. as an entity *403with the capacity to buy and sell property by virtue of the fact that Sidney Becker (Becker), a general partner for Lester Associates and Gateway and a member of Lester, L.L.C., prepared both correctional deeds. Moreover, “Becker, on behalf of [Lester Associates] and Lester, L.L.C., represented to the Commonwealth in the ‘Realty Transfer Tax Statement of Value’ that the property was transferred to another owner and that the transfers were exempt from taxation on the ground that the deeds were corrective or confirmatory deeds.” (Stipulations of Facts, Exhibits C, D). Lester Associates, with full knowledge of the grantee’s legal status, cannot claim on the one hand that the March 20th deed to Lester, L.L.C. is exempt from the transfer tax, and when that charade fails, claim on the other that the deed is void ab initio. In effect, even if I believed we could, by saying these deeds are void ab initio, we are sanctioning this shell game as well as making the certainty of what is on the deed blotter with regard to a good deed a thing of the past.

Finally, regardless of whether the correctional deeds were void ab initio, the transfer tax would still apply because a transfer tax applies to a deed at its recording, not at its execution. “The subject matter of the realty transfer tax is the recording of a deed ... Thus, [it is] the event which triggers the tax ...” Comach Construction, Incorporated v. City of Allentown, 159 Pa.Cmwlth. 605, 683 A.2d 1336, 1338 (1993), petition for allowance of appeal denied, 539 Pa. 682, 652 A.2d 1327 (1994). As Justice Roberts’ in his concurring opinion in Sabatine cogently stated:

[N]o amount of subsequent evidence that the conveyance was ‘void ab initio’ could change the fact that the transfer tax was properly payable at the time the deed was presented for recordation. Where, as here, a party who has properly paid a realty transfer tax at the time of recordation wishes later to recoup the amount paid, his recourse, if any, lies not against the Commonwealth but in his contractual rights.

Sabatine, 497 Pa. at 460, 442 A.2d at 213. The deeds were recorded here. The tax is due and owing.

Accordingly, I dissent.

Judge McGINLEY and Judge COHN join in this dissenting opinion.

. The transfer tax is included within the Tax Reform Code of 1971 (Tax Code), Act of March 4, 1971, P.L. 6, as amended, 72 P.S. §§ 7101-10004. Sections 1101-C to 111.VC of the Tax Code, 72 P.S. §§ 8101-C to 8113-C, constitute the transfer tax. Sections 1101— C to 1112-C of the Tax Code were added by Section 4 of the Act of May 5, 1981, P.L. 36, and were subsequently amended. Section 1102-C of the transfer tax provides:

Every person who makes, executes, delivers, accepts or presents for recording any *400document or in whose behalf any document is made, executed, delivered, accepted or presented for recording, shall be subject to pay for and in respect to the transaction or any part thereof, or for or in respect of the vellum parchment or paper upon which such document is written or printed, a State tax at the rate of one per cent of the value of the real estate represented by such document, which State tax shall be payable at the earlier of the time the document is presented for recording or within thirty days of acceptance of such document or within thirty days of becoming an acquired company.

72 P.S. § 8102-C. A "document” is defined as:

Any deed, instrument or writing which conveys, transfers, devises, vests, confirms or evidences any transfer or devise of title to real estate ...

Section 1101-C of the Tax Code, 72 P.S. § 8101-C.

. The Department is not claiming any transfer tax on this transaction.

. The trial court declared that "by virtue of Defendant’s [Gateway’s] default,” the "title to the [Property] shall be deemed to be in [Lester Associates]” and further provided that, "Nothing herein is intended to express an opinion as to the effect of this Decree, if any, upon any issues of real estate transfer tax liability.” (Trial Court’s Final Decree, 10/6/96, at 5-6.)