Appeal from the United States District Court for the Central District of California. D.C. No. C.V. 87-7220 HLH, D.C. No. CV-90-3972 HLH(Kx). Harry L. Hupp, District Judge, Presiding
Before: Tang, Canby, And Beezer, Circuit Judges.
Robert and Ruth Peck appeal the district court's summary judgment in favor of the Internal Revenue Service ("IRS"). The court concluded the IRS' claim to interpleader funds had priority over the Pecks' claim. We have jurisdiction under 28 U.S.C. § 1291, and we affirm.
Stephen Henry, an investment advisor, embezzled the Pecks' funds. On October 1, 1986, the Pecks, weary of Henry's excuses for not returning their money, sued Henry and attached his real property. On November 18, 1986, Henry made a general assignment of his assets for the benefit of creditors to Earle Hagen. Henry's assets were worth approximately $1,000,000 and his clients claimed the entire estate. In addition, Henry's wife held a promissory note signed by Henry for $305,000, and First Professional Bank had sued to collect a loan for $320,000 on which Henry had defaulted. After Henry was charged with and pleaded guilty to grand theft, the IRS asserted a claim for payment of unpaid taxes exceeding $4,000,000, and the Franchise Tax Board of California sought approximately $1,000,000 in unpaid state taxes.
By early 1989, Hagen had liquidated the estate and initiated an interpleader proceeding. The Pecks and the IRS, among others, stipulated to facts for the purpose of determining priority of claims to the funds. On cross-motions for summary judgment, the district court concluded the IRS' claim had priority over the Pecks' claim.
We review the grant of summary judgment de novo. T.W. Elec. Serv., Inc., v. Pacific Elec. Contractors Ass'n, 809 F.2d 626, 629 (9th Cir. 1987). Viewing the evidence in the light most favorable to the Pecks, we hold there are no genuine issues of material fact to be tried and the IRS is entitled to judgment as a matter of law. Id. at 630; Fed. R. Civ. P. 56(c).
The Pecks contend the embezzled funds were not taxable income to Henry. Case law establishes, however, that Henry owed income taxes on the funds he embezzled. James v. United States, 366 U.S. 213 (1961); Cohen v. United States, 297 F.2d 760, 769 (9th Cir.), cert. denied, 369 U.S. 865 (1962).
The IRS has a first-priority claim when a debtor who owes federal taxes is insolvent and "without enough property to pay all debts makes a voluntary assignment of property." 31 U.S.C. § 3713(a)(1)(A)(i). The Pecks contend § 3713 does not apply to the present case. We disagree.
The Pecks first argue that the IRS failed to prove Henry was insolvent when he transferred his assets to Hagen. The record shows, however, that when Henry made his assignment, the claims of his creditors went far beyond Henry's ability to pay. The assignment of all his assets was itself evidence of Henry's insolvency. See Bramwell v. United States Fidelity & Guaranty Co., 269 U.S. 483, 488 (1926) (noting statute applies when debtor's insolvency "is shown" in any of ways stated in statute). Because the insolvency statute "has reference to the public good" and "ought to be liberally construed," the burden lies with those who argue against the government's priority claims to show the statute does not apply. Id. at 487; see also United States v. Cole, 733 F.2d 651, 654 (9th Cir. 1984). Once the IRS, as the party moving for summary judgment, demonstrated Henry's insolvency, the Pecks were obligated to "set forth specific facts showing that there [was] a genuine issue for trial." Fed. R. Civ. P. 56(e). The Pecks failed to present evidence of any kind demonstrating Henry was solvent. There was thus no triable issue of fact on Henry's solvency.
The Pecks further contend the transfer of Henry's assets was not a "voluntary assignment of property" within the meaning of § 3713 because the transfer did not divest Henry of absolutely all his property. This argument must be rejected under § 3713 and relevant case law. Henry transferred to Hagen "all of the property and assets of [Henry] of every kind and nature . . . not exempt front execution." A transfer of assets is sufficient under the statute if it constitutes, as does Henry's transfer, a "general divestment of property." United States v. Hooe, 7 U.S. (3 Cranch) 73, 91 (1805). That Henry may not have been stripped bare of all his assets or have physically turned over some of the assigned property to ...