Posting for

Tuesday, September 8, 1998

by: Bert Rush

brush@firstam.com

and: Jim Dufficy

jdufficy@firstam.com

TAX LIENS/FRAUDULENT TRANSFERS/CLAIMS CHRONICLES

Here's the story of how Claims Chronicles once saved the Company $900,000.

Sort of.

Years ago we had a claim involving gold mine property in Fairplay, Colorado. Fairplay is in a high mountain plateau surrounded by the Pike National Forest, about 90 miles southwest of Denver.

In the 1970's, the subject property was owned by one Kenneth H. Winchell. Winchell was a tax protester who also became notorious for filing self-styled "liens" against Colorado lawyers, judges and politicians--venting his grievances against The System.

Winchell became so "pestiferous" that special legislation was enacted making it illegal to record a "Winchell Lien." Some of the law firms targeted by Winchell Liens sued him and pursued default judgments--at about the same time the IRS was bearing down on him for failure to file tax returns.

Under the threat of tax and judgment liens, Winchell took the honorable course and attempted to shield his property by transferring it into a trust. So it was that on October 1, 1979 Winchell recorded a Quitclaim Deed conveying the property from himself to the "Alta-Vista Trust Organization." The Quitclaim Deed reflected no consideration and, in fact, there was none.

In April 1984 the IRS recorded a tax lien against Winchell in the amount of $419,407. This lien was based on Winchell's estimated income for tax periods through 12/31/75, so the ten-year lien period would ordinarily expire on 12/31/85. But, prior to 12/31/85, an IRS agent personally served Winchell with a notice of levy--a first step in the Service's effort to execute upon its lien by forced sale of Winchell's property. The effect of this personal service was to extend the life of the tax lien--although there was nothing in the public records giving notice of the extended period.

Also in 1985, Winchell was sued by a former business associate, Ted Zigan, who had leased the PIQ to operate a gravel business. Zigan got a default judgment against Winchell, and executed on this judgment by filing a supplementary proceeding for a sheriff's sale of the PIQ. In the supplementary proceeding, Zigan filed affidavits alleging that the recording of the Quitclaim Deed from Winchell to the Alta-Vista Trust was a sham, and the Alta-Vista Trust was merely an alter ego for Winchell.

Winchell didn't contest these allegations, so the sheriff's sale was ordered, held, and Zigan was the successful bidder.

After the sale, an agent issued a First American owner's policy insuring Zigan for $2.8 million. Less than a year later, in 1986, Zigan sold the property to M&M Mining Company, a Pennsylvania corporation, for $6 million. M&M Mining hoped to use new technology to re-mine tailings on the property for gold which could not have been extracted decades ago. The agent issued First American's owner's policy to M&M Mining for $6 million. Zigan's policy also continued in force because he carried back a purchase money mortgage.

Our agent insured these transactions without exception for the IRS tax lien and/or several judgment liens naming Winchell, of which the agent was aware, because no lien named "Alta-Vista Trust Organization"--the vestee of record when all the liens were recorded --and because the agent assumed the tax lien had expired.

But after closing the IRS continued its collection efforts against our insureds (remember, the ten-year period was extended)and they made claims under their policies. First American hired outside counsel, Jim Dufficy (now in the Home Office Legal Dept.), to represent M&M Mining.

The IRS won the first round, obtaining a partial summary judgment finding that the conveyance to the Alta-Vista Trust was fraudulent, and it would be disregarded. The judge also found that the Alta-Vista Trust was not a legal entity in which title to real property could vest under Colorado law, because Winchell had botched the necessary paperwork.

By now the Service claimed more than $1 million was due, with penalties and interest.

So we entered a million-dollar settlement reserve for the claim, and I (then in the Home Office Legal Dept.) asked Jim to get pictures of the PIQ for possible use in a Claims Chronicles slide program. The actual person to take the pictures would be Ben Knittel, another outside counsel working on the case. (Ben is now in-house counsel in Houston.)

Jim and Ben drove to Fairplay to take pictures. While there Jim accidentally left a file containing his abstract of title--provided by the agent--on top of the car. When Jim and Ben drove off, the file was lost.

Meanwhile, back at the Ranch, we were discussing how much to offer the IRS to settle. We decided on $750,000. The IRS mulled this over and sent the message they couldn't even refer an offer to their superiors in Washington unless we offered more than $900,000.

While this was going on Jim contacted the agent and asked for another copy of the abstract. Because it was a second request, this time the agent made less of an effort to weed out extraneous documents in the chain. The agent sent Jim copies of everything of record.

In this second abstract Jim found some things he hadn't seen before--which the agent had failed to mention assuming they weren't important. Mainly, Jim found that the IRS had mistakenly recorded a RELEASE of the offending tax lien--which it later sought to cancel by another recorded document explaining the Release was done in error.

Jim checked the Internal Revenue Code and found they couldn't do this--once the IRS records a Release, they can't change their minds.

Fortunately, Jim called us with this news before we could get back to the IRS and offer $900,000. So instead, we had the pleasure of telling the Service "no soap."

They wanted to litigate further, but Jim beat 'em on a motion for summary judgment without breaking a sweat.

So that's how Claims Chronicles saved the Company $900,000.

Sort of.

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