US v. Baker, et al

Filing

OPINION issued by Juan R. Torruella, Appellate Judge; Rogeriee Thompson, Appellate Judge and William J. Kayatta , Jr., Appellate Judge. Published. [16-1415]

Case: 16-1415

Document: 00117133890

Page: 1

Date Filed: 03/24/2017

Entry ID: 6078906

United States Court of Appeals
For the First Circuit
No. 16-1415
UNITED STATES,
Plaintiff, Appellant,
v.
SCOTT G. BAKER, ROBYN BAKER,
Defendants, Appellees,
ONEWEST BANK, F.S.B.,
Defendant.

APPEAL FROM THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF MASSACHUSETTS
[Hon. Richard G. Stearns, U.S. District Judge]

Before
Torruella, Thompson, and Kayatta,
Circuit Judges.

Norah E. Bringer, Attorney, Tax Division, Department of
Justice, with whom Caroline D. Ciraolo, Principal Deputy Assistant
Attorney General, Thomas J. Clark, Attorney, Tax Division, and
Carmen M. Ortiz, United States Attorney, were on brief, for
appellant.
D. Sean McMahon, with whom Eric J. Rietveld and McMahon &
Associates, PC were on brief, for appellee Robyn Baker.

March 24, 2017

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TORRUELLA, Circuit Judge.

Date Filed: 03/24/2017

Entry ID: 6078906

Scott G. Baker used a tax

shelter to reduce his taxable income for the years 1997-2002.

In

2008, he divorced his wife Robyn Baker in order to fraudulently
transfer assets and avoid some of his tax liability.1

Following

an agreed judgment for over five million dollars against Scott in
2015, the dispute narrowed to whether and to what extent the
government's tax liens attached to certain assets.

After the

district court set aside the Bakers' separation agreement as a
fraudulent transfer, it proceeded to re-divide and reallocate
these assets applying Massachusetts law.

The government's tax

liens attached directly to any assets allocated to Scott.

The

government also argued that its tax liens attached indirectly to
certain assets allocated to Robyn.
This appeal concerns the district court's allocation of
two assets in particular (1) funds that were directly traceable to
Scott's tax shelter (the "Escrowed Funds"); and (2) a property the
Bakers owned in Hingham, Massachusetts (the "Hingham property").
The district court divided both assets more or less evenly,

1

As will become clear in this opinion, Robyn appears to be
implicated in at least some of Scott's fraudulent activity.
However, she was never put on trial, and it appears that the
government is not pursuing any claims for fraud against her. As
such, nothing in this opinion is meant to suggest that Robyn has
been found guilty of fraud.
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reasoning that it was applying "an equitable 50/50 division of the
couple's assets consistent with the common-law community property
system adopted by Massachusetts and recognized as valid by the
IRS."

In order to effectuate this division as to the Hingham

property, the court ordered it to be sold and half the proceeds to
be paid to the government and half to Robyn.
The government challenges the 50/50 division of the
Escrowed Funds on the ground that Massachusetts is not a community
property state.

In fact, Massachusetts law requires a judge to

consider, either explicitly or by clear implication, fourteen
factors in order to arrive at an equitable division of the parties'
assets.

See Bowring v. Reid, 503 N.E.2d 966, 967–68 (Mass. 1987).

Because it is not clear to us that the district court considered
these fourteen factors, we vacate and remand the division of the
Escrowed Funds.
The government does not challenge the 50/50 division of
the Hingham property.

Instead, it argues that it is entitled to

Robyn's half of the proceeds from the sale on a lien-tracing
theory.

The district court rejected this theory on the ground

that the government had not submitted evidence sufficient to trace
the liens with the required level of specificity.
aspect of the district court's ruling.

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We affirm this

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I.
A.

Date Filed: 03/24/2017

Entry ID: 6078906

Background

Factual History
In December 2002, Scott G. Baker and his business partner

sold eight Planet Fitness gyms to Bally Fitness for approximately
$15 million, including Bally Fitness stock that he later sold for
$3.4 million.

He used a Son-of-BOSS tax shelter2 to reduce his

taxable income on gains from the Planet Fitness sale, claiming a
negative $2.5 million in income in his 2002 return, which he filed
separately from his wife.

Scott then amended his tax returns for

1997-2001 to carry back the loss, leading the IRS to refund
"virtually all" of the taxes the Bakers had paid in the years 19992001.
In June of 2003, and as part of the Son-of-BOSS tax
shelter, Scott established and became the settlor of the "Scott
Baker Family Trust" (the "Family Trust") in the Cayman Islands.

2

Son-of-BOSS (Bond Options Sales Strategy) tax shelters involve
creating capital losses on paper to offset real capital gains.
See, e.g., Fid. Int'l Currency Advisor A Fund, LLC v. United
States, 661 F.3d 667, 668 (1st Cir. 2011) ("the plan . . . put
into effect required [the U.S. taxpayer] to form a partnership
with a foreign national; that partnership would engage in
transactions that would generate largely offsetting gains and
losses without net risk; the gain component would be principally
allocated to the foreign national; the loss component would be
principally allocated to [the U.S. taxpayer] and used on his
individual return to offset gains on his exercise of the [] stock
options, virtually eliminating tax on those gains.").
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He chose Royal Bank of Canada Trust Company to be the initial
trustee, and granted himself a one-third beneficial interest, with
the remaining interests divided among Robyn and their two children.
Scott had the power to add or exclude beneficiaries and to appoint
successors to the trustee(s).

The trustee(s) had discretion to

disburse the funds in the Family Trust to any of the beneficiaries,
to end the trust at any time, and to invest its capital and income.
Scott deposited the proceeds from the sale of the Bally
Fitness stock into the Family Trust, and instructed the Trustee to
invest the corpus of the Family Trust into a hedge fund called
International Management Associates ("IMA").

Late in 2005, the

Bakers learned that IMA was in fact a Ponzi scheme and that all of
the money had disappeared.

IMA filed for bankruptcy in 2006.

In August of 2005, the Bakers purchased a home in
Hingham,

Massachusetts,

which

they

entirety, for just over $1.6 million.

owned

as

tenants

by

the

In the same month, the IRS

opened an examination of Scott Baker's 2002 tax return.

Scott

agreed to participate in the IRS's Global Settlement Initiative,
agreeing to pay $1.2 million in outstanding taxes.

However, he

was removed from the program in 2007 after the IRS determined he
was unable to pay the agreed amount through his disclosures on
Form 433-A, which "collect[s] information on a debtor's current
assets when he or she claims an inability to pay the taxes owing."
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Scott contends that his inability to pay was due to the losses he
suffered in the IMA Ponzi scheme.
In February 2007, the Bakers remortgaged their Hingham
property with Scott as the sole mortgagor; on the same day, they
established

the

S&R

Realty

Trust

with

Robyn

as

trustee

and

transferred the title of their Hingham Property into the trust.
They also established the C&S Realty Trust on the same day, with
Robyn

as

sole

trustee

and

their

two

children

as

primary

beneficiaries, and transferred into it a beach house located in
Scituate, Massachusetts.

Scott did not receive any consideration

for transferring his interests in the properties to the trusts.
In November 2007, Robyn sold the Scituate property and deposited
the $433,000 in proceeds into a South Shore Bank account owned by
C&S Trust.

She used the majority of the money to pay down loans

secured by the Hingham property, and the remainder on living
expenses.
On January 10, 2008, the Bakers signed a separation
agreement, and the following day the two filed for divorce.

The

agreement, which was incorporated into the final divorce judgment,
gave most of the assets to Robyn, but most of the liabilities to
Scott.

Robyn received sole ownership of the Hingham Property, as

well as of the New Hampshire properties worth $200,000 as of March
of 2007.

She also received a boat, a car, two motorcycles, and
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title to any money recovered from the IMA investment.

Entry ID: 6078906

Scott, on

the other hand, assumed the $875,000 mortgage on the Hingham
Property.

According to his testimony, he "regularly made monthly

payments" to Robyn of $6,200 to apply to the mortgage. He received
real property relating to his construction business, and he agreed
to assume all marital credit card debt and all liability relating
to his construction business.

He maintained sole ownership of his

business ventures, including a Planet Fitness gym in Scarsdale,
New York, with an asserted worth of $250,000 at the time of
divorce.

Scott claimed losses on this business in both his 2007

and 2008 federal income tax returns.
The agreement stipulated that Scott could continue to
reside in the Hingham Property, and he did so after the divorce
became final in May of 2008.

After the divorce, Robyn continued

to refer to Scott as her husband, though she testified that those
references were mistakes or oversights.

Scott testified that he

had never told his children of the divorce, and he did not know if
they were aware of the separation.

The Bakers continued to

vacation

family

together,

often

with

their

Theriault and his wife Lori Leo.

friends,

Michael

Theriault testified that the

Bakers took an estimated fifteen ski trips with them, as well as
numerous camping trips.

Theriault also estimated that over the

course of four years, he and his wife had dinner with the Bakers
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approximately 250 times.

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For the duration of their friendship,

Theriault and Leo were under the impression that the Bakers were
married.

Their friendship eventually went sour, after Robyn, who

had been working for Leo, went to work for a competitor.

Around

the same time, it came to light that Theriault and Robyn had been
having sexual relations.

When Theriault went to talk to Scott

shortly thereafter, Scott allegedly assaulted him, gouged out
Theriault's artificial eye and attempted to gouge out his good eye
as well.
On May 14, 2009, the IRS determined that Scott had
underpaid his taxes for the years 1997-2002 and assessed taxes and
penalties for the 1997, 1998, and 2002 tax years. On May 20, 2010,
it made additional assessments for the years 1999-2001. Per I.R.C.
§ 6321, federal tax liens "arose on the dates of assessment . . .
and

attached

to

all

of

[Scott's]

property

and

interests

in

property."
In November of 2012, the trustee of the IMA bankruptcy
issued a check to the Family Trust for just over $202,000 and
mailed

the

check

to

Scott,

who

testified

"flabbergasted" to have recovered any money.

that

he

was

Robyn -- who had by

this time been made the sole trustee of the Family Trust -invested the money from the IMA bankruptcy payment into a design
company

owned

by

a

friend,

which
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then

hired

Scott

to

do

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construction on a home being built by the company.

Entry ID: 6078906

She testified

that she gave the money to the company in $9,000 increments because
she "didn't want the IRS to take [her] money."

The value of this

investment subsequently increased to $528,962.28.
The Family trust received a second payment from the IMA
bankruptcy for $84,000, which Robyn used to pay legal fees for
both her and Scott.

Finally, a third payment from the IMA

bankruptcy for $70,116.49 was added to the Bakers' share of the
proceeds from the design business to comprise the escrowed funds
now at issue, for a total of $599,078.77 (the "Escrowed Funds").
B.

Procedural History
The United States commenced this suit in May 2013 when

Scott failed to pay the tax liabilities assessed against him.

The

United States sought collection of the tax liabilities, as well as
enforcement of federal tax liens against property that had been
fraudulently transferred to Robyn and liens attached to a property
interest held by Robyn. The United States claimed first that Scott
had fraudulently transferred to Robyn his interest in the Hingham
Property, and second that the federal tax liens had attached to
the Hingham Property to the extent of the mortgage payments that
Scott made after the tax liens arose.
On January 29, 2015, the district court entered an agreed
judgment against Scott in the amount of $5,026,915.43 for federal
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income taxes due for the years 1997-2002.

Entry ID: 6078906

Thus, the dispute was

narrowed to the issue of the extent to which the tax liens attached
to various assets.
On August 17, 2015, following a bench trial, the district
court found that the February 2007 transfers of property into
trusts were fraudulent and that the Bakers had divorced with the
purpose of fraudulently transferring assets. It identified several
"badges

of

fraud"

under

the

Massachusetts

Uniform

Fraudulent

Transfer Act that applied to the property transfers in the Bakers'
2008 settlement agreement, including that: (1) they continued to
live together after their divorce; (2) Scott remained at the
Hingham Property and made the majority of the mortgage payments;
(3) they concealed the divorce and held themselves out as married;
(4) Robyn received substantially all of Scott's assets in the
divorce agreement; (5) they hid assets after the divorce; (6) there
was not adequate consideration for Scott's transfer; (7) Scott was
insolvent when the transfer occurred; and (8) the transfer was
made after a substantial debt was incurred.

The district court

also found additional indicia that the divorce had been obtained
so as to fraudulently transfer assets: (1) only Robyn had been
represented by counsel; (2) they continued to live together in the
house that had been transferred by the divorce; (3) Scott paid the
mortgage and other bills related to the house; and (4) Robyn
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received most of the assets while Scott received most of the debts
in the divorce.
The

district

court

accordingly

entered

a

partial

judgment on October 23, 2015, holding in favor of the United States
on

a

theory

of

fraudulent

transfer,

adding

that

while

the

government's lien-tracing claim was "not rejected," it was also
"not embraced."

The district court found that the government's

tax liens attached to Scott's one-half interest in the Hingham
Property, and ordered that the property be sold to satisfy Scott's
tax liabilities.

It also ruled that Scott had one-half interests

in the New Hampshire properties and other personal property, which
he had fraudulently conveyed to Robyn, and that the government
could take necessary action to recover those assets.

Finally, it

found that the liens attached to Scott's interest in the Escrowed
Funds and ordered the funds be turned over to the United States,
giving Robyn time to submit a claim for whatever portion of the
funds she believed she was due. The district court did not resolve
which portion of the Escrowed Funds Robyn was entitled to. Rather,
the district court indicated that it would "separately adjudicate
the matter unless the parties are able to come to an agreement on
an appropriate division of the escrowed funds."
After the parties failed to reach such an agreement, the
district court divided the Escrowed Funds evenly between Scott and
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Robyn.

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The district court noted that it had applied "an equitable

50/50 division of the couple's assets consistent with the commonlaw

community

property

system

adopted

by

Massachusetts

and

recognized as valid by the IRS" for the division of the couple's
real property. Because the district court saw "no reason to depart
from the 50/50 equitable formula," it used the same formula to
divide the Escrowed Funds.

It also deemed Scott to be entitled to

half of the $84,000 second payment from the IMA bankruptcy and
Robyn to have taken that entire payment for herself.

Thus, it

compensated Scott for his $42,000 share of that payment out of the
Escrowed Funds. By the court's final calculations, Robyn was found
entitled to $256,539.38, with the remaining $342,539.39 going
through Scott to the United States.3 The United States now appeals.
II.
This

Court

Standard of Review

generally

"review[s]

a

district

court's

ultimate decision to grant or withhold an equitable remedy for
abuse of discretion."

Texaco P.R., Inc. v. Dep't of Consumer

Affairs, 60 F.3d 867, 875 (1st Cir. 1995).

However, where a court

applies "an improper standard to the facts, it may be corrected as
a matter of law."

United States v. Singer Mfg. Co., 374 U.S. 174,

3

The United States notes that the district court appears to have
made a mathematical error: the government's share should have been
$341,539.39, and Robyn's share $257,539.38.
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194 n.9 (1963).

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"[A] district court by definition abuses its

discretion when it makes an error of law."

Alison H. v. Byard,

163 F.3d 2, 4 (1st Cir. 1998).
Determinations regarding the sufficiency of evidence
during a bench trial are legal determinations, and hence are
reviewed de novo.

See In re Pharm. Indus. Average Wholesale Price

Litig., 582 F.3d 156, 162-63 (1st Cir. 2009) (citing United States
v. 15 Bosworth St., 236 F.3d 50, 53 (1st Cir. 2001)).
III.
A.

Discussion

The Escrowed Funds
Although the divorce of the Bakers was entered into in

order to fraudulently transfer assets, the divorce itself is not
therefore invalid.

Consequently, it fell to the district court to

divide the marital assets following the divorce. In Massachusetts,
such a division is governed by Mass. Gen. Laws ch. 208, § 34
("§ 34").

The district court stated that it "applied an equitable

50/50 division of the couple's assets consistent with the commonlaw

community

property

system

adopted

by

Massachusetts

and

recognized as valid by the IRS."
Contrary

to

the

statement

of

the

district

court,

Massachusetts is not a community property state, and its laws do

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not prescribe a "50/50" division of marital assets upon divorce.4
Rather, Massachusetts law requires "an equitable, rather than an
equal division of property."
939 (Mass. 2000).

Williams v. Massa, 728 N.E.2d 932,

In order to arrive at this equitable division,

a court must consider
the length of the marriage, the conduct of the parties
during the marriage, the age, health, station,
occupation, amount and sources of income, vocational
skills, employability, estate, liabilities and needs
of each of the parties, the opportunity of each for
future acquisition of capital assets and income, and
the amount and duration of alimony, if any, . . . [as
well as] the present and future needs of the dependent
children of the marriage.
Mass. Gen. Laws ch. 208, § 34.

In addition, a court may, but need

not, consider "the contribution of each of the parties in the
acquisition,

preservation

or

appreciation

in

value

of

their

respective estates and the contribution of each of the parties as
a homemaker to the family unit." Id. Thus, § 34 "contains fourteen
mandatory

factors

which

the

judge

must

consider,

discretionary factors which the judge may consider."

and

four

Bowring v.

Reid, 503 N.E.2d 966, 968 (Mass. 1987).
In dividing assets under § 34, a court must also "ma[k]e
findings consistent with [its] obligations under G.L. c. 208, § 34,

4

It is undisputed that Massachusetts law applies to the division
of the various assets in this case.
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indicating that [it] has fairly considered all factors relevant
under § 34 and has not considered any irrelevant matter," in which
case its determination "may not be reversed unless plainly wrong
and excessive."

Redding v. Redding, 495 N.E.2d 297, 300 (Mass.

1986) (citations omitted).

The court's reasons for coming to its

conclusions under § 34 "must be apparent in [its] findings and
rulings." Id. at 301. "The rationale for the decision must appear
in the judgment either explicitly or by clear implication," and
"the mere listing of findings, even if detailed, is not enough."
Bowring, N.E.2d at 968.
In the present case, while the district court did make
extensive factual findings, it is not clear to us that the district
court considered all the fourteen factors required under § 34.

To

the contrary, the district court used a "50/50 equitable formula"
to divide the Escrowed Funds without explanation as to how any of
the facts in the case factored into this decision.

This implies

that it did not consider the factors of § 34, but rather simply
divided the property evenly between the Bakers.5
The government also argues that the district court, in
dividing the Escrowed Funds, was wrong to consider Massachusetts's

5

To the extent that the government urges us to apply the § 34
factors ourselves, we decline. The district court is in a better
position to apply what are typically findings of fact.
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"strong public policy of protecting the interests of nondebtor
spouses." Bakwin v. Mardirosian, 6 N.E.3d 1078, 1085 (Mass. 2014).
Because the district court appeared to have simply applied a
"50/50" formula, however, it is not clear to us that this public
policy factored into the district court's analysis in any way.

To

the extent that the district court did rely on this public policy,
such reliance was misplaced.

"The judge may consider only factors

which are enumerated in § 34, in making alimony and property
division determinations." Bowring, N.E.2d at 968 (emphasis added).
B.

The Hingham Property
The government also urges us to find that the district

court erred in rejecting its lien-tracing theory.

We decline to

do so.
The government argues that its tax liens attached to any
property Scott possessed on or after May 14, 2009, the date of the
first tax assessment.

The government infers from the Bakers'

testimony that one of the Bakers made the mortgage payment on the
Hingham property every month up to the time of trial, and that
each payment was $6,200.

The government notes that the district

court found that Scott ultimately "made the majority of the
mortgage payments."

Thus, reasons the government, Scott must have

paid at least half of the total mortgage payments made on the
Hingham property between June 2009 and December 2014 (just before
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the start of trial) using money on which the government had a tax
lien.

By that logic, the government concludes that it had a lien

on the property no smaller than $6,200 times sixty-seven months
divided by two, or $207,700.

Dividing that lien between the two

halves of the property, the government claims that it has a lien
of $103,850 on Robyn's half, which exceeds her share of the sale
proceeds. Thus, on this argument, the government would be entitled
to all the proceeds from the sale of the Hingham property.
The government's argument suffers from a fatal flaw.
The district court found that "for the lien tracing theory to be
viable the government has the burden of showing with particularity
the sums transferred by [Scott] Baker to which the tax liens
attach."

However, the district court never made a finding as to

the amount or the number of the mortgage payments.

The government

relies entirely on the testimony of the Bakers -- which the
government

itself

concedes

was

contradictory

--

for

the

proposition that the amount of the payment was $6,200,6 and then
assumes that every payment during the relevant time period was
made in full.
be

credible

The district court found "neither of the Bakers to
witnesses,

at

least

6

insofar

as

their

financial

Indeed, Robyn Baker testified that "[c]urrently the mortgage is
[$]6200 interest-only payments." This leaves open the possibility
that the mortgage payments were not $6,200 at all times.
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interests are concerned.
problems with honesty.

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Leo credibly testified that [Robyn] has
[Robyn] admitted that she struggles with

the truth."
We agree with the district court that "the equivocal
testimony of the Bakers by itself [is not] sufficient to satisfy
the government's burden in a lien tracing context." The government
has not here met its burden of distinctly tracing its lien, because
the evidence it has presented is insufficient -- the government
has proven neither the amount of any mortgage payment, nor has it
proven that all mortgage payments were in fact made.

We do not

mean to hold that every time the government wishes to trace a lien
it must be able to prove the amounts involved to the penny -- but
it should present the court with more than the testimony of
witnesses who struggle with the truth.7
IV.
For

the

Conclusion

foregoing

reasons,

the

district

court's

February 19, 2016 Memorandum and Order, as well as paragraph 6 of
the February 19, 2016 Amended Judgment, are vacated, and the case
is remanded for further proceedings consistent with this opinion.
Vacated and Remanded.

7

We have considered the parties' other arguments and found them
to be without merit.
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