Estate Creditor’s Lien Inferior to IRS Claim

In re Estate of Forgett, No. A-0443-17T4, 2019 WL 4165062 (N.J. Super. Ct. App. Div. September 3, 2019

Lisa Farina, a creditor of the estate, appealed orders declaring the estate to be insolvent, approving the estate’s final account, and directing distribution of the estate’s assets. Farina argued that (i) her judgment against the estate had priority over other creditors, including the IRS, and (ii) a stock purchase agreement (SPA) between the estate and one of the co-executors should be voided.

The decedent owned and operated Service Group, Ltd. (Service Group). Farina was an employee of one of Service Group’s subsidiaries. In 2000, prior to the decedent’s death, Farina filed a worker’s compensation action against the decedent after sustaining injuries in a fall in an uninsured lot owned by the decedent individually.

The decedent died in 2002. Farina obtained a $230,000 judgement against the estate in 2005.

The decedent’s son, Valmore J. Forgett, III (Val III) and a friend, Raymond Bentley, served as co-executors. In addition to Service Group, the decedent owned a commercial building in Union City and an investment account with PNC Bank (PNC). At the time of his death, the decedent’s liabilities included loans owed to PNC that were secured by liquid assets and by a mortgage on the Union City property. The decedent also owed federal personal income taxes of $127,000.00 for 2002.

PNC commenced two actions, one seeking to foreclose its mortgage on the Union City property, and the other seeking to take inventory and assets from one of Service Group’s subsidiaries, in which PNC had a security interest. When the estate could not find a buyer for that subsidiary, co-executor Val III offered to purchase the stock for nominal value and assume the debt owed to PNC. The SPA provided that Val III would pay the estate $100 for the Service Group shares and assume responsibility to pay PNC in full.

In January 2004, co-executor Bentley filed a verified complaint seeking instructions regarding the estate’s proposed sale of its shares in Service Group to Val III. The pleading referred to the poor financial circumstances of the estate. A copy of the SPA was attached to the complaint, which was served on Farina, whose claim was also pending. Farina did not file opposition. The trial judge entered judgment approving the SPA after noting that no opposition papers were filed.

Neither the IRS nor Farina took any action between 2005 and 2010 toward collecting the amounts owed to them by the estate. In 2011, Farina began to pursue collection of the judgment. In 2012, Farina filed a verified complaint against the co-executors and their attorneys for their alleged roles in diverting assets from the estate. The court entered an order to show cause in September 2012, after which Farina voluntarily dismissed the verified complaint. Despite the dismissal, the judge directed the estate to file a verified complaint seeking a judgment of insolvency and instructions.

The estate filed that pleading in April 2013. In May 2014, Farina filed a motion for partial summary judgment, seeking an adjudication that her claim was superior to the claims of other creditors and also seeking to void the SPA. The estate argued that Farina was not a judgment creditor under N.J.S.A. § 3B:22-2(f) because her judgment was obtained after the decedent’s death, rendering her a general claimant under N.J.S.A. § 3B:22-2(g). The trial judge agreed and also ruled that there was no basis to disturb the 2004 judgment approving the SPA.

One of the judges retired and in August 2017, a successor judge issued an order approving the final account, declaring the estate to be insolvent and directing distribution of the estate assets to counsel fees N.J.S.A. § 3B:22-2(b) and the IRS, N.J.S.A. § 3B:22-2(d). The distribution order did not include a payment to Farina, a general creditor under N.J.S.A. § 3B:22-2(g).

The Appellate Division affirmed. Regarding the SPA, the Appellate Division cited N.J.S.A. § 3B:14-36, which provides that a sale or encumbrance to a fiduciary is voidable by any person interested in the estate, except one who has consented after fair disclosure unless (a) the will or a contract entered into by the decedent expressly authorized the transaction or (b) the transaction is approved by the court after notice to interested persons. Accordingly, the 2004 judgment approving the SPA barred Farina’s request to void the SPA.

The Appellate Division also found that Farina’s argument that her judgment had priority over other creditors, including the IRS, was without merit. The Appellate Division noted that the priority of claims in an insolvent estate is fixed by N.J.S.A. § 3B:22-2, and that “debts and taxes have priority over a creditor who obtained a judgment against a decedent before his or her death, and those creditors have priority over those who obtained a judgment against an estate or personal representative.” N.J.S.A. § 3B:22-2(f) and (g) provide that a judgment against an executor or administrator, unlike a judgment against a decedent in his lifetime, is not entitled to a preference over other claims payable out of the assets of a decedent’s estate.

The Appellate Division also rejected Farina’s contention that the IRS was required to file notice of its claim in order to have priority under N.J.S.A. § 3B:22-2(d). The Appellate Division noted that 26 U.S.C. § 6321 provides, “If any person liable to pay any tax neglects or refuses to pay the same after demand, the amount shall be a lien in favor of the United States upon all property and rights to the property, whether real or personal, belonging to such person.” 26 U.S.C. § 6323(a) provides (emphasis added) “that the lien imposed by § 6321 shall not be valid against any purchaser, holder of a security interest, mechanics lien or judgment lien creditor until notice thereof has been filed by the Secretary.” The court concluded that because Farina never had a judgment against the decedent, she had no lien against his property prior to his death and was therefore a general claimant of the estate and that, with or without filing its lien, the IRS had priority over Farina’s judgment under N.J.S.A. § 3B:22-2(d).