United States v. Verduchi

United States Court of Appeals
For the First Circuit

No. 05-1950

UNITED STATES,

Plaintiff, Appellee,

v.

ROSALINA VERDUCHI; DENNIS VERDUCHI,

Defendants, Appellants,

OPTION ONE MORTGAGE CORPORATION,

Defendant.

APPEAL FROM THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF RHODE ISLAND
[Hon. Ernest C. Torres, Chief U.S. District Judge]

Before

Boudin, Chief Judge,
Stahl, Senior Circuit Judge,
and Lynch, Circuit Judge.

Brent R. Canning, with whom Hinckley, Allen & Snyder LLP
was on brief, for appellants.
Robert J. Branman, Attorney, Tax Division, Department of
Justice, with whom Eileen J. O'Connor, Assistant Attorney General,
and Bruce R. Ellisen, Attorney, Tax Division, were on brief, for
appellee.

January 10, 2006
 LYNCH, Circuit Judge. As framed by the parties, this

case raises a question about whether the Uniform Fraudulent

Transfer Act (UFTA), in its Rhode Island incarnation, R.I. Gen.

Laws §§ 6-16-1 to -12, restricts a court, in setting aside a

fraudulent conveyance, to awarding against the transferee a money

judgment that is limited to the value of the property at the time

of the transfer.

On May 14, 1992, Rosalina Verduchi and her husband

Coriolano ("Cal") transferred their home at 10 Chestnut Street,

North Providence, to their son, Dennis, for no consideration. The

problem was that they made this "gift" while they owed the IRS more

than $82,000 in taxes and interest, as had been finally adjudicated

in court a year earlier. See Schwartz v. Comm'r, 930 F.2d 920 (9th

Cir. 1991) (unpublished table decision).1

On March 18, 1993, the IRS issued an assessment against

Rosalina and Cal for their tax liability, which by then had

ballooned to almost $400,000 because of interest. A federal tax

lien arose on all of the Verduchis' property upon the date of

assessment, see 26 U.S.C. §§ 6321, 6322, and in January 1994, the

IRS filed its notice of tax lien.

Rosalina and Cal successfully went through bankruptcy

proceedings in 1996 and discharged their debts. But the discharge

1
The Verduchis and the IRS had agreed to be bound by the
outcome of Schwartz, which involved a taxpayer who had participated
in the same tax shelter as the Verduchis had.

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did not apply to any tax obligation that the debtors sought to

avoid by fraudulently conveying property that would have been

available to satisfy that debt. See 11 U.S.C. § 523(a)(1)(C). In

April 2003, the United States brought suit against Rosalina and

Dennis pursuant to 26 U.S.C. §§ 7401 and 7403,2 seeking to reduce

Rosalina's unpaid tax liabilities to judgment, to set aside the

transfer of the Chestnut Street property as fraudulent, and to

foreclose the federal tax lien against the property.

The government learned in discovery that Dennis, on

November 5, 2002, had given a mortgage on 10 Chestnut Street to

Option One Mortgage Corporation ("Option One") in exchange for

$196,000. It then filed an amended complaint on March 2, 2004

naming Option One as a defendant with an interest. See 26 U.S.C.

§ 7403(b). Before trial, the government conceded that any federal

tax lien on the Chestnut Street property would be subordinate to

Option One's mortgage.

In the amended complaint, the government sought, inter

alia: (1) foreclosure of its federal tax liens upon and the sale of

10 Chestnut Street pursuant to 26 U.S.C. § 7403 and 28 U.S.C.

§§ 2001 and 2002, or (2) money judgment against Dennis for the

greater of three possible values -- the current market value of the

property, the date-of-transfer market value, or the $196,000 he

received from the mortgage, plus interest. Initially, these two

2
Cal Verduchi died in 1998.

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remedies were sought in the alternative; however, in a pre-trial

memorandum submitted to the district court on June 9, 2004, the

government stated its intention to seek foreclosure of the lien, as

well as a money judgment against Dennis for $196,000, plus

interest, representing the amount of the mortgage he had taken out

on the property.

After a bench trial on November 8, 2004, the district

court held that the transfer of the Chestnut Street property to

Dennis was fraudulent, set aside the transfer, and ordered that the

federal tax lien should be foreclosed and the property sold. See

United States v. Verduchi, No. 03-139-T, 2005 WL 1027017, at *7

(D.R.I. Apr. 25, 2005). The court ordered that judgment be entered

against Rosalina for $397,824.16 plus interest accrued since March

18, 1993 (for a total of more than $875,000) and that the proceeds

from the sale of the property in excess of Option One's mortgage

amount be applied toward Rosalina's unpaid tax liabilities. Id.

The court also entered a money judgment against Dennis as

transferee in the sum of $196,000 plus post-judgment interest, on

the basis that the sum received from the sale of the property would

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be diminished by the amount of Option One's mortgage.3 Id. Dennis

appeals.4

I.

We offer a brief background on how the federal tax laws

operate in this arena.

Where the United States seeks to recover a tax debt, it

has at its disposal a "formidable arsenal of collection tools."

United States v. Rodgers, 461 U.S. 677, 683 (1983); see also

Markham v. Fay, 74 F.3d 1347, 1353-54 (1st Cir. 1996) (cataloging

various means by which the government can collect from deficient

taxpayers). In a fraudulent transfer case, the government can

elect, among other options, "to bring an action either to enforce

a lien under 26 U.S.C. § 7403 or against the transferee of a

taxpayer."5 United States v. Perrina, 877 F. Supp. 215, 217

3
Dennis has never asserted that he has paid off any part
of the mortgage or that Option One's take would be less than
$196,000.
4
While nominally both Rosalina and Dennis are listed as
appellants, in fact this appeal concerns only Dennis's challenge to
the judgment against him for $196,000.
5
Section 7403 provides, in relevant part:

(a) Filing.--In any case where there has been a refusal
or neglect to pay any tax, or to discharge any liability
in respect thereof, whether or not levy has been made,
the Attorney General or his delegate, at the request of
the Secretary, may direct a civil action to be filed in
a district court of the United States to enforce the lien
of the United States under this title with respect to
such tax or liability or to subject any property, of
whatever nature, of the delinquent, or in which he has

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(D.N.J. 1994) (citing Rodgers, 461 U.S. at 682); see also Leighton

v. United States, 289 U.S. 506, 509 (1933) (noting, among other

methods of recovering an outstanding tax debt, "the right of the

United States to proceed against transferees by suit").

"The threshold question in . . . all cases where the

Federal Government asserts its tax lien[] is whether and to what

extent the taxpayer had 'property' or 'rights to property' to which

the tax lien could attach." Aquilino v. United States, 363 U.S.

509, 512 (1960). "In answering that question, both federal and

state courts must look to state law . . . ." Id. at 512-13; see

also United States v. Craft, 535 U.S. 274, 278 (2002) ("[W]e look

initially to state law to determine what rights the taxpayer has in

the property the Government seeks to reach, then to federal law to

determine whether the taxpayer's state-delineated rights qualify as

'property' or 'rights to property' within the compass of the

any right, title, or interest, to the payment of such tax
or liability. . . .

(b) Parties.--All persons having liens upon or claiming
any interest in the property involved in such action
shall be made parties thereto.

(c) Adjudication and decree.--The court shall
. . . proceed to adjudicate all matters involved [in the
action] and finally determine the merits of all claims to
and liens upon the property, and, in all cases where a
claim or interest of the United States therein is
established, may decree a sale of such property, by the
proper officer of the court, and a distribution of the
proceeds of such sale according to the findings of the
court in respect to the interests of the parties and of
the United States.

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federal tax lien legislation." (quoting Drye v. United States, 528

U.S. 49, 58 (1999) (internal quotation marks omitted))); United

States v. Murray, 217 F.3d 59, 63 (1st Cir. 2000). Accordingly, in

the present case, the question of whether the Chestnut Street

property was fraudulently transferred is a matter of Rhode Island

law. See R.I. Gen. Laws § 6-16-4; see also United States v.

Bryant, 15 F.3d 756, 758 (8th Cir. 1994).

If the government proceeds under 26 U.S.C. § 7403 to

enforce a lien, once a court declares a transfer fraudulent and

void, the asset reverts back to the ownership of the

debtor-transferor and federal law governs the foreclosure of the

lien and the selling of the asset. See 26 U.S.C. § 7403(c); 28

U.S.C. §§ 2001, 2002.

In contrast, if the government seeks to recover a

debtor's tax deficiency in the form of a judgment against the

transferee, state law applies to set the amount of recovery. See

Comm'r v. Stern, 357 U.S. 39, 44-45 (1958) (holding, in an action

arising under 26 U.S.C. § 6901, which provides the federal

government with a procedural remedy against transferees for

transferors' tax liabilities, that state law governs the extent to

which a transferee can be held liable); United States v. Westley,

7 F.App'x 393, 399 (6th Cir. 2001) (unpublished decision) (holding

that state law controls the determination of transferees' liability

even if the government does not proceed under § 6901); see also

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R.I. Gen. Laws § 6-16-8 (defining the limits on transferee

liability).

In the present case, the district court determined under

state law that the conveyance of 10 Chestnut Street was fraudulent,

set aside the transfer of the property, and issued judgment against

Rosalina and the property, pursuant to 26 U.S.C. § 7403, as well as

against the transferee, Dennis, for $196,000 plus post-judgment

interest. See Verduchi, 2005 WL 1027017, at *7.

On appeal, Dennis does not contest the district court's

determination that the property was fraudulently transferred.

Instead, he takes issue only with the district court's remedy,

arguing that, pursuant to certain provisions of the Rhode Island

Fraudulent Transfer Act, R.I. Gen. Laws § 6-16-8(b), (c), "[t]he

judgment is wrong because it awards the United States the current

market value of 10 Chestnut Street even though the law states

clearly that creditors may recover only the value of the asset at

the time of the transfer."

Although Dennis does not specify which portion of the

judgment he is contesting, we understand him to be appealing only

the money judgment against him, not the judgments against Rosalina

and the property, for three reasons. First, Rosalina has not

contested the amount of her tax liability, which appellants

acknowledge is far greater than the current market value of the

property. Thus, once the transfer is voided and the ownership of

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the Chestnut Street property is reverted to Rosalina, the

government is entitled to force the sale of the property and to

collect all the proceeds in excess of Option One's take. See 26

U.S.C. §§ 6321, 6323(a), 7403.

Second, the Rhode Island statute Dennis invokes solely

governs transferee liability. See R.I. Gen. Laws § 6-16-8

("Defenses, liability, and protection of transferee."). Because a

judgment pursuant to 26 U.S.C. § 7403 is essentially a judgment

against the property, see Rodgers, 461 U.S. at 695 (likening § 7403

to an in rem proceeding), or against the debtor-transferor, not

against the transferee, R.I. Gen. Laws § 6-16-8 can apply to limit

only the money judgment against Dennis, not the amount the

government can recover from the sale of the property.

Further, the government in its brief framed the issue on

appeal as "[w]hether the district court erred in entering judgment

against Dennis Verduchi for $196,000." The government also noted

that "Rosalina raised no defense to the amount of the tax

liabilities" -- and by implication to the amount of the lien on the

property -- "except for her contention that they had been

discharged in bankruptcy." Appellants do not contest the

government's characterizations, and we proceed accordingly.

II.

As to the money judgment against him, Dennis argues that

by requiring him to pay $196,000 plus post-judgment interest, the

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district court was essentially penalizing him as transferee by

awarding the government the current market value of the property,

in violation of certain provisions of the Rhode Island Fraudulent

Transfer Act. See R.I. Gen. Laws § 6-16-8(b), (c).6 He asks that

the judgment be reversed or, alternatively, that it be vacated and

the matter remanded.

The Rhode Island statute provides, in relevant part:

(b) Except as otherwise provided in this
section, to the extent a transfer is voidable
in an action by a creditor . . . , the
creditor may recover judgment for the value of
the asset transferred, as adjusted under
subsection (c) of this section, or the amount
necessary to satisfy the creditor's claim,
whichever is less. The judgment may be
entered against:

(1) The first transferee of the asset
or the person for whose benefit the
transfer was made; or

(2) Any subsequent transferee other
than a good faith transferee who took
for value or from any subsequent
transferee.

(c) If the judgment under subsection (b) is
based upon the value of the asset transferred,
the judgment must be for an amount equal to
the value of the asset at the time of the
transfer, subject to adjustment as the
equities may require.

6
Both parties have assumed that this provision governs the
outcome of this appeal, an assumption that we will accept for the
purpose of argument. We note, however, that the district court did
not cite to state statutory authority in the remedial portion of
its opinion. We also note that this is not a proceeding under 26
U.S.C. § 6901, and neither the district court nor the parties
contends that it is.

-11-
R.I. Gen. Laws § 6-16-8. Subsection (b) permits the creditor, here

the government, to recover judgment against Dennis for the lesser

of (1) the value of asset transferred, as adjusted under subsection

(c), or (2) the amount necessary to satisfy the creditor's claim.

At the time of the fraudulent conveyance judgment, the amount

needed to satisfy the government's claim was in excess of $875,000.

Dennis admits that the value of the property is less than

the amount necessary to satisfy the government's claim. He argues

that this means the "whichever is less" sum in subsection (b)

requires reference to subsection (c), which is explicit that the

judgment "must be for an amount equal to the value of the asset at

the time of the transfer," subject to equitable adjustment. The

district court failed, he says, to make the needed express finding

about the value of the asset at the time of the transfer in 1992.

Only after it determined the value of the asset, he argues, could

the court adjust for the equities.

There is no doubt the district judge was aware of

Dennis's argument about the limitations imposed by R.I. Gen. Laws

§ 6-16-8(c) on the judgment against the transferee. Dennis

advanced this argument at trial.

The government responds that the district court simply

made an equitable decision, as permitted under the Rhode Island

statute, that in order to make the government whole, Dennis should

have to pay back to the government the amount of $196,000 plus

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interest to offset the diminishment of the proceeds of the

forfeiture sale by what Option One takes. We agree that this is

what happened and that there was nothing impermissible about the

court's approach.

In the end, Dennis's appeal rests on three propositions.

The first is that under R.I. Gen. Laws § 6-16-8(b) and (c), a court

must follow a sequence of decisionmaking: before making an

equitable adjustment, the court must explicitly make a finding of

the value of property at the time of the transfer. Dennis argues

that the burden of showing that time-of-transfer value falls on the

government, and that the judgment must either be reversed because

the government failed to make that showing or at least be remanded

to the district court to make such a finding. The second

proposition is that the order is contrary to the commentary to the

UFTA. The third is that the award cannot be justified on equitable

grounds.

The district court cited two Rhode Island cases, Spaziano

v. Spaziano, 410 A.2d 113 (R.I. 1980), and Nisenzon v. Sadowski,

689 A.2d 1037 (R.I. 1997), each authorizing equitable adjustment.

As the district court noted, Spaziano gave it ample authority under

Rhode Island's general equitable law to enter a money judgment

against Dennis in addition to a judgment against the property. In

Spaziano, the court held that a money judgment against a transferee

of a fraudulently conveyed property is permissible "where such

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transferee has disposed of or dealt with the property . . . in such

fashion that a return of the property is impossible or in

situations in which the property has been diminished in value."

410 A.2d at 115. And in Nisenzon, the Supreme Court of Rhode

Island recognized that the state trial courts have wide latitude to

craft equitable remedies.7 See 689 A.2d at 1050.

Nothing in the Rhode Island statute compels the court to

make an express finding before addressing equitable concerns. It

is commonplace that courts usually need not in their opinions be

explicit about every detail of an analysis. See, e.g., Walgreen

Co. v. Sara Creek Prop. Co., B.V., 966 F.2d 273, 276-77 (7th Cir.

1992) (stating that a "judge is not required to explicate every

detail of the analysis" in determining the appropriateness of

injunctive relief).

Spaziano and Nisenzon also lead to the rejection of

another of Dennis's arguments -- that the order violated the

commentary to UFTA,8 which states:

7
Although in Nisenzon, the damages award was fixed by the
amount of the claim rather than the value of the property, the
court approvingly cited the proposition that "equity will not allow
itself to be frustrated but will adapt its relief to the exigencies
of the case and will enter a money judgment if this will achieve an
equitable result." Nisenzon, 689 A.2d at 1050 (quoting Spaziano,
410 A.2d at 115 (quoting Damazo v. Wahby, 305 A.2d 138, 142 (Md.
1973))).
8
Rhode Island enacted the Fraudulent Transfer Act in 1986,
after Spaziano was decided. See 1986 R.I. Pub. Laws ch. 438, § 2.
Dennis suggests that the statute displaced the common law
(presumably including Spaziano). But Nisenzon, decided after

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 The measure of the recovery of a defrauded
creditor against a fraudulent transferee is
usually limited to the value of the asset
transferred at the time of the transfer. The
premise of § 8(c) is that changes in value of
the asset transferred that occur after the
transfer should ordinarily not affect the
amount of the creditor's recovery.

See Unif. Fraudulent Transfer Act § 8 cmt. 3, 7A U.L.A. 654 (2004)

(citations omitted).

The UFTA commentary itself only says that the transfer

should not "ordinarily" affect the amount of the recovery. This

statement is consistent with the approach taken under the earlier

Uniform Fraudulent Conveyance Act (UFCA); even under the

predecessor UFCA, courts had carved out equitable adjustments. It

was for that reason that the explicit equitable adjustment language

was added to the successor UFTA. See Dahar v. Jackson (In re

Jackson), 318 B.R. 5, 27 (Bankr. D.N.H. 2004).

Often the exercise of the equitable adjustment power is

meant to protect the transferee, not the creditor. The law sought

to avoid giving creditors the windfall of the costs incurred by an

innocent transferee to improve the property. See id. This is

similar, as Jackson notes, to a provision of the Bankruptcy Code,

11 U.S.C. § 550(e), which provides to a good faith transferee a

enactment of the UFTA, expressly cited Spaziano with approval. See
Nisenzon, 689 A.2d at 1044. More importantly, the statute
explicitly grants the court authority to make equitable
adjustments, whether or not it displaces the common law in some
respects. See R.I. Gen. Laws § 6-16-8(c).

-15-
lien for improvements on the property. Jackson, 318 B.R. at 27

n.20.

Here, Dennis is in a vastly different position. The

district court did not characterize him as a particularly innocent

transferee, and the sums involved are not claimed to be from

improvements he made, but simply cash he took out of the property.

Further, Dennis paid nothing for the conveyance of the property to

him. This is not, then, a situation in which Dennis as transferee

is in a worse position than if he had never received the property.

See Stanko v. Comm'r, 209 F.3d 1082, 1087 n.5 (8th Cir. 2000). Nor

is this an instance where the remedy would result in Dennis's

transferee liability being greater than the transferor's liability.

See id. at 1087 n.6 (suggesting that it would be "grossly unfair"

to impose on a transferee liability greater than that imposed upon

the transferor).

The statutory authorization in the UFTA for equitable

adjustment does not say it is a one-way ratchet. In discussing the

general provision for equitable adjustment, the commentary

explicitly provides protection for the creditor against the

diminution of assets by the transferee. See Unif. Fraudulent

Transfer Act § 8 cmt. 3 ("If the value of the asset has been

diminished by severance and disposition of timber or minerals or

fixtures, the transferee should be liable for the amount of the

resulting reduction." (citing Damazo v. Wahby, 305 A.2d 138, 142

-16-
(Md. 1973))). That equitable discretion can surely be used to

avoid an unfair windfall to a not-so-innocent transferee at the

expense of an undersecured creditor. That is particularly so when

the undersecured creditor is the federal government. Cf. Rodgers,

461 U.S. at 694 (discussing "the policy inherent in the [federal]

tax statutes in favor of the prompt and certain collection of

delinquent taxes"). Moreover, just as the commentary suggests that

a "good faith transferee should be reimbursed" for his contribution

"if the value of the asset at the time of levy and sale to enforce

the judgment of the creditor has been enhanced by . . . [the]

discharge of liens on the property," we see no reason why equity

would not allow for a money judgment against a transferee who has

decreased the value of the property by encumbering it with a

mortgage. Unif. Fraudulent Transfer Act § 8 cmt. 3.

This gets us into Dennis's remaining argument that the

result is not equitable for other reasons. The argument is that

due to appreciation of the property, the present judgment more

likely than not exceeds the sum of any judgment that would have

been entered based on the 1992 value of the house even if interest

were allowed from the date of the transfer. Further, Dennis

argues, it was unfair for the court to hold him liable for the

prejudgment interest owed by his parents. He argues that no

prejudgment interest can be awarded because the Rhode Island

statute does not explicitly allow for it. Even if such interest

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could be awarded, Dennis posits, it would run only from the 2003

notice of the IRS's claim against him and be at most a few thousand

dollars.

We address his argument about prejudgment interest first.

Dennis misunderstands the nature of the district court's judgment

against him. As transferee, he is not personally liable for any

prejudgment interest; the only judgment against him is for

$196,000, plus post-judgment interest, and that value was set by

the mortgage he placed on the property. The only prejudgment

interest accrued was on his parents' debt, and the interest due on

their tax liabilities is a matter of federal, not Rhode Island,

law. See 26 U.S.C. § 6601.

As to Dennis's other argument, there are a few responses.

One is that it is Dennis who seeks to use the 1992 valuation as a

shield against an equitable alteration meant to make the government

whole. But Dennis failed to produce any evidence of that

valuation, and thus his arguments are speculative at most.

A second response is that whatever the value of the

property now, it is axiomatic that the fraudulent transfer of

property does not affect the amount of the lien. See, e.g., United

States v. Bess, 357 U.S. 51, 57 (1958) (noting that "[t]he transfer

of property subsequent to the attachment of the lien does not

affect the lien, for 'it is the very nature and essence of a lien,

that no matter into whose hands the property goes, it passes cum

-18-
onere'" (quoting Burton v. Smith, 38 U.S. (13 Pet.) 464, 483

(1839))); see also Rogers, 461 U.S. at 701 ("[Section] 7403 . . .

gives the Federal Government the opportunity to seek the highest

return possible on the forced sale of property interests liable for

the payment of federal taxes."). The district court simply used

the value of the assessment against Rosalina and accumulated

interest to set the underlying debt owed. See 26 U.S.C. §§ 6321,

6601. The tax debt owed by Rosalina was at the time of the

judgment, with interest, over $875,000. The debt is large because

the Verduchis stalled payment of the taxes they owed for over

fifteen years, including a decade after the Tax Court decision

determining their tax deficiencies became final.

Even with the entry of this judgment, the United States

will likely receive only a fraction of the total sum it is owed.

Further, Dennis, who is hardly free from blame, has had the benefit

of use of the house for himself and his parents, apparently

mortgage-free, until he chose to mortgage the property. Had the

property been sold earlier to satisfy the debt, Dennis would not

have been in a position to take out the $196,000 mortgage. The

effect of the district court order is to try to place the parties

into the position they would have been in had no fraudulent

transfer taken place. Cf. Rodgers, 461 U.S. at 701 ("[Section]

7403 is intended . . . to reach the entire property in which a

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delinquent taxpayer has or had any 'right, title, or interest . . . .'").

Equitable determinations such as these are clearly

committed to the trial court's discretion and are reviewed only for

abuse of discretion. Cf., e.g., Gordon Sel-Way, Inc. v. United

States (In re Gordon Sel-Way, Inc.), 270 F.3d 280, 289 (6th Cir.

2001) (noting that review of bankruptcy court's equitable

determinations is for abuse of discretion). While Dennis disagrees

with the ruling, he has not explained why this result is an abuse.

Indeed, the result reached by the trial judge here was entirely

sensible.

We affirm the judgment.

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