In the Matter of Mary Jane Lee, Individually and Doing Business as "The Breakers." O. W. Irwin, Trustee in Bankruptcy v. United States

We have here a contest over the proceeds ($14,093.37) of the sale of a California liquor license used at a restaurant operated by Mary Jane Lee and her sister Betty Jean Parker in Monterey, California, known as “The Breakers.”

The government has a claim for estate taxes due from the estate of Donald Roy Bailey. For this, Mrs. Lee and her sister as co-administratrices are personally liable. Bailey was the father of Mrs. Lee and Mrs. Parker.

In 1961 Bailey owned a motel in Pacific Grove. He transferred it to Mrs. Lee subject to a first trust deed held by a third party. The sole consideration was a purchase money second trust deed in the amount of $25,500. (That is, this was the balance due at the time of his death in 1962.)

Soon after the father’s death, the sisters began their restaurant business, unconnected with the motel. A liquor license was needed. This required money. To raise the money, Mrs. Lee obtained a loan in the amount of $29,000 on her equity in the motel by giving a third trust deed as security. At the time she obtained this loan, the entire amount of the note secured by the second deed of trust in favor of Bailey’s estate was due and payable.

Out of the proceeds…

dissenting:

I dissent, and would affirm the District Court. The facts are undisputed. The trial court found, applying California law:

This case is controlled, as the government urges not by tax law, nor bankruptcy law, but the California law of constructive trusts.

Section 2224 of the California Civil Code states:

*1252 The applicability of this equitable rule to the present case is clear upon its face. The bankrupt-administratrix violated “a trust” (Estate of Walker, 125 Cal. 242 , 57 P. 991 (1899)) and thereby gained “a thing (the liquor license) which otherwise” (if she had performed her fiduciary duty and paid over the $25,000 toward discharge of her debt) the estate would “have had” (to the extent of the $12,000 paid for the license). She therefore must be held, as the district court held, to be the constructive trustee of the license for the benefit of the estate, and her trustee in bankruptcy (appellant here) has no “better right thereto.”

The language of In re Loheide, 17 Cal.App. 475 , 120 P. 56 (1911), is here applicable:

See also California Civil Code, § 1573, and Cardozo v. Bank of America, 116 Cal.App.2d 833 , 254 P.2d 949 (1953), where constructive fraud by an…

468 F.2d 1249 72-2 USTC P 12,882 In the Matter of Mary Jane LEE, individually and doing business as "The Breakers." O. W. IRWIN, Trustee in Bankruptcy, Appellant, v. UNITED STATES of America, Appellee. No. 25063. United States Court of Appeals, Ninth Circuit. Aug. 28, 1972. Rehearing Denied Sept. 22, 1972. Vernon D. Stokes (argued), James M. Conners, San Francisco, Cal., Harold C. Kruse, Monterey, Cal., Donald G. Hubbard, of Thompson & Hubbard, Monterey, Cal., for appellant. John M. Youngquist, Asst. U. S. Atty. (argued), James L. Browning, Jr., U. S. Atty., San Francisco, Cal., Lee A. Jackson, Crombie J. D. Garrett, Attys., Johnnie M. Walters, Asst. Atty. Gen., Washington, D. C., for appellee. Before CHAMBERS and BARNES, Circuit Judges, and JAMESON, * District Judge. CHAMBERS, Circuit Judge: 1 We have here a contest over the proceeds ($14,093.37) of the sale of a California liquor license used at a restaurant operated by Mary Jane Lee and her sister Betty Jean Parker in Monterey, California, known as "The Breakers." 2 The government has a claim for estate taxes due from the estate of Donald Roy Bailey. For this, Mrs. Lee and her sister as co-administratrices are personally…