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United States v. Bigalk

August 28, 2009

UNITED STATES OF AMERICA, PLAINTIFF,
v.
KATHRYN BIGALK, KIM BIGALK, TODD BIGALK, TERRY BIGALK, ARNOLD BIGALK, THE PERSONAL REPRESENTATIVE OF THE ESTATE OF KENNETH BIGALK, THE TRUSTEE FOR THE K & K LIMITED TRUST, CROSBY & ASSOCIATES, ROBERT MANSEAU, JEAN MANSEAU, MARVIN PULLMAN, LORRAINE PULLMAN, AND THE ESTATE OF WINFIELD BENDER, DEFENDANTS.



The opinion of the court was delivered by: Joan N. Ericksen United States District Judge

ORDER

The United States of America brought suit against Kathryn Bigalk, Kim Bigalk, Todd Bigalk, Terry Bigalk, Arnold Bigalk, the personal representative of the estate of Kenneth Bigalk, the trustee for K & K Limited Trust (K & K), Crosby & Associates, Robert Manseau, Jean Manseau, Marvin Pullman, Lorraine Pullman, and the estate of Winfield Bender to foreclose on federal tax liens encumbering real property in Fillmore County, Minnesota. The government seeks a decree that Kenneth and Kathryn Bigalk, a married couple, fraudulently conveyed the real property (Bigalk farm) to K & K and/or that K & K holds the Bigalk farm as their alter ego or nominee; to reduce federal tax assessments against Kenneth's estate to judgment; and to foreclose on federal tax liens encumbering the Bigalk farm. The case is before the Court on the government's motion for partial summary judgment seeking a declaration that the transfer of the Bigalk farm to K & K was a fraudulent conveyance under the Minnesota Uniform Fraudulent Transfer Act, Minn. Stat. §§ 513.41-.51 (2008), and a determination that K & K is the alter ego or nominee of Kenneth and Kathryn Bigalk under Minnesota law. Kathryn Bigalk, Kim Bigalk, Todd Bigalk, Terry Bigalk, Arnold Bigalk, the personal representative of the estate of Kenneth Bigalk, K & K, and Crosby & Associates (Responding Defendants) responded to the motion. For the reasons set forth below, the Court grants the motion.

I. BACKGROUND

A. Chronology

Kenneth and Kathryn married in 1956.*fn1 They operated the Bigalk farm and lived in a house located on the property, where they raised their daughter, Kim, and two sons, Terry and Todd. Kathryn, Terry, and Todd all testified during their depositions that Kenneth did not believe that he had to pay taxes. Kathryn could not recall when Kenneth's involvement with people who believed they did not have to pay taxes began, but Terry testified that Kenneth became involved in anti-tax activities "later on in the 80s." Kim testified that Kenneth became involved with tax protestor activities in the 1980s because "[t]hings were tough" for farmers. Kenneth's involvement with the tax protestor movement included participating in meetings attended by other people who believed they did not have to pay taxes. According to Todd, Kenneth's cousin Milton Bigalk hosted the meetings.

On March 4, 1991, Kenneth and Kathryn signed their federal income tax return for 1990, claiming they were entitled to a refund of $178. That same day, Kenneth and Kathryn established K & K. According to Kathryn, Kenneth got the idea to set up a trust from Marvin Pullman, who also was involved in anti-tax activities. The settlor of K & K was Cache Properties Unlimited and the first trustee was Alex Yung. Yung was later convicted on charges of conspiracy to defraud the United States for selling trusts marketed as a device to eliminate income tax liability, some of which listed Cache Properties Unlimited as their grantor and Yung as the first trustee. See United States v. Scott, 37 F.3d 1564, 1569-70 (10th Cir. 1994); see also United States v. Engels, No. 98-2096, 2001 WL 1346652 (N.D. Iowa Sept. 24, 2001) (finding Cache Properties trusts to be alter egos for federal tax purposes). Although Kathryn stated in Answers to Interrogatories that K & K was created to avoid probate expenses and pass the Bigalk farm and equipment to their children, Kathryn testified that K & K was set up to protect the Bigalk farm because she thought "if you have a trust, you don't have to pay taxes." According to a May 13, 1992, letter from the U.S. Department of Agriculture (USDA), Kenneth and Kathryn each held a 50% interest in K & K.

On August 13, 1991, Kenneth and Kathryn transferred the Bigalk farm to K & K, and subsequently transferred the farm equipment. The Responding Defendants maintain that Kenneth and Kathryn received "Capital Share Units" in K & K in exchange for the Bigalk farm, but they admit in their Answers to Interrogatories that K & K "paid no consideration for the transfer of the real property." The recorded deeds indicate that Kenneth and Kathryn received no consideration for the Bigalk farm. Kim testified that Kenneth put the Bigalk farm into K & K because he hoped it would "keep their heads above water." Terry testified that Kenneth put the Bigalk farm into K & K "so the IRS couldn't get it." On January 30, 1993, Kenneth and Kathryn executed deeds stating that they, as trustees of K & K, were transferring the Bigalk farm to themselves as trustees for consideration of "$500 or less."

Kenneth and Kathryn did not timely file their federal tax returns for 1991 to 1993.*fn2 In August 1993, the Internal Revenue Service (IRS) audited Kenneth and Kathryn's 1990 tax return and requested documents to substantiate claimed income and business expenses. In response, Kenneth and Kathryn sent letters, affidavits, "constructive notices," and "notices of defaults" between August 1993 and April 1995 in which they maintained that the audit violated state and federal law, that the IRS had no authority to serve summonses on financial institutions, that the federal income tax is a voluntary tax, that they were not taxpayers, and that they did not have to provide the requested documents. They also demanded the return of all federal income tax they had paid in the past. A Certificate of Assessments, Payments, and Other Specified Matters submitted by the government indicates that in July 1994, the IRS assessed additional tax, interest, and penalties in the amount of $195,426 against Kenneth and Kathryn for 1990. The IRS also conducted an audit for 1991 to 1993. The Certificates of Assessments, Payments, and Other Specified Matters for those years indicate that the IRS prepared substitute returns for Kenneth and Kathryn for 1991 to 1993 and, on May 2, 1996, assessed tax, interest, and penalties of $321,531 for 1991, $282,873 for 1992, and $321,735 for 1993 against them.

On May 17, 1995, after receiving a lien notice from the IRS, Kenneth submitted a false money order for $390,854 to the IRS, purportedly in payment of his 1990 tax liability.*fn3 In that submission, Kenneth requested a refund because the false money order was for more than the taX owed. In September 1997, Kenneth was indicted and charged with various felonies related to his tax protestor activities. Marvin Pullman and Milton were co-defendants in the case. On March 12, 1998, Kenneth pleaded guilty to conspiracy to defraud the United States. In Kenneth's plea agreement, he admitted that he had obtained the false money order from Milton; that he had submitted the false money order and requested a refund knowing that the money order was false; that he and Milton had transferred funds owned by Kenneth to Antigua, which has no reciprocal tax/income agreements with the United States; and that between February and June 1996, he had served on the IRS "Non-Statutory Abatements" prepared by the Fillmore County "common law court," which demanded that the IRS cease and desist all collection activities against Kenneth or face severe criminal and civil penalties. Marvin Pullman and Milton went to trial and were convicted of conspiring to defraud the United States, aiding and abetting the use of counterfeit securities, and obstructing and impeding the IRS. Kenneth was sentenced to four months' imprisonment in the Fillmore County jail, but was permitted to work the Bigalk farm on work release during that time. According to Kathryn, Kenneth destroyed all of their business records at the conclusion of the criminal case on the recommendation of Special Agent Tschida from the IRS.

Approximately seven years ago, Kenneth and Kathryn moved from the Bigalk farm to Harmony, Minnesota. Todd took over operation of the Bigalk farm and moved into the house located on the property. Kenneth died in 2006.

B. Operation of K & K

The Responding Defendants' Answers to Interrogatories state that Kim, Terry, Todd, Kenneth's brother Arnold Bigalk, Bruce Popken, and Lorraine Pullman served as trustees of K & K. Kathryn testified that Popken was Kenneth's friend, and Kim testified that Lorraine Pullman was a friend of Kenneth and Kathryn's. The Answers to Interrogatories also state that Kenneth, Kathryn, Kim, and Todd served as managers of K & K. During their depositions, however, Kathryn, Kim, Terry, and Todd appeared confused about their respective roles and the roles of other family members. According to Kathryn, she served as the secretary of K & K at one time, although she did not remember ever taking meeting minutes. Kathryn testified that Todd was an assistant manager and Kim was the manager, but could not say what, if anything, they did in those roles. Todd testified that Marvin Pullman was the secretary of K & K and drafted the meeting minutes. Todd also testified that Terry, Kim, and Popken were trustees and that Kim was the assistant manager of K & K. Todd did not know what Kim did in her managerial role. Todd thought that he was "either the assistant manager or general manager or whatever," but did not know which position he actually held. Terry thought he had been a trustee and did not know if he had ever served as a manager of K & K. He thought that Todd was the manager of K & K, but did not think Kim had ever managed the trust. Kim testified that she was the treasurer and a general manager for K & K. She did not know if she had ever served as a managing trustee.

Although Terry, Todd, and Kim were named as trustees and officers of K & K, they were not actively engaged in the management of the trust. Terry testified that only Kenneth and Marvin Pullman understood how K & K worked. He did not know if he would ever inherit the Bigalk farm. Terry did not know what a capital unit holder was, could not identify the grantor or settlor of K & K, and did not know that he was a beneficiary of K & K until he was shown a document indicating as much on the day of his deposition. Terry testified that he signed trust meeting minutes without attending the meetings because Kenneth told him to do so and admitted that he signed K & K documents without reading them when Kenneth asked for his signature.

When shown a document stating that Terry had met with people concerning a loan for K & K, Terry had no recollection of the meeting. According to Terry, when Todd began operating the farm seven years ago, Kenneth, not K & K, chose Todd to operate the farm and decided that Todd could start living in the house on the property.

Kim testified that Kenneth took care of the business and that she did not do anything as a member of the board of K & K other than sign documents at Kenneth's request. According to Kim, she became the general manager because Kenneth asked her to fill the role. Kim became the treasurer because they "needed a name." She did not do any bookkeeping for K & K, was not in possession of the K & K checkbook, only "vaguely" remembered signing checks for the trust, and did "nothing" as the general manager. At her deposition, when shown a document purportedly signed by Kim in her role as the manager of K & K and notarized by Lorraine Pullman, Kim denied that the signature was hers.

Todd testified that he did not understand trusts. He did not know if he had any ownership interest in K & K, what Terry and Popken did as trustees of K & K other than show up at meetings, or what Kim did as a trustee or manager. Kathryn testified that she did not understand K & K and did not know what a capital unit of the trust was. She did not think she had any capital units, and did not know what happened to Kenneth's interest in K & K when he passed away.

With respect to trust meetings, Kathryn could only remember one meeting that took place before she and Kenneth moved to Harmony. The only meeting Terry could remember occurred in Harmony after Kenneth died in 2006, and he didn't "know if [he] would call it a trust meeting." Todd testified that annual trust meetings were held at Kathryn's house in Harmony and thought that one other trust meeting took place at the house on the farm. Todd, however, could not give any examples of business discussed at the meetings. Kim testified that she attended "a few" meetings which were attended by board members, but could not remember which board members attended, how many meetings she attended, when or where the meetings occurred, or what was discussed at those meetings.

Kathryn, Terry, and Kim testified that the transfer of the Bigalk farm to K & K did not change how Kenneth operated the farm. Kenneth and Kathryn received a draw from K & K, but did not pay rent to live in the house. Todd currently does not pay rent to live in the house. Kathryn testified that K & K placed no restrictions on how she and Kenneth used the Bigalk farm or the house. Terry testified that he never put any restrictions as a trustee on Kenneth's use of the Bigalk farm and that decisions about running the farm were "not [his] call." Kathryn testified that Kenneth, Popken, and another friend of Kenneth's had signatory authority for the K & K checking account. According to Kathryn, there were no restrictions on Kenneth's use of the K & K checkbook, which was kept in their house, and he could write a check for any reason at any time. The insurance on the Bigalk farm remained in the names of Kenneth and Kathryn. K & K paid for Kenneth's life insurance policy and Todd's rent. In 1998, Kenneth and Kathryn listed the Bigalk farm as a personal asset when filing for bankruptcy.

C. Fillmore County Probate Court Proceedings

Kenneth died intestate in February 2006. In April 2008, two months after commencing this action, the government filed a Petition for Formal Adjudication of Intestacy, Determination of Heirs, and Appointment of Personal Representative in Fillmore County Probate Court. The government then moved for the appointment of a personal representative of the estate. Counsel in the probate court case are the same as counsel in this case. In an order dated December 1, 2008, the probate court "temporarily denied" the motion because there was "not currently an estate to probate." In so ordering, the court found that, based on the parties' testimony, it appeared that Kenneth had left all of his assets in a trust and that no assets remained in his estate. The probate court further found that the validity of the trust was not before it because the "U.S. District Tax Court in St. Paul, Minnesota" had asserted jurisdiction over the validity of the trust.*fn4

The probate court explicitly found that the only issue before it was whether a personal representative should be appointed. Finally, the findings of fact indicate that the defendants in the probate case asserted that other lawsuits were pending involving the same parties and that "this matter" should be handled in one of those cases.*fn5

II. DISCUSSION

Summary judgment is proper "if the pleadings, the discovery and disclosure materials on file, and any affidavits show that there is no genuine issue as to any material fact and that the movant is entitled to judgment as a matter of law." Fed. R. Civ. P. 56(c). The movant "bears the initial responsibility of informing the district court of the basis for its motion," and must identify "those portions of [the record] which it believes demonstrate the absence of a genuine issue of material fact." Celotex Corp. v. Catrett, 477 U.S. 317, 323 (1986). If the movant satisfies its burden, the non-movant must respond by submitting evidentiary materials that "set out specific facts showing a genuine issue for trial." Fed. R. Civ. P. 56(e)(2); see Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 587 (1986). In determining ...


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