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United States v. Schmidt

United States District Court, W.D. Washington, Seattle

February 8, 2018

UNITED STATES OF AMERICA, Plaintiff,
v.
WILLIAM P. SCHMIDT, et al., Defendants.

          MEMORANDUM OF DECISION

          Robert S. Lasnik United States District Judge.

         This 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 Property”).[1]

         FINDINGS OF FACT

         By a preponderance of the evidence, the Court finds as follows:

         Defendant 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. § 6323(a).

         Mr. 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 the years.

         In the 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, [2] 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).

         From 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.

         Mr. 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.

         During 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.[3] 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.

         By 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.[4] 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.[5] 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.”[6] 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.

         At the 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 calculations.

         On June 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.

         At all points during his business transactions with Mr. Schmidt, Mr. Hamad acted ...


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