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U.S. v. FREIDUS

July 15, 1991

UNITED STATES OF AMERICA, PLAINTIFF,
v.
JACOB FREIDUS, CLAIRE BRITT, 601 WEST 26 CORP., S.L. BUILDING COMPANY, CAESAR'S WORLD, INC., PROVIDENCE GRAVURE, INC., GLOBAL LEASING SERVICES, INC., STARRETT RESTAURANT, INC., LARSEN & TOUBRO, INC., AND MERICOR, INC., DEFENDANTS.



The opinion of the court was delivered by: Sweet, District Judge.

OPINION

S.L. Building Company ("S.L. Building") has moved under Rule 56, Fed.R.Civ.P., for summary judgment dismissing the complaint by which plaintiff the United States of America (the "Government") seeks to collect, by way of foreclosure of the property 601 West 26th Street, $1.2 million in unpaid taxes, which are owed by Claire Britt Freidus ("Britt"). The Government has cross-moved for summary judgment directing foreclosure. For the reasons set forth below, the motion of the Government is granted and that of S.L. Building denied based upon the findings and conclusions set forth below.

Prior Proceedings

This action was filed on July 20, 1990 and certain discovery has been had. The instant motions were argued and submitted on February 15, 1991.

The Facts

The following facts have been established by the 3(g) statements submitted by the parties.

S.L. Building is a New York partnership with its principal place of business at 60 East 42nd Street, New York, New York, and is the current fee owner of the property located at 601 West 26th Street, New York, New York. S.L. Building acquired title to the property at public auction held on August 20, 1974, as a result of a mortgage foreclosure proceeding of a third mortgage held by Precision Dynamics Corporation.

On June 21, 1967, Britt entered into a settlement agreement (the "Settlement Agreement") with her husband, Jacob Freidus ("Freidus"), 601 West 26 Corp. (of which Freidus was then the president and principal owner) and other parties, resolving, inter alia, matters relating to Britt's divorce from Freidus.

The relevant portions of the Settlement Agreement include:

    ¶ 1: Jacob Freidus will indemnify Mrs. Freidus
  and hold her harmless with regard to any income tax
  claims which may be asserted against her by the
  United States Government.
    ¶ 2: [I]f Mr. Freidus permits a tax judgment to
  be enforced against Mrs. Freidus, . . . or suffers
  the enforcement of a tax lien . . . this will be an
  act of default entitling Mrs. Freidus to proceed
  against the security.
    ¶ 3: [A] tax claim is an enforceable claim by the
  government. So that if Mr. Freidus obtains a stay
  of the enforcement of the judgment, or bonds a
  lien, this will not be an act of default.
    ¶ 4: [A]ny income tax claims which may be
  asserted against her by the United States
  Government with respect to

  income taxes for the years 1949 through 1964,
  inclusive, and for New York State income taxes,
  personal income taxes, for the years 1941 through
  1964, inclusive.

The Settlement Agreement also provided:

    ¶ 5: Upon such a default, Mr. Freidus shall be
  entitled to receive written notice thereof . . .,
  and he shall be entitled to ten days' notice if the
  amount of the default is less than $5,000, and
  thirty days notice if it is in excess thereof,
  during which period of time Mr. Freidus shall have
  the opportunity to cure the default. If he fails to
  do so, the escrowee . . . shall, if he is holding
  cash, pay over to Mrs. Freidus an amount thereof
  sufficient to cure the default, and if he is not
  holding sufficient cash, Mrs. Freidus may direct
  the sale of the securities which he [the escrowee]
  is holding in escrow.

It also provided that Freidus would indemnify Britt for any counsel fees that she might have expended "in defending or settling any claims which are covered by these indemnities, if Mr. Freidus fail[ed] adequately to defend or settle them. . . ." and that in the event of a default under the Settlement Agreement, which default was defined as:

    ¶ 6: Mr. Freidus permit[ting] a tax judgment to
  be enforced against Mrs. Freidus with regard to the
  tax years . . . recited above [1961 through 1964],
  or suffers the enforcement of a tax lien with
  regard to those years, or if Mrs. Freidus has to
  make expenditures for counsel fees against which
  she has been indemnified, this will be an act of
  default,

Britt would be permitted to proceed against the security. On June 26, 1967, Britt, Freidus, 601 West 26 Corp. and others entered into an addendum to the Settlement Agreement and on June 29, 1967, Britt, Freidus and 601 West 26 Corp. entered into a further agreement.

On February 15, 1968, 601 West 26 Corp., by Freidus, created a guarantee (the "Guarantee") which guaranteed Freidus' performance of the Settlement Agreement with Britt. The Guarantee stated that:

  601 [West 26 Corp.] consents that the obligations
  of Jacob Freidus (or any security therefor) may, at
  any time in whole or in part, be renewed, extended,
  modified, accelerated, compromises, settled or
  released by Claire Freidus. . . . Claire Freidus
  shall not be liable for failure to collect or
  realize upon Jacob Freidus' obligations or any
  security therefor, or any part thereof, or for any
  delay in so doing, nor shall Claire Freidus be
  under any obligation to take any action whatsoever
  with regard thereto. (emphasis added).

On March 29, 1968, 601 West 26 Corp. gave a mortgage to Britt, which was recorded in the office of the City Register of New York County on October 23, 1969 on reel 154, page 1067 (the "Mortgage"), to secure the February 15, 1968 Guarantee. It stated:

  [T]he mortgagor herein agrees that in the event of
  any default by said Jacob Freidus under the terms
  of said indemnity agreement the holder of this
  mortgage shall have the option to institute,
  without notice, and to maintain an action or
  actions of partial foreclosure for the sum or sum
  with respect to which said Jacob Freidus is then in
  default in connection with said indemnity
  agreement. (emphasis added).

The Mortgage agreement provides that there might be multiple defaults and partial foreclosures, each of which would be treated separately:

  [T]he mortgagor herein agrees that in the event
  of any default by said Jacob Freidus under the
  terms of said indemnity agreement the holder of
  this mortgage shall have the option to institute,
  without notice, and to maintain an action or
  actions of partial foreclosure for the sum or sum
  with respect to which said Jacob Freidus is then in
  default in connection with said indemnity
  agreement. Said actions of partial foreclosure may
  be maintained subject to the continuing lien of
  this mortgage. It being understood and agreed
  that the holder hereof may, from time to time, as
  defaults occur with respect to said

  indemnity agreement, maintain one or more actions
  of partial foreclosure hereof, as such defaults
  occur. (emphasis added).

On March 29, 1968, 601 West 26 Corp. was the fee owner of the property located at 601 West 26th Street, New York, New York.

By Judgment of Foreclosure and Sale, dated July 29, 1974, the Supreme Court of the State of New York directed a public sale of the property and further directed that the property be sold:

  [S]ubject to state of facts shown on an accurate
  survey, covenants, easements and restrictions of
  record, violations, zoning regulations, rights of
  tenants not parties to this action, and also
  subject to the lien of a consolidated first
  mortgage made by 601 WEST 26TH CORP. to THE NEW
  YORK BANK FOR SAVINGS, dated February 15, 1968
  recorded in the Office of the Register of the
  City of New York, New York County, on February
  18, 1968, in reel 277, page 412 . . . and also
  subject to the lien of a mortgage dated March 28,
  1968 made by 601 WEST 26TH CORP. to CLAIRE
  FREIDUS, recorded in the Office of the Register
  of the City of New York, New York County on
  October 23, 1969 in reel 151, page 1067.

On December 19, 1979, the United States Tax Court issued its decision in Freidus, et al v. Commissioner, Nos. 4317-63, 4319-63, 1205-68, 1206-68, and 1207-68, 1979 WL 3591 regarding Britt's federal personal income tax liability for tax years 1949 through 1960. Britt filed an appeal of this decision with the United States Court of Appeals for the Second Circuit, Claire Britt v. Commissioner of Internal Revenue, No. 82-4167 (2d Cir.).

On October 27, 1982, and November 19, 1982, the Internal Revenue Service made assessments of federal personal income tax, penalty and interest against Britt in the total amount of $6,791,987.39, based upon the United States Tax Court decision.

On June 20, 1984, Britt, through her attorneys, offered to settle the case of Claire Britt v. Commissioner of Internal Revenue, No. 82-4167 (2d Cir.). The offer for settlement stated:

  Mrs. Britt and her attorneys will cooperate fully
  in attempting to obtain for the Government
  payment of the $1,200,000 mortgage, which will be
  assigned to the United States immediately upon
  acceptance, and in no event later than 30 days of
  the date of the letter advising of acceptance of
  the offer.

It also provided:

  While the United States will be entitled to keep
  any property that has been surrendered to it
  pursuant to the Offer, the liability to the
  United States will be considered satisfied to the
  extent of the property so surrendered, and such
  surrendered amounts will reduce any continuing
  liability of Mrs. Britt.

On August 2, 1984, Britt, through her attorneys' letter confirmed the June 20, 1984 offer of settlement with clarifications. The letter stated:

  [W]e would appreciate your confirmation that upon
  the satisfaction by Mrs. Britt of the terms of
  the settlement offer, all Federal income tax
  liabilities of Mrs. Britt for the years 1949
  through 1961, including any interest and
  penalties, will be extinguished, and that the
  United States will not, in connection with such
  Federal income tax liability seek to recover any
  assets from Mrs. Britt or from those who have
  purchased her assets pursuant to the settlement
  agreement.

By letter of August 7, 1984, Glenn L. Archer, Jr., Assistant Attorney General, by Mildred L. Seidman, Chief, Office of Review, Tax Division, Department of Justice, accepted Britt's offer of settlement, as submitted on June 20, 1984 and confirmed on August 2, 1984, stating that:

  [A]ll Federal income tax liabilities of Mrs.
  Britt for the years 1949 through 1961, including
  interest and penalties, will be extinguished, and
  the United States will not, in connection with
  such Federal income tax liability seek to recover
  any assets from Mrs. Britt or from those ...

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