Century Hotels, Plaintiff,crismar Corporation, Movant-appellant, v. United States of America, Defendant-appellee, 952 F.2d 107 (5th Cir. 1992)

This is an appeal of a bankruptcy adversary case, wrongful tax levy claim, tried to the district court in a jumbled proceeding having some marks of each. The debtor-in-possession, Crismar Corporation (Crismar), instituted the adversary proceeding as a turnover action to regain $141,892.63 seized by the Internal Revenue Service (IRS) levy for payment of taxes of Mark C. Smith III, Taxpayer. The IRS seized the funds pursuant to a levy on the theory of alter ego status of Crismar and Taxpayer. The district court found that the Crismar bankruptcy estate is not entitled to the seized funds.

On appeal, Crismar challenges the legal standard for, as well as the factual sufficiency of, the alter ego finding which established the nexus between the seized funds and Smith. More important, Crismar also maintains that the district court ignored both the Crismar bankruptcy estate, and basic principles of bankruptcy law because the matter was tried as a wrongful levy rather than a bankruptcy turnover action. We affirm in part, vacate in part, and remand.

A Confused Procedural Background

On September 18, 1987, the IRS levied on the assets of 33 companies controlled by Smith's family (the "Smith family companies"), for Mark Smith's unpaid taxes. Five days later, the Smith family companies sought a preliminary injunction in the district court claiming wrongful levy. The district court granted the injunction which never became effective for inability to post bond.

On November 23, 1987, one of the Smith family companies, Crismar, filed for Chapter 11 bankruptcy protection. Crismar then filed a turnover action adversary proceeding under 11 U.S.C. § 542(a) in the bankruptcy court to recover the funds seized by the IRS, which would be a part of the bankruptcy estate as defined by 11 U.S.C. § 541(a). The bankruptcy automatic stay accomplished the same purpose as would have the preliminary injunction sought earlier. On December 15, 1987, the IRS under 28 U.S.C. § 157(d) moved in the district court to withdraw the reference to the bankruptcy court. After a rather complicated procedural history,¹  the case now before us was tried.

Having withdrawn reference to the bankruptcy court so it was acting as a court in bankruptcy, the district court held the turnover adversary proceeding essentially to be in the nature of a wrongful levy action under 26 U.S.C. § 7426, and proceeded to try it under those elements. The district court found that the IRS established a nexus between Taxpayer (Smith) and the funds seized from Crismar by holding that Crismar was the alter ego of Smith. It then found that Crismar failed to meet its ultimate burden of showing the levy to be wrongful. Crismar appealed.

Standard of Review

In this bankruptcy matter, issues of law are reviewed de novo. We will not overturn findings of fact unless they are clearly erroneous. Matter of Killough, 900 F.2d 61 (5th Cir. 1990).

Was the Wrongful Levy Right?

Crismar's appeal presents two major points. First, was the finding that Crismar was Smith's alter ego either legally or factually erroneous, such that the nexus element of the wrongful levy action was not properly found? Second, in focusing on a wrongful levy approach, did the district court ignore the rights of the Crismar bankruptcy estate?

Patterns Along the Wrongful Levy

In order for Crismar to prove a wrongful levy, Crismar was required to show: 1) the IRS filed a levy covering taxpayer liability against property held by Crismar, 2) Crismar had an interest or lien on that property superior to the interest of the IRS, and 3) the levy was wrongful because Smith did not own the property, at least in part. Texas Commerce Bank--Fort Worth v. United States, 896 F.2d 152, 156 (5th Cir. 1990).

To prove the levy was wrongful, Crismar was first required to make an initial showing of some interest in the funds, in order to have standing.²  Once Crismar made the initial showing, the IRS was required to prove a nexus between the funds and Taxpayer. If the IRS proved a nexus by substantial evidence, Crismar then had the ultimate burden of proving the levy was wrongful. Morris v. United States, 813 F.2d 343, 345 (11th Cir. 1987); Valley Finance, Inc. v. United States, 203 U.S.App.D.C. 128, 629 F.2d 162 (1980), cert. den. sub. nom., Pacific Dev., Inc. v. United States, 451 U.S. 1018, 101 S. Ct. 3007, 69 L. Ed. 2d 389 (1981).

The district court concluded that the IRS established the nexus between the seized funds and Smith by finding that Crismar was the alter ego of Smith. Crismar attacks that finding on several fronts.

First, Crismar, pointing to a list of factors which we previously developed to determine whether a subsidiary company is the alter ego of the parent in Jon-T Chemicals,³  argues that the district court applied the wrong legal standard to find an alter ego. The district court should have used those factors to establish "total domination," rather than the less rigorous standard of "active and substantial control."

We used the laundry list in Jon-T in lieu of verbally articulating a coherent doctrinal basis to find an alter ego.⁴  Jon-T, 768 F.2d at 691. We did so, at least in part, because, with no litmus test for determining whether a subsidiary is the alter ego of a parent, one must look to the totality of the circumstances in considering the factors. Id. at 694.

The facts of this case do not concern a subsidiary and parent as in Jon-T, but the district court correctly gleaned the important factors from the Jon-T list to be considered in an alter ego question.⁵  The district court applied an appropriate legal standard to the alter ego issue.

Next, Crismar maintains that, if anything, it was "reverse piercing" of the corporate veil,⁶  which Louisiana does not recognize. Owens & Sons, Inc. v. Gustella East, Inc., 354 So. 2d 571 (La.App. 4th Cir. 1978), writ ref'd, 356 So. 2d 1013 (La.1978). However, no Louisiana cases, including Owens, squarely address the issue of reverse piercing concerning a seizure of the assets of an alter ego. The court in Owens did not embrace the reverse piercing remedy, finding it unnecessary because if the corporate assets are truly the assets of the individual rather than the corporation, the assets can be seized in execution of claims against the individual. Id. at 572. Thus, Louisiana law is no impediment to the district court's findings in this case.

Next, Crismar contends that the district court improperly found the nexus in the wrongful levy action because the alter ego finding was factually erroneous. The alter ego finding was erroneous because the district court (i) used the wrong legal standard, (ii) ignored the fact that Smith was not a shareholder of Crismar, and (iii) misinterpreted the evidence in finding that Smith controlled Crismar; the consequence being erroneous findings of fact.

Again, the district court applied a proper legal standard. Not only did Crismar get the legal standard it pressed, but Smith's ownership position was also one of the factors used and considered. We agree that the fact that Smith did not hold Crismar stock is a factor, but it does not preclude the finding of alter ego when control is otherwise established. Krivo Indus. Supply Co. v. Nat'l Distillers and Chem. Corp., 483 F.2d 1098, 1104 (5th Cir. 1973).⁷ 

We also reject Crismar's assertion that the district court misinterpreted the evidence concerning control so that the finding of alter ego was not supported. To the contrary, the record is replete with valid support for the findings that Smith controlled Crismar and that Crismar was Smith's alter ego.

Taxpayer Smith was director and president or vice president of Crismar for all years but one. At all material times, Smith had the sole authority to write checks for Crismar. Crismar was owned by a series of single shareholders. Since 1970, those shareholders were always relatives, family members or Smith family companies.⁸ 

The most recent owner of Crismar was Smith's son, who purchased Crismar in 1984 by an unsecured promissory note of $1000.00. A financial statement for Smith's son dated December 31, 1987 revealed that Crismar⁹  owned a substantial majority in sixteen Smith family companies and had assets of $2,095,536.95 with liabilities of $2,000.00. With one exception, those assets were acquired from the Smith family's Assets Holding Corp., after the son's purchase, in return for unsecured promissory notes. In contrast, Crismar's bankruptcy petition, filed November 23, 1987, just sixty days before the financial statement, showed total assets of $456,673.74.¹⁰ 

Smith claimed to own no property.¹¹  Smith's personal expenses were paid from Smith's son's checking account which was funded by "loans" from Crismar and from Smith's son's salary from Crismar and a wholly-owned subsidiary of Crismar. Even though the money came from Crismar and the subsidiary by way of Smith's son,¹²  it was Smith who instructed an employee working for Crismar and other Smith family companies as to which of his personal bills to pay, and when to pay them.

From 1976 until 1987, the Smiths lived in a New Orleans garden district house, custom designed and built for Smith (the "Soniat residence"), but always owned by the Smith family companies. Smith referred to the Soniat residence as his "personal residence." The Soniat residence was freely traded among the Smith family entities.¹³  Crismar ended up with the Soniat residence. When it was sold to an outsider for $585,000.00, a check for $95,000.00 was given to Crismar at closing. Most of the funds seized by the IRS are traceable from the $95,000.00.¹⁴ 

Given the well-supported conclusions of the district court, what we said eighteen years ago bears repeating in terms of these facts. One of the two ways for a corporation to be held liable for the debts of another entity is when it misuses the corporation by treating it, and by using it, as a mere business conduit for the purposes of the controlling entity. In such cases, "the courts will look through the forms to the realities of the relation between the companies as if the corporate agency did not exist and will deal with them as the justice of the case may require." Krivo, 483 F.2d at 1102-03 (1973) (quoting United States v. Reading Co., 253 U.S. 26, 63, 40 S. Ct. 425, 434, 64 L. Ed. 760 (1920)). In our case, the district court found, based upon the patterns of dealing among the Smith family companies, that they used the corporate form for illegitimate ends. They did so to enjoy the material benefits of the world without having to bear its tax burden.

The findings of fact that Crismar was the alter ego of Smith were not clearly erroneous. Consequently, the IRS established a nexus. Crismar failed to prove that the levy against the Crismar entity was wrongful. Thus far, we sustain the findings and conclusions of the district court.

Diving Into Whiting Pools

Were this case not concerning interests in property claimed to belong to a bankruptcy debtor, we would stop here and affirm for the IRS. True, we previously pointed out that wrongful levy is the exclusive remedy for an innocent third party whose property was confiscated by the IRS to satisfy the tax debt of another. Texas Commerce, 896 F.2d at 156. However, Texas Commerce did not involve an adverse claimant who was then a debtor under Bankruptcy Chapter 11. Crismar is a Chapter 11 debtor. However much the trial court redocketed, withdrew, consolidated, and severed, the district court could not escape the presence of a bankruptcy debtor or avoid the supremacy of the Bankruptcy Code. This amounts to no intrusion though since the district court withdrew the controversy from the bankruptcy court and was sitting in part, at least, as a judge in a bankruptcy proceeding.

Crismar correctly contends, relying on United States v. Whiting Pools, Inc., 462 U.S. 198, 103 S. Ct. 2309, 76 L. Ed. 2d 515 (1983), that the district court could not, but did ignore its bankruptcy status by nominally trying the case as a wrongful levy rather than as a turnover. Under Whiting Pools a turnover proceeding would be the appropriate remedy if Crismar had any bankruptcy interest in the property.¹⁵ 

Even though the district court correctly found against Crismar in the wrongful levy phase, it failed to deal with Whiting Pools and the requirements of the Bankruptcy Code. Whiting Pools interprets 11 U.S.C. § 541(a) (1),¹⁶  which reflects the broad range of interests in property intended by Congress to be included in the bankruptcy estate as property essential to a rehabilitation effort. Whiting Pools, 462 U.S. at 204, 103 S. Ct. at 2313.

In Whiting Pools, the bankruptcy debtor filed for a turnover under 11 U.S.C. § 542(a) for the return to the estate of the debtor's property which had been seized by the IRS immediately before the debtor filed bankruptcy. The Court affirmed the judgment in favor of the debtor because all the debtor's interests in property must be included in the reorganization estate whether in the debtor's possession or not. Provisions such as 11 U.S.C. § 542(a) facilitate the return of the debtor's property in the possession or under the control of a secured creditor, even the IRS. Whiting Pools, 462 U.S. at 203-205, 103 S. Ct. at 2312-14. However, the Court also said that the debtor's interest in the property may be so minor as to be excluded from the estate.¹⁷ 

Because the district court failed altogether either to (i) address the question of the bankruptcy estate's interest in property to which the IRS has alter ego rights, (e.g.: to satisfy debts), because Crismar, the debtor, is the alter ego of Smith, or (ii) make a determination of the kind, nature, and value of the interest the Crismar estate might have had in the seized funds, the court's findings and conclusions are significantly deficient. Consequently, we must vacate the district court's judgment in complete favor of the IRS. The district court should have more precisely determined the nature of Crismar's interest, if any, in the seized funds. In order for Crismar's claim to prevail, the district court must find that Crismar showed that the estate had an interest in the seized funds as referred to in 11 U.S.C. § 541(a) (1), and as defined by the Supreme Court in Whiting Pools.¹⁸ 

Although the matter is not before us, we would point out, without deciding that the levy was wrongful, the IRS potentially holds at least a secured interest if its tax lien was properly executed. If Crismar is found to have an interest sufficient to warrant a turnover and the IRS lien was properly executed, then the lien would not dissolve, nor would the IRS's secured creditor status be destroyed. Furthermore, the IRS would be entitled to adequate protection of its interest. Whiting Pools, 462 U.S. at 202, 211, 103 S. Ct. at 2312, 2316. Accordingly we remand for further inquiry consistent with this opinion.

AFFIRMED IN PART, VACATED IN PART, AND REMANDED.