6321 After Aquired Property page2

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Dissenting Opinion

BROWN, Circuit Judge, dissenting:

This is a startling result. Laws of Texas which are designed to protect innocent persons dealing in faith on the revelations of title records are twisted to permit the great national sovereign to take property from one who is the acknowledged owner of it to apply on the tax debts of another, the former owner who--as the trial Court found and this Court does not dispute--has transferred ¹ the property. I do not believe that Congress ever intended any such result. I do not think that a Court should lend its hand to anything so demeaning to a sovereign. ²

The Federal Statute creates a lien only "upon all property and rights to property * * * belonging to such person [taxpayer]." ³ Unless there is property belonging to the taxpayer, the Government's lien is nonexistent. The Texas Statute ⁴ which protects business creditors and those parting with consideration on the faith of apparent record title speaks in terms of the persons against whom the conveyance is not good, such as bona fide purchaser, judgment creditors, etc. Unlike this, the Federal Statute speaks in terms of the origin of the lien. The tax lien arises, the tax lien comes into being, only as to property or rights to property belonging to the taxpayer.

Clearly this property did not belong to Taxpayer. It had no right to such property. True, under Texas law a judgment creditor had a superior claim against the purchaser whose deed was imperfect for late recordation. But one thing clear is that Taxpayer here had no right in or to the property. ⁵ Not a single Texas case could possibly be dredged up which in even the most remote way would suggest the faintest hope that Maxwell, the vendor-taxpayer, had any rights, legal or equitable, against anyone--Creamer, the public, or the Publican to get the property back or assert any interest in it.

And yet it is this--ownership by the taxpayer--which gives rise to the lien for the National Government. Congress has not said that this Nation has a tax lien against any and all property once owned by a delinquent taxpayer to the same extent as some innocent purchaser or judgment creditor might have under local recordation statutes.

Once Congress so declares, Courts must enforce it. But the morality of the Government's taking property which the Court's opinion reflects was sold to, paid for by, and in equitable conscience and law belonged to a stranger, is so disturbing to me that before the heavy hand of the tax gatherer falls, it is for Congress to speak clearly to declare that this is the conscience of the country.

I therefore respectfully dissent.

¹ See, e.g., "The deed had inadvertently failed to include certain real property * * *. The question is whether the federal tax lien attaches to the property erroneously omitted from the * * * deed. * * * By inadvertence the contract failed to list or describe * * * the six lots of land * * *." (Emphasis supplied)

² I am at a loss to understand why there is any question about jurisdiction. United States v. Morrison, 5 Cir., 1957, [57-2 USTC ¶9801] 247 F. 2d 285. Under F. R. Civ. P. 54(c) the power of the Court is not affected by the particular section of the code cited in the complaint or the magic words used to describe the relief sought.

³ 26 USCA §6321, note 6 Court's opinion.

⁴ Tex. Civ. Stat. Ann. art. 6627.

⁵ Texas ' Article 6627, set out in the Court's opinion, does speak in terms of conveyances being "void as to all creditors and subsequent purchasers * * * unless * * * recorded * * *" But the concluding portion of the section is positive that "as between the parties * * *" the conveyance "shall be valid and binding."

 

 

 

Edna Kathleen Terry, as Trustee, etc., Plaintiff v. United States of America , Defendant-Appellant, Professional Technical Representatives Money Purchase Plan, Defendant-Respondent

U.S. Court of Appeal of the State of Calif. , 2nd Appellate Dist., Div. One, B117644, B119401, 1/21/99, Affirming an unreported SuperCt. of Calif. decision

[Code Secs. 6321 and 6323 ]

Tax liens: Priority against third parties: Attachment of: After-acquired property: Trust assets: Beneficial interest: Personal v. real property interests: Equitable conversion: When conversion occurs.--A lender's security interest in a delinquent taxpayer's residual interest in trust property was accorded priority over earlier IRS tax liens. Under state ( California ) law, the tax liens, which were filed in the county where the taxpayer resided, attached only to his personal property and to any real property located in that county. Although the trust's remaining asset was real property, the IRS did not file its liens in the county where the property was located. The taxpayer's interest in the trust was equitably converted to a personal property interest, however, since the trust had to sell the real estate to distribute the residue to the beneficiaries. However, such conversion did not occur until the closing date of the property's sale. As a result, the tax lien did not attach to the taxpayer's interest until after it was assigned to the lender.

Nora M. Manella, United States Attorney, Loretta C. Argrett, Assistant Attorney General, Edward M. Robbins, Jr., Thomas D. Coker, Randolph L. Hutter, for defendant-appellant. W. Montgomery Jones, Jones and Jones, for defendant-respondent.

 Caution: This court has designated this opinion as NOT FOR PUBLICATION. Consult the Rules of the Court before citing this case.

ORTEGA, Acting P.J.: In June 1990, Nellie Whitaker Beasley created a revocable trust into which she transferred both her real and personal property. Beasley, the trust's sole income beneficiary during her lifetime, used the trust as a will substitute to pass her assets to her beneficiaries upon her death, when the trust was to terminate. Beasley died on January 27, 1994. This appeal concerns two competing claims to the interest of Beasley's grandnephew, Marvin Stone, a residual beneficiary of 30 percent of the trust residue. The two claimants are the United States of America (on behalf of the Internal Revenue Service), ¹ which had assessed $2.8 million in tax liens against Stone for delinquent federal taxes, penalties, and interest, and Professional Technical Representatives Money Purchase Plan (Plan), to whom Stone had assigned his interest in the trust residue as additional security for a loan.

For the reasons that follow, we affirm the trial court order awarding Stone's remaining residual interest of $83,985.72 to the Plan. We direct the Los Angeles County Treasurer, who is holding Stone's interpleaded share of the residue, to transfer the funds to the Plan.

BACKGROUND

Before Beasley's death, a conservatorship was established over Beasley and her estate. (Conservatorship of the Person and Estate of Nellie Whitaker Beasley (Super. Ct. L.A. County, 1991, No. BP000175).) The trust instrument was amended to require the trustee to obtain court approval before selling, distributing, or transferring any trust assets. Following Beasley's death, the court exercised its continuing jurisdiction and supervision over the trustee's disposition of the trust assets in accordance with Beasley's testamentary intent as expressed in the trust instrument.

When Beasley died, the trust had personal property valued at about $380,000 and real property in Los Angeles valued at about $400,000. ² On September 1, 1994, the court entered an order confirming the sale of the trust's real property in Los Angeles . (The escrow on that sale did not close, however, until March 21, 1996.)

In December 1994, the trustee made an initial distribution to the residual beneficiaries, including Stone. Assets remaining to be distributed to the residual beneficiaries included the anticipated proceeds from the sale of the real property (which was in escrow) and about $100,000 in personal property.

Stone anticipated that following the close of escrow, he would receive a second distribution of about $90,000. On August 4, 1995, Stone assigned to the Plan his interest in the remaining residue. ³ The assignment served as additional security for a $140,000 loan to third parties, John and Heather Bomarito. In return for his assignment, Stone received a portion of the Bomaritos' loan proceeds. With Stone's approval, the Plan's attorney instructed the trustee to send the attorney Stone's second distribution check.

Unbeknownst to the Plan, the IRS had assessed $2.8 million in tax liens against Stone. In 1993 and 1994, the IRS had filed notices of federal tax lien in Monterey County , where Stone resides. ⁴ The bulk of the tax liens were filed before Beasley's death and well before Stone assigned his interest to the Plan in August 1995. In 1996, the IRS served the trustee with a notice of levy against Stone's interest in the trust. ⁵

Escrow closed on the real property sale on March 21, 1996. After receiving the proceeds from that sale, the trustee filed a final report asking the court to approve her final distributions to the residual beneficiaries, except for Stone. Faced with the two competing claims to Stone's interest, the trustee interpleaded Stone's share of $83,985.72 by depositing that sum with the Los Angeles County Treasurer.

The IRS (through the United States of America ) petitioned for an order establishing its right to the interpleaded funds. (In re The Nellie W. Beasley Revocable Trust (Super. Ct. L.A. County, 1997, BP014805).) The IRS contended it was entitled to priority over the Plan, having recorded its tax liens in 1993 and 1994, well before the Plan received Stone's assignment as additional security for the loan. The Plan, on the other hand, contended the notices of lien were recorded in the wrong county with regard to the trust's real property in Los Angeles . The Plan asserted the notices of lien filed in Monterey County did not establish the IRS' priority as to Stone's interest in the Los Angeles property.

The trial court ruled in favor of the Plan. It concluded that the notices of tax lien filed in Monterey County were "of no force and effect inasmuch as the Claimant, UNITED STATES OF AMERICA, failed to record the lien in the County of Los Angeles, where the principal assets were located, pursuant to the provisions of 26 U.S.C. Section 6323(f)." The trial court awarded the Plan all of the deposited funds. This appeal followed.

CONTENTIONS ON APPEAL

(I) The IRS contends its notices of tax lien attached to Stone's interest in the trust's real property before the Plan's security interest arose. The IRS asserts it is thus entitled to the whole of the interpleaded funds.

(II) Alternatively, the IRS contends its notices of tax lien attached to Stone's interest in the trust's personal property before the Plan's security interest arose. The IRS asserts it is thus entitled to a portion of the interpleaded funds.

DISCUSSION

I

Stone resided in Monterey County , but the trust's real property was located in Los Angeles County . As a general rule, filing the notice of tax lien in Monterey County would have had no effect with regard to the trust's property in Los Angeles County . Both parties agree that, as a general rule in California , a tax lien notice recorded in one county has no effect with regard to real property located in another county. The IRS states in its opening brief. "Under I[nternal ]R[evenue ]C[ode] section 6323(f) and applicable California law, the liens must be filed with the office of the recorder for the county in which the real property is located (where the [trust] assets involved are real property) or in which the Trust beneficiary resides (where the [trust] assets involved are personal property)."

The IRS contends, however, that under the doctrine of equitable conversion, Stone's interest in the trust's real property was converted, upon entry of the order confirming sale, from a real property interest to a personal property interest. Under the IRS' theory, the tax liens attached to Stone's personal property interest in the Los Angeles property as of the date of the order confirming sale.

We will first ascertain the nature of Stone's interest in the trust assets on the date of Beasley's death. We begin by noting that in federal tax lien cases, " 'Property' is a concept which draws its definition from state, not federal, law. Aquilino v. United States [60-2 USTC ¶9538], 363 U.S. 509, 512-13 . . . (1960)." (Cavanaugh v. Cavanaugh (B.R. Ct., N.D. Ill., E.D. 1993) 153 B.R. 224, 228.) Accordingly, we took to California law to determine the nature of Stone's property interest in the trust assets.

Under California law, when Beasley transferred her real property to the revocable trust, she transferred legal title to the trustee. Beasley still retained, however, her beneficial ownership of the real property as sole beneficiary of the trust during her lifetime. This conclusion is consistent with California real property tax law. When Beasley transferred her real property to the revocable trust, that transfer did not constitute a change of ownership to trigger a reassessment because the rights conferred to the residual beneficiaries were entirely contingent during Beasley's lifetime. " 'If the trust is revocable it is excluded [from reassessment] because the rights conferred are contingent. If the trustor is the sole beneficiary during his lifetime, his retained interest is considered to be "substantially equivalent in value" to the fee interest in any real property covered by the trust. He is therefore the true owner and the change in ownership does not occur until the property passes to the remaindermen on the trustor's death.' " (Empire Properties v. County of Los Angeles (1996) 44 Cal.App.4th 781, 788, quoting January 1979 Report of the Task Force on Property Tax Administration commissioned by the Legislature after passage of Proposition 13.)

When Beasley died on January 27, 1994, the revocable trust became irrevocable and was terminated under the express provisions of the trust instrument. (Empire Properties v. County of Los Angeles, supra, 44 Cal.App.4th at pp. 786-787.) At that time, Stone acquired a present beneficial interest in the trust's residual assets, including the trust's real property. The question we face is whether Stone's beneficial interest in the trust's real property is properly classified as a personal or a real property interest.

Ordinarily, because the asset at issue is real property, Stone's beneficial interest would be classified under California law as a real property interest. The IRS contends that upon entry of the order confirming sale, however, Stone's beneficial interest in the real property was equitably converted into a personal property interest. Under the doctrine of equitable conversion, "Where real property is conveyed to a trustee with directions to sell in any event it will be treated in equity as personal property. But where the property in kind is, or may be, conveyed to the beneficiary no such equitable conversion results." (Lynch v. Cunningham (1933) 131 Cal.App. 164, 173.)

Although the trustee theoretically possessed discretion either to sell the real property or convey it in kind, Beasley's gifts to the residual beneficiaries were not so large as to afford the trustee the option of giving any single beneficiary the real property in whole. Stone, with a 30-percent share of the residuary, received the largest gift of all. By the time the real property was in escrow, Stone knew he was to receive only an additional $90.000, less than half the value of the Los Angeles property. When Stone assigned his interest in the trust's remaining assets, both he and the lender knew the real property was going to be sold and Stone was to receive only a portion of the sale proceeds.

We agree with the IRS that the trustee, by entering into a contract for sale and obtaining an order confirming sale, had legally bound the trust to sell the property. "[W]hen a binding agreement of sale is entered into by the parties, an equitable conversion is worked; the purchaser becomes the equitable owner of the land and the seller the owner of the purchase price." (Vigli v. Davis (1947) 79 Cal.App.2d 237, 254; Lynch v. Cunningham, supra, 131 Cal.App. at p. 173.)

That is not to say, however, that the conversion occurred upon the date of the order confirming sale. Prior decisions have held that the conversion occurs on the closing date, whether or not the sale takes place. " 'The rule of equitable conversion merely amounts to this, that where there is a mandate to sell at a future time, equity, upon the principle of regarding that done which ought to be done, will for certain purposes and in aid of justice consider the conversion as effected at the time when the sale ought to take place, whether the land be then really sold or not.' " (Vigli v. Davis, supra, 79 Cal.App.2d at p. 255.)

The IRS would have us advance the date of sale in this case to the date of the order confirming sale. We see no reason to depart from the existing rule. If a buyer defaults before the closing date, the court may vacate its order confirming sale and direct the trustee to find another buyer. Although a defaulting buyer would remain subject to liability for losses, including consequential damages, caused by the default (Prob. Code. §§10350, 10351), the buyer would not be obligated to purchase the property. We conclude, applying the usual rule, that the IRS' preexisting tax liens immediately attached to Stone's personal property interest upon the date escrow closed, March 21, 1996. ⁶

Before the IRS liens could attach, however, Stone had assigned his interest to the Plan on August 4, 1995. Accordingly, the IRS' liens are not entitled to priority. "Under federal tax law, a contest between the federally created tax lien and a competing lien is resolved by the first-in-time, first-in-right rule. United States v. City of New Britain [54-1 USTC ¶9191], 347 U.S. 81, 85 . . . (1954)." (Cavanaugh v. Cavanaugh, supra, 153 B.R. at p. 228.) This priority rule applies "unless Congress has created a different priority rule to govern the particular situation." (Petro Source Partners, Ltd. v. 3-B Rattlesnake Refining (1990) Ltd., supra [93-1 USTC ¶70.029; 94-1 USTC ¶50,053], 827 F.Supp. at p. 1269.) There is no contention that a special priority applies here.

We hold that the federal tax liens are inferior to the Plan's previously acquired assignment of Stone's interest in August 1995. Accordingly, the trial court correctly awarded the interpleaded funds to the Plan.

II

The IRS alternatively contends that it "is entitled to an award of $55,010.65, or 65.5 percent, of the funds deposited with the Los Angeles County Treasurer. This is because at the time of Beasley's death $380,704.90, or 65.5 percent of the total Trust assets worth $580,996.57, consisted of cash, stocks, and bonds, i.e., personal property. This fact is reflected in the Trustee's Final Report--to which no party filed an objection and which the Superior Court approved--and nothing in the record contradicts it."

The trustee's final report, however, was not filed until July 31, 1996, several months after the escrow on the sale of real property had closed on March 21, 1996. The final report indicated that "a significant portion of the residue of the Trust was distributed to the residuary beneficiaries" pursuant to a court order entered on December 29, 1994. That order and the resulting initial distribution were made while the real property transaction was still in escrow. Accordingly, the initial distribution could not have been made with proceeds traceable to the sale of the real property, and must necessarily have been made with personal property assets. It thus follows that the IRS' reliance upon the final report to show the ratio of real and personal property held by the trust at the time of Beasley's death is misplaced. Even assuming there was once a 65.5 to 34.5 percent ratio of real to personal property assets when Beasley died, that ratio no longer existed when the trustee's final report was filed, due to the initial distribution made by the trustee while the real property transaction was in escrow.

The IRS has failed to demonstrate that the trial court's award of the whole of the interpleaded funds to the Plan was erroneous. We rely on the familiar rule that, " 'A judgment or order of the lower court is presumed correct. All intendments and presumptions are indulged to support it on matters as to which the record is silent, and error must be affirmatively shown. . . .' [Citations.]" (Denham v. Superior Court (1970) 2 Cal.3d 557, 564.)

DISPOSITION

We affirm the order awarding the interpleaded funds to the Plan. We direct the county treasurer to release the funds accordingly. The Plan is entitled to costs on appeal.

We concur:

VOGEL (Miriam A.), J.

DUNN, J. ^*

¹ For the sake of convenience, all further references to the Internal Revenue Service (IRS) are meant to include the appellant United States .

² This initial $400,000 valuation was only an estimate by the trustee of the property's value. According to the trustee's final report, the $400,000 valuation was "arbitrarily placed on the property for purposes of this Trust by [the trustee], without benefit of any appraisal, at the time of the creation of this Trust in 1990." Ultimately, the property was sold in 1996 for about $200,000. The trustee's final report explained that the property value "declined substantially because of the effects of both the general real estate depression in Southern California as well as the civil unrest which occurred in the area of Los Angeles County in which the property was located." In her final report, the trustee reported a loss (for accounting purposes) on the sale of $199,708.33.

³ The trust instrument contained a spendthrift clause that prohibited the beneficiaries from selling, assigning, pledging, mortgaging, encumbering, alienating, or impairing all or any part of their interest in the trust or in the trust's principal or income. The Plan argued successfully below that the spendthrift clause was extinguished upon Beasley's death, when the trust terminated. The IRS does not challenge on appeal the trial court's ruling on this point. Accordingly, we will not address it.

⁴ When a federal tax liability is assessed, a lien automatically attaches as of the date of the assessment unless the liability is paid within the allotted time. (26 U.S.C. §6321.) When a notice of federal tax lien is filed, it gives "notice to the rest of the world that the IRS has a tax lien against the taxpayer." (Petro Source Partners, Ltd. v. 3-B Rattlesnake Refining (1990) Ltd. (W.D. Tex. 1993) [93-1 USTC ¶70,029; 94-1 USTC ¶50,053], 827 F.Supp. 1265, 1268.) The notice of tax lien does not affect the validity of the lien itself. It does, however, affect the priority of the lien as against the claim of a third party against the taxpayer's property. (Id. at pp. 1268-1269.)

⁵ The IRS does not, as a general rule, have to levy against the taxpayer's property in order to perfect its liens. In most cases a tax lien is perfected when the notice of federal tax lien is filed. (Petro Source Partners, Ltd. v. 3-B Rattlesnake Refining (1990) Ltd., supra [93-1 USTC ¶70,029; 94-1 USTC ¶50,053], 827 F.Supp. at p. 1269.)

⁶ When notices of tax lien are filed, they attach and " 'continue[to exist] until the taxpayer satisfies the debt, or the statute of limitations runs.' Texas Commerce Bank[- Fort Worth , N.A. v. United States (5th Cir. 1990)] [90-1 USTC ¶50,155], 896 F.2d[ 152.] 161; 26 U.S.C. §6322." (Petro Source Partners, Ltd. v. 3-B Rattlesnake Refining (1990) Ltd., supra [93-1 USTC ¶70,029; 94-1 USTC ¶50,053], 827 F.Supp. at p. 1268.)

^* Judge of the Municipal Court for the Long Beach Judicial District assigned by the Chief Justice pursuant to article VI, section 6 of the California Constitution.

 

 

 

In the Matter of Succession of Bernice Addison Brumfield. United States of America , Petitioner v. Noel A. Brumfield, William Brumfield, Vincent Brumfield, and Succession of Bernice Addison Brumfield, Respondents

U.S. District Court, Mid. Dist. La., Civ. 96-7508-B-M1, 9/30/98

[Code Secs. 6321 and 6323 ]

Tax liens: Validity: Attachment: After-acquired property: Inherited property: Renunciation of bequest, consideration for: Constructive or tacit acceptance.--A federal tax lien attached to two parcels of real estate inherited by a delinquent taxpayer despite his valid renunciation of the bequest. Under state ( Louisiana ) law, he was deemed to have actually accepted the properties. While Louisiana statutes provide that a valid renunciation will retroactively preclude a transfer of ownership from a decedent to a renouncing heir, renunciation of the heir's rights to a co-heir for a "price" can nonetheless result in an irrevocable acceptance. The taxpayer's receipt of a release from his co-heir for liabilities for inheritance taxes and monetary claims was a valuable consideration, or "price," for his renunciation. Thus, the taxpayer had an interest in the properties that dated back to the decedent's death and to which the outstanding federal tax liens attached despite his renunciation

Lyman Edgar Thornton III, Baton Rouge , La. 70801 , for plaintiff. Greg Gouner, 5515 S. Sherwood Forest Blvd., Baton Rouge, La. 70816, John R. Rarick, Rarick & Brumfield, 9821 Royal St., St. Francisville, La. 70775, Cherie Rarick Brumfield, 435 W. Ardenwood Dr., Baton Rouge, La. 70806, David L. Guerry, Daniel D. Holliday III, 8550 United Plaza Blvd., Baton Rouge, La. 70809, for defendants.

RULING

POLOZOLA, Chief District Judge:

This case requires the Court to resolve important issues involving the rights of the Internal Revenue Service ("IRS") against a taxpayer's interest in the estate of his mother. There are now five motions pending before the Court. ¹ The Court has also questioned its subject matter jurisdiction. For reasons which follow, the Court finds it does have subject matter jurisdiction. The Court also finds that the tax lien of the IRS attached to the properties of the taxpayer at the time of his mother's death. Therefore, the United States is entitled to foreclose on the taxpayer's property interest and sell the real estate at a judicial sale.

I. Background

Noel A. Brumfield owed income taxes for 1983 and 1984. The IRS assessed these taxes on December 2, 1985 and February 6, 1993, respectively. Noel A. Brumfield, his brother William Brumfield, his son Vincent Brumfield, and the succession of his mother, Bernice Addison Brumfield, were named as defendants in the federal foreclosure action filed by the United States in 1996. Later, the succession suit was removed from the Nineteenth Judicial District Court for the Parish of East Baton Rouge and consolidated with the federal suit.

The United States then filed a contempt action against Noel A. Brumfield regarding certain properties, located in the Cayman Islands , in which Noel A. Brumfield possessed an interest. Noel A. Brumfield was held in civil contempt of court on July 31, 1996 and has been in custody since that time.

There is little dispute in the underlying facts except for the validity of the renunciation allegedly made by Noel A. Brumfield of his interest in his mother's estate.

As previously stated, the IRS assessed income taxes for 1983 and 1984 against Noel A. Brumfield on December 2, 1985 and on February 6, 1993. The United States filed a Notice of Federal Tax Lien with respect to Noel A. Brumfield's unpaid tax liabilities in East Baton Rouge Parish, Louisiana on July 19, 1993.

Despite notice of the assessments and demand for payment, Noel A. Brumfield has refused to pay the full amount of the assessments described above. As of July 19, 1993, Noel A. Brumfield remained indebted to the United States in an amount exceeding $2.4 million, plus statutory additions according to law. Additional unassessed interest and all statutory additions thereon as provided by law continue to accrue on this liability, which exceeds $3.5 million.

Bernice Addison Brumfield died testate on November 8, 1995. On November 14, 1995, the state court ordered the olographic will of Bernice Addison Brumfield to be executed according to law. The will of Bernice Addison Brumfield granted to her son, William Louis Brumfield, everything which she possessed "except the following two properties; the six and one-half acres with improvements located at 11136 Julia Aubin Lane, Baton Rouge, La. and the house and lot located at 10590 Toledo Bend, Baton Rouge, La. which I leave and bequeath to my grandson Noel Vincent Brumfield II with Noel Addison Brumfield usufruct." ²

Despite this specific bequest and his right to a "forced portion" in the assets of his mother's succession under Louisiana law, Noel A. Brumfield executed a document on July 15, 1996 which purported to renounce his usufruct interest in the two subject properties. On July 28, 1996, Noel A. Brumfield executed another document which purported to renounce both his usufruct interest in the two subject properties and his "forced portion" in the succession's assets.

The state court had previously granted a judgment of possession to the legatees for all of the succession property except for the two parcels which are the subject of the petition by the United States to foreclose, thus leaving the disposition of these two properties as the only matter pending in the succession. The United States then intervened in the state court succession case as a creditor of Noel A. Brumfield. Thereafter, the United States filed a petition in state court to foreclose the tax liens on the usufruct interest of Noel A. Brumfield in the Aubin Lane and Toledo Bend properties. The succession action was removed to federal court. Thereafter, this Court denied defendant's motion to remand. The case is now before the Court on the pending motions.

In its motion for summary judgment and motion for default judgement, the United States seeks an order "determining that the tax liens of the United States encumbered, as of November 8, 1995, Noel Brumfield's interests in the assets of the Succession and specifically in the two parcels of property bequeathed to him under his mother's will." ³ The United States also seeks an order allowing it to foreclose its tax liens on Noel A. Brumfield's interest in the succession through a judicial sale.

II. Subject Matter Jurisdiction

This Court clearly has subject matter jurisdiction under 28 U.S.C. §1331 to determine whether or not the government has a lien on Noel A. Brumfield's "forced portion" and his usufructs over the two pieces of real estate. ⁴ The Court also has subject matter jurisdiction over the underlying issues of the validity and effect of the purported renunciations executed by Noel A. Brumfield. The basis for the government's foreclosure suit is 26 U.S.C. §6321, which provides for a lien on the property of the delinquent taxpayer.

The more difficult question regarding jurisdiction is whether this Court can exercise jurisdiction over the property and whether it can subsequently order its transfer in accordance with the Court's decision finding that the government has an enforceable lien on the property. This issue implicates the "probate exception" cases cited by the Brumfields in their prior memoranda. ⁵ Noel A. Brumfield's forced portion and the proceeds from the sale of the properties, until adjudicated by the state court handling the succession, remain property of the succession. ⁶ The probate exception cases hold that a federal court has no jurisdiction to probate a will or administer an estate. However, a federal court may exercise its jurisdiction to adjudicate rights in estate property provided its judgment does not interfere with the state court's possession of the property or its probate proceedings, except for the state court's obligation to accord full faith and credit to the federal court's judgment regarding the lien. ⁷

While the government may obtain a judgment from this Court recognizing the validity of its lien on the property, this Court may not order the transfer of the property nor exercise control over the property because either action would constitute an exercise of control over property under probate. Therefore, this Court's jurisdiction is limited to declaring the validity or invalidity of the government's lien and leaving the United States to assert this Court's judgment as res judicata in the state court succession proceedings.

Thus, the proper course for this Court seems to be an order transferring the sales proceeds from the registry of this Court to the registry of the state court handling the succession. The prevailing party could then assert this Court's judgment regarding the validity of the government's lien in the ongoing probate proceedings in state court. Whether it is really necessary to transfer the proceeds to the state court is unclear since the government has no objections to this Court's jurisdiction over the proceeds and since the Brumfields requested, via motion, that the proceeds be deposited into the registry of this Court. To avoid a problem, the Court will schedule a separate hearing to determine which court should distribute the proceeds from the sale.

III. The Validity of the Government's Tax Lien

As noted earlier, there are five pending motions before the Court. These pending motions can be resolved by the Court's ruling on the issue of whether or not the United States has a valid tax lien on Noel A. Brumfield's property interest in the succession.

The resolution of this issue requires an analysis of both Louisiana succession law and federal law. It is the ownership of the succession property which the Court is concerned with on these motions. Ownership is transmitted at the moment of death to the heirs and legatees. ⁸ Thus, Noel A. Brumfield acquired the forced portion and the two usufructs on November 8, 1995, the date of Bernice Brumfield's death.

The United States ' tax lien, which was filed against Noel A. Brumfield pursuant to 26 U.S.C. §6321, arose at the time of its assessments of Noel A. Brumfield's deficiencies on December 2, 1985 and February 6, 1993. ⁹ This tax lien attached to "all property and rights to property" belonging to Noel A. Brumfield, whether owned at the time of the assessments or subsequently acquired. ¹⁰ The Court must look to state law to determine whether and when Noel owned "property" or "rights to property." ¹¹

As noted above, it is clear that Noel A. Brumfield acquired the right to his forced portion and to the usufructs at the moment Bernice Brumfield died on November 8, 1995. Since Noel acquired "rights to property" on November 8, 1995, the conclusion would seem to be that the United States ' tax lien attached to the property on the same date and is effective as of the date of the assessments. ¹²

However, Louisiana Civil Code article 946, which was cited by the Brumfields in their prior memoranda, complicates the Court's resolution of the issue and is at the crux of the dispute between the parties. Article 946 provides that while Noel A. Brumfield is said to acquire the right to his forced portion and to the usufructs at the time of Bernice Brumfield's death, such right is "in suspense" until he decides whether to accept or renounce the part of the succession that has fallen to him.

The article further provides that if Noel A. Brumfield accepts his part of the succession, he is deemed to have succeeded to such part from the moment of Bernice Brumfield's death. However, if he renounces such part, he is considered as never having received it. The Court cannot overlook the retroactive nature of this code article. Louisiana law provides that no one may be compelled to accept a succession and that one may accept or renounce a succession. ¹³

The Brumfields, relying on this retroactive language and on the Fifth Circuit's recent decision in Leggett v. United States, ¹⁴ argue that the July 28, 1996 renunciation by Noel A. Brumfield of his rights to the property was valid. Thus, the Brumfields argue that under article 946, it must be that Noel A. Brumfield never succeeded to the property. Accordingly, the Brumfields argue that since Noel is deemed to never have had any rights in the property, the government's tax liens could not attach to the property.

In Leggett, the Fifth Circuit was confronted with a similar fact scenario in which a delinquent taxpayer renounced her succession rights in an alleged attempt to prevent the government's tax lien from attaching to her rights. Applying Texas succession law containing a retroactivity provision similar to Louisiana 's article 946 and an immediate vesting provision similar to Louisiana articles 940 and 1626, the Fifth Circuit attempted to determine whether the taxpayer ever had a property interest in the succession property to which the government's lien could attach. The court noted the contradiction between the two provisions of Texas law which on the one hand provided that the heir was vested with a property right from the moment of death, while on the other hand provided that the renouncing heir never had a property interest at all. ¹⁵ There is a similar contradiction between article 946 and articles 940 and 1626 of the Louisiana Civil Code.

The Fifth Circuit noted two ways to resolve this apparent contradiction: the "transfer theory" and the "acceptance-rejection theory". ¹⁶ The court then examined Texas succession law and noted that under Texas law, like Louisiana law, the heir had the right to accept or reject the succession. ¹⁷ The court then concluded that the Texas courts have followed the "acceptance-rejection theory". ¹⁸ Based on this analysis, the Fifth Circuit concluded that the taxpayer had not accepted the bequest but rather had executed a valid renunciation and, accordingly, the taxpayer never had a property right to which the tax lien could attach. ¹⁹

The United States argues, based on the language of article 946, that its tax lien against Noel A. Brumfield attached at the time of Bernice Brumfield's death and, thus, federal law controls thereafter. It further argues that since federal law controls once the lien attached to the property, state law (namely, Noel's renunciation and the retroactivity provision under article 946) could not defeat the attachment of the lien. The United States relies on United States v. Comparato, ²⁰, which cites the Supreme Court's decisions in United States v. Rodgers ²¹ and United States v. Bess. ²² The New York successions provisions noted in the Comparato opinion are also similar to Louisiana 's provisions. ²³

The Fifth Circuit in Leggett distinguished Comparato, noting that New York law was at issue and that the New York courts had held heirs to have a property interest in the right to accept or reject the inheritance to which the federal tax lien attached. ²⁴ Therefore, New York law follows the so-called "transfer theory". ²⁵ Thus, the delinquent taxpayers in Comparato could not destroy the property right by renouncing the underlying succession. ²⁶

The Court's research reveals that the Louisiana courts have not decided whether Louisiana follows the "transfer theory" or the "acceptance-rejection theory". In fact, there are very few cases applying or interpreting the above-cited code articles. Thus, the Court must rely on the language of the code articles and the Fifth Circuit's guidance in Leggett.

The situation this Court is now faced with is similar to the situation the Ninth Circuit was faced with in Mapes v. United States . ²⁷ In Mapes, the court was applying Arizona law which had not been interpreted by the Arizona courts. Thus, the Ninth Circuit assumed that Arizona's statutory scheme followed the so-called "acceptance-rejection theory." ²⁸ The Fifth Circuit in Leggett noted that the "acceptance-rejection theory" is the majority rule. ²⁹ Because (a) the "acceptance-rejection theory" is the majority rule; (b) there is a substantial similarity between the Texas statutes cited in Leggett and the Louisiana provisions; and (c) the language of Louisiana Civil Code article 946 states that the heir's right is in suspense until the heir decides whether to accept or reject the succession, it is reasonable to conclude that the Louisiana Supreme Court would follow the "acceptance-rejection theory" and that the Fifth Circuit would so hold.

Therefore, this Court finds that it is bound by the Fifth Circuit's holding in Leggett. Thus, the validity of the United States ' tax lien on Noel A. Brumfield's interest in the succession property is dependent on the Court's resolution of three issues:

A. Was Noel A. Brumfield's July 28, 1996 Renunciation a Valid Renunciation?

If Noel A. Brumfield's renunciation of July 28, 1996 was a valid renunciation, Leggett dictates that he never had an interest in the property to which the tax lien could attach. Thus, the property would pass unencumbered by the lien. In its prior memoranda, the United States contests the validity of the renunciation. On its face, the renunciation appears valid because it meets all of the codal requirements. The renunciation was, on its face, executed by notarial act before a notary and two witnesses. ³⁰ Noel A. Brumfield had the requisite capacity to make the renunciation. ³¹ Further, his right to renounce had not proscribed. ³²

The court believes that what the government is really asserting when it claims the renunciation was invalid is that the renunciation should be annulled because of its allegedly fraudulent purpose. The United States cites, in its memorandum opposing the defendants' motion for summary judgment and in its memorandum supporting its earlier-filed motion for summary judgment, several bases for annulling the renunciation: 1) a revocatory action under articles 2036-2043 of the Louisiana Civil Code; 2) an oblique action under article 2044 of the Louisiana Civil Code; 3) a finding that the renunciation is a simulation under articles 2025-2028 of the Louisiana Civil Code; 4) an action allowing the government to accept the succession, despite the renunciation, in the name of Noel A. Brumfield, under Louisiana Civil Code article 1021 on the basis of the prejudice caused the United States by the renunciation; and 5) an avoidance of the renunciation as a fraudulent transfer under the Federal Debt Collection Procedures Act. ³³

The simulation articles are not a basis for annulling the renunciation and are not applicable under the facts of this case.

The revocatory action is prescribed by the one year prescription of Louisiana Civil Code article 2041.

The oblique action must be brought via a separate action with both Noel A. Brumfield and the succession joined as defendants therein. This requirement has not been met here.

In order for the United States to exercise the right to accept the succession in Noel A. Brumfield's stead, Louisiana Civil Code article 1071 requires that a petition to obtain such authorization be presented to the judge of the place where the succession is opened with service of process made on the debtor (Noel A. Brumfield). The United States has failed to meet these requirements.

Finally, the use of the Federal Debt Collection Procedures Act to set aside the renunciation also requires a separate complaint with service of process. Therefore, this Act does not apply herein.

Thus, in the absence of a separate petition filed by the United States seeking to set aside the renunciation on one of the above grounds, Noel A. Brumfield's renunciation appears to be a valid renunciation.

B. Did Noel A. Brumfield Actually Accept the Succession?

The Court must now determine whether Noel A. Brumfield, by his actions, actually accepted the succession, thus making his right to the property, under Louisiana Civil Code article 946, effective as of the date of Bernice Brumfield's death. If Noel A. Brumfield actually accepted the succession, the United States tax lien, under Leggett, attached to the property at the same time. An acceptance of the succession by an heir is irrevocable. ³⁴ An acceptance can be either express or tacit. ³⁵ There was clearly no express acceptance by Noel A. Brumfield under the facts of this case.

However, the United States contends that Noel A. Brumfield tacitly accepted the succession by residing in and on one of the properties, in the capacity of an heir, from 1994 until the time he was incarcerated in 1996. While the United States did not cite a code article, the Court presumes it is relying on article 993 and/or article 994 of the Louisiana Civil Code. Considering that Noel resided in and on the property before Bernice Brumfield's death in 1995, the Court does not believe it would be proper to conclude that he was occupying the property after his mother's death in the capacity of an heir. Thus, the Court concludes that there was no tacit acceptance of the succession by Noel A. Brumfield on this basis.

However, the Court finds that Noel A. Brumfield, via his renunciation and the "receipt and full release" agreement of July 28, 1996, accepted the succession under article 1003 of the Louisiana Civil Code. Article 1003 provides that a renunciation in favor of a coheir is an acceptance when the renouncing party receives a "price" for the renunciation. Noel's renunciation was in favor of his co-heir and brother William Brumfield as the civil code provides that Noel's portion of the succession, once renounced, falls to William as the instituted universal legatee. ³⁶ Although the United States contends several times in its memoranda that the renunciation was in favor of the son, Vincent Brumfield, the Court can find no support for this in the language of the renunciation or in the civil code.

The Court finds that Noel A. Brumfield did receive a "price" for his renunciation. A careful reading of the "receipt and full release" agreement reveals that Noel received valuable consideration in exchange for his renunciation, including a release from William for any and all liability for inheritance taxes pertaining to his part of the succession and a release from any and all claims that William had against Noel, including the claims pertaining to the Livingston suit debt and to Noel's alleged wrongful taking of items' from Bernice Brumfield's home after her death. While the Court could not locate any cases interpreting the meaning of the term "price" as used in the article, it is reasonable to conclude that the valuable consideration set forth above clearly satisfies this requirement.

Therefore, the Court concludes that under the clear terms of article 1003 of the Louisiana Civil Code and Leggett, Noel A. Brumfield accepted his mother's succession. Thus, the Court finds, under the facts of this case and as a matter of law, that the United States ' tax lien attached to the property at the time of Bernice Brumfield's death.

The Court also finds as a matter of law that Noel A. Brumfield accepted the succession under article 1002 of the Louisiana Civil Code. This article provides that a donation, sale, or assignment by a coheir of his/her rights of inheritance to a fellow coheir is considered to be an acceptance of the succession. Since Noel A. Brumfield executed the renunciation in exchange for the valuable consideration mentioned above, it follows that such a transaction was a sale or assignment of Noel's rights in the succession.

C. Does Louisiana 's Succession Law Follow the "Acceptance-Rejection Theory" or the "Transfer Theory" as Termed and Defined by the Fifth Circuit in Leggett?

For reasons noted above, the Court concludes that Louisiana follows the "acceptance-rejection theory" and thus the Court is bound by the Leggett holding.

IV. Summary and Conclusion

For reasons set forth above, the Court finds that the renunciation was valid in form and that Louisiana follows the "acceptance-rejection theory." However, because Noel A. Brumfield accepted the succession under articles 1002 and 1003 of the Louisiana Civil Code, the Court finds that, pursuant to article 946 of the Louisiana Civil Code, Noel had rights in the succession as of the moment of Bernice Brumfield's death at which time the United States ' tax liens attached.

Therefore, the Court concludes that the United States ' tax liens are valid and that the United States is entitled to foreclose on the property. The United States is also entitled to a lien for its share of the proceeds from the judicial sale of the property.

The parties shall have until October 16, 1998 to submit a prepared judgment which shall include a provision for the disposition of the funds in the registry of the Court.

Therefore:

IT IS ORDERED that plaintiff's motion for summary judgment be and it is GRANTED.

IT IS FURTHER ORDERED that plaintiff's motion for a default judgment against Noel A. Brumfield and Vincent Brumfield be and it is DENIED.

IT IS FURTHER ORDERED that defendants Succession of Bernice Addison Brumfield and William Brumfield's motion for summary judgment be and it is DENIED.

IT IS FURTHER ORDERED that defendants Succession of Bernice Addison Brumfield and William Brumfield's motion for hearing of pending probate rule to place legatee in possession of property be and it is DENIED.

IT IS FURTHER ORDERED that defendant Vincent Brumfield's motion for summary judgment be and it is DENIED.

¹ Motion for summary judgment, filed by plaintiff United States of America ("United States") on April 10, 1997 (Rec. Doc. No. 39); motion for default judgment against Noel A. Brumfield and Vincent Brumfield, filed by plaintiff United States on April 10, 1997 (Rec. Doc. No. 39); motion for partial summary judgment, filed by defendants Succession of Bernice A. Brumfield and William L. Brumfield on June 24, 1997 (Rec. Doc. No. 46); motion for hearing of pending probate rule to place legatee in possession of property, filed by defendants Succession of Bernice A. Brumfield and William L. Brumfield on June 24, 1997 (Rec. Doc. No. 46); and motion for summary judgment, filed by defendant Vincent Brumfield on March 3, 1998 (Rec. Doc. No. 1)

² Will of Bernice Addison Brumfield, dated October 27, 1995, as contained in Exhibit C of the United States ' Statement of Material Facts filed April 10, 1997 (Rec. Doc. No. 40).

³ Memorandum of Law by the United States in Support of its Motion for Summary Judgment and Motion for Default Judgment, page 3, filed April 10, 1997 (Rec. Doc. No. 41).

⁴ See generally American Well Works Co. v. Layne & Bowler Co., 241 U.S. 257, 36 S.Ct. 585, 60 L.Ed. 987 (1916).

⁵ See Markham v. Allen, 326 U.S. 490, 66 S.Ct. 296, 90 L.Ed. 256 (1946) and Turton v. Turton, 644 F.2d 344 (5th Cir. 1981).

⁶ See generally La. Civ. Code art. 872.

⁷ Markham v. Allen, 326 U.S. 490, 66 S.Ct. 296, 90 L.Ed. 256 (1946); Turton v. Turton, 644 F.2d 344 (5th Cir. 1981).

⁸ Baten v. Taylor, 386 So.2d 333 ( La. 1979) and La. Civ. Code arts. 940 and 1626.

⁹ United States ' Statement of Material Facts, filed April 10, 1997 (Rec. Doc. No. 40).

¹⁰ 26 U.S.C. §6321 and J.N. Randall v. H. Nakashima & Co., Ltd. [76-2 USTC ¶9770], 542 F.2d 270 (5th Cir. 1976).

¹¹ Aquilino v. United States [60-2 USTC ¶9538], 363 U.S. 509, 80 S.Ct. 1277, 4 L.Ed.2d 1365 (1960); Leggett v. United States, 120 F.3d 592 (5th Cir. 1997); and Medaris v. United States [89-2 USTC ¶9565], 884 F.2d 832 (5th Cir. 1989).

¹² 26 U.S.C. §§6321 & 6322.

¹³ La. Civ. Code art. 977.

¹⁴ 120 F.3d 592 (5th Cir. 1997).

¹⁵ Leggett, 120 F.3d at 594-595.

¹⁶ Id. at 595.

¹⁷ Id. at 595-596.

¹⁸ Id.

¹⁹ Id. at 596.

²⁰ [94-2 USTC ¶50,354], 22 F.3d 455 (2d Cir.), cert denied, 513 U.S. 986, 115 S.Ct. 481, 130 L.Ed.2d 394 (1994).

²¹ [83-2 USTC ¶9572], 461 U.S. 677, 103 S.Ct. 2132, 76 L.Ed.2d 236 (1983)

²² 357 U.S. 51, 78 S.Ct. 1054, 2 L.Ed.2d 1135 (1958)

²³ Comparato [94-2 USTC ¶50,354], 22 F.3d at 457.

²⁴ Leggett, 120 F.3d at 596.

²⁵ Id.

²⁶ Id.

²⁷ 15 F.3d 138 (9th Cir. 1994).

²⁸ Mapes, 15 F.3d at 140-141.

²⁹ Leggett, 120 F.3d at 597.

³⁰ La. Civ. Code art. 1017.

³¹ La. Civ. Code art. 1018.

³² 32 La. Civ. Code art. 1030.

³³ 33 28 U.S.C. §3001 et seq.

³⁴ La. Civ. Code art. 1009.

³⁵ La. Civ. Code arts. 989 and 990.

³⁶ La. Civ. Code arts. 1703 and 1709.

 

 

 

Gordon Kim, Plaintiff v. United States of America, Harry E. Yanellas, Wespaq Computer Systems, Inc., Helen Yanellas, Thomas M. Foley, Defendants

U.S. District Court, Dist. Hawaii, Civ. 95-00365 ACK, 7/1/96

[Code Sec. 6323 ]

Tax liens: Priority of claims: First in time: After-acquired property: Settlement proceeds.--The IRS was entitled to the net settlement proceeds awarded to a delinquent taxpayer in a personal injury action because its tax liens against his property were first in time with respect to other potential claims and, therefore, had priority over them. Although several parties may have had a claim to the settlement proceeds, none of them appeared in the action to establish their interests or opposed the IRS's motion for summary judgment with regard to disposition of the proceeds. Moreover, those parties' claims were not perfected. Despite the fact that the IRS recorded its tax liens before the taxpayer was awarded his settlement, those liens were first in time, even with respect to after-acquired property. However, the other potential claimants could not have perfected their interests in the settlement proceeds before the funds were awarded to the taxpayer.

Gordon Kim, 1188 Bishop St. , Honolulu , Hawaii 96813 , for plaintiff. Michael Chun, Honolulu, Hawaii 96850, Thomas J. Sawyer, Department of Justice, Washington, D.C. 20530, Mark J. Bernardin, Brooks, Tom & Miller, 737 Bishop St., Honolulu, Hawaii 96813, for defendant.

ORDER GRANTING UNITED STATES' MOTION FOR SUMMARY JUDGMENT AND DIRECTING INTERPLEADER FUNDS TO BE DISBURSED

BACKGROUND

KAY, Chief Judge:

This suit is an interpleader action in which the United States seeks to recover monies owed by defendant Harry Yanellas for unpaid taxes. The United States ("Government") and the other defendants in this action each claim potential interests in a $250,000 personal injury settlement awarded to defendant Harry Yanellas. The net proceeds of this settlement award form the basis of this interpleader action.

Attorney Gordon Kim, who represented Harry Yanellas in the personal injury action, filed this interpleader suit in Hawaii state court on April 13, 1995. The Government thereafter removed the case to federal court on May 15, 1995. Kim subsequently paid the net settlement proceeds of $150,753.40 into the registry of this Court.

On February 23, 1996 the Government filed the instant motion for summary judgment on grounds that it is the sole entity entitled to the net settlement proceeds. Harry Yanellas did not file an opposition to the Government's motion prior to the hearing, but after the hearing he faxed a letter to the Court, which the Court construed as an opposition and has considered as such. The other potential claimants to the funds, defendants Wespaq, Thomas Foley, Ruth Trina Yanellas, and Helen Yanellas, have not filed opposition to this motion.

This motion came before the court for hearing on June 24, 1996.

FACTS

Defendant Harry Yanellas ("Yanellas") was injured in a 'slip and fall' accident on December 29, 1989, on the premises of Wespaq Computer Systems ("Wespaq"). Yanellas is the President of Wespaq. Due to injuries stemming from this accident, Yanellas sought benefits from Wespaq's insurance company, Paul Revere Life Insurance Company ("Paul Revere"). When Paul Revere did not readily pay the benefits to Yanellas, Yanellas filed suit against Paul Revere and the parties subsequently entered into a settlement agreement for $250,000. According to the Government, the settlement proceeds were paid jointly to Harry Yanellas and Wespaq. This personal injury settlement award forms the basis of the instant interpleader action.

The Government contends that it is entitled to the entire net settlement proceeds of $150,753.40 ¹ due to unpaid federal tax liabilities owed by Yanellas and by Wespaq. A declaration provided by the Government indicates that Yanellas owes $170,106.64 in unpaid federal taxes. These taxes cover the tax periods from 1987 to 1991 and were officially assessed against him on May and June of 1994. The Internal Revenue Service ("IRS") filed liens for these amounts with the State of Hawaii Bureau of Conveyances on July 14, 1994. (Exhibits A and B to Government's Memorandum In Support of Motion For Summary Judgement ("Memorandum")). The Government's declaration also shows that Wespaq owes $190,999.59 in unpaid federal taxes. These taxes cover the tax periods from 1987 to 1990 and were assessed against Wespaq in October and November of 1991. The IRS filed a lien for these amounts with the State of Hawaii Bureau of Conveyances in 1991 on November 4, 15, and 29. (Exhibits C, D, and E to Government's Memorandum).

Other than the Government, the defendants who might claim interests in the settlement proceeds are as follows: (1) Harry Yanellas, who received the initial settlement award, (2) Ruth Yanellas, the estranged wife of Harry Yanellas, (3) Thomas Foley, a prior attorney for Harry Yanellas, (4) Wespaq Computer Systems, which according to the Government received the settlement award jointly with Harry Yanellas and (5) Helen Yanellas, the mother of Harry Yanellas. Of these defendants, only Harry Yanellas filed an opposition to the Government's motion (albeit an untimely opposition) and it appears that he and Wespaq are the only remaining actual litigants in this case.

In the June 25, 1996 fax from Harry Yanellas, which the Court construes as an opposition to the Government's motion, Yanellas objects to the Government's supplemental memorandum which discusses its pending settlement agreement with Ruth Yanellas. Apparently the couple is divorced or separated and Harry Yanellas' main concern is that disbursement to Ruth Yanellas will violate a supposed order in family court which directs the settlement proceeds to not be distributed. In his opposition Harry Yanellas also contests the amount of taxes he owes the Government.

Ruth Yanellas has not filed an opposition or response to the Government's motion. She previously filed an answer in state court, claiming that she is entitled to some of the funds because (1) they form part of the marital estate and therefore she is entitled to a share of the proceeds and (2) there is a child support order against Harry Yanellas in the amount of $360 per month. The Government and Ruth Yanellas have purportedly entered into a settlement agreement under which Ruth Yanellas will receive $5,000 of the interpleaded funds if the Government prevails in this motion. However, the Court expresses no opinion as to the existence or validity of that settlement agreement.

The interests of the other two defendants are unclear. Thomas Foley is an attorney who represents Harry Yanellas in an unrelated matter, but he has conceded that he does not claim an interest in the interpleader funds. Helen Yanellas, the mother of Harry Yanellas, may have loaned money to Harry at some unspecified point. However the existence of the loan is uncertain and, even if she did loan him money, there is no indication that this loan was secured. In addition Helen Yanellas has not filed anything with this court or with the state court (before the case was removed to federal court). Plaintiff served her with a copy of the state court complaint but she never filed an answer.

STANDARD OF REVIEW

Summary judgment shall be granted where there is no genuine issue of material fact and the moving party is entitled to judgment as a matter of law. Fed. R. Civ. P. 56(c). One of the principal purposes of the summary judgment procedure is to identify and dispose of factually unsupported claims and defenses. Celotex Corp. v. Catrett, 477 U.S. 317, 323-24, 106 S.Ct. 2548, 2553 (1986). Summary judgment must be granted against a party who fails to demonstrate facts to establish an element essential to his case where that party will bear the burden of proof of that essential element at trial. Id. at 322, 106 S.Ct. at 2552.

If the party moving for summary judgment meets its initial burden of identifying for the court the portions of the materials on file that it believes demonstrate the absence of any genuine issue of material fact, the nonmoving party may not rely on the mere allegations in the pleadings in order to preclude summary judgment.

T.W. Electrical Serv. v. Pacific Elec. Contractors Assoc., 809 F.2d 626, 630 (9th Cir. 1987) (citations omitted). Instead, Rule 56(e) requires that the nonmoving party set forth, by affidavit or as otherwise provided in Rule 56, " 'specific facts showing that there is a genuine issue for trial.' " Id. (quoting Fed.R.Civ.P. 56(e)) (emphasis in original). At least some " 'significant probative evidence tending to support the complaint' " must be produced. Id. (quoting First Nat'l Bank v. Cities Serv. Co., 391 U.S. 253, 290, 88 S.Ct. 1575, 1593 (1968)). Legal memoranda and oral argument are not evidence and do not create issues of fact capable of defeating an otherwise valid motion for summary judgment. British Airways Bd. v. Boeing Co., 585 F.2d 946, 952 (9th Cir. 1978), cert. denied, 440 U.S. 981, 99 S.Ct. 1790 (1979).

The standard for a grant of summary judgment reflects the standard governing the grant of a directed verdict. See Eisenberg v. Ins. Co. of North America, 815 F.2d 1285, 1289 (9th Cir. 1987) (citing, Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 250, 106 S.Ct. 2505, 2511 (1986)). Thus, the question is whether "reasonable minds could differ as to the import of the evidence." Id.

The Ninth Circuit has established that "[n]o longer can it be argued that any disagreement about a material issue of fact precludes the use of summary judgment." California Architectural Bldg. Products, Inc. v. Franciscan Ceramics, Inc., 818 F.2d 1466, 1468 (9th Cir. 1987), cert. denied, 484 U.S. 1006, 108 S.Ct. 698 (1988). Moreover, "[w]hen the moving party has carried its burden under Rule 56(c), its opponent must do more than simply show that there is some metaphysical doubt as to the material facts." Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 586, 106 S.Ct. 1348, 1356 (1986) (footnote omitted). Indeed, "if the factual context makes the non-moving party's claim implausible, that party must come forward with more persuasive evidence than would otherwise be necessary to show that there is a genuine issue for trial." Franciscan Ceramics, 818 F.2d at 1468 (emphasis in original) (citing, Matsushita, 475 U.S. at 587, 106 S.Ct. at 1356.). Of course, all evidence and inferences to be drawn therefrom must be construed in the light most favorable to the nonmoving party. T.W. Elec. Services, 809 F.2d at 630-31.

DISCUSSION

A. Legal Standards

The Government may impose tax liens against the real or personal property of any person who neglects or refuses to pay federal income taxes. 26 U.S.C. §6321 . A tax lien arises at the time the tax is assessed and continues until the tax liability is satisfied or is unenforceable due to lapse of time. 26 U.S.C. §6322 . ²

Priority between competing debts or liens is established by the "first in time" rule: a tax lien has priority over other debts if it is first in time. U.S. By and Through I.R.S. v. McDermott [93-1 USTC ¶50,164 ], 113 S.Ct. 1526 (1993). Moreover this is generally the rule even if the tax lien has not been recorded. Id. However, the statute accords special priority to certain competing debts enumerated in §6323 such as purchasers, holders of security interests, mechanic's lienors and judgement lien creditors. 26 U.S.C. §2623(a) . A federal tax lien is not valid as to these creditors unless notice of the tax lien is recorded in accordance with the laws of the state in which the property sits. ³ 26 U.S.C. §§2623(a) , 2623(f)(1) .

In order for a competing lien to be deemed first in time against the federal lien, the competing lien must be "perfected." McDermott [93-1 USTC ¶50,164 ], 113 S.Ct. at 1528. This requires that the "the identity of the lienor, the property subject to the lien, and the amount of the lien are established." Id. (quoting U.S. v. New Britain [54-1 USTC ¶9191 ], 74 S.Ct. 367, 369 (1954) (emphasis added in McDermott)). A competing lien is not deemed "perfected" as to property yet to be acquired. Even if the terms of the competing lien extend to "all current and future property," the recordation will not establish that lien to be first in time if the property from which the creditor seeks to payment is not acquired until after the recordation. Id. at 1529. Interestingly this rule does not apply to federal tax liens, which are deemed first in time even if the property is acquired after the tax lien is recorded. Id. at 1530. For this reason the Supreme Court has held that where a competing lien is filed before the property is acquired and the federal tax lien is subsequently filed, although also before the property is acquired, the federal tax lien is deemed to be first in time and has priority over the competing interest. Id.

B. Application

Applied in the case at bar, the Court finds that the Government's tax lien has priority over all potential claims asserted in this action.

There appear to be no perfected liens which could have first in time priority over the federal lien. In order to have first in time priority, a competing lien must be "perfected" in that the identity of lienor, the property subject to the lien, and the amount of the lien are established. See McDermott. No such interests have been established in the case at bar. Although it has been suggested that Ruth Yanellas and Helen Yanellas may have a claim to the settlement proceeds, the amounts of their interests are not established and these defendants have not appeared in this action to establish their interests or oppose the Government's motion. In addition, attorney Thomas Foley claims no interest in the funds. He stated in his Answer that "he is owed certain amounts by Harry E. Yanellas for legal services rendered but denies that he has any interest in or right to the interpleaded funds." (Answer of Defendant Thomas Foley, ¶8.)

Moreover, even if these individuals had asserted claims in this action and opposed the Government's motion, their claims would fail because none of their claims could be perfected as to the settlement proceeds. The holding in McDermott dictates the result here. Since the Government recorded the tax liens before Harry Yanellas was awarded the settlement proceeds, its tax liens were first in time even before any secured interests the defendants may have recorded prior to that time. Under the holding in McDermott, these interests could not have been perfected as to the settlement proceeds because the settlement proceeds were not in existence before then. The Government's tax liens are conclusively first in time over the Defendants' potential interests because the Government recorded the liens before the settlement was awarded; under McDermott any prior recordation by the Defendants would have been ineffective.

For these reasons the Court finds that the Government's tax liens were first in time to the Defendants' potential claims and therefore have priority over them. On this basis the Government is entitled to the net settlement proceeds of $150,753.40 because Harry Yanellas owes $170,106.64 and Wespaq owes $190,999.59 in back taxes. Although in his opposition Harry Yanellas contests the amount of taxes he owes, it is well settled that taxpayers cannot attack their tax liability in such interpleader actions because the Court's jurisdiction under 28 U.S.C. §2410 does not extend to such claims. See Hughes v. United States [92-1 USTC ¶50,086 ], 953 F.2d 531 (9th Cir. 1992) ("A taxpayer may not use a section 2410 action to collaterally attack the merits of an assessment.")

For these reasons the Court finds there is no genuine issue of fact and awards summary judgement in favor of the Government.

CONCLUSION

The Court GRANTS the Government's motion for summary judgement and hereby directs the entire interpleaded funds to be disbursed to the United States of America .

IT IS SO ORDERED.

¹ The settlement award was for $250,000 but net of attorney's fees the amount at issue in this action is $150,753.40.

² A tax lien is unenforceable if a court proceeding is not brought within six years after the date the tax liability is assessed. 26 U.S.C. §6502(a)(1) . This is not an issue in the case at bar because the six-year period has not lapsed (the assessment against Harry Yanellas was made in 1994 and the assessment against Wespaq was made in 1991).

³ Personal property is deemed to be located in the state in which the taxpayer's residence is located at the time the lien is filed. 26 U.S.C. §2623(f)(2)(B) .

 

 

 

Jack F. Wasenius, Barbara F. Wasenius, Plaintiffs-Appellants v. Fadia O. Shatila, Badrie Abdullah Shatila, Internal Revenue Service of the United States of America , Defendants, United States of America , Defendant-Appellee

(CA-11), U.S. Court of Appeals, 11th Circuit, 96-2666, 4/29/97, Affirming a District Court decision, 96-1 USTC ¶50,283

[Code Sec. 6321 ]

Tax liens: After-acquired property: Perfection: Equitable lien: Priority.--An IRS tax lien against real property owned by delinquent taxpayers, which was recorded after the realty was sold to third parties, had priority over the purchasers' equitable lien that arose following a state (Florida) court-ordered rescission of the sale. The tax lien was perfected when title reverted to the sellers, but the purchasers' equitable lien was not perfected until the later date when the state court's final judgment fixed the amount of their lien.

[Code Sec. 6321 ]

Tax liens: After-acquired property: Constructive trust.--An IRS tax lien against real property owned by delinquent taxpayers, which was recorded after the realty was sold to third parties, had priority over the purchasers' equitable lien that arose following a state ( Florida ) court-ordered rescission of the sale. The property was not part of a constructive trust that arose before the tax lien became choate; since the purchasers sought rescission of the deed, any constructive trust would encompass only the money paid for the property, and not the property itself. BACK REFERENCES: ¶39,036.71

[Code Sec. 6323 ]

Tax liens: After-acquired property: Estoppel: Timely filing of lien.--An IRS tax lien against real property owned by delinquent taxpayers, which was recorded after the realty was sold to third parties, had priority over the purchasers' equitable lien that arose following a state ( Florida ) court-ordered rescission of the sale. The government timely recorded its tax lien four days after assessing the unpaid taxes against the sellers. Thus, it was not estopped from asserting the priority of its lien on the basis of what the purchasers described as "tardy filing." BACK REFERENCES: ¶39,060.079 .

Before: DUBINA and BLACK, Circuit Judges, and COHILL, ^* Senior District Judge.

 Caution: This court has designated this opinion as NOT FOR PUBLICATION. Consult the Rules of the Court before citing this case.

Per Curiam"

EC: Appellants Jack and Barbara Wasenius challenge a district court order denying their motion for summary judgment and granting the United States ' cross-motion for summary judgment. The Waseniuses instituted this action to establish the priority of their interest in a parcel of real property over a federal tax lien claimed by the United States . As the material facts were not in dispute, the parties filed cross-motions for summary judgment. The district court awarded summary judgment to the United States after concluding that the federal tax lien took priority over the Waseniuses' inchoate equitable lien. We affirm.

I. BACKGROUND

The property at the center of this controversy was formerly owned by Osman and Fadia Shatila. On May 29, 1992, Appellants purchased the property, situated in St. Augustine , Florida , for $148,500. The Waseniuses paid the Shatilas $48,500 of the purchase price in cash and the remainder by executing a promissory note and purchase money mortgage. The Waseniuses recorded a full warranty deed to the property on June 9, 1992.

Shortly thereafter, the Waseniuses discovered that their property previously had served as an unlawful waste disposal site. On August 21, 1992, the Waseniuses filed a state court action against the Shatilas seeking to rescind the sale, cancel the mortgage, and secure reimbursement for all costs. On July 28, 1993, the state court granted partial summary judgment as to the liability of the Shatilas and ordered rescission of the deed, note, and mortgage on the property. The state court entered final judgment on March 14, 1994, at which time it fixed the amount of the Shatilas' liability at $75,889.36. The court also granted the Waseniuses an equitable lien on the property to secure payment of the award. The state court order provided that the lien would relate back to August 21, 1992, when the Waseniuses filed a lis pendens.

Meanwhile, the United States had also been pursuing legal action against the former owners of the property. On June 25, 1992, 16 days after the Waseniuses recorded their deed, the United States assessed Osman and Fadia Shatila for unpaid federal taxes for the years 1984 through 1990. By operation of law, the assessment created a lien in favor of the United States on any property owned or acquired by the Shatilas. See 26 U.S.C. §§6321-6322. The United States recorded its lien on June 29, 1992. On February 10, 1994, the Internal Revenue Service served the Waseniuses with a Notice of Seizure that purported to arrest the St. Augustine property.

II. DISCUSSION

After considering these undisputed facts, the district court determined that the federal tax lien had priority over the Waseniuses' equitable lien. The court concluded that the federal tax lien achieved priority because it had been perfected, and thus became choate, before the equitable lien. The district court indicated the federal tax lien became choate on July 28, 1993, when the Shatilas reacquired their interest in the property by virtue of the state court order rescinding the deed. By contrast, the district court determined the equitable lien did not become choate until March 14, 1994, the date when the state court fixed the amount of the Shatilas' liability and, therefore, the amount of the lien.

We concur with the district court's determination that the federal tax lien prevails over the Waseniuses' equitable lien and reject each of the arguments advanced by the Waseniuses in opposition to this conclusion. First, although the Waseniuses correctly recognize that the Shatilas had to regain some interest in the property before the federal tax lien could attach, they fail to appreciate that this is precisely what happened when the state court rescinded the deed. At that point, title reverted to the Shatilas and the lien attached, notwithstanding the continued occupation of the property by the Waseniuses or the alleged inability of the Shatilas to convey good and marketable title to any third party.

Second, although Florida law provides that equitable liens arise at the time of the transaction from which they spring, see Blumin v. Ellis, 186 So. 2d 286, 295 ( Fla. Dist. Ct. App. ), cert. denied, 189 So. 2d 634 Fla. 1966), the relevant inquiry in the present case concerns not when the equitable lien arose, but when it was perfected. Under federal law, a state lien comes into existence for "first in time" purposes only when it has been "perfected" in the sense that identity of the lienor, the property subject to the lien, and the amount of the lien are established. United States v. McDermott [93-1 USTC ¶50,164], 113 S. Ct. 1526, 1528 (1993). As a result, it is of no consequence that the equitable lien may have arisen on June 9, 1992, the time of the underlying transaction. The lien did not become extant for federal purposes until perfected.

As a variant of their second argument, Appellants suggest that the St. Augustine property should be considered part of a constructive trust that arose at the time of the underlying transaction, more than one year before the federal tax lien became choate. A constructive trust arises where a person who holds title to property is subject to an equitable duty to convey it to another on the ground that he would be unjustly enriched if he were permitted to retain it. Mitsubishi Int'l Corp. v. Cardinal Textile Sales, Inc., 14 F.3d 1507, 1518 (11th Cir. 1994), cert. denied, 115 S. Ct. 1092 (1995). The constructive trust argument fails because the Shatilas were not subject to an equitable duty to reconvey the property to the Waseniuses after the state court rescinded the deed. The Waseniuses can hardly claim that equity required the Shatilas to convey the property at issue back to them when their state court action specifically sought recision of the deed. Moreover, even if a constructive trust were to be imposed, the real property would not be included within it. Any constructive trust would encompass only the money that the Waseniuses paid to the Shatilas in exchange for the property, not the property itself.

Third, Appellants' contention that their equitable lien became choate on June 9, 1992, must be rejected. The mere fact that the purchase price of the property had been fixed by that date does not mean that the amount of the lien to be imposed had also been fixed. The amount of the lien, which included amounts for property improvements, court costs, and attorneys' fees, was not fixed until the state court issued its final judgment on March 14, 1994.

Fourth, we find no merit to Appellants' suggestion that the United States should be estopped from asserting the priority of its federal tax lien on the basis of what the Waseniuses describe as "tardy filing." The uncontroverted evidence establishes that the IRS recorded its tax lien on June 29, 1992, a mere four days after it assessed the unpaid taxes against the Shatilas.

In sum, we hold that the district court properly determined that the United States ' federal tax lien has priority over the Waseniuses' equitable lien. We recognize, of course, that the governing legal principles produce a rather harsh result in the instant case. The Waseniuses are innocent parties, attempting to recover from the fraud perpetrated upon them by the Shatilas. If there were any way to find for the Waseniuses while remaining faithful to our judicial obligations, we would have done so. In the end, however, we are bound to decide cases in accordance with the law, not our sympathies.

III. CONCLUSION

For the foregoing reasons, we affirm the district court order denying the Waseniuses' motion for summary judgment and granting the United States ' cross-motion for summary judgment. ¹

AFFIRMED.

^* Honorable Maurice B. Cohill , Jr., Senior U.S. District Judge for the Western District of Pennsylvania, sitting by designation.

¹ Given this disposition, we deny the United States ' Motion to Strike Appellants' Record Excerpts and to Require Refiling of Record Excerpts as moot.

 

 

 

Estelle R. Silverman and Jay N. Silverman as they are Executors of the Estate of Melvin N. Silverman, et al. v. United States of America, et al

U.S. District Court, Dist. Mass. , Civ. 93-10776-RGS, 4/8/94

[Code Sec. 6323 ]

Tax liens: Priority: After-acquired property: Summary judgment: Debtor.--A federal tax lien was accorded priority over a creditor's lien despite the fact that it was filed after the creditors obtained a security interest in the debtor's after-acquired property and filed a state financing statement. The federal lien was fixed in time on the date that it was filed, while the creditor's lien could not be perfected until the date that it attached to the subject property. Thus, since the federal lien was filed before the debtor acquired rights in the property and the security interest attached, the federal lien had priority.

Sibley P. Reppert, Stanley N. Wallerstein, Posternak, Blankstein & Lund, 100 Charles River Plaza, Boston, Mass. 02114, for plaintiff. John V. Cardone, Department of Justice, Washington , D.C. 20530 , for defendant.

MEMORANDUM OF DECISION AND ORDER ON CROSS MOTIONS FOR SUMMARY JUDGMENT

STEARNS, District Judge:

This case involves a simple issue--which lien as between the United States and the holders of a security interest in a debtor's after-acquired property takes priority. There is no dispute but the federal tax lien came into existence upon its filing on June 27, 1991. See 26 U.S.C. §6323(a) . There is also no dispute but that the funds levied by the Internal Revenue Service were funds earned by the debtor for services rendered between February 1, 1993 and February 28, 1993. Finally, there is no dispute but that plaintiffs acquired their security interest in the debtor's property on January 3, 1984, and duly perfected a UCC filing on January 5, 1984.

The order of priority of competing liens "depend[s] on the time [that they] attached to the property in question and became choate." United States v. City of New Britain [54-1 USTC ¶9191 ], 347 U.S. 81, 86 (1954). A federal lien becomes fixed in time as of the date of its filing, "regardless of when it attaches to the subject property." United States v. McDermott [93-1 USTC ¶50,164 ], 113 S.Ct. 1526, 1530 (1993). A state-created lien is choate only when "there is nothing more to be done . . .--when the identity of the lienor, the property subject to the lien, and the amount of the lien are established." New Britain , supra at 84. When a creditor's interest runs to a debtor's after-acquired property, a creditor's lien under the UCC "is generally not considered perfected when the financing statement is filed, but only when the security interest has attached to particular property upon the debtor's acquisition of that property." McDermott, supra at 1529. Here the debtor acquired rights in the levied property only after the services were rendered, that is no sooner than February 1, 1993. The lien of the United States thus prevails. ³

ORDER

For the foregoing reasons, the motion of the United States for summary judgment is ALLOWED. Plaintiffs' motion for summary judgment is DENIED.

SO ORDERED.

³ Holzman v. L.H.J. Enterprises, Inc., 476 F.2d 949, 951 (9th Cir. 1973), to the extent that it suggests a different result, and to the extent that plaintiffs accurately characterize their interest as a "purchase money security," does not survive the Supreme Court's holding in McDermott. Nor am I persuaded that replacement inventory is "a functional equivalent of accounts receivable" as plaintiffs contend. Inventory may be fungible, services are not. See First Interstate Bank of Utah . N.A. v. I.R.S. [91-2 USTC ¶50,303 ], 930 F.2d 1521, 1527 (10th Cir. 1991). ("An important distinction exists between funds extended for asset acquisition and those extended for the ordinary operation of a business").

 

 

 

In re B&B Printing Co. , Inc., Debtor. Larry E. Staats, Trustee, Plaintiff v. John J. Guzzo, et al., Defendants

U.S. Bankruptcy Court, So. Dist. Ohio , East. Div., 2-91-05227, 12/14/93, 164 BR 273, 164 BR 273

[Code Secs. 6321 , 6322 and 6323 ]

Liens: Priority: Relation back theory: Perfected tax liens: Competing interests.--

A federal income tax lien on after-acquired property that arose from an assessment made after an earlier tax lien was filed on a separate tax obligation did not relate back to the earlier lien and was not a validly perfected tax lien. However, another creditor's lien was also unperfected until the after-acquired property was identified as the property subject to the lien and the debtor obtained rights to such property. Consequently, the government's lien on the debtor's after-acquired property had priority because the date that the notice of the second federal tax lien was filed rendered such lien extant for first-in-time priority purposes regardless of whether it had yet attached to identifiable property. (B.J. McDermott, SCt [93-1 USTC ¶50,164 ] followed.)