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United States v. Patras

United States District Court, D. New Jersey

December 20, 2012

UNITED STATES of America, Plaintiff,
v.
Ruth PATRAS, Defendant.

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[Copyrighted Material Omitted]

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Jan M. Geht, E. Christopher Lambert, Geoffrey J. Klimas, U.S. Department of Justice, Washington, DC, for Plaintiff.

Steven M. Tanenbaum, Tanenbaum Law, LLC, Metuchen, NJ, for Defendant.

OPINION

IRENAS, Senior District Judge.

This is a civil federal tax liability suit brought by the United States against Defendant Ruth Patras pursuant to the Uniform Fraudulent Transfer Act (" UFTA" ), N.J.S.A. §§ 25:2-20 to -34. The United States argues that Defendant Patras's husband, Dr. Anthony Patras, sought to evade his federal income tax liabilities by fraudulently

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transferring 6 Princess Court, Holmdel, NJ (" the Property" ) to Defendant Patras.

This Court held a bench trial on September 4-6 and September 21, 2012. The Court now issues this Opinion in accordance with Federal Rule of Civil Procedure 52(a)(1). [1] Section I contains findings of fact. Section II contains conclusions of law. For the reasons stated herein, the Court concludes that Defendant Patras acquired the Property through a fraudulent transfer, that her husband, Dr. Patras, is the true owner, and that he owns the Property subject to federal tax liens. The Court also concludes that Defendant has transferee liability and that the United States is entitled to a personal judgment against her. Accordingly, the Court will enter judgment in the United States' favor.

I.

1. Dr. Anthony Patras (" Dr. Patras" ) bought 6 Princess Court, Holmdel, New Jersey (" the Property" ) on February 27, 1989 for $1,660,000 from Walter and Jerry Karach. (Stip. Facts ¶ 39) [2]

The Property was custom built for Dr. Patras by Walter, Jerry, and John Karach. (Trial Tr. 6:19-24, Sept. 5, 2012) It encompasses 2.77 acres of land and a 7,183 square foot residence. (P.'s Ex. 183, i)

2. Dr. Patras has lived in the Property since 1989 without any interruptions. (Stip. Facts ¶ 2)

3. Anthony and Ruth Patras were married in August 1990. They have lived in the Property together since then. (Trial Tr. 4:18-20, 115:20-116:14, Sept. 5, 2012)

4. On July 12, 1993, Anthony Patras filed for Chapter 11 bankruptcy in the U.S. Bankruptcy Court of the District of New Jersey. (P.'s Ex. 138) He remained in bankruptcy until February 25, 1999. ( Id. Tab A)

5. When he filed for bankruptcy, Dr. Patras had $4,968,945.93 in liabilities, $140,399.31 of which were federal income tax liabilities owed to the Internal Revenue Service (" IRS" ) for the years 1991 and 1992. (P.'s Ex. 138 Tab C; Trial Tr. 8:20-9:1, Sept. 5, 2012)

6. On October 28, 1994, Dr. Patras was ordered to transfer title of the Property to John and Olga Karach for $800,000 as part of his bankruptcy proceedings. (Stip. Facts ¶ 1) He did so on November 30, 1994. (P.'s Ex. 109A)

7. Although the deed conveying the Property to John Karach was from both Anthony and Ruth Patras ( id. ), Ruth Patras was never placed on the deed between when Dr. Patras bought the Property in 1989 and when he sold it in 1994.

8. John Karach was the father of Walter and Jerry Karach and a close personal friend of the Patrases. (Trial Tr. 6:25-7:1, Sept. 5, 2012) During the time he owned the Property, he allowed the Patrases to live there. ( Id. at 14:19-15:3) Although they paid rent to John Karach, there was no lease. ( Id. at 15:2-8)

9. In 1996, John Karach told Dr. Patras that he wanted to sell the Property. ( Id. at 15:9-21) At the time, Dr. Patras was still in bankruptcy and could not buy the Property, although he testified that he

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tried to do so. ( Id. at 7:9-8:3, 15:22-16:5, 123:14-20; P.'s Ex. 138 Tab A)

10. Dr. Patras approached his friend, Donato Gallo, Jr. (" Gallo" ) and suggested that he buy the Property so that the Patrases could continue to live there. (Trial Tr. 16:21-17:5, Sept. 5, 2012; Cicerale Dep. Tr. 15:21-16:9; Gallo Dep. Tr. 24:24-25:5)

11. Dr. Patras and Gallo were best friends and " like brothers." They were each other's best men and went on trips together. (Trial Tr. 16:9-17, 124:7-12, Sept. 5, 2012; Gallo Dep. Tr. 78:13-80:7, 81:14-17, 82:2-19)

12. Dr. Patras, Gallo, and Frank Cicerale (" Cicerale" ), Gallo's accountant, knew that Gallo had to take title to the Property because Dr. Patras could not purchase it himself due to his financial difficulties. (Gallo Dep. Tr. 34:3-11, 35:18-36:2; Cicerale Dep. Tr. 15:24-16:9, 22:8-17, 60:18-24, 69:16-18, 76:20-25)

13. Dr. Patras told Gallo that he would not lose money on the house, and they agreed that Gallo would not incur any expenses while he owned the home. (Trial Tr. 17:15-17, 38:23-41:4, 106:6-10, Sept. 5, 2012; Cicerale Dep. Tr. 24:25-25:25, 27:6-20, 39:1-22, 43:8-16, 48:7-11, 74:6-16; Gallo Dep. Tr. 30:7-14, 31:20-32:11, 99:2-18)

14. Dr. Patras and Gallo further agreed that Patras would buy the Property back from Gallo within a year, which was the amount of time Patras said he needed to settle his legal and financial problems. (Gallo Dep. Tr. 30:18-31:19; Cicerale Dep. Tr. 60:16-61:1; P.'s Ex. 136 Tabs H, K & N) At least one document refers to them making this agreement in 1996 (P.'s Ex. 136 Tab N), and another references Gallo extending the option to purchase for " another year." ( Id. Tab K)

15. On June 6, 1996, Gallo bought the Property from John and Olga Karach for $843,000. (P.'s Ex. 110; Trial Tr. 15:18-21, 16:6-8, 18:24-19:2, Sept. 5, 2012; Gallo Dep. Tr. 23:23-24:16) He was the only person on the deed from 1996 until 2001. (P.'s Exs. 110, 112, 114)

16. Dr. Patras was actively involved in the sale of the Property from John Karach to Gallo. He suggested that Gallo take out loans to buy the Property, procured funds for Gallo's down payment, and called the attorney who was handling the closing on several occasions. (Trial Tr. 19:12-23:17, 23:24-25:25, 26:22-29:14, 30:14-31:9, Sept. 5, 2012; P.'s Ex. 135, Tabs A & B)

17. Barry Szymanski, who owned GP Mortgage & Finance, was the mortgage broker involved in the transfer from the Karaches to Gallo. (P.'s Ex. 135 Tab C; Trial Tr. 26:19-21, Sept. 5, 2012)

18. To finance his purchase of the Property, Gallo took out a mortgage of $632,000 from Washington Mutual Home Loans, Inc. (" Washington Mutual" ). (P.'s Ex. 135 Tab C, 10; P.'s Ex. 136 Tabs D & E; P's Ex. 137 Tab A; Gallo Dep. Tr. 95:17-20)

19. Gallo also provided $228,000 as a down payment to purchase the Property. (Trial Tr. 21:18-22:21, Sept. 5, 2012; Gallo Dep. Tr. 54:8-55:6; Stip. Facts ¶ 40) Of this payment, Gallo borrowed $33,000 from Cadogan Management (" Cadogan" ) and $120,000 from New Brunswick Health Treatment Center (" New Brunswick Health" ). (P.'s Ex. 137 Tab A; Stip. Facts ¶ 40; Trial Tr. 21:18-23:6, 26:22-27:4, 29:12-14, Sept. 5, 2012) $75,000 of the payment came from Gallo's personal funds. (Trial Tr. 22:5-6, Sept. 5, 2012; Cicerale Dep. Tr. 27:21-28:4; P.'s Ex. 137 Tab A)

20. Both New Brunswick Health and Cadogan were companies over which Dr. Patras had significant, if not total, control. He was the president and owner of New Brunswick Health, controlled its finances,

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and signed federal tax returns on its behalf. (Trial Tr. 27:5-7, 41:5-15, 74:11-76:16, Sept. 5, 2012; P.'s Exs. 117-20; P.'s Ex. 136 Tabs H & I) In addition, Dr. Patras was the vice president of Cadogan and signed federal tax returns on its behalf. At times he earned more from Cadogan than its owner did. (Trial Tr. 30:19-31:15, 43:17-24, Sept. 5, 2012; P.'s Exs. 127-33) Further, Ruth Patras co-signed loans for Cadogan. (Trial Tr. 31:13-32:15, 170:13-172:10, Sept. 5, 2012; P.'s Ex. 137 Tab P, 8)

21. Both New Brunswick Health and Cadogan were companies involved with medical services and billing, and neither company made residential loans regularly. (Trial Tr. 27:5-16, 29:15-21, 30:14-18, Sept. 5, 2012)

22. Both loans were made to benefit Dr. Patras personally, and, in Cadogan's case, the loan was made at Dr. Patras's behest. ( Id. at 20:1-23:18)

23. Neither New Brunswick Health nor Cadogan reported the loans to Gallo on their federal tax returns from 1996 to 2001, nor did they report any interest income during that time. (P.'s Exs. 117-20, 127-33)

24. Although Gallo promised to repay the loan to New Brunswick Health within one year with seven percent interest, he did not repay the loan until 2001 when he sold the house to Ruth Patras. (P.'s Ex. 136 Tabs H & I; Cicerale Dep. Tr. 50:22-51:3) However, he did make interest payments for the duration of the loan. (P.'s Ex. 136 Tab D)

25. From 1996 to 2001, the Patrases lived in the Property; at no time did Gallo ever live there. (P.'s Ex. 136 Tab E, 18) During this period, Dr. Patras made rental payments of approximately $9,000 per month to Gallo, which were sufficient to cover the mortgage, insurance, utilities, maintenance, and taxes for the Property. (Stip. Facts ¶ 2; Trial Tr. 33:9-12, Sept. 5, 2012; P.'s Ex. 136 Tab A; Gallo Dep. Tr. 31:20-32:8) Cicerale described these payments as " a smoke screen to cover for all the expenses." (Cicerale Dep. Tr. 39:20-23) Further, during this period, Dr. Patras possessed, controlled, and enjoyed the benefits of the Property. (Cicerale Dep. Tr. 74:25-75:7; Stip. Facts ¶ 2)

26. Since Ruth Patras had little to no income during this time period, Dr. Patras provided all of the money for the rental payments. (Stip. Facts ¶¶ 17-26; Trial Tr. 46:14-17, Sept. 5, 2012)

27. Gallo would not have been able to purchase or maintain the Property without Dr. Patras's payments. (P.'s Ex. 136 Tab Q; Gallo Dep. Tr. 43:5-7; Cicerale Dep. Tr. 70:11-12, 71:21-25) Indeed, in 2001, his adjusted gross income— without any income from the Property— was $23,000. (P.'s Ex. 136 Tab Q)

28. On several occasions, Dr. Patras was late in making rental payments to Gallo (P.'s Ex. 136 Tab Q, 4), yet Gallo took no action against Patras and made no effort to ...


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