United States District Court, W.D. Washington, Seattle
MEMORANDUM OF DECISION
S. Lasnik United States District Judge.
matter was heard by the Court in a two day bench trial
commencing on January 8, 2018. Plaintiff, the United States
of America, filed this lawsuit seeking to foreclose on
federal tax liens on a parcel of real property located at
4010 S. 130th Street, Tukwila, WA 98168 (the “4010
preponderance of the evidence, the Court finds as follows:
William P. Schmidt, who owned the 4010 Property until 2011,
has not paid federal taxes since 2001. In 2010, the United
States made its first assessment against him for the unpaid
taxes, penalties, and interest. After the assessments began
but before federal tax liens were recorded, Mr. Schmidt
conveyed his interest in the 4010 Property to defendant
Sufian Hamad, who subsequently transferred it to his
wholly-owned company, Riverton Holding, LLC. The United
States argues that its assessments give it a priority
interest in the 4010 Property because the transfer to Mr.
Hamad is voidable under the Uniform Fraudulent Transfer Act,
RCW 19.40.011(a) and/or Mr. Hamad did not pay adequate and
full consideration for the property and therefore does not
qualify for the protections offered by 26 U.S.C. §
Schmidt and Mr. Hamad have known each other for over twenty
years. They met when Mr. Hamad was an employee of U.S. Bank
where Mr. Schmidt sought a loan to purchase property. In
2001, Mr. Hamad started developing real estate, buying land,
designing and constructing buildings, and renting them out.
Mr. Schmidt, who is an iron worker, taught Mr. Hamad to weld.
The two men worked together on a number of projects through
mid-1990s, Mr. Schmidt purchased the 4010 Property and
another parcel located at 13001 41st Avenue South, Tukwila,
WA 98168 (the “13001 Property”). The 13001
Property contained a single family residence and a
dilapidated four-car garage. In July 2006,  the City of
Tukwila issued a final demolition order regarding the garage
structure, but Mr. Schmidt did not have the funds to comply
and was facing daily penalties. Mr. Schmidt offered to sell
to Mr. Hamad the third of the property on which the garage
stood for one-third of the assessed value of the land ($30,
000), with the understanding that Mr. Hamad would fund the
demolition of the existing garage and construct a new garage
with a workshop on top. Mr. Hamad agreed to pay $30, 000, but
negotiated a reduction based on whatever fees and penalties
the City of Tukwila would assess (which the parties estimated
to be $15, 000).
his conversations with Mr. Schmidt, Mr. Hamad believed that
the 13001 Property was held by a personal trust. At Mr.
Schmidt's request, the transfer of an interest in the
13001 Property would involve the creation of a new trust, the
13001 Land Trust, through which Mr. Schmidt's Iron Man
Trust would retain a two-thirds interest and Mr. Hamad's
Baumeister, LLC, would hold a one-third interest. In October
2006, the parties entered into a Co-Venture Agreement. The
agreement promised the formation of a land trust, set forth
the basic covenants of the parties, and included a diagram
showing the intended division of the property. In January
2007, the parties entered into a purchase and sale agreement,
and Mr. Hamad hired an escrow agent to close the sale. A
statutory warranty deed was recorded on February 12, 2007.
The deed identifies Mr. Schmidt as the grantor and
Baumeister, LLC, as the grantee. When Mr. Hamad submitted his
demolition and building plans to the City of Tukwila, the
City waived the fees and penalties that had accrued. Mr.
Hamad therefore paid Mr. Schmidt the additional $15, 000 that
had been withheld from the sale price.
Hamad set about demolishing the garage structure and building
a new garage/workshop on his third of the 13001 property. The
four month delay in formalizing and recording his interest
proved costly: while Mr. Hamad was putting $150, 000-$170,
000 into the project, Mr. Schmidt was encumbering the
property with a $240, 000 mortgage and Deed of Trust, dated
October 27, 2006. In doing so, Mr. Schmidt breached an
express provision of the Co-Venture Agreement. When Mr. Hamad
learned about the mortgage in 2007, he confronted Mr.
Schmidt, who assured Mr. Hamad that he would pay off the
mortgage and that it would not affect Mr. Hamad's
interest in the property. Mr. Schmidt stopped making payments
on the mortgage, however, and a Notice of Trustee's Sale
was posted in July 2009. Mr. Hamad again confronted Mr.
Schmidt, who promised to make Mr. Hamad whole. Mr. Schmidt
attempted to stall or prevent the foreclosure by recording a
mishmash of documents, including liens and quit claim deeds,
some of which Mr. Hamad signed in one capacity or another.
Mr. Schmidt hoped that the investment he made with the
mortgage proceeds would double and he would be able to pay
back the loan.
this time frame, the United States began making assessments
against Mr. Schmidt for unpaid taxes, penalties, and
interest. The first assessment was made in
2010. It is not clear when Mr. Schmidt learned
of the assessments or whether Mr. Hamad ever knew of the
assessments. Mr. Hamad was, however, aware that Mr. Schmidt
thought taxes were illegal.
2011, Mr. Schmidt had to acknowledge that he had lost all of
the funds he had invested and would not be able to pay down
the October 2006 mortgage. Mr. Schmidt offered to sell Mr.
Hamad the 4010 Property in exchange for a release from all
liability related to the 13001 Property. A purchase and
sale agreement was drafted by Mr. Schmidt's lawyer. It is
dated April 13, 2011, and identifies the seller as Mr.
Schmidt and the buyer as Riverton Holding. The agreement
specifies that both Riverton Holding and Mr. Hamad
“waive or release all claims it and he might otherwise
have against William Paul Schmidt arising from or related to
the prior foreclosure of property located at 13001 - 41st
Ave. S., Tukwila, Washington.” The Real Estate Excise Tax
Affidavit states that the transfer was a gift without
consideration, a non-taxable event. At Mr. Schmidt's
request, Mr. Hamad signed additional documents related to the
13001 Property which purported to transfer the property from
the 13001 Land Trust to Mr. Schmidt.
time of the transfer, Mr. Hamad had invested approximately
$255, 000 into the purchase and development of the 13001
Property. The tax assessment on the 4010 Property was
approximately $280, 000, but there is no indication that the
assessor had evaluated the inside of the 90 year old
building. The retail and residential units were in such bad
shape that Mr. Hamad did not feel right collecting rent from
the commercial tenants or Mr. Schmidt, who lived in one of
the units. The bathroom situation was particularly egregious,
and Mr. Hamad set about making some basic repairs and
upgrades shortly after the transfer just to make the units
habitable. The Court finds that the fair market value of the
4010 Property at the time of transfer was $245, 000. This
value was calculated by averaging the valuation estimated
using the cost and income approaches. The Court adopted the
highest and best use analysis, comparables, and methodologies
used by plaintiff's expert, Timothy Holzhauer, but made a
significant upward adjustment in the anticipated renovation
expenses, which in turn increases the calculated investor
incentive and lost rents reductions. In particular, the costs
associated with the major renovations that were undertaken in
2014, 2015, and 2016 were increased to account for Mr.
Hamad's labor at $55, 000 per year. Although Mr.
Holzhauer recognized that renovation expenses that would be
anticipated by a reasonable investor had to be deducted from
the potential for income and value after renovation, the
labor expenses were not included in Mr. Holzhauer's
18, 2012, Mr. Hamad transferred the 4010 Property to Riverton
Holding by quit claim deed. He then discovered that the
United States had placed a tax lien on the property. He
unsuccessfully sought to have the tax lien on the 4010
Property removed in April 2013.
points during his business transactions with Mr. Schmidt, Mr.
Hamad acted ...