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6339 - Annotations - Effect of Faulty Transfer |
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Levy Additional Information:
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Effect of Faulty Transfer |
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6339
Annotations: Effect of Faulty Transfer- Levy Certificate of
[79-1
USTC ¶9101]The National Bank and Trust Company of (CA-7),
U. S. Court of Appeals, 7th Circuit, No. 78-1232, 589 F2d 1298, Paul
A. Murphy, 211 Lafayette Bldg., South Bend, Ind. 46601, John D.
Krisor, Jr., Krisor, Zimmerman & Nussbaum, 2416 American Nat'l
Bank Bldg., South Bend, Ind. 46601, for plaintiff-appellant. FAIRCHILD,
Chief Judge. This
is an appeal from a judgment for the defendant United States in a
wrongful levy action brought under 26 U. S. C. §7426(a)(1) and
from the dismissal of the pendent claims against the other
defendants in the action. The
facts are as follows: National Bank and Trust Company of Thereafter
the Internal Revenue Service (IRS) made an assessment of unpaid
taxes against Smith and filed notices of a tax lien. After
unsuccessful efforts at collection, the IRS seized the van. In
accordance with 26 Norris
subsequently sold the van for $2,500 to Bobby Acrey, who applied
for and was issued a certificate of title by the Indiana Bureau of
Motor Vehicles. This certificate of title showed Valley Bank and
Trust Company as the first lienholder. The prior lien of National
Bank and Trust was not shown on the certificate. National
Bank and Trust filed a wrongful levy action against the On
appeal, the Bank asserts that a wrongful levy occurred through the
operation of §6339(a)(5), which by voiding the prior certificate
of title also automatically destroyed the Bank's lien--that is,
the certificate of sale issued to Norris resulted in the sale to
him of all interest in the van, including the Bank's security
interest, not just the taxpayer's (Smith's) interest. This result,
it alleges, violates its due process rights because proper notice
was not given before its property was taken. The Bank asserts that
the rights of an innocent third party are entitled to more
protection than those of a delinquent taxpayer, and that the
giving of proper notice to interested parties can be accomplished
without an excessive additional administrative burden. The Bank
also argues that the district court abused its discretion in
dismissing the pendent claims. The
government as appellee argues that the Bank is not entitled to
relief either on the basis of a wrongful levy/due process
violation, or on the basis of a statutory right to written notice
as the owner of the van under §6335. The government argues that
there was no wrongful levy because nothing was seized and sold but
the taxpayer's interest; thus, since no interest of the Bank was
taken by the government, no basis for a due process challenge by
the Bank exists. The government concludes, therefore, that the
district court lacked jurisdiction. In
addition, the government argues that the Bank was not an owner of
the van but a lienholder; thus, it was not entitled by statute to
notice beyond publication. The government maintains that the
notice given was sufficient in spite of the model year error.
While admitting that the Bank's interest as a lienholder may have
been seriously impaired, the government argues that any impairment
was not the result of the issuance by the IRS of the certificate
of sale, but instead was the result of the issuance of a lien-free
certificate of title by the Indiana Bureau of Motor Vehicles. The
government states that the Bank's construction of §6339(a)(5)
would impute an unconditional intent to Congress and is
inconsistent with the case law, statutes, and treasury
regulations. We
hold at the outset that the allegations made by the Bank properly
invoked jurisdiction of the claim against the The
Bank states that the basic issue on appeal is the constitutional
adequacy of the notice it received of the seizure and sale. We
cannot agree. Before the notice issue is reached, there must be a
finding that the Bank was an owner of the van and thus entitled by
statute to written notice, or that an interest of the Bank was
taken by the IRS. The determination of whether an interest of the
Bank was taken rests ultimately on a determination of the proper
construction of §6339(a)(5). We
conclude first that the Bank was not an owner of the van under The
As
early as 1890, the Supreme Court recognized that a certificate
issued at a tax sale transferred only the interest of the
delinquent taxpayer: "If
Congress intended to invest the collector with authority to sell,
by the summary process of notice and publication, the interest of
any other person than the delinquent distiller, the statute would
have described a certificate that would pass the interest of such
person in the property sold. The provision that the certificate of
purchase shall pass the interest of the delinquent in the property
sold by the collector excludes, by necessary implication, the
interest of any other person." Mansfield
v. Excelsior Refining Co., 135 U. S. 326, 340, 10 S. Ct. 825,
830, 34 L. Ed. 162 (1890), quoted in Blacklock v. United
States, 208 U. S. 75, 88, S. Ct. 228, 52 L. Ed. 396 (1980), quoted
in Blacklock v. United States, today. See e.g., United
States v. Sage, 566 F. 2d 1114, 1115 (9th Cir. 1977). This
long-standing principle must be kept in mind in a determination of
the proper construction of §6339(a)(5). In addition, §6339(a)(5)
is a corollary to §6339(a)(2) and the two provisions should be
construed consistently if possible. Section 6339(a)(2) states that
the certificate of sale for personal property transfers "all
right, title and interest of the party delinquent in and to the
property sold." This provision is followed by the word
"and" and several provisions relating to the specific
types of property. Thus, when subsection (5) refers to "such
transfer," its reference is to subsection (2)--i. e.,
the transfer of only the taxpayer's interest. In addition, the
authority granted by §6339(a)(5) is to record the transfer
"as if the certificate of title . . . were transferred or
assigned by the party holding the same." The stated intent of
§6339(a)(5) was to "keep the public records of title to
motor vehicles in proper order." H. Rep. No. 1337, [1954] Our
construction of §6339(a)(5) is consistent with §6331(a); the
regulations, Treas. Reg. §301.6335-1(c)(4)(iii), and the printed
matter on the notice of sale, Treas. Form 2434-A, and the
certificate of sale, Treas. Form 2435. All of the above refer to
the subject of the levy and sale as the right, title, and interest
of the taxpayer. The regulations and notice of sale state
specifically only that right, title, and interest is
offered for sale. We
thus conclude that the Bank's construction would impute to
Congress an intent clearly not present in comparable provisions of
the tax law, and we hold that construction incorrect. The
authority granted under §§ 6339(a)(5) is to record the transfer
of the taxpayer's interest in the vehicle and to void the prior
certificate showing the taxpayer's interest, not to void any lien
showing on the prior certificate. The latter would be an intrusion
into property rights that is neither necessary under the tax sale
procedure, nor consistent with prior construction of similar
statutes or the government's intention as stated in the
regulations, notices, and certificate of sale. This
construction of §6339(a)(5) is further supported by contrasting
the levy procedures of §6331 et seq. with the judicial
proceeding authorized under 26 We
further conclude that the actions of the IRS in this situation did
not in effect destroy or irreparably injure the Bank's interest in
the van. 4 We have
concluded that the authority granted by §6339(a)(5) is limited to
the voiding of the prior certificate of title and recording of the
transfer as to the taxpayer's interest in the property. There is
no assertion that the IRS actions were in any way inconsistent
with this construction, i. e., that any representation was
made that any interest other than the taxpayer's was involved.
Thus for a wrongful levy to have occurred, some unusual
circumstances, comparable to those which existed or were of
concern in prior cases where wrongful levy actions were held
proper, would have to exist here. For example, in Citizens Bank
& Trust of Md. v. United States, 344 F. Supp. 866 (D. Md.
1972), money in the taxpayer's bank account was levied on and paid
out to the government, leaving nothing for the lienholder. In Little
River Farms, Inc. v. United States, 328 F. Supp. 476 (N. D.
Ga. 1971), the plaintiff was a judgment creditor whose interest
was therefore not in a specific piece of property and who would
have had to follow numerous items of personalty in separate
actions. And in Ala. Exchange Bank v. United States, 373 F.
Supp. 1221 (M. D. Ala. 1974), the court seemed concerned with the
consequences of extreme situations such as sale of the property to
a habitual criminal who would not be a realistic source of
collection. We note that the decision in Ala. Exchange Bank
was a denial of a motion to dismiss; the plaintiff would still be
required to prove its allegation of wrongful levy. These
situations can be contrasted with the circumstances in Parmagent
v. Fitzgerald, 272 F. Supp. 553 (S. D. N. Y. 1967), where the
plaintiff was the holder of a purchase money mortgage on plant and
fixtures which were seized and sold at a tax sale. The court
disallowed the wrongful levy claim, noting that the senior
mortgage was unaffected by the tax sale and that the plaintiff who
had actual notice of and a representative present at the sale, had
neglected to protect its own interests. We
find no circumstances here which support a conclusion that the
Bank's interest in the van was in practical effect destroyed by
the issuance of a certificate of sale by the IRS. The van
continued to exist as a source of collection after the sale.
Although the failure of the Bank to appear as lienholder on the
certificate of title issued to Norris was the cause of the
impairment of its interest, this result was not mandated by the
provisions of §6339(a)(5). In addition, under Since
the interest of the Bank was neither taken nor destroyed by the
IRS issuance of a certificate of sale, we do not reach any
question of the adequacy of notice to the Bank in the context of
due process requirements. See Herndon v. United States, 501
F. 2d 1219, 1220, n. 4 (8th Cir. 1974) (wife's homestead interest
not conveyed by tax sale of property held in husband's name only;
thus, no violation of due process rights). Notice by publication
was all that was required under §6334(b), and the model year
error was not a defect which harmed the Bank's interest as
lienholder. Finally,
we hold that the dismissal of the claims against the five
defendants other than the (1)
Against Smith, for default on the contract with the Bank; (2)
Against Norris, on the basis that he purchased no more than the
taxpayer's interest and had constructive notice of the Bank's
interest because of the original certificate of title; (3)
Against Acrey, on the basis that he purchased only the taxpayer's
interest and had constructive notice of the Bank's interest
because §6339(a)(5) is unconstitutional, and the tax sale was
void and thus Norris and nothing to sell; (4)
Against Van Natta, on the basis that the federal statute under
which he acted is unconstitutional and he acted beyond the scope
of his authority; (5)
Against Valley Bank and Trust, on the basis that it could not
acquire an interest in the van greater than its debtor Acrey, and
it had constructive notice of the Bank's interest since §6339(a)(5)
is unconstitutional. Appellant's
Brief at 21-22. The
district court dismissed these claims under the guidelines
provided for the discretionary exercise of pendent jurisdiction
under United States Workers of America v. Gibbs, 383 U. S.
715, 86 S. Ct. 1130, 16 L. Ed. 2d 219 (1966). The
parties have devoted their arguments here to the propriety of that
exercise of discretion. We have no doubt that the court did not
abuse its discretion under the Gibbs guidelines. We
do note that the so-called pendent state claims ran against
parties other than the United States the only defendant specified
in 26 U. S. C. §7426. Where that is true, pendent or ancillary
jurisdiction cannot be found without further inquiry into the
intent of Congress in conferring jurisdiction of the federal
claim. See Aldinger v. Howard, 427 The
judgment is AFFIRMED. 1
Section 6339(a) Certificate of Sale of Property Other Than Real
Property.--In all cases of sale pursuant to section 6335 of
property (other than real property), the certificate of such
sale--. . . . (2)
As conveyances.--Shall transfer to the purchaser all right, title
and interest of the party delinquent in and to the property sold;
and .
. . . (5)
As authority for transfer of title to motor vehicle.--If such
property consists of a motor vehicle, shall be notice, when
received, to any public official charged with the registration of
title to motor vehicles, of such transfer and shall be authority
to such official to record the transfer on his books and records
in the same manner as if the certificate of title to such motor
vehicle were transferred or assigned by the party holding the
same, in lieu of any original or prior certificate, which shall be
void, whether canceled or not. 2
The stated purpose of §7426(a)(1) was to provide a remedy, via
suit against the government, when the property levied on and sold
is other than the taxpayer's. S. Rep. No. 1078, [1966] U. S. Code
Cong. & Adm. News 3722, 3751-52 (89th Cong., 2d Sess.). The
regulations are not inconsistent with this objective; if the
interest of a person other than the taxpayer is in effect
destroyed by the proceeding, the result is the same as if that
person's interest were actually taken. Thus, such a situation is
entitled to the protection of §7426(a). 3
In Ala. Exchange Bank v. United States, 373 F. Supp. 1221
(M. D. Ala. 1974), the court characterized the lienholder as the
owner of the property involved to the extent of its lien and thus
allowed the lienholder to sue for wrongful levy. The definition we
choose does not strain the state law concepts of ownership or
accepted principles of tax sales, but still allows consideration
of the merits of a wrongful levy claim under the effective
destruction rationale. 4
Treas. Reg. §301.7426-1(b)(1)(d) lists the following as
factors to be considered in this determination: nature of the
property, number of purchasers, value of each item sold, increase
in costs of collection, and percentage of property available for
payment sold at the tax sale. 5
Admittedly the Bank's options for collection have been
considerably complicated in the course of events. We express no
opinion on the cause of any impairment of the Bank's interest
beyond our conclusion that it was not a necessary result of the
actions of the IRS. [82-1
USTC ¶9189]United States of America v. Cassel Brothers, Inc.;
Ronald E. Cassel; Newcomer Oil Corporation; Commonwealth of
Pennsylvania, Department of Labor and Industry; Commonwealth of
Pennsylvania, Department of Revenue Bureau of Sales and Use Tax;
American Bank and Trust Co. of Pennsylvania Defendants U.
S. District Court, Mid. Dist. Pa., Civil Action No. 79-1285, J.
Andrew Smyser, Assistant United States Attorney, Harrisburg,
Pennsylvania 17108, Gregory S. Hrebiniak, Department of Justice,
Washington, D. C. 20530, for plaintiff. Clement N. Page, Jr., Memorandum RAMBO,
District Judge: Plaintiff
brings this action, which arises under the Internal Revenue Code,
for the collection of tax assessments owed by defendant Cassel
Brothers, Inc. Plaintiff claims valid tax liens upon all property
and rights thereto, both real and personal, of defendant Cassel
Brothers, Inc. Plaintiff seeks to foreclose on federal tax liens
filed against two parcels of real estate owned by Cassel Brothers,
Inc. The taxes due are unpaid excise taxes for the second quarter
of 1966 through the 4th quarter of 1970, inclusive, and the second
quarter of 1974 and for withholding and FICA taxes due for the
first and second quarters of 1975 in the total amount of
$493,122.69, 1 which
includes penalties and interest through [Facts] Notices
of Federal Tax Lien for all assessments made on The
defendant, Commonwealth of Pennsylvania Department of Labor and
Industry filed a statutory lien on The
defendant, Defendant
Newcomer Oil Corporation recorded a promissory note for $15,000.00
against the assets of defendant Cassel Brothers, Inc. on Defendant
American Bank and Trust Company of Plaintiff
filed its motion for summary judgment against defendant Cassel
Brothers, Inc., Ronald E. Cassel and the [Purported
Assignment] On
Defendant
Ronald Cassel argues that he, and not Cassel Brothers, Inc., is
the owner in fee of the two parcels of real estate against which
the plaintiff holds valid tax liens and upon which plaintiff seeks
to foreclose. Mr. Cassel bases his argument on the fact that he
paid Pushnik for the land and Pushinik in turned assigned to
Cassel Pushnik's interest in the land including his certificate of
sale. This fact, argues Mr. Cassel, coupled with the assignment by
Cassel Brothers, Inc. of its right to redemption to Ronald Cassel,
gives the latter vested title in fee to the land and thereby
relieves the land from foreclosure and a tax sale as requested by
the plaintiff. Defendant Ronald Cassel filed a brief opposing
plaintiff's motion, urging that his argument raises genuine issues
of fact to be tried in the case. The court finds no issues of fact
to be tried. Defendant Ronald Cassel's brief raised legal and not
factual questions and those legal questions are capable of
resolution in favor of plaintiff as discussed below. [Equitable
Lien] Plaintiff
contends that Ronald Cassel is not fee owner of the land but
merely holds an equitable lien on the property superior to
plaintiff's lien to the extent of the amount paid to Pushnik plus
interest. Plaintiff cites Samet v. United States [65-2 USTC
¶9520], 242 F. Supp. 214 (D. C. N. C. 1965) as authority for this
position. Plaintiff also contends that since Cassel Brothers, Inc.
is still the owner of the property and since the property is
encumbered by unsatisfied federal tax liens, plaintiff may
foreclose on those tax liens under 26 U. S. C. §7403(a). The
Internal Revenue Code permits the owners of real property sold at
a tax sale, their heirs, executors or administrators, or any
person having any interest therein or a lien thereon, or any
person in their behalf, to redeem the property or a particular
tract, within 120 days of the sale. 26 U. S. C. §6337(b)(1).
Redemption is accomplished when the redeemer pays the purchaser of
the property the amount paid by the latter, plus interest at a 20%
rate. 26 U. S. C. §6337(b)(2). The Code further provides that a
tax sale purchaser obtains from the government a certificate of
sale following payment of the purchase price (26 [Redemption
Right Unassignable] Defendant
Ronald Cassel argues, in his brief opposing this motion, that a
question of fact exists as to whether he purchased Pushnik's
interest in the property and thus stands in Pushnik's position or
instead exercised the right of redemption as assignee of defendant
Cassel Brothers, Inc. Mr. Cassel has raised a legal and not
factual question and it appears that 26 U. S. C. §6339(b) and Samet
control regardless of how the issue is resolved. If Mr. Cassel
were found to have merely purchased Pushnik's interest in the
property, Mr. Cassel only purchased a certificate of sale and not
title to the property. Pushnik received a certificate of sale from
the government but never received a deed for the seized and sold
property of Cassel Brothers, Inc. because the property was
redeemed. (See §6338(b)). Since §6339(b) states that only a deed
passes title to the tax sale purchaser, and since Pushnik had no
such deed to convey to Mr. Cassel, Cassel acquired no title to the
property when he purchased Pushnik's interest in the property.
Under Samet, title remained in the name of Cassel Brothers,
Inc. as if no tax sale had occurred. Mr. Cassel cites no authority
at all in this brief and thus offers no contradictory
interpretation of §6339(b) or case law opposing Samet. If
Mr. Cassel were found to have exercised the right of redemption,
this court holds that the legal effect of the exercise of that
right was on behalf of Cassel Brothers, Inc. And, again under Samet,
title remains where it was prior to the tax sale i. e. in
the name of Cassel Brothers, Inc. Under
26 [Priority
of Lien] Under
Samet, however, it appears likely that Ronald Cassel should
nevertheless obtain "a first preferred equitable lien . . .
for the amount of the redemption price with interest thereon from
the date of payment," 242 F. Supp. at 226, since he paid the
tax sale purchaser for the property. Samet, however,
concerned redemption by a woman with an inchoate right to dower in
the property. The court found that this interest qualified her to
exercise the right of redemption. 242 F. Supp. at 221-22. As
discussed above, Ronald Cassel had no right to exercise
redemption. Whether this distinction should alter the result of Samet
as applied to defendant Ronald Cassel is a question this court
reserves for further consideration. Several other defendants in
this action have questioned the priority that any equitable lien
held by Ronald Cassel should have over previously recorded liens
held by other defendants. This court will address the priorities
issue following receipt of plaintiff's proposed findings of fact
on the subject and defendants' response thereto. Defendants in
their response may address the equitable lien status assertedly
held by defendant Ronald Cassel and its priority. Since
the court has found that the property in question remains in the
ownership of defendant Cassel Brothers, Inc., plaintiff correctly
contends that it may subject the property to valid tax liens filed
against the property and may request the court to order the sale
of such property. 26 U. S. C. §7403(a). The plaintiff is directed
in the accompanying order to specify all liens against the
property existing as of This
court finds that there are no genuine issues as to any material
facts and that plaintiff is entitled to a judgment as a matter of
law against defendants Cassel Brothers, Inc., Ronald E. Cassel and
the Commonwealth of Pennsylvania, Department of Labor and
Industry. 1
While defendant Ronald Cassel, president of Cassel Brothers, Inc.
does not admit to the accuracy of the total amount, he does admit
to the individual assessments and although final judgment may be
subject to a recomputation in order to include interest to date of
judgment, the amount is far in excess of the value of the property
at issue. 2
(b) Parties. All persons having liens upon or claiming any
interest in the property involved in such action shall be made
parties thereto. 26 U. S. C. §7403(b). 3
Plaintiff has filed a supplement to its brief noting that the Bank
filed a timely answer and that the Bank's mortgage takes priority
over plaintiff's tax liens. 4
Under 26 U. S. C. §6339(c), a deed to real property issued
pursuant to 26 U. S. C. §6338 shall discharge such property from
all liens, encumbrances, and titles over which the lien of the
United States, with respect to which the levy was made, had
priority. 5
United States v. Lowe [67-2 USTC ¶9650], 268 F. Supp. 190,
192 (N. D. Ga. 1966), aff'd sub nom. Lowe v. Monk, [67-2
USTC ¶9654], 379 F. 2d 555 (5th Cir. 1967), cert. denied, 389 6
Keeley v. Sanders, 99 [88-1
USTC ¶9204] Angel U.S.
Claims Court, 539-83T, 12/29/87, 14 ClsCt 157 Orison
Trossi Orlandi, OPINION GIBSON,
Judge: I.
Introduction On
or about May 30, 1980, plaintiffs, Angel Burgos Fuentes ( The
trial of the issues herein was held in II.
Facts At
the trial on the merits, four witnesses testified in behalf of
plaintiffs: Mr. Burgos, Mrs. Burgos (Maria Otero), Ms. Mendez
(attorney and notary), and Mr. Cardona (attorney and notary).
Defendant called only the two Revenue Officers, i.e., Mr.
Milton and Mr. Pacheco, who were involved in the seizure and the
resulting tax sale. The court finds the operative facts adduced at
the trial to be as indicated hereinafter and no separate
fact findings are being filed pursuant to RUSCC 52(a). The
undisputed background facts in this case are summarized
hereinafter, while the facts in controversy shall, for the most
part, be ventilated in the discussion, infra. On Immediately
following the tax sale on September 17, 1976, which was held at
the site of the seized property, Mr. Burgos proceeded to the Banco
de Ponce (the bank) and procured a bank manager's check in the
amount of $15,000. Revenue Officers Milton and Pacheco, who ran
the tax sale, met Burgos at the bank, received the $15,000 check
as payment in full of the purchase price, and in turn gave Burgos
the Certificate of Sale as required by §6338(a) , 26 U.S.C. (See
Pltfs' Ex. 1.) 2 A tax sale
under the foregoing statutes allowed, in 1976, a 120-day
redemption period which permitted the delinquent taxpayer to
reacquire his property upon paying a certain minimum amount to the
purchaser within that 120-day period. §6337b, 26 U.S.C. In the
case at bar, Consequently,
in February of 1978, Ms. Mendez again contacted the IRS regarding
the alleged defects in the Quit Claim Deed. She was told, at this
time, that the IRS needed an official statement of
nonrecordability by the Registery of Property in Also,
on or about During
this period, on or about It
does not appear from the certification of the Registry dated First
Federal was the only bidder at the mortgage foreclosure
sale and, therefore, was awarded the property at foreclosure. As a
result of the mortgage foreclosure having been concluded by the
first mortgagee (because plaintiffs who acquired the property at
the tax sale subject to the two mortgages did not make the
mortgage payments), plaintiffs at that point were out $15,000 in
cash plus the property previously purchased. III.
Contentions of the Parties A.
Plaintiffs' Position. Plaintiffs, in their concerted effort
to obtain relief, make several contentions with regard to the
efficacy of the Quit Claim Deed prepared by the IRS, and its
recordability under Puerto Rican law, as well as a number of
allegations of defects in the tax sale procedure itself. In
substance, plaintiffs contend that the government is in breach of
contract because it failed to give plaintiffs a valid recordable
deed, per local law, after plaintiffs duly paid the full sale
price of $15,000. First, plaintiffs allege that the Registry of
Property rejected the Quit Claim Deed because it recited that the
IRS notified only the taxpayer, Benjamin Muniz Medina, of
the seizure and sale of the property in issue notwithstanding the
fact that the seized property was held by the conjugal partnership
of the taxpayer and his wife, Aida Mendez. As a result, argues
plaintiffs, the Quit Claim Deed failed to show that both spouses
received said notice as required by local law. That is one of the
reasons, says plaintiffs, that the Registry of Property in In
addition to alleging a legally defective deed under Puerto Rican
law, plaintiffs also make a number of arguments attacking the
procedures of the tax sale itself. First, plaintiffs alleged that
they did not receive notice, at the tax sale, of the two
pre-existing encumbrances on the property because the IRS officers
did not make available for bidders or post a notice of such
encumbrances at the site of the tax sale. Second, they also
violated regulations, say plaintiffs, by not fixing or announcing
the minimum bidding price for which the property would be sold.
And, finally, the sale procedures were defective because the
defendant also violated its regulations by failing to apply the
surplus proceeds from the sale to the then outstanding
encumbrances against the property. The ultimate point being that
had defendant properly applied the excess proceeds from the sale,
there would not have been a foreclosure by the first mortgagee and
a resulting loss by plaintiffs. B.
Defendant's Position. Defendant counters the foregoing by
averring that the tax sale was conducted substantially in
accordance with the federal statutes and regulations governing tax
seizures and sale. Moreover, defendant argues that neither
statutes nor regulations required it to affirmatively give notice
of any encumbrances on the property sold. Further, defendant
contends that the proceeds from the tax sale were disbursed in
accordance with federal statutes and regulations. Federal law
imposed no duty, it says, to pay off superior encumbrances with
surplus tax sale proceeds absent appropriate circumstances, not
present here. Finally, the government argues that the revenue
officers in charge of the sale had no legal duty to inform
plaintiffs of the minimum sale price, established through the use
of an IRS internal formula. Focusing
on the validity of the deed that plaintiffs received, defendant
maintains that the deed was valid because the tax sale was
conducted substantially in accordance with federal law.
Additionally, the Quit Claim Deed recited the facts set out in the
Certificate of Sale as required by federal statute and the IRS
executed the Quit Claim Deed in accordance with Puerto Rican law
governing execution of deeds. Further, defendant claims that the
validity of the Quit Claim Deed must be determined under federal
law, not local law. Consequently, it is defendant's position that
the government did not breach the contract of sale, but rather
issued plaintiffs a valid deed in exchange for full payment of the
sale price. IV.
Issues In
ruling on the merits of plaintiffs' claims, the court must address
the following issues: (1) whether the procedures applied at the
tax sale complied with federal law, including notice of the
seizure and sale, disposition of the surplus proceeds, and notice
to bidders of prior encumbrances on the property and of the
minimum sales price; (2) whether local or federal law governs the
validity of the Quit Claim Deed; and (3) whether the
nonrecordability of the Quit Claim Deed was the direct and
proximate cause of plaintiffs' damages. V.
Discussion A.
The Tax First,
plaintiffs claim that the government violated its regulations by
not giving them prior notice of the superior encumbrances against
the purchased property. Under federal law, there are no statutory
provisions regarding the seizure and sale of property, within 26
U.S.C. §6331
et seq., that impose an affirmative duty on the
Revenue Officers to disclose to the bidders any pre-existing
encumbrances on the property before it is sold. Nor are there any
regulations promulgated by the IRS that speak to the duty of the
Revenue Officers handling the sale to make known such
encumbrances. The only reference to a notice to bidders of
encumbrances is included in an internal policy statement found in
the Internal Revenue Manual for 1978 at §5362.2(4). The pertinent
language therein is as follows: "Form 2434-B Notice of
Encumbrances Against Property Offered For In
view of the evidence adduced at the trial, i.e., the
testimony of Revenue Officer Milton who ran the tax sale (Tr. 179,
186, 199), the completed Form 2434-B submitted into evidence as
Defendant's Exhibit 2, and the corroborative testimony of Revenue
Officer Luis Pacheco, the court finds that--Officer Milton did in
fact perform a title search and found two existing mortgages in
the original amounts of $19,000 and $20,000, prepared Form 2434-B,
Notice of Encumbrances Against Property Offered For Sale on which
they were included, and made said form available at the tax sale
of the property in issue. In this connection, Revenue Officer
Milton testified that--while he does not remember a specific
discussion with Mr. Burgos regarding encumbrances, it is customary
to simply post or make the notice of encumbrances available at the
place of sale: "I do know that this [Defendant's Exhibit 2]
was made available" because when he (Milton) arrived at the
premises he had said document in his possession and as a
consequence stated--"I feel that I did do it." (Tr. 201,
246-47). Revenue Officer Pacheco, who assisted Yes
Mr. Burgos asked if there was [sic] any encumbrances and he was
informed that there were encumbrances by Mr. Milton. With
respect to the question of a governmental officer doing his duty,
there is a well-established presumption that government officials
perform their duties in a proper manner. Sun Oil Co., The
Superior Oil Co., and Marathon Oil Co. v. United States, 215
Ct. Cl. 716, 572 F.2d 786 (1978) (plaintiff failed to rebut
presumption of regularity in its challenge to U.S. Geological
Service procedures for granting of oil drilling permits). On the
record before the court, plaintiffs similarly failed to present
credible evidence to overcome the presumption that Officer Milton
properly prepared Form 2434-B and made it available at the site of
the tax auction sale. Against this background, therefore,
particularly the corroborative testimony of Revenue Officer
Pacheco, the court finds that plaintiffs had and received legal
notice of the prior encumbrances against the property prior
to submitting the bid of $15,000.00. Second,
plaintiffs allege that defendant violated federal statutes and
regulations by not applying the excess proceeds from the tax sale,
in the amount of $12,577.06, to the balance due on the first
mortgage, which was initially foreclosed on Under
this section, and section 5374.2 of the Internal Revenue Manual of
1978, plaintiffs allege that defendant should have paid the
surplus proceeds to the first mortgagee of the property, i.e.,
First Federal. However, section 5374.2(d) provides in pertinent
part that the application of sale proceeds will be as follows:
"If property is seized and sold to enforce several
outstanding tax liens and there are other liens
intervening between the tax liens, the proceeds of the sale must
be applied toward the satisfaction of [all] the liens in order of
their priority" (emphasis added). We find that this section
is inapposite to the case under consideration because here there
was only one outstanding tax lien against the property in
the amount of $2,340.74. Consequently, there were no intervening
private liens that would have had priority over a second and
subsequent tax lien. Plaintiffs, therefore, err in citing to this
section of the Internal Revenue Manual to support their position
that the defendant had a duty to apply the surplus proceeds to the
existing first mortgage. Moreover,
section 5374.3 of the Internal Revenue Manual of 1978 sets out the
procedures whereby "any person, including the taxpayer"
may make a claim for the surplus proceeds. Under this section,
"the taxpayer is the person entitled to the surplus proceeds
unless another person establishes a superior
claim." (emphasis added). Thereunder, if no claim is made
after one year, the surplus proceeds are transferred from the
deposit fund account to the Treasury General Fund for Revenue
Receipts. 7 As a
consequence of the foregoing, the IRS was not required to sua
sponte make a payment of the surplus proceeds to the first
mortgagee, but rather such payment would have been triggered by
the submission of an appropriate claim to the IRS. As a result,
neither the foregoing internal procedures nor the federal
statute(s) support plaintiffs' position that defendant acted in
violation of any laws, regulations, or internal procedures by not
paying the surplus proceeds over to the first mortgagee, First
Federal. Further, the record is devoid of any evidence that either
First Federal or any other person ever submitted such a claim to
defendant. The
third reason that plaintiffs challenged the sale claiming that it
(the sale) did not proceed substantially in accordance with
federal law is that the government did not establish and announce
at the tax sale, and prior to the bidding, a minimum price for the
property. Thus, defendant violated 26 U.S.C. §6335(e) , allege
plaintiffs, in not announcing the minimum bid price before
the sale. Section
6335(e)(1) provides in pertinent part that
"[b]efore the sale the Secretary or his delegate shall
determine a minimum price for which the property shall be sold . .
. . In determining the minimum price, the Secretary or his
delegate shall take into account the expense of making the levy
and sale." Section
6335(e)(2) further provides that: The
Secretary or his delegate shall by regulations prescribe the
manner and other conditions of the sale of property seized by levy
. . . . [s]uch regulations shall provide: . . . [w]hether the
announcement of the minimum price determined by the Secretary or
his delegate may be delayed until the receipt of the highest bid. As
the foregoing clearly indicates, the statute imposes a duty on the
Secretary or his agent to calculate a minimum price but
does not strictly impose an affirmative duty on defendant to announce
said price prior to the sale. The regulations implementing
the statute at 26 C.F.R. §301.6335-1(c)(3) (1976)
confirm this conclusion and provide, in pertinent part, that
"[t]he internal revenue officer conducting the sale shall either
announce the minimum price before the sale begins or defer
announcement of the minimum price until after the receipt
of the highest bid, and, if the highest bid is greater than the
minimum price, no announcement of the minimum price shall be made."
(emphasis added). First, we note that the language of this
regulation grants discretion to Revenue Officer. That is to say,
he may "either" announce the minimum price before
the sale, defer announcement until after bidding, or make no
announcement if the highest bid exceeds the minimum price. Here
Revenue Officer Milton, as permitted, chose the latter. In
the case now before the court, the record shows that Officer
Milton, who was responsible for the sale, calculated the minimum
price of $2,231.00 prior to the sale (Tr. 221-224). The court
finds that, under 26 U.S.C. §6335(e) and 26 C.F.R. 301.6335-1(c)(3),
Officer Milton acted in accord with federal law in not announcing
the minimum bid price before the sale since the highest bid of
$15,000 was greater than the minimum bid price of $2,231.
Therefore, for the reasons stated above, plaintiffs' challenges to
the tax sale procedure must fail. Moreover, the court finds that
the sale was accomplished substantially in accordance with
federal law. B.
The Quit Claim Deed. Plaintiffs argue, in addition to the
foregoing, that the government breached its contract by not
delivering a deed that was legally recordable under the laws of Later,
in February of 1978, Ms. Mendez contacted Mr. Calderon at the IRS
to ascertain why there had been a delay in the correction of the
deed. The court notes that this delay could have been due, in
part, to the fact that in plaintiffs' counsel's letter to
defendant on The
Registry of Property declined to record the 1977 deed by letter
dated As
a result of plaintiffs' foregoing inability to record the deed,
they argue that the government is in breach of contract since
plaintiffs did not receive a legally sufficent deed under the laws
of The
threshold issue for the court to decide, against this background,
regarding to the deed(s) that plaintiffs received from the IRS
is--what law governs the standard for determining the legal
sufficiency of deeds issued as a result of tax sales. 26
U.S.C. §6339(b)
speaks to the legal effect of the deed issued by the
IRS as follows: (b)
Deed of real property.--In the case of the sale of real property
pursuant to section 6335 -- (1)
Deed as evidence.--The deed of sale given pursuant to section 6338 shall be
prima facie evidence of the facts therein stated; and (2)
Deed as conveyance of title.--If the proceedings of the
Secretary or his delegate as set forth have been substantially
in accordance with the provisions of law, such deed shall be
considered and operate as a conveyance of all the right, title,
and interest the party delinquent had in and to the real property
thus sold at the time the lien of the United States attached
thereto. (emphasis
added). Section 6339 refers to §6338 in that the deed of
sale "given pursuant to section 6338 shall be prima
facie evidence of the facts therein stated." The facts that
the deed states are the same facts set forth in the certificate of
sale: identification of the real property purchased, the name of
the delinquent taxpayer, the name of the purchaser, and the price
paid for the property. 26 U.S.C. §6338(a) and (b) . Under §6339(b)(1) the deed, as
evidence, must be given pursuant to §6338 in order to be
accorded the benefit of a presumption of the truth of the facts
recited by the deed. Section
6338(b) requires that the Secretary "execute (in
accordance with the laws of the State in which such real property
is situated pertaining to sales of real property under
execution)" a deed to the purchaser at the tax sale. Here,
the property in issue is located in Santurce, The
court finds, therefore, that defendant had to meet both the
requirements of §6338(b) and §6339(b)(2) in order to
fulfill its obligation under the contract of sale of property to
plaintiff(s). We note that a sharp focus must be placed on the
distinction between the law applicable to the efficacy of a tax
sale and the law applicable to the execution of a deed stemming
therefrom. As to the former, we find that federal law is
applicable; and as to the latter, local law governs. Brown v. Execution
of deed upon sale of immovable property When
immovable property is sold by the marshal or other duly authorized
officer of any court, at public sale, under an execution or
order of sale issued by a court of justice, it shall be the duty
of such marshal or other officer to execute to the purchaser a good
and sufficient public deed for such property, before the
notary chosen by said purchaser, and the latter shall pay for such
deed. (emphasis
added). This
statute clearly requires that the officer over the public sale
execute a "good and sufficient public deed" to the
purchaser. In this context, a public deed is a document that has
been authenticated by a notary and entered into the protocols of
the notary who prepared it. 31 LPRA §3271. As attorney Mendez
testified, the process of entering the deed in the protocols
elevates the deed to the level of a public deed. (Tr. 107). The
protocol is "the orderly collection of the original
instruments authorized during a year by a notary." 4 LPRA §1028.
The "original instrument" referred to in §1028 is
"one drawn up by a notary upon the contract or writing
submitted to him for authentication and which is signed by the
parties . . . and which is authorized by the notary . . . with his
signature, sign, seal and mark . . . ." 4 LPRA §1009. In
other words, to become a public deed as required by 32 LPRA §1140
the Quit Claim Deed that plaintiffs received had to be first
entered into the yearly collection of documents authenticated by a
notary. To be a "good and sufficient" public deed the
deed had to be accepted for recordation by the Registry of
Property. 30 LPRA §2 mandates that deeds
conveying ownership of real property rights "shall" be
recorded. Further, attorney Mendez testified that in order for the
deed, prepared outside of The
Registrar rejected the 1977 Quit Claim Deed, as previously
indicated, for the following reasons: 1) the deed did not show
that both owners of the seized conjugal property had notice of the
tax sale; 2) the authority of the IRS officers to sell the
property was not evident from the face of the deed; 3) the
Certificate of Sale of the property was not filed with the deed to
show that the requirements of law were met; 4) the fees for
recording the document were not paid; and 5) the signature of the
notary public before whom the IRS officer signed was not certified
to by the County Clerk. The Registrar also rejected the 1978 Quit
Claim Deed for substantially similar reasons: 1) it was not
evident from the face of the deed that both members of the
conjugal partnership owning the seized property were notified of
the public sale; 2) the authority of the IRS officers to sell the
property was not evident from the recitations of the deed; 3) the
Certificate of Sale was attached but did not show that the legal
requirements were met; and 4) the fee for recordation was not
paid. Thus, the statutorily appointed and empowered local agency
found on both occasions that the Quit Claim Deeds as presented to
plaintiffs and protocolized by plaintiffs' notary attorney was not
"a good and sufficient public deed." (Pltfs' Exs. 7 and
9.) As
a result of the rejection of the Quit Claim Deeds by the Registry
of Property, this court finds that the defendant was in breach of
contract due to its failure to comply with 26 U.S.C. §6338(b)
as it implicates local law. Notwithstanding the breach,
as found, the plaintiffs still have the affirmative burden
of establishing, by credible proof, that their damages resulted directly
from the breach under the court's jurisdictional statute, 26
U.S.C. §1491(a)(1) . H.H.O.,
Inc. v. Since
plaintiffs knowingly took said property subject-to the prior
mortgages they had the continuing obligation of timely curtailing
these mortgages on a monthly basis. The consequence of a mortgage
default is foreclosure. Since the mortgages went unpaid from
December 1976, as the local court found, the first mortgagee,
First Federal, filed its complaint in foreclosure (April 27, 1977)
and bought in the property at the subsequent public sale. First
Federal initially received a foreclosure judgment on August 26,
1977, five months after the 1977 Quit Claim Deed was sent to
plaintiffs on or about March 18, 1977. The mortgagee's foreclosure
and resulting sale were the proximate cause of plaintiffs' loss of
the $15,000 in cash and the property. This is quite evident
because, even if plaintiffs had had a Quit Claim Deed which was
duly recorded on March 18, 1977, they would nevertheless have been
faced with the same mortgage foreclosure proceedings and
still would have had to pay the mortgagee off to protect their
interest in the property. The
fact that the Registry of Property refused to record the 1977 and
1978 Quit Claim Deeds, due to defendant's omissions, resulted in a
breach of contract, but this court finds that defendant's
"omissions" were harmless error with regard to
plaintiffs' damages. See Lake Tool & Stamping Co., Inc. v.
United States, 7 Cl.Ct. 213 (1984) (contract appeal board's
mistake in including certain language into a government contract
was harmless error). Here the court notes that the Registrar
refused recordation for several reasons--not all the fault of
defendant. Since the authority of the government agents to sell
the seized property was not apparent on the face of the 1977 Quit
Claim Deed, the Registrar rejected it. On the face of the 1978
Quit Claim Deed, defendant added the following: 1) an
authentication of the deed by the Secretary of State; 2) an
assurance of the authority of the Director of International
Operations, executor of the deed, by the Assistant Director of
Disclosure Operations Division; 3) a reference to the Code
section, 26 U.S.C. §6338 , that empowered the
Revenue Officer to sell the taxpayer's property; and 4) a
certification of the signing notary's authority by the Executive
Secretary to the Commissioner of the District of Columbia. These
additions addressed the defects attributable to defendant. 8 However,
we find that plaintiffs were responsible for one of the cited
defects, and the record reflects no evidence that they sought to
cure such defect. According to local law plaintiffs were
responsible for the fees of recordation. 32 LPRA §1140. This
section states that it shall be the duty of the purchaser
of the property to pay for the deed. Plaintiffs failed to pay the
necessary fees and consequently plaintiffs' omission, which was
never corrected, also caused the deed to be unrecordable. 9 Therefore,
defendant's corrected omissions were harmless errors in that they
alone did not preclude recordation. The
other damages claimed by plaintiff ( Conclusion For
the foregoing reasons, this court finds for defendant and,
therefore, directs the clerk to enter judgment accordingly. No
costs. 1
Pursuant to a verbal motion of plaintiffs' counsel made at the
conclusion of the trial in this court, that the complaint in the
names of Ignacio Hance Pizarro and his wife, Monica Alvarez Hance,
be dismissed, said motion and ruling, as allowed, was memorialized
by an order dated 2
26 U.S.C. §6338(a)
provides in pertinent part: "In the case of
property sold as provided in section 6335 , the
Secretary shall give to the purchaser a certificate of sale upon
payment in full of the purchase price." Section 6335 is captioned
" 3
Section 6338(b) provides: "In the case of any real property
sold as provided in section
6335 and not redeemed . . ., the Secretary or his
delgate shall execute (in accordance with the laws of the State in
which such real property is situated pertaining to the sales of
real property under execution) to the purchaser of such real
property at such sale, upon his surrender of the certificate of
sale, a deed of the real property so purchased by him. . . ." 4
Under Puerto Rican law, a deed to property situated within Puerto
Rico, that is prepared outside Puerto Rico, must undergo a process
referred to as "protocolization" in order to be binding
in 5
In plaintiffs' motion to intervene in the local court foreclosure
proceedings, Mr. Burgos represented to the local court that he
"proceeded to sell" the property at issue to Ignacio
Hance Pizarro (Hance) and his wife on 6
See United States v. Manufacturers National Bank [61-2 USTC ¶9701 ],
198 F.Supp. 157 (N.D. N.Y. 1961) (liens for federal taxes and
provisions for their collection are strictly federal matters). The
court notes that plaintiffs have sought to apply the provisions of
local (Puerto Rican) law, that govern the procedures for
foreclosure of a mortgage, to the sale of the property at issue.
However, the court finds that application to be erroneous as this
sale was a levy, seizure, and sale for the payment of delinquent
federal taxes, not a mortgage foreclosure. See 26 U.S.C. §6331(b) . The authority
under this section covers the power to seize and sell property or
property rights. See also Tavares v. United States [74-1 USTC ¶9240 ],
491 F.2d 725 (9th Cir. 1974) (no requirement exists that a
judicial hearing be held before levy). 7
Section 5374.3(3) and (7) provide: (3)
The taxpayer is the person entitled to the surplus proceeds unless
another person establishes a superior claim. In any case in which
a claim for surplus proceeds is made by any person, including the
taxpayer, a copy of an affidavit submitted by the claimant,
together with a report of the pertinent facts, will be submitted
to the Special Procedures Staff for referral to the Regional
Counsel for an advisory legal opinion prior to making disposition
of the surplus proceeds. *
* * (7)
If after the expiration of one year no claim has been filed, the
Special Procedures Staff will prepare a memorandum to the
Accounting Branch requesting the surplus be transferred from the
deposit fund account to the Treasury General Fund for Revenue
Receipts. 8
The issue of notice to the taxpayer's wife as a defect precluding
registration is questionable since the only property sold at the
tax sale was the interest of the taxpayer, leaving the
wife's interest in the seized property untouched. City of New
York v. United States [60-2 USTC ¶9303], 283 F.2d 829, 832
(2d Cir. 1960) (federal tax lien only attaches to the extent of
the taxpayer's property interest). Under Puerto Rican law, the
conjugal partnership is governed by partnership law. 31 LPRA §3624.
Partnership law allows the creditors of each partner "to
demand the attachment and sale at auction" of that partner's
share in the "partnership capital." 31 LPRA §4373 . Thus the interest
of the taxpayer could be seized and sold without affecting the
interest of the taxpayer's wife. Thus the wife would not require
notice. 9
The Registrar's rejection letter of 10
The court has considered all other contentions not specifically
addressed herein and found them to be without merit. [88-2
USTC ¶9425] Betty Verba, Plaintiff-Appellee v. Ohio Casualty
Insurance Co., Defendant-Appellant, and The (CA-6),
U.S. Court of Appeals, 6th Circuit, 86-3803, Lawrence
J. Rich, Zashin, Rich & Sutula Co., L.P.A., 250 Standard
Bldg., Cleveland, Ohio 44113-1701, for plaintiff-appellee. William
T. Monroe, Monroe, Zucco & Kaselak, 1525 Leader Bldg.,
Cleveland, Ohio 44114-1444, for defendant-appellant. Carolyn W.
Allen, Assistant United States Attorney, Cleveland, Ohio 44114,
Roger M. Olsen, Assistant Attorney General, Michael L. Paup,
William S. Eastabrook, Joan I. Oppenheimer, Department of Justice,
Washington, D.C. 20530, defendant-appellee. Before
LIVELY, MILBURN and RYAN, Circuit Judges. I. RYAN,
Circuit Judge: This
lawsuit is a controversy about the constitutional sufficiency of
the statutory notice given to a judgment creditor lienholder of a
scheduled Internal Revenue Service tax sale of real property. Betty
Verba filed an action against the Ohio Casualty Insurance Company
and the A
declaratory judgment sustaining the constitutionality of 26 U.S.C.
§§6335(b) , and 6339(c) , and A
determination that Ohio Casualty's judgment lien, held on property
purchased by plaintiff Verba at an Internal Revenue Service tax
sale, was extinguished. The
district court held that: The
statutory notice provision, 26 U.S.C. §6339(c)
, is constitutional, and Ohio
Casualty's judgment lien upon Verba's property has been
extinguished. Pursuant
to its findings, the district court entered summary judgment in
favor of the We
hold, for the reasons stated hereafter, that: Ohio
Casualty's judgment lien upon real estate in question constitutes
a property interest for the purposes of the due process clause of
the Fifth Amendment, and The
notice by publication and posting as required by §6335(b) was not, under
the circumstances of this case, reasonably calculated to reach
Ohio Casualty and therefore, the notice was constitutionally
insufficient, and The
judgment creditor lien of Ohio Casualty has not been extinguished
by operation of §6339(c) . Therefore,
we reverse. In
May of 1974, the Internal Revenue Service made tax penalty
assessments against Fred Parsons and Kay E. Parsons. In September
of 1974, the government filed notices of a federal tax lien
against each taxpayer with the Cuyahoga County Recorder. The
notices were refiled in May of 1979. In February of 1976, Ohio
Casualty obtained a judgment against the Parsons for $41,000. Ohio
Casualty filed a certificate of judgment with the Cuyahoga County
Recorder in December 1980. On
On
On
The
somewhat convoluted procedural history of this litigation follows. On
Verba
then filed this declaratory judgment action (No. 84-3937), in the
district court seeking a declaration that the notice given to Ohio
Casualty was constitutionally adequate and that its lien,
therefore, was extinguished. Ohio Casualty was initially named as
a defendant and subsequently Verba amended her complaint to add
the III. The
Fifth Amendment forbids the federal government from depriving
persons of property without due process of law. Initially, we must
determine whether the judgment lien held by Ohio Casualty is a
significant, constitutionally protected property interest.
"[P]roperty interests 'are not created by the Constitution.
Rather, they are created and their dimensions are defined by
existing rules or understandings that stem from an independent
source such as state law--rules or understandings that secure
certain benefits and that support claims of entitlement to those
benefits.' " Parratt v. Taylor, 451 First,
we turn to R.C.
2329.02 is intended to create a specific lien upon the lands and
tenements of the judgment debtor within the county at the time
there is filed in the office of the clerk of the court of common
pleas of such county a certificate of judgment. The lien applies
specifically to all such property identified as belonging to the
debtor at the time of the filing of the certificate and may be
enforced as a specific lien pursuant to R.C. 2323.07 by a
foreclosure action. Feinstein,
2 The
district court's determination that the lien was a general lien
which conferred no interest in a particular piece of property was
erroneously based upon cases 4 construing
the predecessor to §2329.02, which the parties agree is
significantly different from §2329.02 in its current form. We are
satisfied that under O.R.C. 2329.02 as interpreted by the Ohio
Courts of Appeals, a judgment lien is specific and attaches at the
time the certificate of judgment is filed within a county to all
real estate owned by the judgment debtor within that county.
Therefore, it is in this context that we turn to the question of
whether Ohio Casualty's judgment lien is a constitutionally
protected property interest. IV. Although
the precise issue of whether a specific judicial lien is a
property interest protected by due process has not been addressed
by the Supreme Court or in any of the circuits, the Supreme Court
held in Mennonite Board of Missions v. Adams, 462 U.S. 791
(1983), that a mortgagee's interest in real property is a
significant property interest for due process purposes. 462 Recently,
the Supreme Court has held that a creditor's unsecured cause of
action against an estate is a property interest for due process
purposes. [l]ittle
doubt remains that such an intangible interest is property
protected by the Fourteenth Amendment. As we wrote in Logan v.
Zimmerman Brush Co., 455 U.S. 422, 428 (1982), this question
"was affirmatively settled by the Mullane case itself,
where the Court held that a cause of action is a species of
property protected by the fourteenth Amendment's Due Process
Clause." In Additionally,
the Supreme Court of Pennsylvania has held that a general judgment
lien 5 was a
property interest for due process purposes. Tax Claim Bureau v.
Estate of Schumo (In re Upset V. We
now turn to a determination of the type of notice constitutionally
due In
Mullane v. Central Hanover Bank & Trust Co., 339 U.S.
306 (1950), the Supreme Court noted that, "[a]n elementary
and fundamental requirement of due process in any proceeding which
is to be accorded finality is notice reasonably calculated, under
all the circumstances, to apprise interested parties of the
pendency of the action and afford them an opportunity to present
their objections." 339 Later,
in Mennonite, the Supreme Court held that: [s]ince
a mortgagee clearly has a legally protected property interest, he
is entitled to notice reasonably calculated to apprise him of a
pending tax sale. When the mortgagee is identified in a mortgage
that is publicly recorded, constructive notice by publication must
be supplemented by notice mailed to the mortgagee's last known
available address, or by personal service. But unless the
mortgagee is not reasonably identifiable, constructive notice
alone does not satisfy the mandate of Mullane. 462
The
Court explained that: [n]either
notice by publication and posting, nor mailed notice to the
property owner, are means "such as one desirous of actually
informing the [mortgagee] might reasonably adopt to accomplish
it." Mullane, 339 462
Once
Ohio Casualty filed its certificate of judgment with the Cuyahoga
County Recorder, its identity and address became a matter of
public record. Ohio Rev. Code §2329.02. Thereafter, due process
required that Ohio Casualty be given more than mere constructive
notice as provided for in 26 U.S.C. §6335(b) before its
protected property interest was extinguished by a tax sale of the
property. As in Mennonite, personal service or mailed
notice is constitutionally required to be proved to a specific
judgment lienholder whose identity and address are a matter of
public record. 462 VI. Finally,
we address Verba's contention that Mennonite should be
applied nonretroactively. Until recently this circuit applied
Supreme Court decisions retroactively if the Court had applied its
decision to the case before it. Smith v. General Motors Corp.,
747 F.2d 372 (6th Cir. 1984). However, in Thomas v. Shipka,
829 F.2d 570, 571 n. 1 (6th Cir. 1987), we concluded that "Smith
can no longer be the law in this circuit in light of the more
recent Supreme Court pronouncements." Thereafter, this court
has turned to the factors set forth in Chevron Oil Co. v.
Huson, 404 U.S. 97 (1971), to determine whether a Supreme
Court decision should be applied nonretroactively. Thomas,
829 F.2d at 573. In
our cases dealing with the nonretroactivity question, we have
generally considered three separate factors. First, the decision
to be applied nonretroactively must establish a new principle of
law, either by overruling clear past precedent on which litigants
may have relied, or by deciding an issue of first impression whose
resolution was not clearly foreshadowed. Second, it has been
stressed that "we must . . . weigh the merits and demerits in
each case by looking to the prior history of the rule in question,
its purposes and effect, and whether retrospective operation will
further or retard its operation." Finally,
we have weighed the inequity imposed by retraoctive application,
for "[w]here a decision of this Court could produce
substantial inequitable results if applied retroactively, there is
ample basis in our cases for avoiding the 'injustice or hardship'
by a holding of nonretroactivity." Chevron
Oil Co. v. Huson, 404 Because
we find that Mennonite was an extension of Mullane
rather than a case establishing a new principle of law, invoking
the doctrine of nonretroactivity would be inappropriate. In Mennonite,
the court stated that "[t]his case is controlled by the
analysis in Mullane." 462 VII. We
hold today that Ohio Casualty's specific judicial lien constitutes
a property interest entitled to the protections of the due process
clause. Since Ohio Casualty's identity and address were a matter
of public record from the time the judgment certificate was filed
with the Cuyahoga County Recorder, the constructive notice by
publication and posting pursuant to 26 U.S.C. §6335(b) was
constitutionally inadequate. Because Ohio Casualty was not given
proper notice, its interest in the property was not extinguished.
Lastly, because Mennonite was merely an extension of the
principle established in Mullane, and did not
"establish a principle of new law," nonretroactive
application of Mennonite is inappropriate. Accordingly,
the district court's judgment granting the government's motion for
summary judgment is REVERSED. 1
That section provides: (c)
Effect of junior encumbrances.--A certificate of sale of personal
property given or a deed to real property executed pursuant to section 6338 shall
discharge such property from all liens, encumbrances, and titles
over which the lien of the 2
The district court dismissed the removed case as against the
United States and remanded the case against the remaining
defendants to the state court because the state court's lack of
jurisdiction over the United States prevented it from being
properly removed and mandated that that portion of the case be
dismissed. Lambert Run Coal Co. v. Baltimore & O.R.R.,
258 3
That section, in pertinent part, provides: Any
judgment or decree rendered by any court of general jurisdiction,
including district courts of the United States, within this state
shall be a lien upon lands and tenements of each judgment debtor
within any county of this state from the time there is filed in
the office of the clerk of the court of common pleas of such
county a certificate of such judgment, setting forth the court in
which the same was rendered, the title and number of the action,
the names of the judgment creditors and judgment debtors, the
amount of the judgment and costs, the rate of interest, if the
judgment provides for interest, and the date from which such
interest accrues, the date of rendition of the judgment, and the
volume and page of the journal entry thereof. 4
Bigelow v. Renker, 5
Although the lien involved was considered "general"
under Pennsylvania law, it was created under a statute which
provided, as Ohio Revised Code §2329.02 does, that a judgment
entered on the record operates as a lien upon all real property of
the debtor in that county. 505 |