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MEMORANDUM\

TO: HBM

FROM: ED
DATE: FEBRUARY 29, 1996

RE: V&M MANAGEMENT, INC. - TELEPHONE CONVERSATION WITH VICTOR ARANOW ON FEBRUARY 21, 1996

I. indebtedness Owd to LtN
A. Background Information on the L&N Promissory Notes
V&M Management, Inc. ("V&M") is the owner of real property in Roxbury, Massachusetts, utilized as residential apartment housing and known and numbered as 1-5-9 Greenwich St.;
10-22-26-30-34 Hammond St.; 53-57 Windsor St.; 560-570-580 Shawmut Ave.; and 1825-1829-1833-1837-1841-1855 Washington St. (collectively, the "Property").
Alphonse Mourad ("Al") is the sole shareholder and president of V&M. Al and V&M borrowed $255,5001 from Jason Long ("Long"), as evidenced by six promissory notes and attendant mortgages which encumber the Property. Those notes and mortgages were assigned to, and are now held by, Mario Nicosia and Judith Moriarty as Trustees of the L&N First Mortgage Realty Trust ("L&N").
The promissory notes are described as follows:
1) Dated December 21, 1984: $50,000 principal, 24% interest. Secured by a third mortgage.2 Due on February 21, 1985. Any amounts unpaid on the due date bear interest at 5% per month.
2) (V&M version) dated March 29, 1985: $50,000 principal;
Interest rate is the greater of 18% or a variable rate
' Al and V&M borrowed a total of $355,500 from Long, but a $100,000 note was paid in full in July of 1989 (according to Al) , and does not appear to be at issue.
2 The lien seniority of each mortgage is stated in each note, and may not be the actual priority. The first and second mortgages on the Property are held by Winter Hill Federal Savings Bank, and are not in dispute.
(prime plus 7%). Secured by a fourth mortgage. Due on
March 29, 1986._______________________________>.
, i _ ^
(L&N version) March 29, 1985: $50,000 principal; 24%. Secured by a fourth mortgage. Due on March 29, 1986^
3) Dated May 9, 1985; $55,000 principal; 24% interest. Due on June 9, 1985. Secured by a fourth mortgage.
4) Dated August 14, 1985; $60,000 principal; 24% interest. Due on August 14, 1986. Secured by a fourth mortgage. *A1 says this was paid in full in December of 1991.
5) Dated January 23, 1986; $25,000 principal; 24%
interest. Due July 23, 1986. Secured by a fourth mortgage.
6) Dated March 18, 1986; $15,500 principal; 24% interest. Due September 18, 1986. Secured by a fourth mortgage.
B. Issues Concerning the L&N Promissory Notes
1. The amount of indebtedness owed to L&N
There is significant disagreement over the amount paid by V&M to L&N, and the amount outstanding to L&N. V&M maintains that since 1989 it has made payments totalling $614,000 on the foregoing notes. L&N alleges that they are owed over $1,200,000. (The amount of L&N^s demand as to the amount owed to it changes during the various state court suits.)
Robert Munro, CPA has calculated t-hal- 6-13.500 is due on the 18% note. (Mr. Munro has performed accounting services for V&M since approximately 1989, and continues to do so.) Nicosia alleges that $350,000 is owed on the 18% note, but now claims to be owed substantially more, pursuant to the 24% note.
None of the mortgages have been discharged even though notes were paid in full.
Jim Dillon, Jr., Esq. has discovery on this issue, including ten pages of accountings. Those accountings reflect that payments were applied to the most recently executed note first.
2. The 24% note may be a forgery
The two notes at issue are the notes dated March 29, 1985, one of which bears an 18% interest rate and the other a 24% interest rate. Al claims that the 24% note is forged (and Aranow agrees). The notes are similar in many respects, but there are dirrerences in me manner in which they were executed. For" example, all of the notes between Al, V&M and Long were signed by Al and Long except for the 24% note, which Long did not sign
2
(legally, it is not necessary for the lender to sign). Also, Roger J.F. Lehrberg, Esq. ("Lehrberg") notarized each note except for the 24% note (which no one knows who notarized), and the individual pages of the 24% note are not initialed, as were the pages of the other notes.
Furthermore, the 18% note was relied upon by L&N as the basis of a 1988 foreclosure action brought by L&N in Boston Housing Court. Gt these pleadings. The 24% note was ncTE~ mentioned in that suit. (Lehrberg represented L&N in the 1988 foreclosure action.) The 24% note was first produced by~ Kosenoerg in a 1995 superior Court action.(Rosenberg represents L&N in V&M^s bankruptcy case, too).
Michael Altaian, Esq. ("Altaian"), of Rubin & Rudman, represented V&M and Al in a state court action coaunenced in 1996 for the purpose of enjoining a foreclosure sale scheduled by L&N. (A Biotion for a restraining order was denied, and V&M's bankruptcy was filed the next day). He has a copy of Long's loan ledger.
Lehrberg represented Long previously, and he is now with L&N. It is unclear whether Long is now loyal to L&N.
Long has changed his story in the past few years. Earlier, he said that the 18% note was the only note in existence. Now, he claims the 24% note is the proper note. His basis for this is that the ledger shows three payments, soon after the loan occurred, for $1,000 each, made one per month for three months. That amount is consistent with interest only payments on a 24% note.
Long has no explanation as to how or why there are two notes, except that maybe the paperwork was mixed up at the closing. He has no explanation as to why Lehrberg witnessed the 18% note (as well as five other notes) and not the 24% note. His only support is that he relies on his record that $1,000 was paid monthly.
As to the forgery issue (on the 24% note) - a Lehrberg affidavit says that he (Lehrberg) drafted the 24% note. Altman says that we should get a handwriting expert (Jeff Upton knows a couple). Also, even if the signature is not forged, it is possible that the note was ^doctored', i.e., as we are only dealing with copies and not originals, it is possible that Al's signature was cut from another document and appended to the 24% note.
II. Tax Issues
A. Background Information for the Tax Dispute3
From some date prior to 1975 through a certain date in 1979, the Debtor's Property was owned by the Westminster Place, Inc., which were corporations formed under Mass. Gen. L. Ch. 121A ("121A") and Willard Place, Inc. HUD became a mortgagee in possession of the Property in 1979 because those corporations could not pay the mortgage payments.
On December 31, 1981, HUD sold the Property to Inge-Vasquez Development Company, Inc. ("I&V") via public auction. I&V were not told that they were subject to 121A4 or BRA restrictions.5
At the time of the sale, HUD knew that the BRA had to approve the sale, but HUD did not tell the BRA about the sale because the Property could not meet safety and health standards (which the BRA would require in order to approve the sale).
In addition, HUD failed to inform I&V at the time of the sale that there was $737,000 in back 121A taxes due on the Property.
In 1982, Al bought the shares of I&V -- there was a stock transfer and a corporate name change to V&M Management, Inc. At that time, V&M was not told it was subject to 121A.
V&M did not receive a tax bill for 1982. In June of 1983, V&M wrote to the Board of Assessors to find out about the tax bills. V&M was told at that time that it was not subject to 121A, but was subject to Mass. Gen. L. ch. 59 ("59") (ordinary property tax status).
In addition, also in 1983, V&M wrote to HUD for a determination of V&M's tax status. In June of 1983, Kenneth Salk, a HUD official, wrote a letter to V&M stating that it was not subject to 121A, even though Salk knew that 121A may have applied. As a result of this letter, Al met with the City of Boston. A July 13, 1983, letter was sent to V&M by Mr. Moynihan of the Assessor's office, stating that the Debtor was subject to
3 Aranow prepared a complaint with lengthy exhibits to be used during this bankruptcy to determine the 121A tax issues. He will be forwarding a copy to us.
4 As an aside, 121A corporations are chartered under 121A, and approved by the BRA. I&V was incorporated pursuant to Mass. Gen. L. Ch. 156B, and not 121A.
5 The BRA restriction is that the Property cannot be sold without the BRA^s approval. The Registry of Deeds7 (registered land) records show a notation to the effect of the following:
"deed restriction to BRA". This may be deemed to be inquiry notice. (I&V^s lawyer probably had a duty to investigate this deed notation further.)
59 taxes and not 121A. Aranow says that this letter constitutes a revenue ruling or letter ruling (the "Letter Ruling"). (See Exhibit W of the Appellate Tax Board Amended Petition Under Formal Procedure (H&K's files - black binder states "121A tax case" on spine.) (All exhibits identified in this Memorandum refer to that binder.) V&M paid tax bills (based on the amount due under 59) for the years 1982 through 1985.
Attempted sale to Shauir Corporation:
When V&M tried to sell the Property to the Shamir Corporation in 1986, Al asked HUD if V&M was subject to 121A. HUD said V&M was not subject to 121A. However, this statement was false, and Aranow says that HUD lied to Al on that point.
At a BRA hearing to consider the Shamir sale, Saul Shapiro's6 main point in opposing approval of the sale was that Al misappropriated $2,000,000 in 1984 from V&M. The BRA found that Al can do anything he wants with the corporation's money -its his (as the sole shareholder). Get Al's copy of this transcript. Al also asked the BRA if V&M was subject to 121A. The BRA said yes. Al said that even if V&M was subject to 121A, he would be able to pay nearly all the taxes owed from the sale of the Property.
During the BRA sale-approval proceedings, Al intended to negotiate the amount of back taxes, penalties and interest due, and then pay same from the sale proceeds.
The BRA did approve the sale to Shamir, but only after a lengthy 18 month time period. During this time, Al could not refinance, so he borrowed from Long to keep V&M afloat.
By the time the BRA approved the sale, the sale collapsed because it was no longer profitable for Shamir. Shamir then sued V&M on a breach of contract cause of action. At the trial in that action, the judge found that the sale lapse was due to BRA'S delay, and not V&M's fault.
(See below for change in V6M's tax status from 59 to 121A)
Attempted reft/wrap mortgage from Grey stone
When the sale to Shamir fell through, Al sought to either refinance or obtain a wrap around mortgage, from Greystone Funding Corporation to pay off all the outstanding loans. Al expected to be able to settle with the DOR for $700,000. $500,000 would be paid from the Greystone loan, and V&M would grant the DOR a second mortgage on the Property in the amount of $200,000. The Greystone funding was conditioned on V&M winning the Shamir litigation. Days before the Greystone closing, the DOR said that it would not consummate the deal.
6 Saul Shapiro represented the BRA in pre-petition litigation, and continues to represent the BRA during V&M's bankruptcy. According to Aranow, he is not honest, and personally dislikes (hates) Al.
For years, the parties attempted to resolve the tax issue. Negotiations failed, and V&M sued in 1989 in Suffolk Superior Court for declaratory (that 121A did not apply) and injunctive relief, and for an accounting of the taxes due, if any. Prior to this suit, the Debtor's requests for abatements of interest and penalties were denied and the resulting actions were pending in the Appellate Tax Board for a long time, and did not appear to be going anywhere.
In 1990, the BRA was working with the Attorney General to remove Al as the owner of the Property.7 Al never played politics, was abrasive and upset everyone. Three weeks before Shannon ran for Attorney General, Al staged a demonstration at which the media coverage was substantial.
Shannon lost that election. Subseguently, the AG sued V&M based on claims for, inter alia, health code violations. The Superior Court ruled against the Attorney General on its motion for summary judgment, stating that the AG's claim was incorrect as a matter of law, and that the Attorney General should not have brought the suit. GET a copy of that written decision.
In regard to the tax litigation, there were several rulings in which the Superior Court found that V&M was subject to 121A because 121A ran with the land. On February 3, 1995, Superior Court Judge Catherine White held that 121A applied to V&M and a hearing must be held to determine the precise dollar amount of taxes due to the City of Boston. In August of 1995, a different judge ^rotated' into that case (an older man, maybe named Barshaw). That judge sent the matter to the Appellate Tax Court. The City and the BRA filed a motion for a $3,500,000 judgment in that case. See Exhibits TT and UU for Orders on 121A issues.
Exhibit UU is a 1990 Order on summary judgment by Superior Court Judge Owen Todd. That Order found that V&M is subject to 121A, and that Moynihan's (on Board of Assessors) statements to V&M that 59 applied (and not 121A) do not constitute a contract between the City of Boston and V&M for V&M to be free of 121A status. No appeal was taken from that Order.
-Aranow's methods for getting around this decision: the Todd decision does not mention the Letter Ruling. That issue is at the Appellate Tax Board now. Moynihan can issue informal decisions, as a member of the Board of Assessors. There is an issue whether the Letter Ruling is within the jurisdiction of the Appellate Tax Board, and not the Superior Court (so no res judicata issue). (HBM - we don't want to overcome the finding that 121A applies.)
-Also, the Todd decision does not state when V&M became subject to 121A. Thus, that issue may still be litigated. It may have commenced in either 1981 (when I&V purchased the
7 During and after 1990, the BRA had a master plan, which does not include the Mandela apartments or Al.
Property) , 1986 (when Cohen changed the tax status) , or 1990 (on the date of Todd's Order).
The procedural change in V6M's tax status from 59 to 121A:
On July 9, 1986, Richard Cohen, of the Boston Board of Assessors, unilaterally and without notice changed the Debtor's tax status from 59 to 121A, retroactively back to 1982. This caused the Debtor to immediately become liable for over $443,000 in back taxes, interest, and penalties.
-The method by which Cohen changed the tax status from 59 to 121A was by handwriting on the ledger card at the Assessor's Office (he scribbled out the "59" and handwrote "121A"). Aranow deposed Cohen on this issue - get the transcript. See Exhibit KK, X, and Y. V&M got no notice of this change in tax status. After Cohen changed V&M's tax status, V&M started to get 121A tax bills. (Per Aranow, this action by Cohen effectively overruled the Letter Ruling which, according to applicable law, cannot be overruled without formal procedures being followed.)
On this issue, see exhibits:
Exhibit KK: these are the ledger cards from the Assessors Office - one card has the tax status crossed off, one does not.
-V&M's Property was considered to be two parcels of real estate at the Assessor's Office, and each had its own card. Those cards were stapled together, considered together, and 121A was made to be retroactive on both.
-In Cohen's deposition, he admitted making the notation - he said, effectively, that "that's how we operate - we change the tax if the status is changed".
-Cohen is very particular with his words, and will not respond to a question unless it is precisely worded.
Also see the following exhibits:
Exhibit EE - Tax bill under 121A.
-Calculation of 121A assessment for 1983. HUD (as the prior owner) still received 121A bills from the City and BRA, but did not send the bills to V&M.
Exhibit PP - Schedule of retroactive adjustments of money paid under 59. Interest and penalties were assessed retroactively back to 1982. Between $250,000 and $270,000 had been paid under 59 for the years 1982 through 1985. Under the reassignment, a large percentage of that was applied to interest and penalties.
Exhibit QQ - This letter arose because Cohen changed the tax status. The City of Boston's argument is contained in the second paragraph of that letter -- that V&M was simply taxed erroneously.
Abatement issue (1981-1985 taxes, interest and penalties)
Al filed a request for abatements for penalties and interest for the years 1981 through 1986, which were denied. See Exhibit RR. He then went to the Appellate Tax Board (see binder in file - it contains the appeal of the abatement denials). The only issue was the dollar amount of taxes owed.
See Exhibit. SS. An abatement was requested only as to interest and penalties, not as to the principal tax amount owed. According to Aranow, this failure to request an abatement of the principal amount is not fatal, according to an Exxon case (cited in the tax binder) , because one does not need to set forth every ground upon which one relies in an abatement request.
No abatements were sought for 1987 through 1990 (check -Aranow is not positive about the exact years).
*Per HBM: use 505 here - Feeney decision, Ledgmere - get Bankruptcy Court to take jurisdiction of Appellate Tax appeal.
B. Summary of the Tax Issues
The issues on the taxes are:
1) The 1975 amendment to 121A.
2) Legality of retroactively assessing taxes for the years 1981 through 1985; and
3) The actual dollar amount of taxes due.
The tax claims are only against the DOR and the City of Boston, and not the BRA.
Few facts are contested in regard to the tax controversies -there are predominately questions of law.
1) The 1975 Amendment to 121A
A Portion of the Tax is Based on the Value of the Property:
The tax due under 121A (currently) consists of 1% of the assessed value of the real property, plus 5% of the property's income. There is an issue as to the fair assessed value of the real estate each year. V&M says that the real estate was over valued every year. The City of Boston sends its assessment each year to the City tax board.
Tax on Property's Income:
121A was enacted in approximately 1960. At that time, the income portion of the tax was equal to a percentage of the gross income received from any and all sources. (However, according to John Hutchins, even prior to 1975 governmental income was not included in 121A's 'gross income'. Gat case lav on this.)
In 1975, an "Acts and Resolves" was enacted amending 121A.8 That law provided that the tax for the income aspect of the statute was equal to a percentage of all income derived from non-governmental sources. Thus, income from HUD (i.e., the tenant's rent subsidies) was not included - only the tenant paid portion.
Under the 1975 amendment, taxpayers had six months to choose to be subject to'the amendment (i.e., opt-in) by registering their choice at the Secretary of State's Office9) . There is no legislative history as to why one needed to opt-in to obtain this treatment, which is clearly beneficial and would not be refused by any entity qualified to select such treatment. It is almost impossible to prove that one either opted-in or failed to. The burden of proof is probably on the taxpayer. However, there may be a presumption that a corporation acts in its best financial interest (there is no reason why V&M would not choose to be subject to 121A). According to Aranow, failure to opt-in to 121A estops the government from claiming that the taxpayer is not subject to the 1975 amendment.
The 1975 Acts and Resolves amendment was subsequently codified into the Mass. General Laws (at chapter 121A). However, the only part carried over and included in the Mass. General Laws was the new definition of gross income (excluding income received from governmental units), and not the opt-in requirement. (Some Acts and Resolves never become codified into the Mass. Gen. Laws.) In addition, the legislative notes contained in Mass. Gen. L. 121A (contained immediately after the statute) do not mention that the definition of ^gross income' was changed in the 1975 amendment. Thus, one was not on notice to further investigate to see if any prior codification of the law applied to him.
There is a Constitutional argument here, based upon a lack of notice in the Mass. Gen. L. version of the 1975 amendment. The argument is that V&M's due process was violated -- one is entitled to rely on the codification of the law. (Or, is one required to know the underlying Acts and Resolves? There is little law on whether the Mass. Gen. L. or the Acts and Resolves controls.)
8 Get a copy of the Acts and Resolves. It can found at Social Law - look under "Acts and Resolves", 1985, 121A 10, paragraph 21 (or so).
9 Find out where the opt-in records are kept. Aranow is not sure whether V&M opted-in or not. When he looked at this issue previously, he said that the records at the Secretary of State are not kept in an orderly manner.
V&M's argument is that an owner should be able to rely on the law on the books at the time it buys real estate, and not have to rely on whether a prior owner opted-in.10 $2,000,000 of the tax claim is eliminated if this argument wins (the total claim is approximately $3.5 to $3.75 million).
The City of Boston's position is that if the owner did not opt-in, then it is bound by the pre-1975 tax law. (However, Mass. Gen. L. does not state that.)
Other Matters Regarding 121A:
Res judicata issue on whether 121A applies
Aranow discussed a res judicata issue which may bar one from relitigating whether 121A applies to V&M, as there is an order stating that 121A applies and that it runs with the land.
(Per HBM - we want 121A to apply. Taxes are lower under 121A then 59 - under 59, one is assessed a certain percentage of the assessed value of the real estate. This percentage is higher than that utilized under 121A, which also contains an income portion.)
We should concede that 121A applies from 1990, maybe 1986. There is, however, an issue as to whether the 1975 amendments apply. In addition, we might want to leave the 121A status issue with the Appellate Tax Board. We should file a 505 action for the purpose of requesting the Bankruptcy Court to decide, assuming that 121A applies, what is the amount of tax due? In that action, there are two areas to litigate: a) abatement/retroactive tax issues; and b) the 1975 amendment issue.
121A only applies, if at all, for 15 years
According to the Acts and Resolves, 121A status is limited to 15 years - V&M's time is up in December of 1996. If V&M is taxed under the 1975 amendment, that status only applies for 15 years, and then V&M is taxed under 59. Note that the 15 year limitation is contained only in the Act and Resolves, and was not carried over into the Mass. Gen. L. codification of the 1975 amendment to 121A.
2) Retroactive change of VtM's tax status
First Argument:
There is an official Letter Ruling, dated July of 1983, signed by an official, which is binding and cannot be overturned
10 In 1975, the Debtor's property was owned by the Westminster and Willard corporations, which were run by a church, HUD became a mortgagee in possession in 1979.
without formal procedures, notice, etc. However, Al was on notice, and cannot rely on an incorrect statement by HUD, the BRA, or the City to change V&M's tax status.
Although Superior Court Judge Todd, in 1990, found that there was no contract between the City and V&M by virtue of the Letter Ruling to. exempt V&M from 121A, the Letter Ruling was not known about at that time. There is a Supreme Court case (out of New York) that states that notice is required for actions similar to Cohen^s act of changing V&M's tax status -- a mere administer ial act is improper and insufficient. (In that case, funds were escheated to the state.)
Second Argument:
Even if the first argument (above) fails, any interest and penalties incurred for years prior to the time that the 59 status was revoked (i.e., 1986) should be abated. The taxes were paid through 1985 based upon 59, and then refunded to pay the tax due under 121A (reassignments) , which paid for about two years of taxes. The City did not forgive interest or penalties. If the interest and penalties were abated, and paid to post 1985 taxes, then interest and principal would significantly decrease. The Debtor did file an abatement request for 1983 and 1984 - that is still pending. (See the Moehill case - a Mass. case - which states that the DOR must apply payments to principal and not interest and penalties (per Aranow).)
Other Issues:
BRA claims that Al looted from V6M.
The BRA claims that V&M did not comply with 121A requirements in general. V&M's response is that the BRA was on notice that the real estate was to be sold in 1981, from HUD to I&V, and that there is a system whereby Boston reviews for taxes upon sales of real estate. (However, an estoppel argument cannot be used against the government.) Shapiro (who represents the BRA prior to and during the V&M bankruptcy) says that the BRA has 121A supervisory authority. Aranow says that if that is true, then the BRA had a fiduciary duty to notify V&M about the tax issue.
In 1986, there was a BRA hearing to consider V&M's proposed sale to the Shamir Corporation. Get this transcript. The BRA counterclaimed that V&M did not pay taxes because Al looted V&M.
Priority of Taxes in Bankruptcy
If 59 applies, then the City holds a first priority lien. In addition, the amount owed will be greater. (Don't argue that 59 applies.)
If 121A applies, then the priority status is just that of a personal property/excise tax, and not a priority tax lien.
(Pursuant to the bankruptcy code, income generated taxes lose priority after three years, and are deemed to be general unsecured claims.)
The DOR has filed a lien - we need to check the status of the lien^s perfection (the levy and executions on these are usually performed improperly).
3) Computation of the tax due
The actual dollar amount due has never been determined by a court, and therefore this issue is open to debate.
************************************ PER HBM:
For April l, we need to:
1. Challenge the L6M debt
2. File a 505 complaint
************************************
Litigation (partial):
U.S. District Court, District of Massachusetts, C.A. No. 95-12272-REK. V&M and Al v. City of Boston; V&M, third party plaintiff v. HUD, third party defendants.
-Motion for preliminary restraining order denied by Judge Keeton December 29, 1995.
Suffolk Superior Court, C.A. No. 96-0036D. V&M and Al v. L&N. Cause of action - notes paid.
-Motion for preliminary injunction to stop foreclosure scheduled for January 9, 1996, denied. (Chapter 11 filed January 9, 1996.)
Attorney for V&M and Al: Michael Altman at Rubin & Rudman.
Suffolk (Boston) Housing Court, C.A. No. CA21919. Long v. Al and V&M. Suit on notes. The 18% (and not 24%) March 29, 1985 note is attached as an exhibit.
Middlesex Superior Court, C.A. No. 95-____. Al and V&M v. Long and L&N. Action for declaratory and injunctive relief, re:
usury laws violated, 93A claim.
121519



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