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Judicial Sales |
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U.S. District Court, Dist. Minn., 4-85-440, Joseph
A. Rheinberger, 200 South Robert Street, St. Paul, Minn. 55107,
for plaintiff, Elissa G. Mautner, Assistant U.S. Attorney, Beth A.
Sabbath, Department of Justice, Washington, D.C. 20530, for
defendant. MEMORANDUM OPINI0N MURPHY,
District Judge: This
is an action to quiet title. Plaintiffs James and Debora Gratke 1
and Barney Sigel, the contract purchasers and the fee owner of a
home in St. Paul, Minnesota, brought this action against the
United States. Plaintiffs seek a declaration that a tax lien filed
against the Factual Background. The relevant facts in this case are undisputed. Plaintiff Sigel is the
record owner of a tract of property. On June 19, 1979, he sold
that property in a contract for deed to Gerald and Vivian Hanson.
On November 2, 1982, the Discussion.
The The
Ninth Circuit reviewed a case factually identical to the instant
one in Runkel v. United States [76-1
USTC ¶9152 ], 527 F.2d 914 (9th Cir. 1975). The Upon
a declaration of forfeiture under a After
the Runkel decision, the Internal Revenue Service
promulgated C.F.R. §301.7425-2(a)
, which defines "nonjudicial sale." Courts which
have considered similar cases since the promulgation of §301.7425-2(a)
have not been persuaded by the effort to overcome the effect
of Runkel and have refused to hold that a cancellation of a
contract for deed is a nonjudicial sale. See Brookbank, Inc. v.
Hubbard [83-2
USTC ¶9507 ], 712 F.2d 399 (9th Cir. 1983); Johnson v.
United States [86-1
USTC ¶9442 ], 616 F.Supp. 439 (D. Minn. 1985). In Brookbank
the Ninth Circuit reconsidered §7425(b)
and concluded that the new regulation was inconsistent with it
and therefore unenforceable: The
difficulty with [the Internal Revenue Service's] analysis is that
the United States Supreme Court has held that state law determines
whether federal tax liens are extinguished, unless Congress by
statute provides otherwise. United States v. Brosnan [60-2
USTC ¶9516 ], 363 U.S. 237, 240-42 (1960). Congress did to
some extent limit the power of state proceedings to extinguish tax
liens by requiring notice to the government when extinction would
occur by judicial proceedings or by nonjudicial sale. By
implication, if state law permits extinction in a manner other
than by sales described in section
7425 , no notice is required. Brookbank, 712 F.2d at 400-401 (citations omitted). In Johnson,
the court concluded that the cancellation of a contract for deed
in Minnesota did not constitute a "sale" for purposes of
§7425(b) . In
its briefs and at oral argument, the United States argued that Brookbank
and Johnson were wrongly decided. This court is unpersuaded.
State law determines whether federal tax liens are extinguished
unless Congress provides otherwise. E.g., Brosnan, 363 U.S.
at 240-42; United States v. Winterburn [85-1
USTC ¶9119 ], 749 F.2d 1283, 1286 (9th Cir. 1984); Rodriguez
v. Escambron Development Co. [84-2
USTC ¶9698 ], 740 F.2d 92, 99 (1st Cir. 1984). This court
agrees with Brookbank and Johnson that the
cancellation of a contract for deed is fundamentally different
from a forfeiture under a mortgage and that the former is not a
sale. 4
The Treasury Department regulation alone is insufficient to
override this principle of state law. 5
See, e.g., Manhattan General Equipment Co. v. Commissioner
[36-1
USTC ¶9105 ], 297 U.S. 129, 134 (1936). ORDER Accordingly,
based upon the above and all the files, records, and proceedings
herein, IT
IS HEREBY ORDERED that 1.
Plaintiff's motion for summary judgment is granted. 2.
Defendant's motion for summary judgment is denied. LET
JUDGMENT BE ENTERED ACCORDINGLY. 1 The Gratkes were dismissed without prejudice on 2 §7425(b) provides in relevant part: . . . a sale of property on which the United States has or
claims a lien, or a title derived from enforcement of a lien under
the provisions of this title, made pursuant to an instrument
creating a lien on such property, pursuant to a confession of
judgment on the obligation secured by such an instrument, or
pursuant to nonjudicial sale under a statutory lien on such
property-- (1)
shall, except as otherwise provided, be made subject to and
without disturbing such lien or title, if notice of such lien was
filed or such title recorded in the place provided by law for such
filing or recording more than 30 days before such sale and the
United States is not given notice of such sale in the manner
prescribed in subsection (c)(1); or (2)
shall have the same effect, with respect to the discharge or
divestment of such lien or such title of the United States, as may
be provided with respect to such matters by the local law of the
place where such property is situated, if-- (A)
notice of such lien or such title was not filed or recorded in the
place provided by law for such filing more than 30 days before
such sale, (B)
the law makes no provision for such filing, or (C)
notice of such sale is given in the manner prescribed in
subsection (c)(1). 3 26 C.F.R. §301.7425-2(a)
provides in relevant part: The term "nonjudicial sale" includes, but is not
limited to, the divestment of the taxpayer's interest in property
which occurs by operation of law, by public or private sale, by
forfeiture, or by termination under provisions contained in a
contract for a deed or a conditional sales contract. 4 Under a contract for deed, legal title remains in the vendor
and only equitable title shifts to the vendee. See, e.g., In Re
S.R.A., Inc., 18 N.W.2d 442, 450 (Minn. 1944), aff'd sub.
nom. S.R.A., Inc. v. Minnesota, 327 U.S. 558 (1946); Hibbing
v. Commissioner of Taxation, 14 N.W.2d 923, 926 (Minn. 1944).
Under a mortgage, on the other hand, the mortgagor holds both
legal ad equitable title and the mortgagee's interest is merely
that of a lien-holder. Romanchuk v. Plotkin, 9 N.W.2d 421,
424 (Minn. 1943). Upon default on a contract for deed, the vendor
may cancel the contract pursuant to Minn. Stat. §559.21.
After expiration of the redemption period, the right of possession
automatically reverts to the vendor. Legal title does not pass
either when the contract is made or when it is cancelled. E.g.,
Roehrs v. Thompson, 240 N.W. 111, 112 (Minn. 1932). Upon
default on a mortgage, on the other hand, the mortgagee must
institute foreclosure proceedings pursuant to Minn. Stat.
§559.17. "[T]he execution of a mortgage does not effect a
severance of title, but the foreclosure of a mortgage does." Romanchuk
v. Plotkin, 9 N.W.2d 421, 425 (Minn. 1943) (citations
omitted). Moreover, the mortgagee does not obtain possession
unless it outbids everyone else at the foreclosure sale. Minn.
Stat. §580.06. In short, the relevant Minnesota law is the
same as the Washington law at issue in Runkel v. United States
[76-1
USTC ¶9152 ], 527 F.2d 914, 917 (9th Cir. 1975). 5 After the hearing, the United States requested this court
consider an additional argument, which seeks to distinguish Brookbank
and maintains that Minnesota contract for deed cancellations are
"akin" to strict foreclosure proceedings, and therefore
within §7425(b) .
The court has considered the argument but finds it unpersuasive. See
n. 3 in particular. [73-1 USTC ¶9238]United States of America, Plaintiff v. Louis Von Cseh;
Irene Von Cseh; Claude T. Allen; and Mary Babicki Podgoursky,
Individually and as Independent Executrix of Ivan Podgoursky,
Deceased, Defendants U. S. District Court, So. Dist. Tex., Houston Div., Civil
Action No. 70-H-1069, 354 FSupp 315, Anthony
J. P. Farris, United States Attorney, Olney Wallis, Assistant
United States Attorney, Houston, Tex., Michael Andolina,
Department of Justice, Washington, D. C. 20530, for plaintiff.
Ralph S. Carrigan, Baker & Botts, 300 One Shell Plaza,
Houston, Tex., for Mr. & Mrs. Claude T. Allen, Mitchell M.
Bailey, 345 Park Ave., New York, N. Y., for I. Von Cseh, for
defendants. Memorandum Opinion and Order SEAL,
District Judge: The
Government brought this suit to foreclose a tax lien. This Court
has jurisdiction by virtue of Sections 1340 and 1345 of Title 28,
United States Code, and Section 7402(a) of the Internal Revenue
Code of 1954 [26 U. S. C. §7402(a)]. It
would seem that either Mark Twain or Will Rogers said something
that would cover this situation, but it is hard enough to find the
applicable law, so the facts will have to speak for themselves. [Facts] On
June 27, 1972, the Government presented its case against attorney
Claude T. Allen and his wife in an effort to foreclose on a
painting owned by Mrs. Allen. The Government claimed a lien
existed against the painting through its former owner. The
painting's previous owner had been the defendant, Irene Von Cseh.
The painting had been purchased for Mrs. Allen by Mr. Allen's
secretary at a judicial sale at which Mr. Allen and Houston
attorney James Cowan served as "trustees" for the
painting to be auctioned. If that is not confusing enough, Allen
had represented Count Ivan Podgoursky in a federal suit in which
Mr. and Mrs. Von Cseh, represented by Cowan, sued Podgoursky to
recover possession of the painting (Civil Action No. 13,453, So.
Dist. Tex.). By way of counterclaim, Podgoursky sought to
establish that he owned the painting by virtue of a lien against
Louis Von Cseh for services performed. The Von Csehs maintained
that ownership was in Irene, not Louis, and that the claimed lien
was without effect. Podgoursky died while the litigation was
pending and shortly thereafter his attorney (Allen) reached a
settlement with the Von Csehs, and on The
painting portrays three kings paying homage to the Christ-child
and has been referred to as the "Adoration of the Magi."
The testimony indicates that Von Cseh attributed its creation to
Sir Anthony Van Dyke (1599-1641). A portrait painter of great
renown, Van Dyke was born in Antwerp and was a student of Rubens.
In later life he was the painter to the court of the Infanta
Isabella of the Spanish Netherlands and to the court of King
Charles I of England who knighted him. Neither
the Government nor the defendant presented any proof as to its
origin, although the Government did present proof on the issue of
value. Fortunately, this Court does not have to decide whether a
great portraitist executed the painting in suit. The issue is
whether or not the United States may have the sale set aside. [Government Theories] The
Government advances two theories. First, that the sale by the
trustee, Allen, to his wife violates provisions of the Texas Trust
Act, V. A. T. S. Art. 7425b-12, and is therefore void as to the
Government which is a creditor of Mrs. Von Cseh. Second, that the
Government has liens totaling $18,787.55 against Mrs. Von Cseh
which attached to the painting and that Mrs. Allen is not a
"purchaser" protected from those liens within the
meaning of 26 U. S. C. §6323. The defense contends that the
Government has no standing to attack the sale since it is only
"voidable" and can be attacked only by beneficiaries of
the trust; that Allen was not a "trustee"; that Mrs.
Allen was a "purchaser," and even if she was not, that
she purchased at a judicial sale and is protected by the terms of
26 U. S. C. §7425(a). It
is the policy of the law to sustain judicial sales and they are
presumptively valid. McCardell v. Lea, 235 S. W. 518 (Tex.
1921); Hidalgo County Water Imp. Dist. No. 2 v. Dean, (Tex.
Civ. App. 1963, ref. n. r. e.); and see, Cameron v. Saathoff,
363 S. W. 2d 884 (Tex. Civ. App. 1962, ref. n. r. e.). This policy
is as applicable here as it is in the case of a sheriff's sale. The
first question then is the validity of the sale. Since the sale
was the product of a diversity suit then, under the rule of Erie
R. Co. v. Tompkins, 304 U. S. 64 (1938), Texas law determines
the sale's validity. The burden is on the complaining party to
establish invalidity. Kolbo v. Blair, 379 S. W. 2d 125
(Tex. Civ. App. 1964, ref. n. r. e.). For the sale to be void the
complainant must show either a fraud which deceived the
complainant, Dilley v. Jasper Lumber Co., 122 S. W. 255
(Tex. 1909), or "both irregularity calculated to affect the
sale and a gross inadequacy of price." Tex. Jur. 2d Judicial
Sales §13 citing Dilley v. Jasper Lumber Co. The
Government has never contended that Allen engaged in actual fraud,
but it has contended that the sale contained an irregularity and
that the price was woefully inadequate. While
the United States did not perfect its lien against Irene Von Cseh
until This
case should not go off on a "standing" question
especially where the Court is convinced that if allowed to reopen
the Government could easily prove the existence of the judgment of
the Tax Court. [Issue of Claimed Irregularity] The
Government's contention that the sale is void by reason of an
irregularity coupled with a grossly inadequate price must fail.
The claimed irregularity is that in the "Notice To All
Persons" the painting's trustees included a recitation of the
existence of a federal tax lien against Louis Von Cseh for
$242,675.19, and stated that title would be conveyed to the
successful bidder subject to whatever rights the Government might
have by virtue of the lien, (Govt. Ex. 6). However, at the time
immediately preceding the auction the Government claimed that the
painting was the property of Louis Von Cseh and that it had a
valid existing lien against Louis filed of record in New York City
on May 19, 1965, and that the Government's position had been made
known to Allen and a copy of the lien filed with the County Clerk
of Harris County, Texas, on December 6, 1966, (Deft. Ex. 4, 7 and
8). For all Allen and Cowan knew the United States might be
correct in its assertions. If the auction notice was to be
adequate and equitable it would have to include this information.
The Government could not really be "harmed" thereby,
since this would simply reinforce the "notice" of its
lien which it had filed at the Harris County Court House. The
Government has also argued that such a restriction in the notice
was not authorized by either the Internal Revenue Service or the
court order establishing the sale. [Issue of Inadequate Price] The
Government has not carried its burden of proving the inadequacy of
the price paid by the successful bidder. If the painting is a Van
Dyke then it would have considerable value. The Government did not
attempt to prove its value by proving that it is an authentic Van
Dyke. The Government did offer Judge Hannay's order as proof that
the parties and their attorneys considered the painting to have
some value, at least in excess of $3,000.00, but this does not
show the painting's value. The only other proof of value offered
by the Government was a letter consigning the painting to
Podgoursky and stating a value of $35,000.00 (Govt. Ex. 5), but it
was not admitted on the issue of value. [Purchaser] The
Government's second argument, that its post-auction lien against
Irene Von Cseh is superior to the rights of the high bidder, Mrs.
Allen, in that she is not a "purchaser" within the
meaning of 26 U. S. C. §6323(a) and (h)(6), is also rejected.
Since Mrs. Allen purchased the property at a regular judicial sale
pursuant to a judgment in a civil action in which the claimed lien
could have been asserted under 28 U. S. C. §2410 or 26 U. S. C.
§7424 and since no notice of the lien had been filed locally at
commencement of the action, then the provisions of 26 U. S. C.
§7425(a)(2) 1
apply, and the interests of the United States must be subordinated
under Texas law to those of the purchaser at the judicial sale. The
claims of the United States are rejected and judgment will be
entered for the defendant Claude T. Allen that the United States
take nothing by its suit. Counsel for the defendant will submit an
appropriate judgment within twenty days of today's date after
submitting it to counsel for the Government for approval as to
form. Clerk
will enter this Memorandum Opinion and provide counsel with true
copies. 1 §7425. Discharge of liens (a)
Judicial proceedings. If the United States is not joined as
a party, a judgment in any civil action or suit described in
subsection (a) of Section 2410 of title 28 of the United States
Code, or a judicial sale pursuant to such judgment, with respect
to property on which the United States has or claims a lien under
the provisions of this title-- (2)
shall have the same effect with respect to the discharge or
divestment of such lien of the United States as may be provided
with respect to such matters by the local law of the place where
such property is situated, if no notice of such lien has been
filed in the place provided by law for such filing at the time
such action or suit is commenced or if the law makes no provision
for such filing. These
provisions became effective |