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U.S. District Court, Dist. Wyo., C85-399, Francis
Leland Pico, Cheyenne, Wyo. 82003, Teresa J. Rasmussen, Mark G.
Fraase, Department of Justice, Washington, DC 20530, for
plaintiffs. Jeffrey C. Gosman, 139 W. Second, Casper, Wyo. 82601
for Charles R. Anderson, Denise Anderson, Joe R. Wilmetti, for
Meester Inc., William F. Swanton, P.O. Box 3191, Casper, Wyo.
82602, for Alfred Meester and Rose M. Meester. CORRECTED MEMORANDUM OPINION JOHNSON,
District Judge: This
is an action to reduce federal tax assessments against Robert F.
Aden and Carol J. Aden (Aden) to judgment, enforce outstanding
federal tax liens against the interests of the Adens in certain
real property located in Casper, Wyoming; and to foreclose the
federal tax liens on the interest of the Adens in that real
property. Jurisdiction vests by virtue of 28 U.S.C. §§1340 and
1345 and 26 U.S.C. §§7402
and 7403 . Summary
judgment may not be granted unless the pleadings, depositions,
answers to interrogatories and admissions on file, together with
affidavits, if any, show that there exists no genuine issue as to
any material fact and that the moving party is entitled to
judgment as a matter of law. Cayce v. Carter Oil Company,
618 F.2d 669, 672 (10th Cir. 1980). The fact that cross-motions
for summary judgment have been filed does not permit the entry of
summary judgment if disputes remain as to material facts. Buell
Cabinet Co., Inc. v. Sudduth, 608 F.2d 431 (10th Cir. 1979).
However, cross-motions for summary judgment will allow the Court
to infer that there is no evidence which needs to be considered
other than that which has been filed by the parties. Securities
and Exchange Commission v. American Commodity Exchange, Inc.,
546 F.2d 1361 (10th Cir. 1976). Following
a complete examination of the materials filed by both sides, we
find no dispute as to the material issues of fact. On During
the pendency of the contract for deed, and prior to default by the
Adens, the United States filed notices of federal tax liens on Initially,
we note that similar issues were raised in United States v.
Hernandez, Civil No. C85-384 (D. Wyo.). In Hernandez we
held that a purchaser's release of all equitable interests under a
contract for deed, in the state of Wyoming, is not a sale under §7425(b)
of Title 26, U.S.C. As a result, the tax lien filed by the
United States against the equitable interests of the purchaser
under the contract for deed was extinguished upon release and
abandonment of the purchaser's rights under the contract. The
United States' position in this case is that the declaration of a
forfeiture, as opposed to an abandonment, is a "nonjudicial
sale" of which the United States must receive notice under §7425(b)
in order to extinguish a federal tax lien. We do not agree. The
purchaser of property under a contract for deed is vested only
with an equitable interest in the property. Hollabaugh v.
Kolbet, 604 P.2d 1359 (Wyo. 1980). Absolute legal title
remains vested in the vendor, subject only to the right of the
purchaser under the contract. Barker v. Johnson, 591 P.2d
886 (Wyo. 1979). Upon default, unless equity dictates otherwise,
contractual provisions for forfeiture of the purchaser's equitable
interest may be enforced. Id. at 890; Younglove v.
Graham & Hill, 526 P.2d 689 (Wyo. 1974). Forfeiture
forecloses the rights of the purchaser under the contract, and
restores possession to the vendor without sale. Barker v.
Johnson, supra, at 890. Accordingly,
we follow those decisions which have held that a declaration for
forfeiture, under the law of their respective states, is not a
sale of property within the meaning of §7425(b)
; Title 26 U.S.C. Brookbank, Inc. v. Hubbard [83-2
USTC ¶9507 ], 712 F.2d 399 (9th Cir. 1983); Runkel v.
United States [76-1
USTC ¶9152 ], 527 F.2d 914 (9th Cir. 1975); Sigel v.
United States of America, Civil No. 4-85-440 (D.C. Minn. We
observe that the Andersons have filed a counterclaim against the
United States for attorney's fees under the Equal Access to
Justice Act, 26 U.S.C. §7430
. The United States has filed a motion to dismiss the
counterclaim on the ground that it fails to state a claim upon
which relief can be granted. The Court requests the parties to
fully brief the issues presented in the motion to dismiss and also
to provide authority on the question of whether attorney's fees
should be granted in this case, and if so, affidavits on the
amount of attorney's fees to be granted. Finally,
there remains one matter for the Court to decide. The United
States has filed motions for entry of default against Robert F.
Aden and Carol J. Aden Perkins (Adens). A review of the file
indicates that the Adens have been properly served with process
and that they have filed to plead or otherwise defend as provided
by the Federal Rules of Civil Procedure. In addition, the United
States has now presented evidence of a sum certain owing to
plaintiff in the amount of $36,114.26, plus accrued interest,
penalties and other additions to tax provided by law. Accordingly,
default judgment is entered by the Court in that amount against
Robert F. Aden and Carol J. Aden Perkins. Fed. Civ. Rules
Procedure, Rule 55, 28 U.S.C. Accordingly,
IT IS HEREBY ORDERED, ADJUDGED 1.
Plaintiffs' Motion for Summary Judgment as against defendants
Robert F. Aden and Carol J. Aden Perkins is granted. 2.
Judgment is entered in favor of plaintiff against defendant Robert
F. Aden and Carol J. Aden Perkins in the amount of $36,114.26,
plus accrued interest, penalties and other additions to tax as
provided by law. 3.
Plaintiffs' Motion for Summary Judgment as against Meester, Inc.,
Alfred Meester, Rose Meester, Charles R. Anderson, Jr., a/k/a Gus
Anderson, and Denise Anderson is denied. 4.
Defendants Meester, Inc., Alfred Meester, Rose Meester, Charles R.
Anderson, Jr., a/k/a Gus Anderson, and Denise Anderson's Motions
for Summary Judgment against plaintiff are granted. 5.
The United States and the Andersons shall file further briefs on
the issue of attorney's fees in accordance with this Memorandum
and Order within fifteen (15) days of the filing hereof. [81-2 USTC ¶9744] U. S. District Court, West. Dist. Wash., No. C80-593R, 520
FSupp 81, William
J. Carlson, P. O. Box 326, Redmond, Washington 98052, for
plaintiff. Donald M. Currie, Assistant United States Attorney,
Seattle, Washington 98104, for Internal Revenue Service. Memorandum Opinion and Order HARDY,
District Judge: The
plaintiffs, During
the time the contracts were in effect, a number of liens attached
to the Brellenthins' interest in the properties: 1. A claim of lien by Eastside Glass and Paint Company,
together with a lis pendens giving notice of an action by Eastside
to foreclose the lien. Eastside did not appear in this action and
its default has been entered. 2. Two federal tax liens. 3. A decree of dissolution of marriage dissolving the
marriage of Richard L. and Sheila A. Brellenthin and obligating
him to pay her $10,000. It does not appear that Sheila has been
served with process in this action. 4. Judgments in favor of the State of California, ex rel.
Winnie Rozelle, and the State of Arizona, ex rel. Rene Brellenthin,
for child support arrearages and/or reimbursement for public
assistance. 5. A judgment in favor of the State of Washington, Department
of Labor & Industries, against Richard Brellenthin and Jane
Doe Brellenthin. The State of Washington has not appeared in this
action and its default has been entered. The
Hedlunds have filed a motion for summary judgment against all
parties. The United States of America and the States of California
and Arizona have filed cross-motions for summary judgment. A
Notice of Stay has been filed in the court giving notice that
Richard L. Brellinthin and milo Brellenthin (apparently his
present wife) have filed a petition under Chapter XIII of the
Bankruptcy Act, as a result of which an automatic stay has come
into effect. The Notice also recites, "In addition, most actions and proceedings are stayed as
against co-debtors." The United States and the two states are not co-debtors of
Brellenthin. Accordingly, the Court will proceed to rule on the
motions for summary judgment. For
the reasons stated hereinafter, the motion of Hedlunds will be
granted and the motions of the United States and the States of
Arizona and California will be denied. The Claim of Federal Tax Lien Priority The
Federal Tax Lien Act of 1966, 26 U. S. C. §7425(b), provides that
when the United States has or claims a tax lien against property
". . . a sale . . . 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 a
nonjudicial sale under a statutory lien on such property . .
." shall be made subject to the tax lien if notice of the
sale is not given in writing by registered or certified mail or by
personal service to the Secretary of Treasury not less than
twenty-five days prior to the sale. In
Runkel v. United States [76-1 USTC ¶9152], 527 F. 2d 914
(9th Cir. 1975), the Ninth Circuit Court of Appeals held that a
declaration of forfeiture of a real estate sales contract was not
a sale of property within the meaning of subsection (b).
Thereafter, the Secretary of Treasury promulgated section 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 conditional sales contract . . .. The United States argues that this definition is a reasonable
interpretation of section 7425(b) of the Internal Revenue Code of
1954 (26 U. S. C.) and has the force and effect of law. I
disagree. The
power to prescribe rules and regulations is not the power to make
law. Manhattan General Equipment Co. v. Commissioner of
Internal Revenue [36-1 USTC ¶9105], 297 U. S. 129, 134
(1936), rehearing denied 297 U. S. 728. The Treasury Department
may not supply omissions or enlarge the scope of the Internal
Revenue Code. Busey v. Deshler Hotel Co. [42-2 USTC
¶9587], 130 F. 2d 187, 190 (6th Cir. 1942). See also Hart and
Miller Islands Area Environmental Group, Inc. v. Corps of
Engineers, 459 F. Supp. 279, 281 (D. Md. 1978) (agency
regulation cannot by definition expand the reach of statute),
rev'd on other grounds, 621 F. 2d 1281 (4th Cir. 1980), cert.
denied, -- U. S. --, 101 S. Ct. 544 (1980). The
Treasury Department has lifted "nonjudicial sale" out of
context, and has given it a definition which is inconsistent with
the provisions of the statute and which enlarges the scope of the
statute. Its definition has failed to give consideration to the
modifying phrase "under a statutory lien on such
property," which plainly restricts the meaning of a
"judicial sale" to a sale authorized by a statute
providing for a lien on property. Cf. Arkansas-Oklahoma Gas Co.
v. Commissioner of Internal Revenue [53-1 USTC ¶9170], 201 F.
2d 98, 102 (8th Cir. 1953) (the legislative definition of
"emergency facility" was so broad as to leave no room
for administrative limitation). The Claims of Arizona and California Arizona
and California recognize that it is the rule in Washington that a
vendee's interest under a contract for the sale of real property
is subject to attachment by a creditor of the vendee only where
his interest has not been forfeited or abandoned prior to a levy. Welling
v. Mount Si Bowl, Inc., 79 Wash. 2d 485, 487 P. 2d 620 (1971). To
avoid application of that rule in this case they urge that it
should be applied only to commercial judgment creditors and not
creditors whose judgments are for the collection of unpaid child
support. They argue that public policy dictates this distinction.
However, they cite no authority to support this argument. The
judgment liens of the states attached only to whatever title
Brellenthins had in the parcels of property. When that title was
extinguished, the liens were extinguished. If anything, a stronger
public policy argument could be made that a vendor of real
property does not enter into a contract of sale at the risk of
having his title encumbered because of the failure of his vendee
to provide child support. The
states also argue that they were entitled to notice of the
intention to declare a forfeiture because their judgment liens had
been recorded and because the Hedlunds must have had notice of the
existence of their liens. In
Washington the recording of an instrument is constructive notice
only to persons acquiring interest subsequent to the recording and
it is not notice to persons who had an interest at the time of
recording. Kendrick v. Davis, 75 Wash. 2d 456, 464, 452 P.
2d 222 (1969). The
claim of actual notice is supported only by the assertion that on
April 1, 1980, the Hedlunds ordered a title report from a title
insurance company which disclosed the interests claimed by the
states. This argument is patently ridiculous. The forfeiture was
effected on March 24, 1980. Nothing has been presented to show
that the Hedlunds had actual notice at that time. The
Hedlunds are entitled to summary judgment against the States of
Arizona and California. IT
IS ORDERED granting summary judgment in favor of the Hedlunds and
against the United States of America on its tax liens, the State
of California, ex rel. Rene Brellenthin, and the State of Arizona,
ex rel. Winnie Rozelle, on their judgment liens. 90-1 USTC ¶50,331] Metropolitan National Bank, James M. Oberlies and
Robert F. Ryan, Plaintiff-Appellees v. United States of America,
Defendant-Appellant (CA-5), U.S. Court of Appeals, 5th Circuit, 89-4710, Summary
Calendar, 5/30/90, 901 F2d 1297, 901 F2d 1297. Reversing and
remanding a District Court decision, 90-1
USTC ¶50,330 , 716 F.Supp. 946 Woodrow
W. Pringle Before
POLITZ, GARWOOD, and JOLLY, Circuit Judges. JOLLY,
Circuit Judge: The
United States appeals from the district court's judgment holding
that the United States' perfected tax lien, filed against three
parcels of real property owned by the taxpayer, Weaver & Sons,
Inc., was not entitled to priority over the interests claimed in
the property by the appellees, Metropolitan National Bank (the
"Bank"), James M. Oberlies, and Robert E. Ryan. [90-1
USTC ¶50,330 ] 716 F.Supp. 946. We hold that the appellees
were not entitled to priority under section
6323(a) of the Internal Revenue Code, and we therefore reverse
the judgment of the district court and remand the case for further
proceedings. I The
facts were stipulated by the parties. On On
February 23, March 2, March 9, March 16, and The
taxpayer defaulted in payment of its obligation to the Bank, and
subsequently filed a Chapter 7 bankruptcy petition. Although none
of the papers relating to the taxpayer's bankruptcy are contained
in the record before us, the appellees' brief states that the
taxpayer's bankruptcy petition was filed on On
The
bankruptcy court lifted the automatic stay, authorizing the Bank
to repossess and foreclose upon the subject property. Notices of
foreclosure were posted in the county courthouse, published in the
local newspaper, and sent to the II The
appellees brought this action against the United States under 28
U.S.C. §2410, seeking to quiet title to the property. The United
States counterclaimed, joining the taxpayer as an additional
defendant, seeking to foreclose its federal tax liens against the
subject property and to collect $195,621.65, the outstanding tax
liability of the taxpayer. On cross motions for summary judgment,
the district court granted summary judgment in favor of the
appellees. The district court held that the original deed of trust
was improperly acknowledged and that, even though the deed of
trust was recorded, because the defect in the acknowledgment was
apparent on the face of the deed, the recordation of the deed did
not provide constructive notice to subsequent creditors that the
property was encumbered. Nevertheless, the court held that, even
though the deed was improperly acknowledged and should not have
been recorded, the deed "provided actual notice to anyone who
cared to review the records of the Chancery Clerk." The
district court did not hold, however, that agents of the United
States had in fact reviewed the county records prior to filing the
notices of federal tax liens against the taxpayer, or that the
United States possessed any information sufficient to place it on
"inquiry notice" of the deed. Finally, the district
court concluded that the United States' tax lien was not entitled
to priority over the Bank's interest because, under state law, the
Bank held equitable title to the property by virtue of the
original defective deed of trust, and the United States had actual
notice of such equitable title. Thus, when the Bank foreclosed
upon the property in the non-judicial sale, the district court
held that the United States' junior tax lien was extinguished
under the provisions of Internal Revenue Code section
7425(b) . The United States appeals.
Under
26 U.S.C. §6321 ,
the amount of a delinquent taxpayer's liability constitutes a lien
in favor of the United States upon all of the taxpayer's property
and rights to property, whether real or personal. The lien imposed
by §6321 is
effective from the date of assessment of the tax, and continues
until the liability is satisfied or becomes unenforceable by
reason of lapse of time. 26 U.S.C. §6322
. The question whether and to what extent a taxpayer has
"property" or "rights to property" to which
the tax lien attaches is determined under the applicable state
law. United States v. Rodgers [83-1
USTC ¶9374 ], 461 U.S. 677,683, 103 S.Ct. 2132, 2137, 76
L.Ed.2d 236 (1983). It is undisputed in this case that the
taxpayer owned, or had rights to, the subject property to which
the federal tax liens attached. Once
it has been determined under state law that the taxpayer owns
property or rights to property, federal law controls for the
purpose of determining whether an attached tax lien has priority
over competing liens asserted against the taxpayer's property. Rodgers,
461 U.S. at 683, 103 S.Ct. at 2137 "When a third party also
claims a lien interest in the taxpayer's property, the basic
priority rule of 'first in time, first in right' controls, unless
Congress has created a different priority rule to govern the
particular situation." Texas Commerce Bank-Fort Worth, N.A.
v. United States [90-1
USTC ¶50,155 ], 896 F.2d 152 (5th Cir. 1990). Section
6323 of the Internal Revenue Code, as amended by the Federal
Tax Lien Act of 1966, governs the validity and priority of federal
tax liens imposed by §6321
against "certain persons." The appellees rely on the
special priority rules of subsection (a) of §6323
, which provides, in pertinent part, that a federal tax lien
shall not be valid against any "holder of a security
interest" until notice of the tax lien has been filed. Thus,
the respective priorities with respect to federal tax liens and
competing claims that are protected under §6323(a)
are dependent upon which claim is perfected "first in
time." Both parties agree that, if the Bank was a
"holder of a security interest" at the time the United
States filed its federal tax liens, the appellees' interests are
entitled to priority over the federal tax liens and that the tax
liens were thus extinguished in the foreclosure sale. The
definition of "security interest" is found in 26 U.S.C. §6323(h)(1)
: The
term "security interest" means any interest in property
acquired by contract for the purpose of securing payment or
performance of an obligation or indemnifying against loss or
liability. A security interest exists only when the lienholder satisfies
two requirements: (A)
if, at such time the property is in existence and the interest has
become protected under local law against a subsequent judgment
lien arising out of an unsecured obligation, and (B) to the extent
that, at such time, the holder has parted with money or money's
worth. Because the subject property is in existence and the Bank
parted with money in return for the deed of trust, the Bank's
interest in the subject property by virtue of the original deed of
trust is entitled to priority over the subsequently filed federal
tax lien under §6323(a)
if, as a result of filing the original deed of trust, the Bank
is "protected under local law against a subsequent judgment
lien arising out of an unsecured obligation." 26 U.S.C. §6323(h)(1)
. The United States argues that the district court erred in
holding that the Bank is a "holder of a security
interest" within the meaning of §6323(a)
because the Bank's interest was not protected under
Mississippi law against a subsequent judgment lien arising out of
an unsecured obligation, and thus, there was no security interest
in existence, within the meaning of §6323(h)(1)
,at the time of the filing of the federal tax liens. Because
the corrected deed of trust was not filed until after the federal
tax liens were filed, the issue before us is whether the Bank held
an interest under the original deed of trust that was protected
under Mississippi law against a subsequent judgment lien arising
out of an unsecured obligation. Under
§6323(h)(1) ,
a security interest exists only if "the interest is protected
under local law against a subsequent judgment lien arising out of
an unsecured obligation." The House Committee Report states
with reference to §6323(h)(1)
that: [A]
security interest becomes protected against a subsequent judgment
lien on the date on which all actions required under local law to
establish the priority of the security interest against such a
judgment lien have been taken, or, if later, the date on which all
such actions are deemed effective, under local law, to establish
such priority. H.R. Rep. No. 1884, 89th Cong., 2d Sess. 49 (1966). As
we explain below, our examination of the relevant Mississippi
cases and statutes convinces us that the Bank's interest under the
original deed of trust would not have been entitled to protection
against a subsequent judgment lien arising out of an unsecured
obligation unless such a judgment lien creditor had actual notice
or knowledge of the defectively acknowledged deed of trust. 1 (1) Under
Mississippi law, all deeds of trust are "void as to all
creditors and subsequent purchasers for a valuable consideration
without notice, unless they be acknowledged or proved and lodged
with the clerk of the chancery court of the proper county, to be
recorded . . . ." Miss.Code Ann. §89
-5-3 (1972). "But as between the parties and their heirs,
and as to all subsequent purchasers with notice or without
valuable consideration, said instruments shall nevertheless be
valid and binding." Id. In Burkett v. Peoples Bank
of Biloxi, 225 Miss. 291, 294, 83 So.2d 185, 187 (1955), the
Mississippi Supreme Court held that this statute "applies
with as much force to a creditor obtaining a lien by judgment as
it does to a subsequent purchaser or encumbrancer; and creditors
without notice and subsequent purchasers for value without notice
are on the same footing and are protected to the same
extent." A
deed of trust is not eligible for recordation unless it is
properly acknowledged, and an instrument that does not contain a
proper acknowledgment does not impart constructive notice to
creditors or bona fide purchasers, pursuant to Miss. Code Ann. §89
-3-1 (1972): [A]
written instrument of or concerning the sale of lands . . . shall
not be admitted to record in the clerk's office unless the
execution thereof be first acknowledged or proved, and the
acknowledgment or proof duly certified by an officer competent to
take the same in the manner directed by this chapter; and any such
instrument which is admitted to record without such acknowledgment
or proof shall not be notice to creditors or subsequent purchasers
for valuable consideration. It
is undisputed, and the district court correctly held, that the
original deed of trust dated Under
Mississippi law, the taking of an acknowledgment is a judicial or
quasi-judicial rather than a ministerial act, and . . . this act
cannot be performed by a grantee in the deed, or by one who,
though not a grantee, is the procuring cause of the conveyance or
has a financial or beneficial interest in the transaction . . . . It
would be against public policy to permit a grantee, mortgagee, or
trustee, or other person beneficially interested in the
transaction to take an acknowledgment to an instrument in which he
is named as a party or has a beneficial interest. The object of
the law is to prevent the perpetration of fraud, and the policy of
the law seems to be that the officer taking the acknowledgment
must not be in such relationship to the grantee that there shall
exist any temptation for the officer to do aught but his duty
impartially. Mills v. Damson Oil Corp., 686 F.2d 1096, 1102-03 (5th Cir.1982) (quoting 1 Delvin
on Real Estate and Deeds, §477d (3d Ed. 1911)). The
acknowledgment taken by the trustee in this case was thus void. 2
Jones v. Porter, 59 Miss. 628 (1882) (where the
acknowledgment of a grantor was taken by the husband of the
grantee, who was the procuring cause of the conveyance, the
acknowledgment was void). Because the acknowledgment was void, the
deed of trust was not eligible for recordation and, even though
the deed was recorded, it nevertheless did not impart constructive
notice to creditors under Miss.Code Ann. §89
-3-1. See also Holden v. Brimage, 72 Miss. at 229-30,
18 So. at 383; Wasson v. Connor 54 Miss. 351, 352-53 (1877)
(where grantee acknowledged grantor's signature, "[t]he deed
never having been legally acknowledged, [it] was, of course,
improperly recorded, and it afforded notice to nobody"). In
Mills v. Damson Oil Corp., this court stated that "[i]t
is well settled in Mississippi that constructive notice is not
imparted to bona fide purchasers by recording a defectively
acknowledged deed." 686 F.2d at 1103-04 (citing Ligon v.
Barton, 88 Miss. 135, 40 So. 555 (1906); Elmslie v.
Thurman, 87 Miss. 537, 40 So. 67 (1905); Smith v. McIntosh,
176 Miss. 725, 170 So. 303 (1936)). The court noted, however, that
the cited cases, as well as most of the other cases that describe
the nature of the defect involved, concern patent defects, i.e.,
"defects which are apparent on the face of the
acknowledgment." Mills, 686 F.2d at 1104. The defect
in Mills was "entirely latent" because there was
"nothing in the deed or its acknowledgment to indicate that
the named grantee, Lurline Daws, and S.B. Daws, who took the
acknowledgment, were related to each other, or, indeed, that
either was married." Id. Because only one Mississippi
case, Roebuck v. Bailey, 176 Miss. 234, 166 So. 358 (1936),
discussed the effect of a latent defect in an acknowledgment on
bona fide purchasers, and because in that case the Mississippi
court recognized a potential distinction between latently and
patently defective acknowledgments, this court certified the
following question to the Mississippi Supreme Court: Whether
a defectively acknowledged and recorded deed imparts constructive
notice if the defect in the acknowledgment is entirely latent? Mills, 686 F.2d at 1114. The Mississippi Supreme Court answered
"yes." Mills v. Damson Oil Corp., 437 So.2d 1005,
1006 (Miss. 1983). Nothing
in the Mississippi Supreme Court's answer to the certified
question in Mills casts any doubt on the cases involving
defectively acknowledged deeds in which the defects are patent.
Those cases hold that the recording of such defectively
acknowledged deeds does not impart constructive notice to bona
fide purchasers. See Mills, 686 F.2d at 1103-04 and cases
cited therein; see also Cotton v. McConnell, 435 So.2d 683
(Miss. 1983) (a deed with a defective acknowledgment is not
eligible for recordation, and is not effective as to third
parties, under §89 -3-1,
but it is wholly effective between the parties to it). The
original deed of trust in this case names Robert L. Taylor as
trustee, and Robert L. Taylor acknowledged the signature of the
grantor. Thus, it is clear that the defect in the acknowledgment
is patent, and the district court correctly held that the deed did
not give constructive notice to subsequent bona fide purchasers
and creditors. We therefore conclude that, under Mississippi law,
the recordation of the defectively acknowledged deed of trust did
not impart constructive notice, and thus did not protect the
Bank's interest under the deed of trust against a subsequent
judgment lien creditor in the absence of actual notice to such a
subsequent judgment lien creditor. (2) The
district court held that, although the recordation of the
defective deed did not impart constructive notice, it could impart
actual notice "to anyone who cared to review the records of
the Chancery Clerk." The district court then held that the
United States did have actual notice, apparently because Under
Mississippi law, a prior deed, whether recorded or unrecorded, is
good against a subsequent purchaser or creditor with actual notice
of it. Dixon & Sharkey v. Lacoste, 9 Miss. 70, 107
(1843). In addition, a recorded deed that is not acknowledged is
valid against "one who sees upon the record and reads an
instrument improperly recorded, because not acknowledged or proved
as required by law." Woods v. Garnett, 72 Miss. 78, 16
So. 390, 391 (1894). In order to have "actual notice," a
party must be "aware of the nature and purposes of the
deed." Bass v. Estill, 50 Miss. 300, 306 (1874).
Actual notice is defined by Black's Law Dictionary (5th ed. 1979)
as "such notice as is positively proved to have been given to
a party directly and personally, or such as he is presumed to have
received personally because the evidence within his knowledge was
sufficient to put him upon inquiry." The
appellees contend, and the district court held, that the United
States had actual notice because the deed was recorded and could
have been located had the United States searched the records. This
argument confuses the concepts of actual notice and constructive
notice. The mere recording of a deed does not provide actual
notice to strangers to a transaction who are not in possession of
facts that would place them on inquiry notice. Rather, the primary
purpose of recording is to impart constructive notice. The
appellees contend, however, that the United States had a
"duty to inquire" because its agents had knowledge of
sufficient facts to place it upon inquiry notice to check the
title to the subject property. "Inquiry notice," as
recognized in Mississippi, arises when a party has actual notice
or knowledge of facts that would lead a reasonably prudent person
to question the sufficiency of title to property. E.g., Burkett
v. Peoples Bank of Biloxi, 225 Miss. 291, 83 So.2d 185, 188
(1955). A party who has inquiry notice "is charged with
notice of all those facts which could or would be disclosed by a
diligent and careful investigation." Id. Under
Mississippi law, a party is not on inquiry notice from the mere
recordation of a deed evidencing an interest in property. C&D
Investment Co. v. Gulf Transport Co., 526 So.2d 526, 530
(Miss. 1988). In
support of their position that the United States had a duty to
inquire, the appellees argue, without any citation of authority,
that the fact that the taxpayer had not paid its taxes should have
provided notice to the United States that the title to any
property owned by the taxpayer would be subject to other liens or
problems. We disagree. The fact that the taxpayer was delinquent
in its federal tax obligations created no inferences concerning
the taxpayer's title to any particular property and falls short of
the type of information necessary to place the United States on
inquiry notice. We also reject the appellees' argument that the
taxpayer's filing of a petition in bankruptcy should have led the
United States to conduct an investigation that would have resulted
in the discovery of the Bank's deed of trust. We need not consider
whether the taxpayer's filing of its bankruptcy petition was
sufficient to put the We
conclude that the record does not support the district court's
holding that the United States had actual notice of the defective
deed of trust. The record contains no evidence indicating that the
United States was aware of the deed of trust prior to the time it
filed its federal tax liens, or that it possessed any knowledge of
circumstances that would have put it on inquiry which, if pursued,
would have led it to actual knowledge of the defective deed of
trust. Although the district court's statement that the defective
deed of trust could give actual notice "to anyone who cared
to review the records of the Chancery Clerk" is correct as
far as it goes, there is no evidence that any agent of the United
States reviewed the records of the Harrison County Chancery Clerk,
and, under the facts in the record, the United States did not have
inquiry notice of the existence of the deed. (3) The
district court further held that the defectively acknowledged deed
of trust gave the Bank "equitable title" sufficient to
defeat the claims of "a subsequent purchaser or party coming
after the document in question, who has notice of the questionable
document." Even if we assume that the defectively
acknowledged deed of trust gave the Bank "equitable
title," the United States, as we have already noted, did not
have notice of the defectively acknowledged deed of trust. We
reject the appellees' argument that, when the defectively
acknowledged deed was recorded, the United States received
constructive notice of the Bank's equitable interest because, as
we have already held, the recordation of the defectively
acknowledged deed did not impart constructive notice to subsequent
creditors under Mississippi law. We therefore conclude that, under
Mississippi law, the Bank's interest in the property under the
defectively acknowledged deed of trust was not "protected by
state law against a subsequent judgment lien creditor." The
district court therefore erred in holding that the Bank is a
"holder of a security interest" with respect to the
property within the meaning of 26 U.S.C. §6323(h)(1)
. Thus, the Bank is not entitled to the protection of §6323(a)
. 3 C The
district court's holding that the federal tax lien was
extinguished in the foreclosure sale of the property under the
provisions of 26 U.S.C. §7425(b)
is based on its erroneous conclusion that the tax liens were
junior to the Bank's lien. As we have already held, the Bank's
lien did not prime the federal tax liens. Section
7425(b) provides that, even if the government's lien is
inferior under state law, it will not be discharged by the
foreclosure sale unless the proper type of notice is given to the
United States. Myers v. United States, [81-2
USTC ¶9490 ], 647 F.2d 591, 596-97 (5th Cir. 1981). It is
undisputed that the United States was properly notified of the
foreclosure sale by the Bank. Thus, the sale has "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." 26 U.S.C. §7425(b)(2)
. As this court held in United States v. Boyd [57-2
USTC ¶9791 ], 246 F.2d 477, 483 (5th Cir.), cert. denied,
355 U.S. 889, 78 S.Ct. 261, 2 L.Ed.2d 188 (1957), under
Mississippi law, a nonjudicial sale, with proper notice to the
United States, cuts off the government's lien only if the tax lien
is junior to the nonfederal lien being foreclosed. See also
Peoples Bank & Trust Co. v. L&T Developers, Inc.,
434 So.2d 699 (Miss. 1983). We therefore hold that the district
court erred in concluding that the senior tax liens of the United
States were discharged by the Bank's nonjudicial foreclosure sale. For
the foregoing reasons, the judgment of the district court is
REVERSED, and the case is REMANDED to the district court for
further proceedings. REVERSED
1 Other courts have taken two different approaches in
determining the kind of protection Congress contemplated that a
security interest must have in order to be "protected under
local law against a subsequent judgment lien." One line of
cases applies the "subjective knowledge lien creditor
test," and places the United States in the shoes of a
subsequent judgment lien creditor. Under those cases, if the
United States obtains actual or constructive knowledge of the
competing nonfederal interest prior to filing its federal tax
liens, and if, under local law a judgment lien creditor is
protected only if he is without actual or constructive knowledge
of a prior interest, the tax lien is not entitled to priority over
the nonfederal interest. See, e.g., United States v. Ed Lusk
Constr. Co. [74-2
USTC ¶9773 ], 504 F.2d 328, 331 (10th Cir. 1974); United
States v. Trigg [72-2
USTC ¶9642 ], 465 F.2d 1264, 1268-69 (8th Cir. 1972), cert.
denied, 410 U.S. 909, 93 S.Ct. 963, 35 L.Ed.2d 270 (1973). The
other line of cases applies a "hypothetical judgment lien
creditor test" that focuses on the protection state law gives
to the security interest against other hypothetical lien
creditors. Under that test, the question is whether the security
interest is protected under local law against any hypothetical
judgment lien creditor that might arise, whether or not the
government has knowledge of the competing nonfederal interest.
See, e.g., Dragstrem v. Obermeyer [77-2 USTC ¶9301], 549
F.2d 20, 25-27 (7th Cir. 1977). We do not need to decide which
test should apply in this case. The district court applied the
"subjective knowledge" test, and both parties have
assumed the applicability of that test in their presentation of
the case to this court. 2 Although the acknowledgment was void, it does not follow
that the deed itself was void. Pursuant to Miss.Code Ann. §89
-5-3, a deed that is neither acknowledged nor recorded is
"nevertheless valid and binding" as between the parties
and their heirs, and as to all subsequent purchasers (and
creditors) with notice or without valuable consideration. 3 In Aetna Ins. Co. v. Texas Thermal Industries, Inc. [79-1
USTC ¶9287 ], 591 F.2d 1035, 1038 (5th Cir. 1979), this court
held that the Federal Tax Lien Act of 1966 was intended to
supplant the federal common law with respect to "tax lien
priority questions as to which that statute provides an
unambiguous federal answer." In Texas Commerce Bank-Fort
Worth, N.A. v. United States [90-1
USTC ¶50,155 ], 896 F.2d 152, 161 n. 8 (5th Cir. 1990),
however, another panel of this court has recently noted that there
is an apparent conflict between Aetna and two earlier
decisions of this court, Rice Investment Co. v. United States
[80-2
USTC ¶9654 ], 625 F.2d 565, 572 (5th Cir. 1980) and Texas
Oil & Gas Corp. v. United States [72-2
USTC ¶9653 ], 466 F.2d 1040, 1053 (5th Cir. 1972), cert.
denied sub nom., Pecos County State Bank v. United States, 410
U.S. 929, 93 S.Ct. 1367, 35 L.Ed.2d 591 (1973). In Rice and Texas
Oil, the court, after concluding that nonfederal liens were not
entitled to priority under the Tax Lien Act of 1966, proceeded to
examine the question of priority under pre-1966 common law. We
note that Aetna involved a nonfederal lien that was clearly
entitled to priority under the Tax Lien Act and in that respect
may be distinguishable from the nonfederal liens involved in Rice
and Texas Oil. In
the case before us, the statute provides a nonambiguous federal
answer to the priority. It is unnecessary for us to resolve any
conflict between Aetna, Rice, and Texas Oil in this
case because, even if we examine the question of priority under
pre-1966 federal common law, the answer is the same. Pre-1966
federal common law requires that the competing nonfederal lien be
not only first in time but "choate" as well. A
nonfederal lien is choate when "the identity of the lienor,
the property subject to the lien, and the amount of the lien are
established beyond any possibility of change or dispute." Rice
Investment, 625 F.2d at 568. The question whether a lien has
acquired sufficient substance and has become so perfected as to
defeat a later-arising or later-filed federal tax lien is governed
by federal law. Id. Although
the deed of trust identifies the lienor and describes the property
subject to the lien, the amount of the lien was not established
"beyond all possibility of change or dispute" at the
time the notices of tax liens were filed. The deed of trust
secured not only the $400,000 loan, but also "such future and
additional advances as may be made to the grantor," as well
as "all debts, obligations, or liabilities, direct or
contingent, of the grantor . . . to the beneficiary, whether now
existing or hereafter arising at any time before actual
cancellation of this instrument on the public records of mortgages
and deeds of trust, whether the same be evidenced by note, open
account, over-draft, endorsement, guaranty or otherwise."
Because the deed of trust had not been cancelled at the time the [86-2 USTC ¶9643] Andrew B. Johnson, Individually and as Personal
Representative of the Estate of Andrew Walfrid Johnson, and Joan
M.M. Kuder, Appellees v. United States of America, Appellant (CA-8), U.S. Court of Appeals, 8th Circuit, 85-5350, James
B. Dickinson, 3600 Shoreline Dr., Wayzata, Minn., for appellees. Kenneth
L. Greene, Department of Justice, Washington, D.C. 20530, for
appellant. Before
HEANEY and WOLLMAN, Circuit Judges, and BATTEY, *
District Judge. BATTEY,
District Judge: The
United States of America filed this appeal from the district
court's judgment which held that a forfeiture of a
vendee-taxpayer's interest in real property pursuant to a
statutory cancellation of a contract for deed extinguished federal
tax liens against the vendor perfected prior to forfeiture.
Jurisdiction is conferred on this court by 28 U.S.C. §1291
. For the reasons set forth below, we affirm. 1 I. BACKGROUND This
is a quiet title action involving real property in Hennepin
County, Minnesota. On June 11, 1981, appellees Johnson and Kuder
(sellers) sold the property to Robert A. Mitchell (Mitchell) under
a contract for deed which was recorded in the Hennepin County
Recorder's Office on June 25, 1981. Under the contract, Mitchell
was entitled to possession and would receive the deed after full
payment of the purchase price. He had a duty to pay all real
property taxes and keep the property insured. After the sale,
Mitchell incurred certain liens which attached to the property,
including four federal tax liens totaling $7,828.57. In addition,
Mitchell failed to pay real estate taxes in 1982, 1983, and 1984,
committed waste on the property, and failed to keep it properly
insured. In July 1983, Mitchell ceased making payments to sellers
under the contract. The
contract provided that upon Mitchell's noncompliance, the sellers
were empowered to "declare this contract cancelled and
terminated" upon written notice. Upon cancellation, any
improvements and all payments made by Mitchell were to be
forfeited to the sellers as liquidated damages. Sellers commenced
a statutory cancellation of the contract for deed on October 29,
1983, by personally serving Mitchell with a cancellation notice
pursuant to Minnesota law. The contract for deed was cancelled
when Mitchell failed to cure his default within the statutorily
prescribed 60 day time period in Minn. Stat. §559.21 (1982). On
January 12, 1984, sellers recorded an affidavit of noncompliance
with the Hennepin County Recorder. Sellers
did not serve the United States with notice of their intent to
cancel the contract for deed, nor did the United States give
notice to sellers of any claimed interest stemming from the
federal tax liens. Notice to the United States is not required by
Minn. Stat. §559.21. 2
When sellers discovered the federal tax liens, they sought a
voluntary discharge through an administrative proceeding. This
petition was denied on October 2, 1984, and sellers commenced the
present quiet title action. Originally, there were other named
defendants involved in the case, but only the United States is
involved in this appeal. II. DISCUSSION There
is only one issue in this case: whether a statutory cancellation
of a contract for deed is a "nonjudicial sale" within
the meaning of 26 U.S.C. §7425(b)
3.
We conclude that the cancellation of a contract for deed does not
constitute a "nonjudicial sale." The
identical issue has been addressed twice by the Ninth Circuit
Court of Appeals and once by a district court in that circuit. All
three cases arose in Washington. The first case, Runkel v.
United States [76-1
USTC ¶9152 ], 527 F.2d 914 (9th Cir. 1975), was decided prior
to the promulgation of 26 C.F.R. §301.7425-2
4.
In Runkel, the buyer defaulted on a real estate sales
contract that provided title was to remain in the sellers until
the full purchase price was paid. The United States filed tax
liens on the property against the buyers. When the buyers failed
to make payments, the sellers eventually declared a forfeiture.
The court recognized that a buyer's interest in land purchased
under a contract for deed is an interest of the type to which
federal tax liens may attach. Id. at 916. Therefore, the
question in Runkel is whether these liens were extinguished
by the vendor's declaration of forfeiture. Since state law governs
divestiture of federal tax liens except to the extent that
Congress has entered the field, United States v. Brosnan [60-2
USTC ¶9516 ], 363 U.S. 237, 241, 80 S.Ct. 1108, 1111, 4 L.
Ed. 2d 1192 (1960), the court reasoned that the declaration of
forfeiture was not a nonjudicial sale under §7425(b)
because of Washington law governing real estate contracts of
this type. Until the full purchase price has been paid, the seller
retains legal title; the buyer has equitable title. When a buyer
defaults, possession of the property is returned to the seller
under a declaration of forfeiture, but title does not change
hands. This contrasts with foreclosure of a mortgage, where there
must be a sale so that others can bid on the property, and the
title does change hands. The court held that there is a clear
distinction between the sale of property as in a mortgage or deed
of trust situation and the mere forfeiture of an interest in that
property and that therefore, §7425
does not apply. Id. at 917. A
similar situation arose in Hedlund v. Brellenthin [81-2
USTC ¶9744 ], 520 F.Supp. 81 (W.D. Wash. 1981). By the time Hedlund
was decided, the Secretary of the Treasury had promulgated 26
C.F.R. §31.7425-2(a). The court held that the Treasury Department
in this case was attempting to supply omissions or enlarge the
scope of the Internal Revenue Code. The district court noted the
distinction between the power to prescribe rules and regulations
and the power to make law, and concluded the Secretary was
attempting to make a law by promulgating this regulation. Id.
at 83, citing Manhattan General Co. v. Commissioner of Internal
Revenue [36-1
USTC ¶9105 ], 297 U.S. 129, 134, 56 S.Ct. 397, 399, 80 L.Ed.
2d 528 (1936), reh'g denied 297 U.S. 728, 56 S.Ct. 787, 80
L.Ed. 2d 1010. The
Hedlund analysis was approved in Brookbank, Inc. v.
Hubbard [83-2
USTC ¶9507 ], 712 F.2d 399 (9th Cir. 1983). The government
argued that Runkel did not control in light of the
subsequently promulgated treasury regulation, 26 C.F.R. §301.7425-2
(1982), but the Ninth Circuit held the regulation invalid
insofar as the regulation mandated that a forfeiture under a
contract for deed be treated as a nonjudicial sale. The Ninth
Circuit once again cited the Brosnan case for the rule that
state law determines whether federal tax liens are extinguished
unless Congress provides otherwise. The court noted that Congress
did to some extent limit the power of states to extinguish tax
liens by requiring notice in cases of nonjudicial sales or by
judicial proceedings. Therefore, the Ninth Circuit concluded, if
state law permits extinction of liens in a manner other than by
sales as described in §7425
, notice to the United States is not required. Under
Washington law, forfeiture under a contract for deed is not a
nonjudicial sale and notice to the United States is not required. Minnesota
law on this issue is virtually identical to the law in Washington.
Under Minnesota law, the seller retains the legal title to the
property under contract for deed until the buyer has completely
performed his obligations, including full payment for the
property. See Romain v. Pebble Creek Partners, 310 N.W.2d
118, 120 (Minn. 1981). This contrasts with the operation of a
mortgage under Minnesota law. The mortgagor is the owner of the
property and hold legal title to the property. If a mortgagor
fails to make payments, the mortgagee may begin a foreclosure by
action or foreclosure by advertisement. The mortgagor may bring
the mortgage current and stop the foreclosure if a tender of all
delinquencies and penalties is made before the sale. In case of a
sale, the mortgagor has the right of redemption which is either
six months or one year. After the foreclosure sale, the title
passes to the purchaser, subject only to the redemption rights of
the mortgagor and subsequent lien holders. Under
Minnesota law, forfeiture under a contract for deed is not a
nonjudicial sale within §7425
and notice to the United States is not required. 26 C.F.R. §301.7425-2
is invalid to the extent that it attempts to mandate that such
a forfeiture is a nonjudicial sale. The district court's decision
is affirmed. Sellers' motion for attorney's fees under 26 U.S.C. §7430
(Supp. 1986) is denied. * The HONORABLE RICHARD H. BATTEY, United States District
Judge for the District of South Dakota, sitting by designation. 1 The Honorable Donald D. Alsop, Chief Judge, United States
District Court for the District of Minnesota. The district court's
decision is found at 616 F. Supp. 439 (Minn. 1985). 2 The statute usually requires only notice to the purchaser,
or his personal representatives or assigns. Minn. Stat. §559.21
(1982). In certain circumstances, notice is also required to be
given to the commissioner of revenue. Minn. Stat. §559.21, Subd.
5 (1982). 3 26 U.S.C. §7425(b)
provides for discharge of liens. It states: [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, may 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 a
nonjudicial sale under a statutory lien on such property--(1)
shall, except as other 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) . . . . 4 26 C.F.R. §301.7425-2
states in part: Section
7425(b) contains provisions with respect to the effect on the
interest of the United States a property in which the United
States has or claims a lien, or a title derived from the
enforcement of a lien, of a sale made pursuant to--(1) an
instrument creating a lien on the property sold, (2) a confession
of judgment on the obligation secured by an instrument creating a
lien on the property sold, or (3) a statutory lien on the
property. For
purposes of this section, such a sale is referred to as a "nonjudicial
sale." 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 deed or under a conditional sales contract. Dissenting Opinion WOLLMAN,
Circuit Judge I
would hold that section
301.7425-2 is a reasonable interpretation of section
7425(b) and that therefore the government's tax lien was not
extinguished by the cancellation of the contract for deed. Consolidated
Blenders, Inc. v. United States [86-1
USTC ¶9270 ], 785 F.2d 259 (8th Cir. 1986). (a) In general. --Section 7425(b) contains provisions
with respect to the effect on the interest of the United States in
property in which the United States has or claims a lien, or a
title derived from the enforcement of a lien, of a sale made
pursuant to -- (1) An instrument creating a lien on the property sold, (2) A confession of judgment on the obligation secured by an
instrument creating a lien on the property sold, or (3) A statutory lien on the property sold. For
purposes of this section, such a sale is referred to as a "nonjudicial
sale." 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. Under
section 7425(b)(1), if a notice of lien is filed in accordance
with section 6323(f) or (g), or the title derived from the
enforcement of a lien is recorded as provided by local law, more
than 30 days before the date of sale, and the appropriate district
director is not given notice of the sale (in the manner prescribed
in §301.7425-3), the sale shall be made subject to and without
disturbing the lien or title of the United States. Under section
7425(b)(2)(C), in any case in which notice of the sale is given to
the district director not less than 25 days prior to the date of
sale (in the manner prescribed in section 7425(c)(1)), the sale
shall have the same effect with respect to the discharge or
divestment of the lien or title as may be provided by local law
with respect to other junior liens or other titles derived, from
the enforcement of junior liens. A nonjudicial sale pursuant to a
lien which is junior to a tax lien does not divest the tax lien,
even though notice of the nonjudicial sale is given to the
appropriate district director. However, under the provisions of
section 6325(b) and §301.6325-1, a district director may
discharge the property from a tax lien, including a tax lien which
is senior to another lien upon the property. (b) Date of sale. --In the case of a nonjudicial sale
subject to the provisions of section 7425(b), in order to compute
any period of time determined with reference to the date of sale,
the date of sale shall be determined in accordance with the
following rules: (1) In the case of divestment of junior liens on property
resulting directly from a public sale, the date of sale is deemed
to be the date the public sale is held, regardless of the date
under local law on which junior liens on the property are divested
or the title to the property is transferred, (2) In the case of divestment of junior liens on property
resulting directly from a private sale, the date of sale is deemed
to be the date title to the property is transferred, regardless of
the date junior liens on the property are divested under local
law, and (3) In the case of divestment of junior liens on property not
resulting directly from a public or private sale, the date of sale
is deemed to be the date on which junior liens on the property are
divested under local law. For
provisions relating to the right of redemption of the United
States, see section 7425(d) and §301.7425-4. (c) Examples. --The provisions of this section may be
illustrated by the following examples: Example (1).
(i) Under the law of State M, upon entry of judgment, the judgment
creditor obtains a statutory lien upon the real property of the
judgment debtor, and certain procedures are provided by which the
judgment creditor may execute by public sale upon such real
property. These procedures provide, among other things, for
notification by personal service or registered or certified mail
to other lien creditors, if any, and publication of a notice of
the sale in a local newspaper. After the expiration of a
prescribed period of time after such notification and publication,
the sheriff of the county where the real property is located may
sell the property at public sale. After payment of the amount bid
at the public sale, the sheriff issues to the purchaser a deed to
the real property, and the interests of junior lienors in the
property are divested. (ii)
For purposes of this section, such an execution sale is a
nonjudicial sale described in section 7425(b) because the sale is
made pursuant to a statutory lien on the property sold. The date
of sale, for purposes of computing a period of time determined
with reference to the date of sale, is the date on which the
public sale is held because junior liens on the real property are
divested directly as a result of the public sale. This result
obtains even though the junior liens are legally divested on a
later date when the sheriff issues the deed. Example (2).
(i) Under the law of State N, mortgages on real property may
contain a power of sale which authorizes the mortgagee, upon
breach by the mortgagor of one of the conditions of the mortgage,
to have the mortgaged property sold at public sale. This public
sale must be preceded by notice by advertisement in a local
newspaper, and the time, place, description of the property, and
other terms of the sale must be specified. The purchaser at such a
public sale obtains a title to the real property which is not
subject to a right of redemption by the mortgagor and which
divests the interests of the junior lienors in the property. (ii)
For purposes of this section, a sale pursuant to such a power of
sale is a nonjudicial sale described in section 7425(b) because
the sale is made pursuant to the mortgage instrument which created
a lien on the property sold. The date of the sale, for purposes of
computing a period of time determined with reference to the date
of sale, is the date of the public sale because junior liens on
the property are divested directly as a result of the public sale. Example (3).
Assume the same facts as in example (2) except that the purchaser
at the public sale obtains a title which is defeasible by the
exercise of a right of redemption in the mortgagor. The
purchaser's title divests the interests of junior lienors in the
property as of the time of public sale. The interests of junior
lienors in the property revive if the mortgagor exercises his
right of redemption. The date of the sale, for purposes of
computing a period of time determined with reference to the date
of sale, is the date of the public sale because junior liens on
the property are divested directly as a result of the public sale
although such junior liens may be revived by a subsequent
redemption by the mortgagor. Example (4).
(i) Under the law of State O, upon breach by a mortgagor of real
property of one of the conditions of the mortgage, the mortgagee
may foreclose the mortgage by securing possession of the property
by one of several procedures provided by statute. These procedures
are generally referred to as "strict foreclosure." In
order for a foreclosure to be effective under these procedures, a
certificate attesting the fact of entry must be recorded with the
proper registrar of deeds within 30 days after the mortgagee
enters the property. During the one-year period following the date
on which the certificate of entry is recorded, the mortgagor or a
junior lienor may redeem the property by paying the mortgagee the
amount of the mortgage obligation. If, during such one-year period
the property is not redeemed and the mortgagee's possession is
continued, the interests of the mortgagor and the junior lienors
in the property are divested as of the date such one-year period
expires. (ii)
For purposes of this section, such a foreclosure procedure is a
nonjudicial sale described in section 7425(b) because it results
in the divestment of the mortgagor's interest in the property by
operation of law pursuant to the mortgage which created a lien on
the property. In addition, because there is no public or private
sale which directly results in the divestment of junior liens on
the property, the date of sale, for purposes of computing a period
of time determined with reference to the date of sale, is the date
on which the one-year period following the recording of the
certificate of entry expires. Example (5).
The law of State P contains a procedure which permits a county to
collect a delinquent tax assessment with respect to real property
by the means of a tax sale of the property. First, a notice of a
public auction with respect to the tax assessment on the real
property is published in a local newspaper. At the public auction,
the purchaser, upon payment of the delinquent taxes and interest,
obtains from the county tax collector a tax certificate with
respect to the real property. Because the obtaining of this tax
certificate does not directly result in the divestment of either
the owner's title or junior liens with respect to the property,
the public auction is not a nonjudicial sale described in section
7425(b). At any time before a tax deed with respect to the
property is issued by the clerk of the county court, the owner or
any holder of a lien or other interest with respect to the
property may obtain the tax certificate by paying the holder of
the tax certificate the amount of the taxes, interest, and costs.
After a date which is two years after the date on which the tax
assessment became delinquent, the holder of the tax certificate
may request the clerk of the county court to have the property
advertised for sale. After advertisement of the sale, the clerk of
the county court conducts a public sale of the real property and
the purchaser obtains a tax deed. The interests of all junior
lienors in the property are divested and the property is not
subject to a right of redemption under the law of State P. For
purposes of this section, this public sale is considered to be a
nonjudicial sale described in section 7425(b) because the sale is
made pursuant to a statutory lien on the property sold. The date
of the sale, for purposes of computing a period of time determined
with reference to the date of sale, is the date on which the
public sale is held at which the purchaser obtains a tax deed as
this sale directly results in the divestment of junior liens on
the property. Example (6).
The law of State Q contains a provision which permits a county to
collect a delinquent tax assessment with respect to real property
by the means of a tax sale of the property. After public notice is
given, a "tax sale" of the real property is conducted.
Upon payment of the delinquent taxes and interest, a purchaser
obtains a tax certificate with respect to the real property. If
there is no purchaser at the tax sale, the property is deemed to
be bid in by the State. Because the obtaining of this tax
certificate by a purchaser or State Q does not directly result in
the divestment of either the owner's title or junior liens with
respect to the property, the tax sale is not a nonjudicial sale
described in section 7425(b). Following the tax sale, there is a
three year period during which any person having an interest in
the property may redeem the property by paying the holder of the
tax certificate the amount of taxes, interest, and costs. Unless
redeemed, the holder of the tax certificate may obtain an absolute
title at the expiration of the period of redemption provided he
serves a notice of the expiration of the redemption period upon
the owner at least 60 days prior to the date of expiration.
Because there is no public or private sale which directly results
in the divestment of junior liens on the property, the date of
sale, for purposes of computing a period of time determined with
reference to the date of sale, is the date on which the holder of
the tax certificate obtains absolute title. [Reg. §301.7425-2.] [T.D.
7430, 8-19-76.] [81-2 USTC ¶9735]Republic Bank, Shreveport v. United States of America,
et al. U. S. District Court, West. Dist. La., Shreveport Div., Civil
Action No. 80-1011, 527 FSupp 415, David
M. Touchstone, Touchstone & Wilson, 3821 Southern Avenue,
Sherveport, La. 71106, for Republic Bank. J. Ransdell Keene,
United States Attorney, Shreveport, La. 71161, Jean E. Kilpatrick,
Department of Justice, Washington, D. C. 20530, for U. S. Memorandum Ruling STAGG,
District Judge: On
September 2, 1980, defendants filed a motion to dismiss, asserting
that plaintiff had failed to state a claim upon which relief could
be granted. A review or plaintiff's complaint, filed June 26,
1980, reveals that plaintiff held a mortgage on certain immovable
property owned by Mr. George Upton in Caddo Parish, Louisiana. Mr.
Upton eventually defaulted on the debt secured by the mortgage,
and the Bank foreclosed; the Sheriff's Sale took place February
13, 1980. For purposes of the Sheriff's Sale, the property was
appraised at $16,000, and plaintiff bid the highest price of
$4,000. At the time of the Sheriff's Sale, there were five tax
liens against the property, in favor of the Internal Revenue
Service, the last of which was recorded on September 28, 1979. The
complaint also states that prior to the Sheriff's Sale plaintiff
was aware of these tax liens and, in fact, informed the Internal
Revenue Service of the impending sale. On February 27, 1980, the (1)
Redemption of the property by the (2)
That the (3)
26 U. S. C. §7425(d) is unconstitutional. Plaintiff cites 42 U. S. C. §1983, §1985, 26 U. S. C.
§7426, and the Fourth and Fifth Amendments to the United States
Constitution as providing the basis for this court's jurisdiction. As
this court has already found, executory process in Louisiana
"is clearly not a plenary judicial proceeding and must
be governed by §7425(d)." Myers v. United States
[80-1 USTC ¶9180], 483 F. Supp. 1154, 1159 (W. D. La. 1980), affirmed
[81-2 USTC ¶9490] -- F. 2d -- (5th Cir. 1981). In its affirmance
of the Myers case, the Fifth Circuit noted that: For reasons to be set forth, the district court correctly
held that Louisiana's executory process does not constitute a
"judicial proceeding" within the meaning of §7425(a),
and that the foreclosure sale at issue here is thus an "other
sale" governed by the provisions of §7425(b). Myers v. United States [81-2 USTC ¶9490], -- F. 2d --, Slip op. p. 7922
(5th Cir. June 12, 1981). (1) Right to redeem.--In the case of a sale of real property
to which subsection (b) applies to satisfy a lien prior to that of
the United States, the Secretary or his delegate may redeem such
property within the period of 120 days from the date of such sale
or the period allowable for redemption under local law, whichever
is longer. (2) Amount to be paid.--In any case in which the United
States redeems real property pursuant to paragraph (1), the amount
to be paid for such property shall be the amount prescribed by
subsection (d) of section 2410 of title 28 of the United States
Code. There can be no doubt that "Section 7425(b) allows
redemption. . . ." 483 F. Supp. at 1160. 28 U. S. C.
§2410(d) provides: In any case in which the United States redeems real property
under this section or section 7425 of the Internal Revenue Code of
1954, the amount to be paid for such property shall be the sum
of-- (1) the actual amount paid by the purchaser at such sale
(which, in the case of a purchaser who is the holder of the lien
being foreclosed, shall include the amount of the obligation
secured by such lien to the extent satisfied by reason of such
sale), (2) interest on the amount paid (as determined under
paragraph (1)) at 6 percent per annum from the date of such sale,
and (3) the amount (if any) equal to the excess of (A) the
expenses necessarily incurred in connection with such property,
over (B) the income from such property plus (to the extent such
property is used by the purchaser) a reasonable rental value of
such property. [Redemption Price] Example (1). A, a delinquent taxpayer, owns Blackacre located in X State
upon which B holds a mortgage. After the mortgage is properly
recorded, a notice of tax lien is filed which is applicable to
Blackacre. Subsequently, A defaults on the mortgage and B
forecloses on the mortgage which has an outstanding obligation in
the amount of $100,000. At the foreclosure sale, B bids $50,000
and obtains title to Blackacre as a result of the sale. At the
time of the foreclosure sale, Blackacre has a fair market value of
$75,000. . . . * * * Example (3). Assume the same facts as in example (1), except that under
the laws of X State, the amount bid is the amount of the
obligation legally satisfied as a result of the foreclosure sale,
and in the case in which the amount of the obligation exceeds the
amount bid, the mortgagee has the right to a judgment for the
deficiency computed as the difference between the amount of the
obligation and the amount bid. In such a case, the district
director must under subparagraph (1)(i) of this paragraph, pay
$50,000 in order to redeem Blackacre, whether or not B seeks a
judgment for the deficiency. 26 C. F. R. §405-1 at 325-26 (Emphasis supplied). The bill also provides a formula for determining the price
the Government must pay where it redeems property sold in
proceedings where the Government is joined as a party (under this
section), and where it is sold in foreclosures other than plenary
judicial proceedings. The redemption price is to be the amount
paid by the purchaser at the foreclosure sale plus interest at the
statutory rate (6 percent) from the date of sale. Where the
purchaser at the sale is the person whose lien is being
foreclosed, the amount paid by him includes the amount of the debt
underlying his lien to the extent that the lien is satisfied by
the sale. Where the lien is fully satisfied, the purchaser is not
to receive less than the amount due him at the time of sale. Where
the lien attaches to other property, however, or where, after the
sale, the purchaser still has the right to sue for the unpaid
balance of the amount due him, the amount paid does not include
this unpaid balance. S. Rep. No. 1708, 39th Cong., 2nd Sess. (1966), 1966 U. S.
Code Cong. & News, p. 3756 (Emphasis supplied). These
authorities make it clear that §7425(d) grants the Internal
Revenue Service the right of redemption if the property is sold at
a foreclosure other than a plenary judicial proceeding, such as
the Louisiana executory process, and the amount owed by the [Constitutional Issues] Having
found that the The
court notes, initially, that the only action taken by the
government so far is a notification sent to plaintiffs that the Plaintiff's
final basis for attacking the actions of the Internal Revenue
Service rests on the argument that the procedure authorized by
§7425(d) constitutes an illegal taking of property. Specifically,
the only possible attack in this area is that the procedure
constitutes a taking without just compensation, which plaintiff
itself recognizes in its response brief to the government's motion
to dismiss. The basis of this claim--and indeed this court
believes it to be the basis of the entire lawsuit--is that
plaintiff stands to lose $12,000 because Mr. Upton's original debt
still stood at $16,000 while the bid price by plaintiff was only
$4,000. By only offering the bid price of $4,000, plaintiff
argues, the Nor do we see any denial of substantive due process. Of
course §2410(d)(1) modifies state law, in cases in which the
United States has an interest, as to what a lienor acquires when
he purchases real property at his own foreclosure by giving the
United States the right to redeem when its junior tax lien has
been extinguished. In Virginia, the foreclosing- purchasing lienor
is charged with knowledge that under the federal statute he risks
being left with the right to become a judgment creditor of the
debtor as his sole recourse on the secured obligation unless he
bids the price at foreclosure up to the amount of the secured
obligation. But since this option is available to avoid what may
seem to the foreclosing lienor to be an unacceptable result, we
cannot see where he has been deprived of property without due
process of law. Equity Mortgage Corp. v. Loftus
[74-2 USTC ¶9757], 504 F. 2d 1071, 1079 (4th Cir. 1974). For
the foregoing reasons, this court can perceive no set of facts
under which plaintiff would be entitled to relief. Accordingly,
defendants' motion to dismiss is Granted. |