United States of America v. The Hall Family Trust Dated June 8, 2001 et al

Filing 31

ORDER denying Motions to Dismiss ( #15 , #20 ). Signed by Judge Larry Alan Burns on 3/27/17. (kas)

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UNITED STATES DISTRICT COURT

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SOUTHERN DISTRICT OF CALIFORNIA

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UNITED STATES OF AMERICA,

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CASE NO. 16cv538-LAB (BGS)
Plaintiff,

ORDER DENYING MOTIONS TO
DISMISS

vs.
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THE HALL FAMILY TRUST DATED
JUNE 8, 2001, et al.,
Defendants.

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The United States filed this action to reduce certain tax obligations to judgment and

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to foreclose on certain tax liens on real property in Solana Beach, within this District. The

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complaint named various possible claimants to the property as Defendants. Some

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Defendants have disclaimed interest in the subject property and have been dismissed. But

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Defendants A & F Family Pure Trust, Estate of Neil Alan Scott, Frances V. Scott, and

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Michael A. Scott filed an answer. (Docket no. 5.) Also Defendants Amy Hedwig Hall, Russell

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Merton Hall, and The Hall Family Trust Dated June 8, 2001 filed a motion to dismiss for

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failure to state a claim (Docket no. 15), as did Union Bank, N.A. (Docket no. 20.) Defendant

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California Coast Credit Union joined in the earlier motion to dismiss. The two motions raise

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the same arguments.

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15cv538

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Legal Standards

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A Rule 12(b)(6) motion to dismiss tests the sufficiency of the complaint. Navarro v.

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Block, 250 F.3d 729, 732 (9th Cir. 2001). Under Fed. R. Civ. P. 8(a)(2), only “a short and

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plain statement of the claim showing that the pleader is entitled to relief,” is required, in order

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to “give the defendant fair notice of what the . . . claim is and the grounds upon which it

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rests.” Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 554–55 (2007). “Factual allegations

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must be enough to raise a right to relief above the speculative level . . . .” Id. at 555. “[S]ome

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threshold of plausibility must be crossed at the outset” before a case is permitted to proceed.

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Id. at 558 (citation omitted). The well-pleaded facts must do more than permit the Court to

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infer “the mere possibility of misconduct”; they must show that the pleader is entitled to relief.

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Ashcroft v. Iqbal, 556 U.S. 662, 679 (2009).

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The Court accepts all allegations of material fact in the complaint as true and

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construes them in the light most favorable to the non-moving party. Cedars–Sinai Medical

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Center v. National League of Postmasters of U.S., 497 F.3d 972, 975 (9th Cir. 2007) (citation

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omitted). The Court is “not required to accept as true conclusory allegations which are

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contradicted by documents referred to in the complaint,” and does “not . . . necessarily

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assume the truth of legal conclusions merely because they are cast in the form of factual

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allegations.” Warren v. Fox Family Worldwide, Inc., 328 F.3d 1136, 1139 (9th Cir. 2003)

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(citations and quotation marks omitted). In addition to the pleaded facts, the Court may

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consider facts of which it has taken judicial notice. Skilstaf, Inc. v. CVS Caremark Corp., 669

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F.3d 1005, 1016 n.9 (9th Cir. 2012).

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Arguments not raised in the opening brief are ordinarily waived. Mesa Grande Band

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of Mission Indians v. Salazar, 657 F. Supp. 2d 1169, 1173 (S.D. Cal. 2009).

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Discussion

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The Court accepts the following alleged facts as true for purpose of ruling on the

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motions. In late 1999, the A&F Family Pure Trust acquired the Solana Beach property. At

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the time, Neil Alan Scott was the Trustee. The property was bought with funds from bank

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accounts he controlled. From around 2006 to 2008, the IRS assessed tax liabilities and
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interest against Neil Alan Scott for tax years 1999 through 2002. These and other liabilities

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were adjudicated in favor of the IRS in Neil Alan Scott v. Commissioner, United States Tax

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Court Case Number 14825-06. He failed to pay these obligations. These obligations are

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substantial; as of the end of 2015, they amounted to nearly $7 million.

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In 2008, the IRS filed a notice of federal tax lien (“NFTL”) with the San Diego County

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recorder’s office giving the taxpayer’s name as “A & F Family Pure Trust, as nominee,

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transferee or alter ego of Neil Alan Scott”. Neil Alan Scott died on April 10, 2013. On

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September 6, 2013, Russell Merton Hall and Amy Hedwig Hall (collectively, the “Halls”),

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trustees of the Hall Family Trust Dated June 8, 2001 bought the property from the A & F

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Family Pure Trust for $1.4 million. For purposes of this sale, Michael Alan Scott, Neil Alan

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Scott’s son represented himself as managing trustee of the A & F Family Pure Trust.

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Michael Alan Scott never presented documents showing that he had been validly appointed

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as trustee. The Hall Family Trust now owns the property.

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Neil Alan Scott was a tax protester who purchased a “pure trust” from Gregory Karl.

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Karl was later convicted in federal court of selling “pure trusts” that purported to shield

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income from federal income tax. The A & F Family Pure Trust was Neil Alan Scott’s

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nominee, i.e., the trust held legal title for his benefit.

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Judicial Notice

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The Defendants who filed the two motions raise the same argument, and cite the

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same case in support of that argument. They also ask the Court to take notice, under Fed.

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R. Evid. 201, of certain documents, including a grant dated October 15, 1999 transferring

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the property to the A & F Family Pure Trust; a grant deed dated September 6, 2013

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transferring the property from Michael Alan Scott, “successor trustee of the A & F Family

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Pure Trust” to the Halls; and two NFTLs.1 The United States also asked the Court to take

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notice of a different version of the grant deed from A & F Family Pure Trust to the Halls.2

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Both the grant deeds bear a stamp from the San Diego County recorder’s office; the
dates by which this order identifies them are the recordation dates.
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An email between counsel is also attached as an exhibit, but the government has
not asked the Court to take notice of it.
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15cv538

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The government has not opposed the moving Defendants’ requests for notice, except

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that it argues the September 6, 2013 grant deed may have been altered after it was signed

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and notarized. The fact that this grant deed was recorded is not disputed, however. The

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moving Defendants’ request for notice is GRANTED.

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The moving Defendants object to the government’s request. The government does

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not suggest that the alternate grant deed it proffers is a public record. The declaration in

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support of the request for notice shows that this document was produced to the IRS by the

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escrow company that handled transfer of the property.

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document to show that the recorded grant deed was altered. The government points out that

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its grant deed and the deed recorded September 6, 2013 are identical, except that in the

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recorded deed the typewritten name of the grantor, A & F Family Pure Trust, has been

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erased or covered up and in its place “Michael Alan Scott, successor trustee of the A & F

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Family Pure Trust” has been handwritten.

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The government offers this

Without more, an unrecorded grant deed is not the subject of judicial notice, and the

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government’s request is DENIED.

That being said, this document can properly be

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considered for certain collateral purposes.

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The moving Defendants have asked the Court to dismiss the complaint with prejudice.

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While the unrecorded grant deed does not form part of the complaint, and is therefore not

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considered when determining whether the complaint states a claim, the grant deed is

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evidence of facts the government could allege if given the opportunity. The government, of

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course, could simply have alleged the facts it included in its request for notice and attached

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the unrecorded deed as an exhibit. The deed, along with the declaration supporting it can

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be considered when determining whether dismissal with prejudice is appropriate.

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Furthermore, the complaint alleges that the “A & F Family Pure Trust” transferred the

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property to the Halls. (Complaint, ¶ 32.) The proffered grant deed could have been attached

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as an exhibit to the complaint supporting this allegation. When ruling on a Rule 12(b)(6)

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motion to dismiss, the Court is not required to “accept as true allegations that contradict

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matters properly subject to judicial notice or by exhibit . . . .” Sprewell v. Golden State
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15cv538

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Warriors, 266 F.3d 979, 988 (9th Cir.) (citation omitted), amended on other grounds, 275

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F.3d 1187 (9th Cir. 2001). Here, the recorded deed contradicts the complaint’s allegations;

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but the allegations are supported by an exhibit.3 The exhibit is offered, in part, to show that

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Michael Alan Scott treated the trust as the owner, and altered the deed after notarization.

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It is also being offered to show the government’s good faith in alleging that the A & F Family

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Pure Trust, through its trustees, engaged in tax-evasion strategies. And in any event, this

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motion would be decided the same way even without considering the unrecorded deed.

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Motions to Dismiss

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The moving Defendants argue that the NFTLs are invalid, because “A & F Family

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Pure Trust, as nominee, transferee or alter ego of Neil Alan Scott” is not a legal entity. In

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support of this, they rely on Greenspan v. LADT, LLC, 191 Cal. App. 4th 486, 522 (Cal. App.

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2 Dist. 2010). They also argue that because a trust is not a legal entity, the Hall Family Trust

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is not a proper Defendant in this action.

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The cited section of the Greenspan decision explains that there is a distinction

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between a trust and a trustee. The trust is not a legal person that can own property, enter

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into contracts, sue, or be sued; rather, it is the trustee who must do those things. Id.

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Therefore, Greenspan concludes, the alter ego doctrine has no application with regard to a

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trust. But it does have application with regard to a trustee; a trustee could be the alter ego

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of another defendant.

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The purpose of a notice of tax lien is to give constructive notice to interested parties.

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United States v. Sirico, 247 F. Supp. 421, 422 (S.D.N.Y. 1965). The sufficiency of the notice

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is governed by federal, not state law. Id. The notice need not give the property owner’s

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name accurately, as long as there is “substantial compliance sufficient to give constructive

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notice and to alert one of the government’s claim.” Id.

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The grant deed dated October 15, 1999 purports to transfer the property from Robert

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J. Selmo, trustee of a revocable trust, to “A & F Family Pure Trust, Att’n: Neil Alan: Scott

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Presently the unrecorded grant deed is only an exhibit to the government’s
opposition; but it could have been attached as an exhibit to the complaint, and could be
attached as an exhibit to an amended complaint.
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(Ph.D., D.D.), Managing Trustee” (sic). (Docket no. 20-2 at 5.) In other words, the

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transferee and new title holder is identified as the trust itself. Neil Alan Scott is mentioned,

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but only secondarily. And although the Court is not considering the unrecorded grant deed

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directly, it too identifies the owner and transferor as “A & F Family Pure Trust.” Anyone

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looking through property records would see the new owner identified in this way. Even if it

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is literally true that only a trustee, not a trust, could own the property, the grant deed’s

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identification of the trust as owner is not the government’s fault.

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Gregory Karl sold “pure trusts” to Neil Alan Scott and others for purposes of

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improperly attempting to shield assets from tax liability. This, along with other allegations,

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reasonably suggests that Neil Alan Scott may have nominated the trust as the property’s

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owner in order to put it beyond the government’s reach and make it unavailable to satisfy tax

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liabilities. In other words, if the grant deeds were inaccurate or ambiguous, the Court can

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reasonably infer from the complaint’s allegations that the inaccuracy or ambiguity was

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intentionally inserted. The government’s claim does not fail merely because it accepted what

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the deed said.

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The moving Defendants contend that the recording the NFTLs as drafted and filed did

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not amount to constructive notice. But the government cites federal authority for the

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principle that state laws do not govern the validity of liens. “If the IRS fills out the proper form

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and files it in the correct location, the lien is ‘valid notwithstanding any other provision of law

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regarding the form or content of a notice of lien.’” TKB Int’l, Inc. v. United States, 995 F.2d

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1460, 1465 (9th Cir. 1993) (quoting 26 U.S.C. § 6323(f)(3)). To find tax liens, subsequent

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purchasers have a duty to look beyond the index, but must make a reasonable inquiry. Id.

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There is no evidence before the Court of what a reasonable title search would have

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uncovered, but the documents of which the Court has taken notice disclose some unusual

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facts that would have, at the very least, put a searcher on inquiry notice. First, the chain of

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title does not look entirely correct. The transferee in the 1999 deed and the transferor in the

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2013 deed are not identified in the same way. Neither party suggests that an intervening

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document explains the difference. Apparently no substitution of trustee was recorded, and
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the Complaint alleges Michael Alan Scott has not identified the person or persons who

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appointed him as the A & F Family Pure Trust’s new managing trustee. (Complaint, ¶ 38.)

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Second, even accepting arguendo that a trust cannot be named as record owner, the

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fact is that the trust was named as transferee in the 1999 deed. A person doing a title search

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would reasonably want to know about any later-recorded documents that also designated

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the trust as owner. The NFTLs were recorded in 2008 and identified the trust as owner, so

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it appears someone doing a title search should have uncovered them. And in any event, it

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appears that someone doing a title search would have had to look for the trust’s name,

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because no recorded document would have told them to look for Michael Alan Scott as next

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in the chain of title. If, as the moving Defendants contend, property records should have

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identified Neil Alan Scott as the owner of record (Docket no. 25 at 18–19), then the 2013

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deed suffers from the same fault; it does not name Neil Alan Scott as transferor either. If a

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title search were focused solely on Neil Alan Scott’s name, as these Defendants seem to

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suggest, then the chain of title would have ended with the 1999 grant deed, which is the last

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recorded document mentioning him in connection with the property.

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The complaint’s allegations, accepted as true, show compliance with § 6323(f)(3),

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such that a reasonable inquiry would have disclosed the NFTLs to a subsequent purchaser.

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The moving Defendants’ reply briefs appear to raise new arguments regarding

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whether they can be made parties to this action. They argue that, as third parties who are

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not liable for the tax judgment, they cannot be made Defendants in this action. Even if they

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had raised this argument in their opening brief, it would be denied. Defendants are parties

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whose ownership interest in the subject property would be threatened or diminished if the

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government’s claims succeed and the tax liens are foreclosed. The fact that they are

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opposing foreclosure of the liens attests to this. They also raise other arguments for the first

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time in their reply brief. Even if these were not waived, they do not appear to have any merit.

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Finally, in an aside, the reply brief suggests that the government’s counsel should not

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have been admitted to practice before this Court and should not be allowed to represent the

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government, because he is not admitted to practice law in California. (Docket no. 25 at 9
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n.4.) This is an improper argument; if they had any reason to believe he was not proper

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counsel, they should have raised the issue in a motion to disqualify, or some other proper

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way. They should not raise the issue in a reply brief, to which he has no opportunity to reply.

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And in any event, they are wrong. The government’s counsel is an attorney employed by

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the U.S. Department of Justice and as such is exempt from such requirements. See Civil

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Local Rule 83.3(c)(3).

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Conclusion and Order

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Accepting all allegations of material fact in the complaint as true and construing them

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in the light most favorable to the non-moving party, see Cedars–Sinai Medical Center, 497

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F.3d at 975, the Court finds that the complaint states a claim against the moving Defendants.

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The motions to dismiss are DENIED.

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IT IS SO ORDERED.
DATED: March 27, 2017

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HONORABLE LARRY ALAN BURNS
United States District Judge

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