6321
After Aquired Property page1
Old
National Bank, successor to the Merchants National Bank of Terre Haute,
Plaintiff v. RCH Electronics Systems, Inc., Robert E. Rost II, and Mary
Y. Rost a/k/a Mary V. Rost, Defendants, and United States of America,
Intervenor.
U.S.
District Court, So. Dist.
Ind.
,
Terre Haute
Div.; 2:03-cv-0288-LJM-WTL, January 11, 2005.
[ Code
Secs. 6321 and 6323]
Priority of tax lien: After-acquired property: Accounts receivable:
Simultaneous liens. --
Two
IRS tax liens on a corporate taxpayer's accounts receivable had priority
over a security interest in the same accounts receivable held by the
corporation's bank, even though the bank's security interest predated
the IRS's liens. The funds at issue were received after a state
court-appointed receiver issued invoices to the corporation's customers.
The IRS's liens and the bank's security interest immediately attached to
the funds. In that situation, the federal tax liens had priority, even
though they were filed more than two years after the security interest
arose. Accordingly, the IRS rather than the bank was entitled to the
proceeds from the accounts receivable.
ORDER
ON INTERVENOR'S MOTION FOR SUMMARY JUDGMENT
MCKINNEY
, Chief Judge: This cause is now before the Court on intervenor's, the
United States of America
("
United States
"), Motion for Summary Judgment. The United States contends that
pursuant to 26 U.S.C. §6321,
and according to the U.S. Supreme Court's opinion in United States v.
McDermott [ 93-1
USTC ¶50,164], 507 U.S. 447 (1993), its tax lien on the
accounts receivable of defendants, R.H. Electronic Systems, Inc.
("R.H."), Robert E. Rost, II, and Mary Y. Rost (collectively,
"Defendants"), currently held by a receiver
("Receiver") take priority over plaintiff's, Old National Bank
("Old National"), simultaneously perfected security interest.
Neither Old National nor Defendants have opposed the
United States
' Motion for Summary Judgment.
For the reasons stated herein, the Court GRANTS the
United States
' Motion for Summary Judgment.
I.
BACKGROUND
The undisputed facts are: In June 1997, Old National lent R.H.
$50,000.00. In exchange, R.H. and its owners gave Old National various
forms of security, including a security interest in all of RCH's
accounts receivable in 1997. Compl. Count 1, ¶¶1-5; Count II, ¶¶2-3.
R.H. defaulted on its obligations under the promissory note, and Old
National commenced a collection action against R.H. in state court. Id.
Count 1, ¶7; Count II, ¶4. Eventually, the state court appointed a
receiver ("Receiver") to gather and distribute RCH's assets.
Oath of Receiver.
Receiver collected $12,650.28 in accounts receivable on behalf of R.H.
Receiver's Pet. for Approval, ¶8. These accounts receivable came into
existence beginning on August 16, 2000, and continued through November
9, 2000.
U.S.
Exh. 1, Invoices. Receiver submitted a plan to the Court for the
distribution of these assets. Receiver's Pet. for Approval, ¶8.
Receiver's plan does not provide for the amount that R.H. owes the
United States
.
The
United States
, acting through the IRS, filed two Notices of Federal Tax Liens
("NFTLs") against R.H.; one was filed on November 19, 1999, in
the amount of $6,649.14, the other was filed on March 16, 2000, in the
amount of $31,760.99.
U.S.
Exh. D, Notices of Fed'l Tax Lien. The NTFLs were filed after the
consensual security agreement was given.
II.
SUMMARY JUDGMENT STANDARD
Federal Rule of Civil Procedure 56(c) provides that summary judgment is
appropriate "if the pleadings, depositions, answers to
interrogatories, and admissions on file, together with the affidavits,
if any, show that there is no genuine issue as to any material fact and
that the moving party is entitled to summary judgment as a matter of
law." In determining whether a genuine issue of material fact
exists, "a trial court must view the record and all reasonable
inferences drawn therefrom in the light most favorable to the non-moving
party." Robin v. Espo Eng'g Corp., 200 F.3d 1081, 1088 (7th
Cir. 2000). "The non-moving party, however, cannot rest on the
pleadings alone, but instead must identify specific facts to establish
that there is a genuine triable issue." Bilow v. Much Shelist
Freed Denenberg Ament & Rubenstein, P.C., 277 F.3d 882, 893 (7th
Cir. 2001). "[C]onclusory statements, not grounded in specific
facts, are not sufficient to avoid summary judgment," Lucas v.
Chi. Transit Auth., 367 F.3d 714, 726 (7 th Cir. 2004),
rather, "[t]he party must supply evidence sufficient to allow a
jury to render a verdict in his favor." Robin, 200 F.3d at
1088. Finally, the non-moving party bears the burden of specifically
identifying the relevant evidence of record, and "the court is not
required to scour the record in search of evidence to defeat a motion
for summary judgment." Ritchie v. Glidden Co., 242 F.3d 713,
723 (7 th Cir. 2001).
III.
DISCUSSION
The
United States
contends that the tax liens take priority over a simultaneously
attaching state lien.
Br.
in Supp., at 5 (citing United States v. McDermott [ 93-1
USTC ¶50,164], 507 U.S. 447 (1993)). Here, the
United States
avers, Old National's interest in the accounts receivable attached when
R.H. gained rights in the accounts receivable. The facts brought before
the Court indicate that date was August 16, 2000, through November 9,
2000, when Receiver issued invoices on behalf of R.H. U.S. Exh. 1,
Invoices. See also Ind. Code §26-1-9.1-203(b)(2) (stating that a
security interest is perfected when the debtor obtains rights in the
collateral); Nat'l City Bank of Ind. v. All-Phase Elec. Supply Co.,
790 N.E.2d 488, 490 (Ind. Ct. App. 2003) (stating that a debtor obtains
rights in an accounts receivable when a debt is owed by a third party to
the debtor).
The Court finds the
United States
' argument persuasive. There is no evidence to contradict the fact that
the accounts receivable at issue here came into existence after the
United States
issued the two NFTLs. According to law, the date at which the accounts
receivable came into existence is the time at which Old National's
security interest perfected. In other words, Old National's lien
attached when Receiver issued invoices on August 16, 2000, through
November 9, 2000. The latest of the two NFTL issued on March 16, 2000.
The Supreme Court, in McDermott, held that a properly filed NFTL
takes priority over a simultaneously attaching state lien. McDermott
[ 93-1
USTC ¶50,164], 507
U.S.
at 453-55. Therefore, the
United
State
's tax liens take priority over Old National's perfected security
interest in the accounts receivable.
IV.
CONCLUSION
For the foregoing reasons, intervenor's, the
United States of America
, Motion for Summary Judgment is GRANTED. Receiver is hereby ordered to
pay to the
United States
the $12,650.28, in accounts receivable collected on behalf of defendant,
R.H. Electronics Inc.
IT IS SO ORDERED.
ENTRY
OF JUDGMENT
Through an order dated January 11, 2005, this Court entered summary
judgment in favor of intervenor, the United States of America, and
against both the plaintiff, Old National Bank, and defendants, RCH
Electronics Systems, Inc., Robert E. Rost, II and Mary Y. Rost. Receiver
shall pay to the
United States
the $12,650.28, in accounts receivable collected on behalf of defendant,
R.H. Electronics Inc.
Catherine
F. Quist, Clerk of
Knox County General Sessions Court
, Plaintiff v. Leon Wiesener,
United States of America
, The Internal Revenue Service, Defendants.
U.S.
District Court, East.
Dist.
Tenn.
, at
Knoxville
; 3:03-CV-100, June 18, 2004.
[ Code
Sec. 6321]
Liens for taxes: Validity and priority against third parties: Notice or
knowledge of liens: Property subject to: After-acquired property. --
The
proceeds of the auction of the personal property of a corporation were
ordered to be disbursed to the
United States
and not to a third party. Because a federal tax lien had attached to the
personal property, the lien automatically had also attached to the sale
proceeds of that property.
[ Code
Sec. 6323]
Liens for taxes: Validity and priority against third parties: Notice or
knowledge of liens. --
The
proceeds of the auction of the personal property of a corporation were
ordered to be disbursed to the
United States
and not to a third party. The federal tax lien on the corporation under
its legal name constituted proper constructive notice of the lien to the
third party, who had a judgment against the corporation, but under a
slightly different name. Requiring the government to file a notice of
tax lien using all of the possible names of the taxpayer would be an
unreasonable burden. Because the notice was properly filed using the
taxpayer's registered corporate name, proper notice has been given, and
the lien had priority over all subsequent lien holders. Back reference: ¶38,160.41.
MEMORANDUM
OPINION
PHILLIPS, District Judge: The United States of America has moved for
summary judgment [Doc. 12], to which defendant Leon Wiesener (Wiesener)
has responded [Doc. 18]. Wiesener has also moved for summary judgment
[Doc. 14], which the United States has opposed [Doc. 17]. For the
reasons discussed below, the court finds in favor of the
United States
.
FACTS
On January 31, 2000 and April 17, 2000, the Internal Revenue Service
(IRS) made two assessments against "Joint Effort, Inc.,"
Employer Identification Number 62-0968367, for employment taxes for the
quarters ending September 30, 1999 and December 31, 1999. On June 19,
2000, Wiesener filed a Civil Warrant and Oath of Account in the
General Sessions Court
for
Knox County
,
Tennessee
(
General Sessions Court
) against "Joint Effort Productions, Inc.," for breach of
contract to pay for stock purchased. Wiesener and Joint Effort
Productions, Inc. appeared before a judge on October 2, 2000, and
announced that the parties had reached an agreement. Subsequently, on
October 10, 2000, an Agreed Judgment was entered in favor of Wiesener
and against Joint Effort Productions, Inc. for $15,000.00 plus ten
percent (10%) statutory interest to begin accruing one year after the
date of the judgment. The parties agreed that the judgment would not be
executed upon until after October 3, 2001. To date, Wiesener has
recovered nothing from Joint Effort Productions, Inc. in satisfaction of
the Agreed Judgment.
On April 22, 2002, the Internal Revenue Service (IRS) filed a Notice of
Federal Tax Lien, No. 62-0968367, in the Knox County Register of Deeds
Office against "Joint Effort," for $55,247.04 in unpaid tax
assessments by "Joint Effort, a corporation." However, no
Notice of Federal Tax Lien was filed against "Joint Effort
Productions, Inc." On November 12, 2002, Wiesener filed an
Execution and Non-Wage Third Party Garnishment (Garnishment) against
Joint Effort Productions, Inc. The personal property of Joint Effort
Productions, Inc. was then sold at public auction on November 16, 2002.
On that same day, Wiesener served the Garnishment with instructions to
seize the proceeds of the auction. Subsequently, the Garnishee, Dyer
Realty and Auction Services, placed $10,703.85 in proceeds in the
Registry of the General Sessions Court for disbursement pursuant to the
Garnishment. At the time the funds were placed in the Registry, Wiesener
was the only creditor to execute upon the proceeds of the sale of the
personal property. The IRS failed to execute upon either the personal
property of Joint Effort Productions, Inc. or the proceeds from the sale
prior to the funds being placed in the Registry.
On January 8, 2003, the IRS issued a Notice of Levy to the
General Sessions Court
, attempting to attach the funds deposited by the Garnishee into the
Registry. Catherine F. Quist (Quist), Clerk of the
General Sessions Court
, Civil Division, refused to disburse the funds to Wiesener. On January
22, 2003, Quist filed a Motion for Instruction in the
General Sessions Court
as to the appropriate disbursement of the funds. On February 6, 2003,
Wiesener filed a Petition for Writ of Mandamus in the Chancery Court for
Knox County, Tennessee (Chancery Court) against Quist, 1
request that Quist be commanded to pay him the $10,703.85 held in the
Registry. Quist filed a Complaint in Interpleader in this court against
Wiesener, the
United States of America
and the IRS on February 10, 2003. On February 25, 2003, Quist filed a
Motion to Stay Proceedings in the Chancery Court pending resolution of
the Interpleader action filed in this court.
Rule 56 of the Federal Rules of Civil Procedure provides that the
judgment sought "shall be rendered forthwith if the pleadings,
depositions, answers to interrogatories, and admissions on file,
together with the affidavits, if any, show that there is no genuine
issue as to any material fact and that the moving party is entitled to a
judgment as a matter of law." Fed. R. Civ. P. 56(c). The moving
party bears the initial burden of demonstrating the absence of any
genuine issue of material fact. See Celotex Corp. v. Catrett, 477
U.S.
317, 323 (1986). Once the moving party properly supports a motion for
summary judgment, the burden of proof shifts to the non-moving party,
who "must set forth specific facts showing that there is a genuine
issue of material fact for trial." Anderson v. Liberty Lobby,
Inc., 477
U.S.
242, 250 (1986). It is not enough for the party opposing a properly
supported motion for summary judgment to "rest on mere allegations
or denials of his pleadings."
Id.
at 248.
The
United States
contends that the Federal Tax Lien it filed against "Joint Effort,
Inc." also covers "Joint Effort Productions, Inc.," and
was filed prior to the lien of Wiesener. The Government asserts its
notice was filed in a manner such that a reasonable inspection would
have revealed the notice of the Federal Tax Lien.
Wiesener argues that in order for a Federal Tax Lien to be enforceable,
notice must be provided pursuant to Tenn. Code Ann. §67-1-1403(b),
which requires the lien be filed with the Knox County Register of Deeds.
Determination of the sufficiency of filing of a Federal Tax Lien is
governed by federal law. See United States v. Polk [ 87-2
USTC ¶9432], 822 F.2d 871, 873 (9 th Cir. 1987).
The lien must be filed and indexed such that "a reasonable
inspection of the index will reveal the existence of the deed." 26
U.S.C. 6323(f)(4). See Van Dolen v. Dept. of the Treasury [ 96-1
USTC ¶50,266], 929 F.Supp. 1083, 1086 (M.D. Tenn. 1996).
In Continental Investments v. United States of America [ 53-2
USTC ¶9625], 142 F.Supp. 542 (W.D. Tenn. 1953), the United
States District Court for the Western District of Tennessee found that
the purpose of registration of a Federal Tax Lien is to provide
constructive notice to all interested parties, including judgment
creditors.
Id.
at 544 (W.D. Tenn. 1953). Registration of a Federal Tax Lien will only
serve as constructive notice of what is "upon [the] face" of
the lien.
Id.
The Western District held that the use of the name W.G. Clark, Sr. on a
tax lien filing was insufficient to impute constructive notice to the
creditors of W.R. Clark, Sr. Id. Accordingly, Wiesener argues the
use of only "Joint Effort" was wholly inadequate notice to the
judgment creditors of "Joint Effort Productions, Inc.," as a
lien search of "Joint Effort Productions, Inc.," did not
reveal the IRS' Notice of Federal Tax Lien.
The Knox County Recorder of Deeds maintains a computerized indexing
system for performing lien searches, which may be performed by inputting
a "name or organization" into the system. Different inputs
into the system yield different results:
1.
When the name "Joint" is searched, the following liens are
listed: 1) the Federal Tax Lien filed on April 30, 2002 against Joint
Effort; 2) a lien filed by Wenger Corporation on July 2, 2002 against
Joint Effort Productions; and 3) a lien filed by Leon Wiesener on
November 13, 2002 against Joint Effort Productions.
2.
When the name "Joint Effort" is searched, the following liens
are listed: 1) the Federal Tax Lien filed on April 30, 2002 against
Joint Effort; 2) a lien filed by Wenger Corporation on July 2, 2002
against Joint Effort Productions; and 3) a lien filed by Leon Wiesener
on November 13, 2002 against Joint Effort Productions.
3.
When the name "Joint Effort Productions" is searched, the
following liens are listed: 1) a lien filed by Wenger Corporation on
July 2, 2002 against Joint Effort Productions; and 2) a lien filed by
Leon Wiesener on November 13, 2002 against Joint Effort Productions.
The Tennessee Anytime website provides a tool for searching
information about
Tennessee
corporations. The "Tennessee Secretary of State Business
Information Search" reveals three listings for entities with the
names "Joint Effort" or "Joint Effort Productions."
The three entities listed share the same identification number
--0016984, the same date of formation --November 28, 1975, the same
place of incorporation --Knox County, the same principal office located
at 1805 Maryville Pike, Knoxville, Tennessee 37920, and the same
registered agent --Conrad R. Loy, Jr.
To accept Wiesener's argument is to impose on the IRS, if it wants to be
sure of its liens, the burden of checking whether the taxpayer has
acquired property under a different name from the name under which the
taxpayer has filed a return. In Kivel v. United States [ 89-2
USTC ¶9415], 878 F.2d 301, 303 (9 th Cir. 1989),
the Ninth Circuit Court of Appeals ruled that the IRS is not required to
record Federal Tax Liens under every known name of the taxpayer. The
Middle District of Tennessee has found that the filing of a Federal Tax
Lien under the taxpayer's legal name constitutes proper constructive
notice. See Van Dolen v. Dept. of the Treasury [ 96-1
USTC ¶50,266], 929 F.Supp. 1083, 1086 (M.D. Tenn. 1996)
("If Congress had intended to impose upon the Internal Revenue
Service the duty to investigate what property is owned by a delinquent
taxpayer, record the name under which it was acquired, and file a
separate notice of tax lien for each such name, it could have done
so").
Id.
at 1086 (citing Kivel [ 89-2
USTC ¶9415], 878 F.2d at 303).
An otherwise valid and properly recorded notice of Federal Tax Lien is
effective even when there are minor errors or omissions in the name
identified on the notice. See United States v. Sirico [ 66-1
USTC ¶9209], 247 F.Supp. 421, 422 (S.D. N.Y. 1965); see
also
United States
v. Feinstein [ 89-2
USTC ¶9547], 717 F.Supp. 1552, 1557 (S.D.
Fla.
1989):
The
mere fact that a full name is not given or that there is an addition,
omission or errors, does not, in and of itself, invalidate the notice. [
] The essential purpose of the filing of the lien is to give
constructive notice of its existence. [ ] The test is not absolute
perfection in compliance with the statutory requirement for filing the
tax lien, [ ] but whether there is substantial compliance sufficient to
give constructive notice and to alert one of the government's claim. [
].
Sirico [ 66-1
USTC ¶9209], 247 F.Supp. at 422.
In the view of the court, because the notice of Federal Tax Lien appears
when the names "Joint" and "Joint Effort" are input
into the system, a reasonable inspection of the
Knox
County
indexing system by Wiesener would have revealed the earlier Federal Tax
Lien. As noted, "Joint Effort, Inc." and "Joint Effort
Productions, Inc." are the same entity. According to the records of
the Tennessee Secretary of State, Joint Effort, Inc. and Joint Effort
Productions, Inc. have the same identification number --0016984, the
same date of formation --November 28, 1975, the same place of
incorporation --Knox County, the same principal office located at 1805
Maryville Pike, Knoxville, Tennessee 37920, and the same registered
agent --Conrad R. Loy, Jr. The records also indicate that the entity
changed names more than once and that it was administratively dissolved
on September 20, 2002, which was shortly before the sale of property
giving rise to the funds at issue in this case. Accordingly, the Federal
Tax Lien was properly filed against Joint Effort, Inc., the taxpayer's
legal name, and constituted proper constructive notice that the property
of "Joint Effort Productions, Inc." was encumbered.
The IRS asserts that the Federal Tax Lien attached to all property and
rights to the property of Joint Effort, Inc. See 26 U.S.C. §6321,
6322.
The Federal Tax Lien attaches to property whether real or personal and
after acquired property. See 26 U.S.C. §6321;
United States v. McDermott [ 93-1
USTC ¶50,164], 507 U.S. 447, 453 (1993). Assuming that the
order of sale destroyed the liens on the specific property sold at the
auction of November 2002, then the lien was transferred to the proceeds
realized from the sale. See Phelps v. United States [ 75-1
USTC ¶9467], 421 U.S. 330, 334 (1975); Beaty v. United
States [ 91-2
USTC ¶60,077], 937 F.2d 288, 292 (6 th Cir. 1991)
(stating that "when a tax lien is displaced by a transfer, a lien
on the proceeds of the transfer does result"); In re
Nevada
Environmental Landfill, 81 B.R. 55, 56 (Bankr. D.
Nev.
1987). "The lien reattaches to the thing and to whatever is
substituted for it ..." The owner and the lien holder, whose claims
have been wrongfully displaced, may follow the proceeds wherever they
can distinctly trace them. Phelps [ 75-1
USTC ¶9467], 421
U.S.
at 334-35.
The court finds that when the property of Joint Effort was sold at
auction, the Government's lien attached to the proceeds realized from
the sale of the property. If the sale did not divest the liens, then the
Federal Tax Lien attached to the sale proceeds immediately upon their
creation, as after-acquired property of the taxpayer. See McDermott
[ 93-1
USTC ¶50,164], 507
U.S.
at 453. Accordingly, the Federal Tax Lien against Joint Effort, Inc. is
attached to the funds at issue in this interpleader suit. Because
Wiesener did not become a judgment lien creditor of Joint Effort until
November 13, 2002, which was after the notice of Federal Tax Lien was
filed in accordance with §6323,
the Federal Tax Lien is valid against and prior to Wiesener's judgment
lien. The proceeds of the auction of the personal property of Joint
Effort Productions, Inc., having been placed in the Registry of the
General Sessions Court
, must now be disbursed by Quist to the
United States
.
The motion for summary judgment by the
United States
is GRANTED and the summary judgment motion of Wiesener is DENIED. The
Knox County Clerk is DIRECTED to release the interpleaded funds to the
United States
.
ORDER TO FOLLOW.
JUDGMENT
ORDER
For the reasons stated in the memorandum opinion filed contemporaneously
with this order, the summary judgment motion of the
United States
[Doc. 12] is GRANTED and the motion of Leon Wiesener [Doc. 14] is
DENIED. Catherine F. Quist, Clerk of the Knox County General Sessions
Court, is DIRECTED to release the interpleaded funds to the United
States.
1
On April 11, 2003, Wiesener filed a First Amended Petition for Writ of
Mandamus, naming the
United States of America
and IRS as Defendants and requesting the Chancery Court order that the
IRS' lien is not effective against the funds held by Quist in the
Registry of the
General Sessions Court
.
Bednarowski
and Michaels Development, LLC, and Citizens Bank, Plaintiffs v. John C.
Wallace, et al, Defendants.
U.S.
District Court, East.
Dist.
Mich.
; 2002-60181, June 16, 2003.
[ Code
Secs. 6321 and 6323]
Validity and priority against third parties: Priority of tax liens:
Subrogation: Tax liens, property subject to: After-acquired property:
Property transferred to third party. --
An
IRS tax lien had priority over a purchase money mortgage by a
third-party corporation because subrogation was not available when the
purchase of the property was voluntary. The corporation purchased real
property from a married couple who had executed a mortgage on the
property by executing another mortgage to pay off the first. After the
couple had executed their mortgage, and before the corporation executed
theirs, the IRS made a tax assessment against the couple and a tax lien
was recorded on the property. The corporation's contention that it
became subrogated to the priority position of the first mortgage was
rejected. Equitable subrogation is only available when the parties
paying off the obligations are not doing so freely but, rather, pursuant
to preexisting agreements, such as insurance or guaranty contracts.
Moreover, purchase money mortgages only have priority when the mortgagor
is the taxpayer because the property is owned to a certain extent before
the tax lien attaches.
OPINION
AND ORDER OF THE COURT GRANTING DEFENDANT USA'S MOTION FOR SUMMARY
JUDGMENT AND DENYING PLAINTIFFS' MOTION FOR SUMMARY JUDGMENT
I. INTRODUCTION
BATTANI, District Judge: Before the Court are Plaintiffs' and Defendant
United States of
America
's Cross-Motions for Summary Judgment. Plaintiffs Bednarowski &
Michaels Development (hereinafter "Bednarowski") and Citizens
Bank seek to quiet title to a parcel of real property in
Shelby
Township
(hereinafter "the Property"), and argue in this motion that
they should be awarded that title as a matter of law. Specifically,
Plaintiffs assert that Bednarowski's title (in which Citizens Bank has a
mortgage interest) is unencumbered by the
USA
's tax lien on the Property because it gained the priority of a
preexisting mortgage on the Property. The
USA
responds in its cross-motion that Bednarowski's title is junior to the
government's tax lien, so that the
USA
has title to the Property. The Court agrees with the
USA
that Plaintiffs' interests in the Property is encumbered by the tax
lien. The Court also agrees with Defendant that the tax lien has
priority over Citizens Bank's mortgage despite the fact that Citizens
Bank's mortgage is a purchase money mortgage.
II. STANDARD OF REVIEW
F.R.C.P. 56 states that summary judgment "shall be rendered
forthwith if the pleadings, [ etc.,] show that there is no
genuine issue as to any material fact and that the moving party is
entitled to a judgment as a matter of law." Fed. R. Civ. P. 56.
There is no genuine issue of material fact if there is no factual
dispute that could affect the legal outcome on the issue. Anderson v.
Liberty Lobby, Inc., 477
U.S.
242, 248-49 (1986). In other words, the movant must show that it would
prevail on the issue even if all factual disputes are conceded to the
non-movant. Additionally, for the purposes of deciding on a motion for
summary judgment, a court must draw all inferences from those facts in
the light most favorable to the non-movant. Matsushita Elec. Indus.
Co. v. Zenith Radio Corp., 475
U.S.
574, 587 (1986).
III. BACKGROUND
In January 1995, Defendants John and Dawn Wallace purchased the Property
for $40,000. In 1999, the Wallaces executed a mortgage in favor of
Michigan National Bank to secure loans, including a $150,000 line of
credit. In January 2001, the IRS made a tax assessment against the
Wallaces, and a tax lien was recorded on the Wallaces' property on April
12, 2001. Meanwhile, the Wallaces decided to sell a portion of the
Property to Bednarowski, who, in turn, sought Citizens Bank's help in
financing the purchase. Citizens Bank agreed to receive a mortgage on
the condition that Bednarowski find a way to discharge the 1999
mortgage. These terms were memorialized in a Purchase Agreement signed
on October 29, 2001, and accepted on October 31, 2001. Accordingly, in
November 2001, Bednarowski finalized the agreement with Standard Federal
Bank, the successor by merger to Michigan National Bank, to pay off the
1999 mortgage with a $238,992.76 payment. Shortly thereafter, the
Wallaces sold about 2/3 of the Property to Bednarowski, who executed a
mortgage on the Property in favor of Citizens Bank for a $288,000 loan.
The
USA
claims title to the Property by virtue of its tax lien, which predated
the sale to Bednarowski. Plaintiffs contend that although they acquired
their interest in the Property after the
USA
had acquired its tax lien, they can assume the priority of the 1999
mortgage to gain precedence over the
USA
's title. The instant cross-motions ask the Court to quiet title with
respect to the claims made by Plaintiffs and the
USA
.
IV. DISCUSSION
A.
Plaintiffs do not have priority through equitable subrogation because
Bednarowski was a volunteer when it bought the Property
Plaintiffs acknowledge that their purchase of the Property post-dated
the federal tax lien, but argue that they are subrogated to rights of
Standard Federal Bank/Michigan National Bank, and that their interest is
therefore prior to the tax lien. Plaintiffs observe that under the
Internal Revenue Code, the Court must look to
Michigan
law to determine whether subrogation applies here. Plaintiffs contend
that, under
Michigan
law, they were subrogated to the first mortgage-holder's rights when
they paid off the first mortgage. Under the Internal Revenue Code, a
federal tax lien "shall not be valid as against any purchaser,
holder of a security interest, mechanic's lienor, or judgment lien
creditor until notice thereof ... has been filed by the Secretary."
26 U.S.C. §6323(a).
Thus, "priority of the federal tax lien provided by 26 U.S.C. §6321
as against liens created under state law is governed by the common-law
rule --the first in time is the first in right." United States
v. Pioneer Am. Ins. Co. [ 63-2
USTC ¶9532], 374 U.S. 84, 87 (1963).
There is an important qualification, however, to the first-in-time rule:
"Where, under local law, one person is subrogated to the rights of
another with respect to a lien or interest, such person shall be
subrogated to such rights for purposes of any lien imposed by section
6321." 26 U.S.C. §6323(i)(2).
The Court must therefore look to
Michigan
law to determine whether Plaintiffs' interests are subrogated to the
holder of the 1999 mortgage.
Equitable
subrogation is a legal fiction which permits a party who satisfies
another's obligation to recover from the party `primarily liable' for
the extinguished obligation... The doctrine rests on the equitable
principle that one who, in order to protect a security held by him, is
compelled to pay a debt for which another is primarily liable, is
entitled to be substituted in the place of and to be vested with the
rights of the person to whom such payment is made, without agreement to
that effect.
In re Air Crash Disaster, 86 F.3d 498, 549 (6th Cir. 1996)
(internal citations omitted).
The
USA
asserts that Plaintiffs cannot claim subrogation because they paid off
the mortgage voluntarily. A key requirement for equitable subrogation is
that the party seeking subrogation was "compelled" to pay the
debt in question; in other words, that the party was not a volunteer.
Id.
;
Hartford
Accident & Indem. Co. v. Used Car Factory, Inc., 461
Mich.
210, 215 (internal citations omitted). The
USA
insists that Plaintiffs paid off the 1999 mortgage voluntarily because
the purchase of the Property was a voluntary transaction, so subrogation
is not available to prioritize Plaintiffs' interest over the tax lien.
There is no dispute that Bednarowski paid off the Wallace's 1999
mortgage held by Standard Federal Bank/Michigan National Bank. The only
question, therefore, is whether Bednarowski was somehow
"compelled" to make the payment, or whether it was a volunteer
and therefore ineligible to claim subrogation. Bednarowski claims that
it was not a volunteer because paying off the 1999 mortgage was a
condition precedent to obtaining a new mortgage from Citizens Bank. This
argument, however, does not comport with the examples of entities that
have been "compelled to pay a debt" and were therefore
eligible for subrogation. Air Crash, 86 F.3d at 549. In Hartford
Accident, 461
Mich.
at 218, for example, an insurer was subrogated to the rights of its
insured's employee after discharging a contractual duty to pay the
employee's claim. See also Auto-Owners Ins. Co. v. Amoco Prod.
Co., 658 N.W.2d 460, 463 (
Mich.
2003) ("When an insurance provider pays expenses on behalf of its
insured, it is not doing so as a volunteer"). Similarly, in Harley
J. Robinson Trust v. Ardmore Acres, Inc. [ 98-1
USTC ¶50,343], 6 F.Supp.2d 640 (E.D. Mich. 1998), to which
Plaintiffs cite, the court considered whether a guarantor for a loan
could be subrogated to the rights of the lender. In that case, Comerica
loaned $2.4 million to the defendant in return for a mortgage on certain
property, and the plaintiff agreed to serve as guarantor for the loan.
Id.
at 642. Two federal tax liens were recorded against the defendant, after
which the defendant defaulted on Comerica's loan. The plaintiff paid off
the loan pursuant to the guaranty agreement and received Comerica's
mortgage, and the court ruled that the plaintiff therefore became
equitably subrogated to Comerica's rights.
Id.
at 643, 645.
In these cases, the parties seeking subrogation were not volunteers
because they did not pay off the obligations freely, but rather paid
them off pursuant to preexisting agreements ( i.e., insurance or
guaranty contracts). In the case at bar, in contrast, Bednarowski paid
off the 1999 mortgage for the purpose of gaining the security interest;
Bednarowski had no relationship with the 1999 mortgage-holder until
payoff itself. A virtually identical position was presented in Lentz
v. Stoflet, 280
Mich.
446, 451 (1937). In Lentz, the plaintiff paid off the defendant's
1919 and 1923 mortgages in return for a mortgage of its own in 1930.
Id.
at 448. A competing mortgage had been placed on the property in 1929,
and the plaintiff sought to obtain the priority of the 1919 and 1923
mortgages through equitable subrogation. The Michigan Supreme Court
denied this request on the grounds that the plaintiff paid off the 1919
and 1923 mortgages as a volunteer, rather than pursuant to some
preexisting arrangement or interest.
Id.
at 451. In a more recent case, the Bankruptcy Court for the Western
District of Michigan held that a bank that obtained a mortgage by paying
off a prior mortgage could not equitably subrogate itself to the prior
mortgage because it was a volunteer. In re Lewis, 270 B.R.
215, 216-17 (Bankr. W.D. Mich. 2001). The Court finds this case is
analogous to Lentz and Lewis, and denies Plaintiffs'
request for equitable subrogation.
At oral argument, Plaintiffs implied that, although their actual
purchase came after the tax lien was recorded, the agreement that
contractually obligated Plaintiffs to pay off the mortgage predated
their access to knowledge of the lien. The Court is sympathetic to this
position, but it is of no consequence. The tax lien was filed in April
and the Purchase Agreement was not signed until October (although a
previous agreement was attempted in August). Plaintiffs have not
presented any evidence that the lien was not recorded, they only argue
that they did not learn of it. The Court further notes that the date of
the commitment for title insurance was July 2001, well before the
signing of the Purchase Agreement. No evidence was presented that any
subsequent title search was completed. The Court cannot merely assume
that the lien was somehow "in transit" for over four months,
and that Plaintiffs were therefore justifiably ignorant of it.
Plaintiffs' other cited caselaw does not change this conclusion. For
example, Plaintiffs cite to Mort v. United States [ 96-1
USTC ¶50,315], 86 F.3d 890, 894 (9th Cir. 1996), to
establish that they are not volunteers, but Mort relied on a more
restrictive definition of volunteer supplied by California law.
Specifically, the Mort court read California law as allowing
subrogation for a "person who lends money to pay off an encumbrance
on property and secures the loan with a deed of trust on that
property," id.; this is clearly contradictory to Michigan
law as pronounced in Lentz and Lewis. Plaintiffs also
argue that the government would unjustly receive a windfall if the Court
denied subrogation here, because the
USA
's lien would have its priority elevated with the 1999 mortgage's
priority disappearing. See Dietrich Indus., Inc. v.
United States
, 988 F.2d 568, 573 (5th Cir. 1993). Plaintiffs' windfall argument
is not persuasive, however, because allowing subrogation would give
Plaintiffs the windfall; further, the logic of Plaintiffs' argument
would have applied just as well in Lentz or Lewis, and
both of those courts denied subrogation. Finally, Plaintiffs cite to United
States v. Baran, 996 F.2d 25, 29 (2nd Cir. 1993), but Baran
never discussed the volunteer issue. In conclusion, the Court denies
Plaintiffs equitable subrogation argument.
B.
Citizens Bank's Mortgage gets priority over the tax lien as a purchase
money mortgage under federal law
Both parties agree that Citizens Bank has a purchase money mortgage on
the property, but disagree over whether such a mortgage gets priority
over the tax lien. Plaintiffs argue that the current state of
Michigan
law favors their position. Specifically, Plaintiffs contend that a
Michigan Appeals Court decision, Graves v. American Acceptance
Mortgage Corp., 246 Mich. App. 1 (2001), held that purchase money
mortgages always have highest priority. Plaintiffs acknowledge that the
Michigan Supreme Court later overruled
Graves
, but observe that the Michigan Supreme Court has since vacated its
overruling opinion to reconsider the case. Plaintiffs conclude that with
the Supreme Court opinion vacated, the
Appeals Court
opinion is once again good law. The government responds that state law
is unsettled as to the priority of a purchase money mortgage versus
other liens and securities. The
USA
continues to say that the state of
Michigan
law is irrelevant, because priority in this case is governed by federal
law, and federal law allows for no special priority for purchase money
mortgages.
As both parties agree, state law dictates the existence of property
interests, but the priority of those interests with respect to tax liens
or other portions of the tax law is an issue of federal law. United
States v. National Bank of Commerce [ 85-2
USTC ¶9482], 472 U.S. 713, 722 (1985); Blachy v. Butcher
[ 2000-2
USTC ¶50,629], 221 F.3d 896, 905 (6th Cir. 2000). Defendant
is correct that the dispute over
Graves
is moot, as the question of priority is not governed by state law.
Federal law, however, does generally give priority to purchase money
mortgages. The Supreme Court has held that a federal tax lien is
subordinate to "a purchase-money mortgage regardless of whether the
agreement was entered into before or after the filing of a tax
lien." Slodov v. United States [ 78-1
USTC ¶9447], 436 U.S. 238, 257-58 (1978). "Decisional
law has long established that a purchase-money mortgagee's interest in
the mortgaged property is superior to antecedent liens prior in time ...
and, therefore, a federal tax lien is subordinate to a purchase-money
mortgagee's interest notwithstanding that the agreement is made and the
security interest arises after notice of the tax lien."
Id.
at n. 23; accord First Interstate Bank of
Utah
, N.A. v. Internal Revenue Serv. [ 91-2
USTC ¶50,303], 930 F.2d 1521, 1523 (10th Cir. 1991). This
fact has recently been recognized by another court in this District. Wilson
v. Wilson [ 2003-1
USTC ¶50,153], No. 02-CV-70833, 2002 WL 31545995, at *8
(E.D.
Mich.
Oct. 21, 2002) (citing First Interstate Bank [ 91-2
USTC ¶50,303], 930 F.2d at 1523). Thus, the government's tax
lien seems at first glance subordinate to Citizens Bank's mortgage.
The Court, however, agrees with Defendant that Slodov is
distinguishable from the instant case because the mortgagor in Slodov
was the taxpayer himself, whereas here, the mortgagor is Bednarowski, a
separate purchaser. Defendant insists that this is a crucial distinction
between Slodov and the instant case because of the rationale
underlying the priority given to purchase money mortgagees. In a typical
purchase money mortgage situation, the property-buyer receives a loan
from the lender to buy property, and secures that loan by granting the
lender a mortgage on the purchased property. In such a scenario, the
purchase of the land and the mortgage are seen as simultaneous events,
so that the mortgagor obtains the land already encumbered by the
mortgage.
United States
v. New Orleans R.R., 79
U.S.
362, 365 (1870); cited in Slodov [ 78-1
USTC ¶9447], 436
U.S.
at n. 23. In other words, it is not the case that the mortgagor acquires
the land and then gives a mortgage interest to the lender.
This chronology is critical in explaining why purchase money mortgages
get priority over preexisting liens. A preexisting lien, i.e., a
tax lien, encumbers whatever property the lienee thereafter acquires.
Thus, when a lienee buys property, the lien automatically attaches to
it. This is in contrast to a non-purchase money situation, in which the
lien is the first encumbrance on the property. If the lienee
subsequently gives out a mortgage on that property, the lien takes
priority over the mortgage because the lien attached first. In a
purchase money situation, on the other hand, the property enters the
lienee's hands with the mortgage already attached, and so the lien
attaches after the purchase money mortgage, even though the lien existed
in time before the purchase money mortgage. Thus, the purchase money
mortgage has priority over the lien, because it attached to the property
before the lien. Put another way, the lien can only extend to the
property actually owned by the lienee; the priority given to purchase
money mortgages reflects the fact that the property comes to the
mortgagor already "owned" to a certain extent (the extent of
the mortgage amount) by the mortgagee. Slodov [ 78-1
USTC ¶9447], 436 U.S. at n. 23 (citing New Orleans R.R.,
79 U.S. at 365; Rev.
Rul. 68-57, 1968-1 C.B. 553). Therefore, the lienor's
interest in the property is subordinate to the mortgagee's, because the
lien does not encumber the portion of the property "owned" by
the mortgagee.
The Court finds that the rationale for granting priority to purchase
money mortgages does not apply in the case at bar. In the instant case,
the tax lien had already attached to the Property before Plaintiffs got
involved. In this way, Bednarowski acquired the Property with the lien
attached. Even though the mortgage to Citizens Bank occurred
simultaneously with Bednarowski's acquisition of the property, it still
occurred after the tax lien had attached. Put another way, when the tax
lien attached, Citizens Bank did not yet have an interest in the
Property, unlike the classic purchase money mortgage situation described
above. While Citizens Bank's mortgage would take priority over any tax
liens imposed on Bednarowski, it does not take priority over a
preexisting tax lien on Wallace that was inherited by Bednarowski in its
purchase of Wallace's property. Therefore, the Court concludes that the
purchase money mortgage in this case does not take priority over the tax
lien.
V. CONCLUSION
For the reasons set forth above, the Court GRANTS Defendant's Motion for
Summary Judgment and DENIES Plaintiff's Motion for Summary Judgment.
Specifically, the Court holds that the Property is encumbered by the tax
lien, and that the tax lien has priority over Citizens Bank's mortgage.
IT IS SO ORDERED.
Bernice
C. Williams, Executor, etc., Plaintiff v. U.S. Department of Treasury,
Defendant
U.S.
District Court, No. Dist. Ohio, West. Div., 3:01 CV 7077, 6/14/2001
[Code
Secs. 6321 and 6323
]
Tax liens, validity of: Motion to dismiss: Interpleader actions: State
law: Equitable interest: Attachment of liens.--Tax liens attached to a
legatee's interest in the property of a decedent's estate because, under
state (Ohio) law, he had a current equitable interest in any property of
the estate to which he was entitled. Accordingly, the legatee was not
entitled to dismissal of an interpleader action filed by the estate's
executor to determine the proper distribution of the property in the
estate.
MEMORANDUM OPINION
KATZ,
District Judge:
This
matter is before the Court on the motion for dismissal of interpleader
filed by Defendant Douglas Smith in the Probate Court of Auglaize
County, Ohio, on January 31, 2001. The case was removed to this Court
pursuant to 28 U.S.C. §§1441, 1442, 1444, and 1446. For the following
reasons, the motion to dismiss will be denied.
BACKGROUND
On
January 26, 2001, Bernice Williams, executor for the Estate of Wayne H.
Williams, filed an action for interpleader in the Probate Court of
Auglaize County, Ohio. In her complaint, the executor averred knowledge
that one of the legatees of the estate, Douglas Smith
("Smith"), was the subject of two liens filed by the
Department of Treasury, Internal Revenue Service ("IRS"). 1
The executor then stated her desire not to make a final estate
distribution to Smith until her concerns regarding the liens were
resolved.
On
January 31, 2001, Smith filed a motion to dismiss the interpleader for
failure to state a claim upon which relief can be granted, pursuant to
Ohio Civ. R. 12(b)(6). Smith argued that the action should be dismissed
because the IRS had not claimed any right or interest in the estate, and
because the executor lacked the authority to file an action in
interpleader. On February 21, 2001, the action was removed to this Court
by the IRS. Finally, on March 22, 2001, the IRS filed a memorandum in
opposition to Smith's motion to dismiss. Smith did not reply, and the
matter is ripe for consideration. The parties' contentions are discussed
below.
DISCUSSION
I.
Motion to Dismiss Standard
In
deciding a motion to dismiss under Federal Rule of Civil Procedure
12(b)(6), the function of the Court is to test the legal sufficiency of
the complaint. In scrutinizing the complaint, the Court is required to
accept the allegations stated in the complaint as true, Hishon v.
King & Spalding, 467 U.S. 69, 73, 104 S.Ct. 2229, 2232, 81
L.Ed.2d 59 (1984), while viewing the complaint in a light most favorable
to the plaintiffs, Scheuer v. Rhodes, 416 U.S. 232, 236, 94 S.Ct.
1683, 1686, 40 L.Ed.2d 90 (1974); Westlake v. Lucas, 537 F.2d
857, 858 (6th Cir. 1976). The Court is without authority to dismiss the
claims unless it can be demonstrated beyond a doubt that the plaintiff
can prove no set of facts that would entitle it to relief. Conley v.
Gibson, 355 U.S. 41, 45-46, 78 S.Ct. 99, 101-02, 2 L.Ed.2d 80
(1957); Westlake, supra, at 858. See generally 2 JAMES W.
MOORE, MOORE'S FEDERAL PRACTICE, §12.34[1] (3d ed. 1997).
II.
Potential Applicability of Tax Liens
For
the purposes of this motion to dismiss, this Court must assume that tax
liens were assessed against Smith on September 14, 1992, and December
28, 1992, pursuant to Sections 6321 2
and 6322 3
of the Internal Revenue Code, 26 U.S.C. §6321-22. Further, the Court
must assume that those liens have neither been satisfied nor rendered
unenforceable. With those assumptions having been made, it is clear that
Smith's motion to dismiss must be denied.
By
operation of Sections 6321 and 6322, a tax lien in favor of the United
States arose against Smith on all of Smith's real and personal property
and rights to such property. Under Ohio law, Smith has a current
equitable interest in any property of the estate to which he is
entitled. See Braun v. Central Trust Co., 109 N.E.2d 476, 479-80,
92 Ohio App. 110, 115-16 (1st Dist. 1952); 31 Ohio Jurisprudence 3d,
Decedents' Estates, §1277 (1997). The Supreme Court has made clear that
there is no lien exception for an inheritance. See Drye v. United
States [99-2 USTC ¶51,006; 99-2 USTC ¶60,363], 528 U.S. 49, 56,
120 S.Ct. 474, 480, 145 L.Ed.2d 466 (1999); see also United States v.
McDermott [93-1 USTC ¶50,164], 507 U.S. 447, 453, 113 S.Ct. 1526,
1530, 123 L.Ed.2d 128 (1993) (holding that interest in property of the
estate attaches at the death of the testator). Therefore, the liens
against Smith would attach to his interest in the property of the
estate.
Smith's
motion to dismiss is utterly without merit. Although Smith's claim that
the IRS has not placed any lien against the assets of the estate may be
true, the existence of such liens against the estate is
irrelevant to the motion to dismiss when the action for interpleader
alleges liens against Smith himself. 4
When the allegations of the action for interpleader are taken as true
and viewed in the light most favorable to the non-movant, there clearly
exists a claim upon which relief may be granted. Accordingly, Smith's
motion to dismiss will be denied.
CONCLUSION
For
the foregoing reasons, Douglas Smith's motion to dismiss (filed on
January 31, 2001, and contained in Doc. No. 10) will be denied.
IT
IS SO ORDERED.
1
The interpleader action also requests an order allowing distribution to
two other legatees. Those legatees are not material to the resolution of
the pending motion to dismiss. The matter in the state court was Williams
v. Department of Treasury, Case No. 201-99.
2
Section 6321 provides:
If
any person liable to pay any tax neglects or refuses to pay the same
after demand, the amount (including any interest, additional amount,
addition to tax, or assessable penalty, together with any costs that may
accrue in addition thereto) shall be a lien in favor of the United
States upon all property and rights to property, whether real or
personal, belonging to such person.
26
U.S.C. §6321 (West 2001).
3
Section 6322 provides:
Unless
another date is specifically fixed by law, the lien imposed by section
6321 shall arise at the time the assessment is made and shall continue
until the liability for the amount so assessed (or a judgment against
the taxpayer arising out of such liability) is satisfied or becomes
unenforceable by reason of lapse of time.
26
U.S.C. §6322 (West 2001).
4
Similarly unavailing are Smith's unsupported arguments that the action
must fail because the Will does not give the executor power to withhold
or place other contingencies on Smith's funds.
