Estoppel Page2

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 (20) The Blanches also raise vague affirmative defenses of laches and waiver against the IRS. The Blanches assert that the IRS waited too long to file its tax lien on the property. This contention is not applicable in the context of this case. The tax lien arises at the time of the assessment. The lien is only notice. The Tax Code itself provides a kind of laches protection for persons who acquire an interest in property before the notice provided by a tax lien is filed. Those persons receive protection as "purchasers." Here, however, the Blanches did not acquire any interest in the property. The doctrine of laches does not provide them with any interest in the property. Similarly, waiver does not give rise to rights that never existed. The conveyance of the property was invalid and any delay by the IRS is irrelevant to the question of whether the Blanches acquired an interest in the property.

(21) Finally, this Court finds that the doctrine of unjust enrichment should be applied in this case. It would be unconscionable to allow Hewitt to keep his interest in the property as well as the substantial benefits conferred to him by the Blanches. The purpose of restitution under this remedy is to do what justice demands. See generally, RESTATEMENT OF RESTITUTION, Introductory Matters p.11 (1937). This theory of recovery provides that "[a] person who has been unjustly enriched at the expense of another is required to make restitution to the other." RESTATEMENT OF RESTITUTION §1. The doctrine places the person conferring the benefit back to the position he or she formerly occupied by reimbursing him or her for the benefit conferred on another. Id. at 12. Although restitution is given when one "... wrongfully secure[s] a benefit or has passively received one which would be unconscionable for him to retain," Barrett v. Ferrell, 550 S.W.2d 138, 143 (Tex.Civ.App.--Tyler 1977, writ ref'd n.r.e.), the remedy does not depend on whether the person receiving the benefit committed a wrongful act. Fun Time Centers, Inc. v. Continental Nat'l Bank, 517 S.W.2d 877, 884 (Tex.Civ.App.--Tyler 1974, writ ref'd n.r.e.). Recovery under principles of unjust enrichment is also appropriate when an agreement is "... unenforceable, impossible, not fully performed, thwarted by mutual mistake or void for other legal reasons." Harker Heights v. Sun Meadows Land, Ltd., 830 S.W.2d 313, 319 (Tex. App.--Austin 1992, no writ).

(22) The Court cannot find, based upon the minimal admissible evidence presented at trial, that the Blanches were reasonable in relying on the assumption deed combined with the representations from Mrs. Hewitt indicating that her husband consented to the conveyance. However, the Court finds that the Blanches honestly and with good faith believed that they were actually purchasing the property by assumption. The Blanches expended a great deal of money in fixing the property and making improvements in order to provide a comfortable and safe home for themselves and their children. In addition, the Blanches prevented this property from being foreclosed upon while Hewitt passively let the situation develop. In the name of equity and fundamental fairness, this Court, pursuant to Fed. R. Civ. P. 54(c), holds that the Blanches must be recompensed for the expenditures and improvements to the property that were done in reliance upon the assumption agreement and which have been duly pled in this action.

(23) As to the amounts that should not be reimbursed to the Blanches, the money expended as payments under the earnest money contract are not recompensable since the Blanches failed to meet their obligations under the sales agreement. The Blanches did not confer a benefit, nor was Hewitt unjustly enriched, by the payments under the contract since the Blanches had a contractual duty to pay under the contract in order to purchase the property and there was a possibility that those monies would be forfeit if the Blanches did not meet their other contractual obligations. Further, the itemized expenses listed in Defendant's Exhibit Dl-17 that are mere projections are not to be reimbursed. Finally, the Court finds that the monthly payments to Mrs. Hewitt and to Lomas Mortgage U.S.A. constitute fair rental value for the Blanches' occupancy of the property after the expiration of the earnest money contract and during the time they believed they were assuming the property and will not be reimbursed.

(24) As to amounts that should be reimbursed to the Blanches, the amount that they expended to cure the mortgage default is recoverable since this expenditure was in addition to the fair market paid lease payments. Additionally, amounts spent to repair and improve the property constitute an unfair enrichment of Hewitt as he will retain title to the property with its now enhanced value. Thus, the Court finds that the Blanches should recover for the following:

$969.00 (plumbing repair)

$7,269.73 (Lomas Mortgage to cure default)

$15,650.00 (Pool improvements/repairs)

$293.50 (yard clearing/cleaning)

$3,186.08 (water heater replacement)

$637.00 (fence repair/replacement)

$580.00 (electrical repair)

$600.00 (Heating and air conditioning work)

$750.00 (Garage door repair)

Totaling: $29,935.31

(25) The Court further finds that the Blanches' reimbursement should take priority over the IRS's tax lien because the Blanches' expenditures were made prior to the notice filing of the tax lien.

(26) Any conclusions of law above should be construed as findings of fact to the extent necessary.

It is therefore ORDERED that JUDGMENT shall issue as follows:

(a) the United States shall have judgment against Defendant William S. Hewitt in the amount of twenty five thousand two hundred seventy six and 20/100 dollars ($25,276.20) along with additional interest and penalties accrued since March 1, 1996 ;

(b) the tax lien of the United States upon the property described in this Order and based upon the amount of the judgment awarded against William S. Hewitt above is valid and may be foreclosed with proceeds to be distributed as follows:

(i) first, to Lomas Mortgage , U.S.A. , any outstanding mortgage amount owed on the property;

(ii) second, to Andrew E. and Cynthia D. Blanche, twenty nine thousand nine hundred thirty five and 31/100 dollars ($29,935.31) as restitution for improvements and investments in the property;

(iii) third, to the United States, twenty five thousand two hundred seventy six and 20/100 dollars ($25,276.20) along with additional interest and penalties accrued since March 1, 1996, for the unpaid tax liability of William S. Hewitt; and

(iv) fourth, any remaining excess to William S. and Peggy L. Hewitt, jointly.

It is further ORDERED that if excess proceeds from the sale of the property do not satisfy the unpaid tax liability owed to the United States by William S. Hewitt, the deficiency may be collected directly from William S. Hewitt and any other property which may be subject to liability through him.

It is further ORDERED that the remaining cross-claim by William S. Hewitt alleging conspiracy by Lomas Mortgage and Andrew E. and Cynthia D. Blanche is hereby transferred to the United States Bankruptcy Court that it may be considered in light of the pending bankruptcy proceeding of Lomas Mortgage , U.S.A.

SIGNED and ENTERED.

¹ A letter dated January 3, 1991 , addressed to Mr. and Mrs. Hewitt in Tacoma , Washington , was submitted into evidence detailing the findings of the inspection report dated June 19, 1990 . Exhibit H. In addition, a letter dated June 4, 1991 from Mr. Blanche to Hewitt expressed concern about the needed repairs to be done before the Blanches could secure outside financing to purchase the property. Defendant's Exhibit D1-18.

² Paragraph 7B of earnest money contract.

³ The Blanches expended approximately $969.00 on plumbing repairs prior to the lease option expiration date, which falls below this $1,500.00 limitation.

⁴ There was a conversation sometime after June 30, 1991 , between Hewitt and Mr. Blanche. Mr. Blanche was upset at Hewitt because he still had not made the repairs to the property as promised. Mr. Blanche became even more infuriated because Hewitt told him that he was thinking of putting the property up for sale.

⁵ Mr. Blanche relied on information he received from Mrs. Hewitt indicating that Mr. Hewitt had left her, she did not know his whereabouts, and the lease payments were to be made in her name only.

⁶ The Court sustained an objection to hearsay testimony about what Mrs. Hewitt said her husband told her. This Court cannot presume what was actually said or not said by Mrs. Hewitt or Hewitt but must consider only what was allegedly relied or not relied upon by the Blanches. The Blanches obviously were under the impression that by assuming and curing the mortgage default on the property they were not only getting a good deal, they were also preventing the house from being foreclosed upon. However unreasonable they may have been, the Blanches believed Hewitt gave his consent to the assumption in order to prevent the imminent foreclosure of the property. However, the Court will not make such a finding because the only evidentiary support for this assertion is inadmissible hearsay testimony.

⁷ Defendant's Exhibit no. D1-17

⁸ The IRS states that it is unaware of any law that would allow for such a conveyance; however, it would nonetheless allow a partial conveyance to stand and concede the Blanches' one-half ownership of the property.

⁹ In fact, although Vallone would apparently allow a partial conveyance in some circumstances, Vallone would invalidate the assumption deed in the instant case because it purports to convey the entire property, not just Mrs. Hewitt's one-half interest.

¹⁰ In fact, the Court finds that the Blanches seek specific performance, not of the initial earnest money contract, but of the subsequent assumption agreement to which Hewitt himself was not a party. Specific performance for a subsequent contract cannot be based upon a party's default under a prior expired contract.

 

 

[97-1 USTC ¶50,433] 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.

[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."

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

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

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.

 

 

[97-1 USTC ¶50,282] United States of America , Plaintiff v. Rob ert Scher, Esquire, and Scher & Eliasberg, P.C., Defendants

U.S. District Court, East. Dist. N.Y. , 94-CV-3763 (DRH), 2/21/97

[Code Secs. 6323 and 6332 ]

Liens and levies: IRS: Attorney: Priority: Attachment: Choate: Doctrine of Laches.--Simultaneously a federal tax lien attached and the rights assigned to an attorney from a taxpayer became choate to funds held in escrow by the attorney. Therefore, the IRS's lien had priority because the attorney's lien was not "prior" to the IRS lien. The taxpayer's right to the escrow funds, which were part of sale price for the transfer to a third party of her right to purchase her apartment upon its conversion to a cooperative, became fixed upon confirmation of the conversion. Under state ( New York ) law, the transfer of a conditional right creates merely an equitable lien. Thus, pursuant to an IRS levy, the attorney had to turn over the escrow funds to the IRS. Finally, the IRS was not barred by the doctrine of laches or by the state's six-year statute of limitations for contract actions.

[Code Sec. 6323 ]

Liens and levies: IRS: Individual liability: Corporate obligation: Estoppel.--An attorney, who was president of a law firm that was a corporation, could be called on individually to answer to an IRS levy that was served on the firm relating to funds held in escrow for a taxpayer. He asked the IRS to take no action to derail the taxpayer's real estate closing based on his assurance the funds would remain in escrow pending resolution of this issue. Accordingly, he was estopped from asserting any right that could insulate himself from liability for his act performed as a corporate officer.

Zachary W. Carter, United States Attorney, Brooklyn, N.Y. 11201-2744, Thomas A. McFarland, Assistant United States Attorney, Tamara H. Lindquist, Jennifer M. Blunt, Department of Justice, Washington, D.C. 20530, for plaintiff. Scher & Scher, P.C., 111 Great Neck Rd. , Great Neck , N.Y. 11021 , for defendants.

MEMORANDUM AND ORDER

HURLEY, District Judge:

The United States has moved for summary judgment pursuant to Rule 56 of the Federal Rules of Civil Procedure based on the defendant, Rob ert Scher's ("Scher" or "defendant") failure to honor an IRS levy. In response, Scher moved to dismiss the complaint upon the grounds that: (1) at the time he was served with the levy, he was not in possession of an asset owned by Stephanie Winston ("taxpayer"); (2) he may not be held personally responsible for the obligations of Scher & Eliasberg, P.O. ("Scher & Eliasberg"); and (3) the statute of limitations and doctrine of laches preclude any recovery by the United States.

FACTS

The facts which bear on the question presently before the Court are not in dispute. A recitation of those facts, however, is necessary to place the legal arguments in context. The relevant facts are as follows:

(1) On June 24, 1985 , an assessment in the amount of $101,138.55 was made against the taxpayer. The legitimacy of that assessment is not at issue in this action.

(2) Some time prior to December of 1985, the taxpayer assigned to Scher & Eliasberg $10,000 of the $20,000 that she anticipated receiving from Micon Industries of New York ("Micon"). The $20,000 was to be paid by Micon in consideration of the taxpayer transferring her right to purchase the apartment in which she was living upon its conversion to cooperative status. Under her agreement with Micon, she was to be paid the $20,000 thusly:

25% of the consideration shall be placed into the [taxpayer's] attorney's escrow account upon signing of this agreement. An additional 25% of the consideration will be placed into the applicant's attorney's account upon confirmation that the building will convert to Co-operative status. Upon closing of 250 Mercer Street Co-operative status, the 50% consideration will be released to the applicant. The remaining balance of the consideration which is 50%, will be released to the applicant's attorney upon the applicant vacating the apartment.

( See Pl. 's Rule 3(g) Statement, Ex. 4.)

(3) The purpose of the assignment by the taxpayer to defendant was to compensate Scher & Eliasberg, at least in part, for legal services that the firm had provided to her apparently over a fairly extended period of time. ( See Pl. 's Reply Mem. Ex. 2.)

(4) On April 24, 1986 , the IRS served a Notice of Levy on Scher and the law firm of Scher & Eliasberg.

(5) The first two $5,000 payments under the Micon contract were received by defendant in December, 1985 and March, 1986.

(6) Defendant, in a letter dated April 18, 1986 to the IRS: (a) stated that at the time the levy was served, he was not in possession of any taxpayer assets, given her prior assignment of the $10,000 in question to his law firm; (b) asked that the IRS not interfere with the scheduled closing with Micon and; (c) indicated that the firm would hold "the money . . . in escrow pending an amicable attempt to resolve the differences with your office." The closing thereafter did occur. Micon paid the remaining $10,000 directly to the IRS pursuant to a levy which was served upon them. The dispute between the IRS and Scher regarding the other $10,000 was not resolved, leading to the present lawsuit.

DISCUSSION

I. Attachment of the Federal Tax Lien

A federal tax lien arises when unpaid taxes are assessed which in this case, was June 24, 1985 . See 26 U.S.C. §6321. Such liens "continue in full force and effect until the tax liability is extinguished (26 U.S.C. §6322) and attach to all after acquired property of the taxpayer." Seaboard Surety Company v. United States [62-2 USTC 9653], 306 F.2d 855, 859 (9th Cir. 1962).

The attachment of a tax lien to after acquired property, however, does not occur until the taxpayer's right to the property is "fixed" in the sense of not being contingent or uncertain in nature. See Wagner v. United States [78-1 USTC ¶9340], 573 F.2d 447, 454 (7th Cir. 1978); City of New York v. United States [60-2 USTC ¶9767], 283 F.2d 829, 832 (2d Cir. 1960). ¹ See also Corwin Consult. v. Interpublic Group of Companies, Inc. [74-1 USTC ¶9401], 375 F Supp. 186 (S.D.N.Y. 1974) ("It is settled that although tax liens do not attach to contingent rights . . . pre-existing liens do attached as soon as the taxpayer gains a fixed right to property.") (emphasis in original). Prior to that time, the property does not "belong[]" to the taxpayer within the meaning of Section 6321. See United States v. Long Island Drug Company [41-1 USTC ¶9140], 115 F.2d 983, 986 (2d Cir. 1940).

Here, it is debatable precisely when the taxpayer's rights to the subject $10,000 became fixed, but it would seem to be "upon confirmation that the building will convert to Co-operative status." After that, there were no remaining contingencies, nor was there anything further for the taxpayer to do to be entitled to the escrowed monies at closing. Id.

Confirmation of the conversion, and the corresponding second $5,000 payment to defendant (in his role as attorney), both occurred in March 1996. At that point, the government's interest in the taxpayer's after acquired property attached to the $10,000 received from Micon.

The taxpayer, however, had assigned her interest in that property to defendant "sometime prior to December 1995." And that brings us to the gravamen of the present dispute. Although triggered by defendant's receipt of a levy, it is in essence a claim by him of lien priority.

The government's lien "takes priority over competing liens unless the competing lien was choate prior to the attachment of the federal lien. . .." MDC Leasing v. New York Property Ins. Underwriting [79-1 USTC ¶9122], 450 F. Supp. at 181. See also PPG Industries Inc. v. Hartford Fire Ins., Co. [74-2 USTC ¶9823], 384 F. Supp. 91, 94 (S.D.N.Y. 1974), aff'd [76-1 USTC ¶9257], 531 F.2d 58 (2d Cir. 1976).

Had the earlier assignment transferred the legal right to the $10,000 to defendant, his lien would have been superior to that of the government. Defendant's interest did not become choate, or fixed, however, until "confirmation that the building will convert to Co-operative status." Under the law of the State of New York the transfer of a conditional right creates merely an equitable lien. See, e.g., PPG Industries [74-2 USTC ¶9823], 384 F. Supp. at 95; MDC Leasing [79-1 USTC ¶9122], 450 F. Supp. at 181. In sum, the federal tax lien attached, and the rights assigned to defendant became choate, simultaneously in March of 1986. Defendant's lien not being "prior," it is subordinate. See, e.g., United States v. McDermott [93-1 USTC ¶50,164], 113 S. Ct. 1526 (1993); MDC Leasing [79-1 USTC ¶9122], 450 F. Supp. at 181.

In conclusion of this point, the defendant, at the time he was served with the tax levy on April 24, 1986 , was in possession of an asset of the taxpayer, and was required to remit the $10,000 to plaintiff.

II. Additional Issues Raised by Defendant

Defendant also claims that the levy was served on Scher & Eliasberg, and that he may not be called upon individually to answer for a corporate obligation.

Some background information is required at this juncture. Scher was the president of the corporation, which apparently is no longer operational. As such, he dealt with the IRS regarding the levy. He asked plaintiff to take no action to derail the Micon closing based on his assurance that the monies would remain in escrow pending resolution of the dispute. It was he who wrote the October 2, 1987 letter indicating that:

[i]f the District Court tells us to pay it, we'll do so. You may be assured that since we promised Mr. Demetriou that we would hold the money pending the outcome, that we have, indeed done so.

(Pl.'s Reply, Ex. 3.)

Given the defendant's involvement with plaintiff regarding the levy, including his assurances that the $10,000 would be escrowed until the claim was resolved, his disavowance of responsibility is without merit. He was the one of the two lawyer/shareholders in the corporation who handled the levy. Under the circumstances, he is estopped to assert any right that he might otherwise have, arguendo, to insulate himself from liability for his act performed as a corporate officer.

Short shrift may be made of defendant's final argument. The present claim by the United States is not barred by the doctrine of laches or by New York 's six year statute of limitations for contract actions. See, e.g., United States v. Weintraub [80-1 USTC ¶9172], 613 F.2d 612, 619 (6th Cir. 1979), cert. denied, 447 U.S. 905 (1980); United States v. Incorporated Village of Island Park, 791 F. Supp. 354, 369 (E.D.N.Y. 1992).

CONCLUSION

Plaintiff's motion for summary judgment is granted, and defendant's motion to dismiss the complaint is denied.

Plaintiff shall submit a proposed order consistent with this opinion on or before March 7, 1997 , with at least five days prior notice to defendant.

SO ORDERED.

¹ In MDC Leasing V. New York Property Ins. Underwriting [79-1 USTC ¶9122], 450 F. Supp. 179 (S.D.N.Y. 1978), aff'd 603 F.2d 213 (2d Cir. 1979), however, the Court indicated that the federal tax lien took effect as of the filing of the assessment, even though the amount of the proceeds due under a fire insurance policy had not yet come "into existence." Id. at 181. By way of dictum, however, it was noted in MDC that the IRS would also prevail if the tax lien was deemed to attach at the later date when the proceeds came into existence "since in the event of simultaneous attachment the federal liens are accorded priority." Id. In the present case, as in MDC, the IRS levy has priority under either approach.

 

 

[94-1 USTC ¶50,169] First of America Bank--West Michigan, Plaintiff v. William J. Alt, M.D., Lind Alt, Harbor Laboratory, Inc., United States of America, and Cote La Mer, Inc., Defendant

U.S. District Court, West. Dist. Mich. , So. Div., 1:91-CV-1020, 12/22/93

[Code Secs. 6323 , 6501 and 6502 ]

Tax liens: Assessments: Statute of limitations: Standing to challenge.--A bank lacked standing to challenge the validity of an IRS tax lien against a condominium owned by delinquent taxpayer individuals who had obtained a mortgage on the property from the bank on the grounds that the two underlying assessments were not filed within three years of the date on which their return was filed. The three-year limitations period for assessing tax protects taxpayers only, not third parties. Furthermore, since the assessments were assumed valid due to the bank's lack of standing, the IRS's lien attached for ten years under the applicable limitations period for collecting tax.

[Code Sec. 6321 ]

Lien for taxes: Validity of lien: Transfer to related entity.--The transfer of a condominium by delinquent taxpayers to a related corporation did not defeat an IRS tax lien that was filed against the individuals only. Although the deed was executed before the IRS filed its lien, it was not recorded until afterward.

[Code Sec. 6323 ]

Lien for taxes: Validity of lien: Conflicts of law.--An IRS tax lien had priority over a bank's unrecorded mortgage even though under state ( Michigan ) law it would not have had priority if the IRS was on notice of the bank's lien. Notice of a prior unrecorded interest is irrelevant to determining lien priority under the Code. The priority of IRS liens is determined under federal law, not state law.

[Code Sec. 6323 ]

Lien for taxes: Validity of lien: Estoppel against IRS: Equitable principles.--The IRS was not estopped from claiming an interest in mortgaged real estate even though it waited almost 10 years to begin legal proceedings or to enforce its lien. Despite the fact that the lender would not have made the loan had it known of the IRS's assessment, the IRS had committed no affirmative action that misled the bank or induced it to make the loan. Furthermore, the IRS was not required under equitable principles to apply seized assets to the earliest tax liability.

[Tax Court Rule 37 ]

Suits by nontaxpayers: Default judgment: Attorney fees: Interrogatories, failure to reply.--A lender was not entitled to a default judgment against the IRS in a case involving the priority of liens since the IRS complied with discovery orders. The lender may have been entitled to attorney fees since the IRS had not answered all interrogatories fully and correctly. This issue was referred to a magistrate judge for further consideration.

Alvin D. Treado, Culver, Lague & McNally, 600 Terrace Plaza, Muskegon , Mich. 49443 , for plaintiff. Michael H. Dettmer, United States Attorney, Michael L. Shiparski, Assistant United States Attorney, 110 Michigan Ave., Grand Rapids, Mich. 49503, Alexandra E. Nicholaides, John A. Linquist, Department of Justice, Washington, D.C. 20530, for defendant (IRS). Floyd H. Farmer, 102 S. Buchanan St. , Spring Lake , Mich. 49456, for defendant (Cote La Mer, Inc.). Cote La Mer, Inc., 4739 Poinsettia, Grand Rapids, Mich. 49508, pro se. Michael H. Dettmer, United States Attorney, Michael L. Shiparski, Assistant United States Attorney, 110 Michigan Ave., Grand Rapids, Mich. 49503, Alexandra E. Nicholaides, John A. Linquist, Department of Justice, Washington, D.C. 20530, for defendant (USA).

MEMORANDUM OPINION

MCKEAGUE, District Judge:

This is a civil action brought by plaintiff First of America Bank-- West Michigan ("FOA" or "Bank") to foreclose its mortgage on certain real property previously owned by William and Rosalinda ("Lind") Alt, and to determine the priority of its lien. The subject property is a condominium located in Cote La Mer, a subdivision in Ottawa County , Michigan . The property was recently sold by judicial sale, yielding net proceeds of $79,710.45. Those proceeds have been placed in escrow with the Court.

The United States contends that its tax lien against Lind Alt has priority over plaintiff's claimed mortgage interest in the property pursuant to the Internal Revenue Code, 26 U.S.C. §6323 . Both parties are now before the Court on contesting motions for summary judgment.

FACTS

Lind Alt purchased the disputed Cote La Mer property on December 30, 1971 . On April 16, 1982 , Lind and William Alt filed their 1981 tax return with the Internal Revenue Service ("IRS"). A few months later, on October 11, 1982 , the IRS made an assessment against the Alts for their unpaid taxes from 1981. On June 27, 1984 , the Alts borrowed $501,000 from FOA in the form of a commercial loan, securing the loan with a mortgage on the condominium and two other pieces of property located in Muskegon County . The Bank recorded the mortgages by filing in Muskegon County , but not in Ottawa County where the Cote La Mer condo is located.

On or before April 15, 1985 , the government contends that it issued a statutory notice of deficiency for the Alts' unpaid 1981 taxes. ¹ Later in April of that year, the Alts commenced a Tax Court proceeding relating to their 1981 return. On May 27, 1986 , the Tax Court entered a judgment against the Alts for taxes due in the sum of $83,655.40, plus negligence penalties. A few days later, on June 2, 1986 , Lind Alt transferred the condominium to a corporation called Harbor Laboratory, Inc. ("Harbor Lab"), by quitclaim deed. Although the facts are unclear, Harbor Lab is apparently owned by Lind Alt. The deed was recorded on August 1, 1986 , in Ottawa County . The IRS later found Harbor Lab to be a nominee or alter ego of the Alts. On June 13, 1986 , the IRS made another assessment against the Alts, this time pursuant to the Tax Court's ruling in May.

On November 3, 1986 , the IRS filed a tax lien against Lind and William Alt, but not Harbor Lab, in Ottawa County . The tax lien was for $178,280.87, for the tax period ending December 31, 1981 . This lien initially referenced the assessment of October 11, 1982 . On April 28, 1987 , however, the IRS filed an amended tax lien, changing the assessment date to June 13, 1986 , the date of the assessment which followed the Tax Court's ruling.

In August of 1987, the IRS sold other property of the Alts, realizing net proceeds of $94,770.80. These proceeds were applied against the Alts' 1981 tax liability.

By letter dated December 31, 1987 , FOA requested proof of fire insurance for the Cote La Mer property from the Alts. Lind Alt responded that the loan had been paid in full. Subsequent negotiations between the Alts and the Bank ensued, whereby FOA agreed to refinance the Alts' loan on March 8, 1988 , secured by the same property, including the condominium. This time, however, the mortgage was recorded in Ottawa County on April 28, 1988 . On June 12, 1991 , the IRS filed a notice of Federal Tax Lien against Harbor Lab in Ottawa County .

Throughout early 1991, FOA requested that the Alts obtain fire insurance on the Cote La Mer property. Effective June 26, 1991 , the Bank independently obtained its own insurance coverage for the condo. A few months later, on November 1, 1991 , FOA filed the present foreclosure action in Ottawa County Circuit Court. On November 12, 1991 , the IRS filed further liens against the Alts' property for tax years subsequent to 1981.

The IRS contends that Lind Alt owes the United States $188,794.83 as of August 1, 1993 , on the 1981 tax liability. At the judicial sale of the Cote La Mer condo, the property grossed approximately $91,500. After payment of back taxes on the property, U.S. Marshal fees, dues owed to the condominium association, and utility costs incurred by the association in maintaining the property, $79,710.45 remained. This sum was escrowed with the Court, pending disposition of this matter.

In October of 1992, FOA served its first set of interrogatories and document production requests in this case on the IRS. The IRS objected to most of these requests and inquiries. On January 25, 1993 , Magistrate Judge Scoville granted the Bank's motion to compel discovery, and the IRS was ordered to furnish FOA with supplemental answers. In its subsequent answers, the IRS indicated that it was appropriate for it to file a notice of deficiency for the tax year 1981 in the spring of 1986, as the Alts misrepresented their 1981 income by over 25%, giving the IRS a six-year statute of limitations. These subsequent answers proved inadequate to FOA, however, and on March 31, 1993 , Judge Scoville issued another order compelling the IRS to comply with discovery requests. In this set of answers, the IRS no longer claimed that the Alts had misrepresented their income by over 25%. Rather, the IRS claimed that notice of deficiency had issued on or before April 15, 1985 , pulling it within the three-year statute of limitations applicable in most situations. The IRS also revealed for the first time that the Alts had filed a Tax Court petition in 1985.

DISCUSSION

Both FOA and the United States are now before this Court on cross-motions for summary judgment. The briefs in this case present a myriad of issues for resolution. First and foremost, is the question, "Who has priority in the property?" Although it appears the IRS does, FOA challenges the priority of the federal tax lien on several grounds. The second issue is whether the equitable doctrines of laches or estoppel apply in this case. The third issue concerns whether the doctrine of marshalling may be applied to the IRS. The fourth question presented by the briefs asks whether FOA is entitled to discovery sanctions due to IRS actions (or nonactions) in the course of this litigation. The final issue presented for resolution is whether FOA is entitled to reimbursement for the insurance it obtained on the Cote La Mer property. Applying the standards for summary judgment, the Court will examine each of these issues in turn.

Summary judgment is appropriate when the record reveals that there are no issues as to any material fact in dispute and the moving party is entitled to judgment as a matter of law. Fed. R. Civ. P. 56(c); Sims v. Memphis Processors, Inc., 926 F.2d 524, 526 (6th Cir. 1991) (citing Celotex Corp. v. Catrett, 477 U.S. 317, 322-23 (1986), and Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248 (1986)). The standard for determining whether summary judgment is appropriate is "whether the evidence presents a sufficient disagreement to require submission to a jury or whether it is so one-sided that one party must prevail as a matter of law." Booker v. Brown & Williamson Tobacco Co., 879 F.2d 1304, 1310 (6th Cir. 1989) (quoting Anderson , 477 U.S. at 251-52). "By its very terms, this standard provides that the mere existence of some alleged factual dispute between the parties will not defeat an otherwise properly supported motion for summary judgment; the requirement is that there be no genuine issue of material fact." Anderson, 477 U.S. at 247-48 (emphasis in original).

The moving party bears the burden of clearly and convincingly demonstrating the absence of any genuine issues of material facts. Sims, 926 F.2d at 526. The court must consider all pleadings, depositions, affidavits, and admissions on file and draw all justifiable inferences in favor of the party opposing the motion. See Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574 (1986). If the moving party carries this burden, the nonmoving party must present significant probative evidence showing that genuine, material factual disputes remain to defeat summary judgment. Sims, 926 F.2d at 526. The court's function is not to weigh the evidence and determine the truth of the matter, but to determine whether there is a genuine issue for trial. Id. The court must make purely legal judgments that go to the nature and sufficiency of the complaint as well as the evidence put forward to support it. Val-Land Farms, Inc. v. Third Nat'l Bank, 937 F.2d 1110, 1113 (6th Cir. 1991). Applying these principles to the present case, this memorandum concludes that FOA's motion for summary judgment shall be denied. The government's motion shall be granted.

I. Priority of Lien

The first question presented for resolution in this matter is whose interest in the Cote La Mer property has priority. FOA contends that its mortgage on the condominium has priority, while the United States claims that the federal tax lien prevails. This is a question of both federal and state law.

In Michigan , interests in real property are recorded with the register of deeds in the county where the property is located. All recorded liens, rights, and interests in property take priority over subsequent owners and encumbrances. M.C.L.A. §565.25. Where an individual fails to record a lien or interest in property, that interest is void as against any subsequent interest holder who purchased the interest in good faith for valuable consideration. M.C.L.A. §565.29. A person takes in "good faith" if he or she takes without notice of the prior unrecorded interest. Michigan Nat'l Bank & Trust Co. v. Morran, 194 Mich. App. 407, 410 (1992). Thus, Michigan has adopted what is frequently known as a "race-notice" statute: the first interest holder to record takes priority, unless that individual has notice of a prior unrecorded interest.

The Internal Revenue Code alters the scheme of priorities under Michigan law. Under 26 U.S.C. §6321 , a lien on an individual's property arises when the individual is liable to pay a tax, but neglects or refuses to pay the tax after notice of the liability is given. However, "[t]he lien imposed by section 6321 shall not be valid against any . . . holder of a security interest . . . until notice thereof which meets the requirements of [26 U.S.C. §6323(f) ] has been filed." 26 U.S.C. §6323(a) . Section 6323(f) requires that notice of a lien on real property be filed according to the laws of the state where the property is located. Accordingly, the tax lien has priority if it was recorded first with the register of deeds in the county where the property is situated.

On November 3, 1986 , the IRS filed a tax lien against Lind and William Alt in Ottawa County , Michigan , the location of the Cote La Mer property. The Bank had recorded its mortgage on the property in Muskegon County in 1984, but did not file in Ottawa County until April of 1988. A cursory review of the facts thus suggests that the IRS has priority in the condominium. FOA disputes this conclusion, however, on four separate grounds. First, FOA challenges the validity of the IRS assessment against the Alts, which gave rise to the lien. Second, FOA contends that the statute of limitations on the collection of taxes has expired. Third, the Bank argues that the lien did not attach to the Cote La Mer condominium, as that property had been transferred to Harbor Lab on June 2, 1986 . Finally, FOA maintains that a genuine issue of material fact remains as to whether the IRS had notice of the Bank's prior unrecorded interest in the property. Such notice is relevant, the Bank contends, to determining the priority of the tax lien.

a. Validity of the IRS Assessment

FOA challenges the validity of the government's tax lien, claiming that the assessments pursuant to which the liens were filed were untimely and not preceded by notices of deficiency. Under 26 U.S.C. §6501(a) , taxes must be assessed within three years of the date on which the return was filed. In this case, two assessments were made for the Alts' 1981 taxes: one on October 11, 1982 , and the other on June 13, 1986 .

The first assessment clearly falls within the statutory three-year period. The second assessment, however, falls well outside this time frame. Supplemental assessments are permitted by the Internal Revenue Code, but they too must fall within the three-year period of limitations. See 26 U.S.C. §6204(a) ; Brockhurst, Inc. v. United States [91-1 USTC ¶50,217 ], 931 F.2d 554, 557 (9th Cir. 1991). FOA also contends that the government failed to provide the Alts with notice of deficiency for the June 1986 assessment. Initially, the IRS contended that notice was served sometime in the spring of 1986; later the government alleged that notice was issued before April 15, 1985 , pulling it within the three-year statute of limitations. The government has no evidence to support these assertions, however. ²

The IRS does not appear to argue that the June 13, 1986 , assessment fell inside the statutory time frame, or that it can prove that notice was sent prior to April 15, 1985 . Rather, the government contends that the Bank lacks standing to challenge the assessment. Under 28 U.S.C. §2410(a), sovereign immunity of the government is waived, permitting a party to sue the United States to foreclose a mortgage on property upon which the government has a lien. This is essentially a suit to "quiet title." However, the courts have construed §2410 to permit only challenges to the procedural regularity of the lien, not the underlying tax liability or merits of the assessment. Pollack v. United States [87-2 USTC ¶9463 ], 819 F.2d 144, 145 (6th Cir. 1987). FOA contends that it asserts merely procedural defects in the assessment, and not the underlying tax. The IRS counters that a challenge to the notice is a challenge to the very merits of the assessment.

The case law provides little guidance on the resolution of this issue. In Guthrie v. Sawyer [92-2 USTC ¶50,391 ], 970 F.2d 733, 737 (10th Cir. 1992), the Tenth Circuit held that a taxpayer could not raise a procedural defect in the issuance of a deficiency notice in a quiet title action because the purpose of the notice requirement was to allow the taxpayer to challenge the amount of the assessment in Tax Court. The challenge thus went to the underlying tax liability itself. However, the taxpayer was found to be entitled to relief under another statute, and the Court held that the failure of the IRS to send a notice of assessment could be challenged under §2410. Other cases suggest that all taxpayer challenges to notice, be it notice of deficiency or assessment, do qualify as claims of procedural irregularities. In an unpublished decision, the Sixth Circuit permitted a taxpayer to challenge notice under §2410, although it ultimately ruled against him on the merits. See Williams v. United States, No. 89-5740, 1990 W.L. 47555 (6th Cir. 1990); see also Gentry v. United States [91-2 USTC ¶50,374 ], No. CIV-1-89-337, 1991 W.L. 191246 (E.D. Tenn. 1991) (citing Williams). Thus, it would appear that in this Circuit, a taxpayer may challenge the validity of the assessment and the resulting lien by asserting that no deficiency notice was issued. A taxpayer challenge to the assessment on the grounds that it fell outside the statutory period similarly appears to constitute a procedural challenge.

The result may differ, however, where the individual claiming procedural irregularities which render the lien invalid is not a taxpayer, but a third party. In its brief, FOA cites only one case from 1965 to support its contention that third parties may challenge the validity of IRS liens on procedural grounds. See Falik v. United States [65-1 USTC ¶9295 ], 343 F.2d 38 (2d Cir. 1965). That case, however, made only a passing reference to the issue. Furthermore, McEndree v. Wilson , 774 F.Supp. 1292 (D. Colo. 1991), cited by the Bank during oral argument, is inapposite. Although McEndree addressed third-party standing under §2410, that case did not involve a procedural challenge to the validity of an IRS lien as the plaintiff conceded the validity of the assessments. Id. at 1296. Rather, the plaintiff merely sought to assert the priority of its lien over the federal tax lien. In the present case, no one disputes that FOA may attempt to argue that its mortgage takes priority over the federal lien. There is no authority, however, which permits the Bank, as a third party, to argue that the lien is procedurally invalid. As the procedural provisions of the Internal Revenue Code appear to exist to protect the taxpayer only, not third parties, FOA lacks standing to challenge the procedural regularity of the lien. This challenge to the IRS' priority must fail.

b. Collection of Taxes

FOA claims that any interest that the government had in the property has expired, as the IRS had only six years from the date of assessment to collect the tax owed pursuant to 26 U.S.C. §6502(a)(1) . Because the first assessment issued on October 11, 1982 , the government's lien only attached until 1988, the Bank argues.

The government notes, however, that §6502(a)(1) was amended effective November 5, 1990 , to give the IRS a ten-year collections period. This ten-year period applies even to taxes assessed before the effective date, if the previous six-year period had not yet expired as of November 5, 1990 . Although counting from the 1982 assessment, the six-year time frame expired in 1988, the six-year period had not expired by November 1990, if we count from the June 13, 1986 assessment. The government would have ten years in which to act. Thus, if the 1986 assessment is the proper trigger for the collections period, then the IRS has until June of 1996 to collect the Alts' unpaid taxes.

Due to the conclusion of the preceding section that FOA does not have standing to challenge the validity of the assessment, the Court assumes that the 1986 assessment is valid. Accordingly, the period of time in which the IRS may collect on the deficiency has not expired. This challenge by FOA also fails.

c. Lien as Against Property of Harbor Lab

FOA next argues that the federal tax lien did not attach to the Cote La Mer property as that property was transferred to Harbor Lab by quitclaim deed on June 2, 1986 . Because the lien recorded in Ottawa County only referenced the property of the Alts, it did not attach to the condominium owned by Harbor Lab, the Bank contends. The IRS did not file a lien against Harbor Lab in Ottawa County until June of 1991, after FOA had perfected its interest.

The IRS claims that the transfer to Harbor Lab is ineffective to defeat the tax lien as the deed was recorded after the assessment of the tax liability. The Supreme Court has ruled that "[t]he transfer of property subsequent to the attachment of the lien does not affect the lien." United States v. Bess [58-2 USTC ¶9595 ], 357 U.S. 51, 57 (1958). Although the transfer occurred on June 2, 1986 , the deed was not recorded in Ottawa County until August 1st, well after the June 13th assessment. Furthermore, the IRS had made a previous assessment in October of 1982. In these circumstances, the Alts should not be given the power to defeat the federal tax lien through a quitclaim transfer. The lien did attach to the Cote La Mer property. The Bank's third challenge to the priority of the government's lien is without merit.

d. IRS' Notice of Prior Unrecorded Interest

FOA also contends that the federal tax lien should not take priority as the government was on notice of the prior unrecorded interest held by the Bank. Under Michigan law, a lienholder has priority if he or she recorded first and had no notice of a prior unrecorded interest. The IRS argues that notice of the mortgage is irrelevant, as priority determinations are controlled by federal, not state, law.

Section 6323 of the Internal Revenue Code dictates that a federal tax lien has priority if it has been properly recorded under state law. 26 U.S.C. §6326(a) , (f). The Code imposes no notice requirement. State law appears to matter only to the extent it directs the government where to file the tax lien. Moreover, any notice requirement would render litigation over competing liens highly complex. If federal tax liens were forced to yield every time a governmental department had notice of a prior unrecorded interest, the tax lien system would be hampered. The government does not elect to extend credit based upon the security available, but is an involuntary creditor. Accordingly, the Court finds that notice of a prior unrecorded interest is irrelevant to determining lien priority under the Internal Revenue Code.

As the preceding discussion indicates, the federal tax lien does take priority over the Bank's mortgage on the Cote La Mer property. Summary judgment on this question shall issue for the government.

II. Doctrines of Laches and Estoppel

The second issue raised in the briefs concerns the applicability of the equitable doctrines of laches and estoppel. In its brief, FOA contends that pursuant to the doctrine of laches, the Bank's interest in the Cote La Mer property should be given priority over the government's tax lien. FOA notes that the Alts owed their 1981 taxes for almost ten years before the IRS instituted any legal proceedings or made any effort to enforce the lien on the condominium. Had the Bank been on notice earlier of the IRS' interest, FOA argues, it would not have gone ahead with the initial loan in 1984 or the refinancing agreement in 1988. Further, the issue is only now before this Court because the Bank forced a sale of the disputed property and filed the present action. Given these circumstances, FOA contends, equity demands that the Bank's mortgage prevail over the federal tax lien.

As the government notes, however, the doctrine of laches may not be invoked against the United States when it seeks to enforce its rights. See United States v. Weintraub [80-1 USTC ¶9172 ], 613 F.2d 612, 618 (6th Cir. 1979). This well-established principle is "based upon the important public policy of preserving public rights and revenues from the negligence of public officers." Id. During oral argument, the Bank conceded that the doctrine of laches does not apply in this case.

Alternatively, FOA argues that the IRS should be estopped from claiming an interest in the property. But again, estoppel may not be invoked against the government, unless it is based upon an allegation of affirmative misconduct. See Federal Crop Ins. Corp. v. Merrill, 332 U.S. 380, 385, 68 S.Ct. 1, 3 (1947); Giles v. Carlin, 641 F.Supp. 629, 635 (E.D. Mich. 1986) (long-standing tradition that "estoppel may not be invoked against the government"); Tonkonogy v. United States [76-1 USTC ¶9447 ], 417 F.Supp. 78, 79 (S.D.N.Y. 1976) (estoppel may be invoked only where allegation of affirmative misconduct). The only "affirmative" action which the Bank alleges, however, occurred during the discovery phase of this litigation. Such conduct has no bearing on the real issue in this case: Whose interest in the property should prevail? Estoppel would only apply if FOA demonstrated that the government had taken an affirmative step which caused the Bank to loan money to the Alts in exchange for a mortgage in the Cote La Mer property or to refinance the loan later. No such allegation has been made. Discovery conduct is simply irrelevant to the estoppel question.

The equitable doctrines of laches and estoppel may not be invoked in these circumstances against the government. Accordingly, there is no dispute here meriting a trial. The IRS' motion for summary judgment shall be granted as to these issues.

III. Doctrine of Marshalling

FOA next contends in its brief that the IRS should be required to marshall the assets from previously seized property. Essentially, the Bank wants this Court to order the IRS to apply all previously seized assets to the 1981 tax liability, as that is the earliest tax deficiency. FOA argues that the government is refusing to do so, applying the assets to deficiencies in later years, in order to protect its interest in the Cote La Mer property.

Under §5374.2(d) of the Internal Revenue Manual, agents of the IRS are required to apply all proceeds from the sale of seized property toward the satisfaction of the earliest tax liability. The provision clearly requires the government to marshall assets. However, as the government notes, the Manual was developed solely to guide the internal admin istration of the IRS, and confers no legal rights on taxpayers or third parties. See United States v. Will [82-1 USTC ¶9216 ], 671 F.2d 963, 967 (6th Cir. 1982). Furthermore, there exists no "right of marshalling" against the United States . United States v. Eshelman [87-2 USTC ¶9419 ], 663 F.Supp. 285 (D. Del. 1987). A junior lienholder cannot compel the IRS to marshall its liens. In re Ackerman [70-1 USTC ¶9343 ], 424 F.2d 1148 (9th Cir. 1970); United States v. Herman [63-1 USTC ¶9135 ], 310 F.2d 846, 848 (2d Cir. 1962).

During oral argument, FOA conceded that the doctrine of marshalling is not applicable. Rather, the Bank requested that the Court invoke its "equitable powers" to require the IRS to apply the seized assets to the earliest tax liability. FOA provided the Court with no reason why it should exercise its powers in this fashion, however. Accordingly, the Court finds that the government shall prevail on this issue.

IV. Discovery Sanctions

The fourth issue raised in the briefs focuses on whether FOA is entitled to a default or attorney fees as a sanction against the government. Under Fed. R. Civ. P. 37(b)(2)(C), the Court may render a default against a party who fails to obey an order to provide or permit discovery. Alternatively, the Court may require a party against whom a discovery order is issued to pay the reasonable expenses, including attorney fees, of the party who sought the order. Fed. R. Civ. P. 37(a)(4). FOA claims entitlement to these sanctions due to the various discovery battles it has had with the IRS.

FOA served its first set of interrogatories and document requests on the IRS in October of 1992. The IRS refused to respond to fifteen of the 21 interrogatories and seven of the eight document requests on grounds of relevance. Magistrate Judge Scoville issued an order on January 25, 1993 , compelling the government to furnish supplemental answers. In the first set of supplemental answers which followed, the IRS claimed that the Alts had underreported their income from 1981 by more than 25%, and that a notice of deficiency had issued in the spring of 1986. Because the Alts had misrepresented their income by more than 25%, the government had six years from April 16, 1992 , the date of the 1981 filing, to issue notice, and thus the notice was timely. On March 31, 1993 , Judge Scoville issued another discovery order, requiring the IRS to provide details on the 25% claim. In its second set of supplemental answers, produced in response to the March discovery order, the government stated that it did not contend that the Alts had underreported their 1981 income by more than 25%. Instead, the IRS contended that notice had issued before April 15, 1985 , pulling it within the normal three-year period of limitations. The government also mentioned for the first time the Alts 1985-86 Tax Court proceeding.

FOA contends that these responses by the IRS constitute dilatory and obstructionist conduct, entitling the Bank to default under Rule 37. Default is an extreme sanction, and appears wholly unwarranted in this case. The evidence indicates that the IRS has complied with the discovery orders. The government explains its contradictory responses to FOA's interrogatories by stating that the file on the Alts was temporarily misplaced, resulting in incorrect information for a period of time. This contention is supported by the affidavit of attorney Alexandra Nicholaides.

Attorney fees and costs incurred in seeking the two discovery orders from Judge Scoville, however, may be warranted in this case. It does appear that the government refused to answer several requests and provided FOA with information that it did not fully verify. The Bank requests fees and costs in the amount of $5,916.34. This matter shall be referred to Magistrate Judge Scoville for further resolution.

V. Reimbursement for Insurance Coverage

The final issue presented in this case concerns the fire insurance coverage obtained by FOA on the Cote La Mer property. After the Alts neglected to obtain coverage on the condominium in 1991 as requested by the Bank, FOA independently obtained an insurance policy. FOA now seeks to recover the $717.18 in premiums it paid from the proceeds now in escrow with the Court. The IRS refuses to permit the Bank to recover these costs, claiming that the insurance policy was for the benefit of FOA alone, and not all creditors.

Neither party cites any law in support of their respective positions. It appears the government should prevail on this issue, as the policy never became the property of the taxpayer, and thus the tax lien never attached. Accordingly, if the property had been destroyed, only the Bank would have been entitled to the insurance proceeds. Thus, FOA is not entitled to reimbursement for the insurance costs. Summary judgment shall attach for the government.

CONCLUSION

In sum, FOA's motion for summary judgment shall be denied while the government's motion shall be granted. FOA's request for attorney fees and costs incurred in seeking the January 25, 1993 , and March 31, 1993 , discovery orders shall be referred to Magistrate Judge Joseph G. Scoville for disposition.

IT IS SO ORDERED.

¹ Previously, the government contended that the notice of deficiency was issued in the spring of 1986.

² The government does note that a Tax Court proceeding was commenced by the Alts in April of 1985, suggesting that notice was received prior to that petition. "The notice of deficiency is . . . the 'ticket' into the Tax Court that allows a taxpayer to challenge the tax assessment before paying it." Guthrie v. Sawyer [92-2 USTC ¶50,391 ], 970 F.2d 733, 735 (10th Cir. 1992). It thus seems likely that notice was received sometime in April of 1985 or before.

 

 

[80-1 USTC ¶9253]Keystone Bank, Plaintiff, and District Director of Internal Revenue, Additional Plaintiff added by Court Order v. Walter J. Tierney, Defendant

Court of Common Pleas of Allegheny County, Pa. , Civil Div., No. 3145, 1/29/80

[Code Sec. 6323]

Tax liens: Priority: Secured creditors: Estoppel.--The government's tax lien arose and was duly filed before a secured creditor took an assignment of the debtor's interest. Thus, the federal lien had priority. Moreover, the secured creditor could not claim that the government delayed unduly in assessing the tax after liability arose; only the debtor can, in this situation, raise an estoppel argument.

Abraham Fishkin, 104 Lawyers Building, Pittsburgh , Pennsylvania 15219 , for plaintiff. Mark Albert, Department of Justice, Washington , D. C. 20530, for district director. Thomas Welsh, Metz , Cook, Hanna & Kelly, 3600 Grant Building , Pittsburgh , Pennsylvania 15219 , for defendant.

Opinion

WEKSELMAN, Judge:

The instant action, one of interpleader, involves the two plaintiffs' competing interests in a fund of some $6,000.00. Both claim priority and each, having a claim in excess of the fund, seeks the full amount at stake. The facts, as stipulated to by both parties, flow in a simple chronological order. On August 22, 1958 , and on October 10, 1958 , Lawrence J. O'Toole (taxpayer) was assessed of tax liability for his 1952 and u951 tax returns, respectively. Notice of tax liability was filed in the Prothonotary's Office of Allegheny County on December 20, 1958 , and refiled on November 21, 1967 , and February 13, 1973 . On January 17, 1968 , in order to secure a loan from Keystone Bank, taxpayer assigned his one-quarter interest in a partnership to his wife as consideration for her becoming an accommodation maker on the note. In turn, the wife assigned this interest to the Bank. Certain real estate owned by the partnership was sold subsequent to the loan. These proceeds were deposited with defendant, Walter J. Tierney, accountant for the partnership. Upon Keystone's commencement of an action of assumpsit, defendant paid the fund into court and interpleaded the claimants.

The first argument advanced by Keystone would dispose of the matter instantly. It is the position that the lapse of time between the taxable periods and the assessment dates should estop the United States from claiming priority in this situation. In the tax law area, however, there has been a long-standing proposition that only the taxpayer can attack an assessment. U. S. v. Pearson [66-1 USTC ¶9448], 258 F. Supp. 686 (S. D. N. Y., 1966); Falik v. U. S. [65-1 USTC ¶9295], 343 F. 2d 38 (C. A. 2d, 1965); Graham v. U. S. [57-1 USTC ¶9645], 243 F. 2d 919 (C. A. 9th, 1957). Some recent, as yet unreported decisions, have stated this proposition clearly: "[O]nce the line [sic] is assessed, only the taxpayer has the right to question the correctness of the same." U. S. v. Santos, -- F. Supp. --, (D. C. Puerto Rico, 1979); U. S. v. Formige, -- F. Supp. --, (D. C. D. C., 1979).

The inquiry does not end here. Although 26 U. S. C. §6322, provides for the assessment becoming a lien at the time it is assessed, §6323 allows some exceptions. Keystone claims relief under §6323(c)(1)(B). That section states that the United States ' lien shall not be valid against security interests "protected under local law against a judgment lien arising, as of the time of tax lien filing, out of an unsecured obligation." It is the Bank's contention that since levy was made subsequent to the assignment they were without notice. First of all, it is not the date of levy but, rather, the date of assessment that activates the priority mechanism. Secondly, the Internal Revenue Code clearly spells out the filing requirements so that notice will be given to subsequent creditors. See §6323(f). The courts have been confronted with these situations and their analysis has led them to give priority to the United States where the liens arose and were duly filed of record prior to the taking of an assignment of a taxpayer's interest. Keystone Mercantile Corp. v. Graham [61-1 USTC ¶9202], 192 F. Supp. 90 (M. D. Pa., 1961).

Keystone lacks standing to argue that laches applies to the United States lien. Nor can it be heard to say it was without notice of the lien and should therefore fall into the exception of §6323(c)(1)(B).

A nonjury decision awarding the interpleaded fund to the United States will be entered.

 

 

[86-2 USTC ¶9558] William Little, Plaintiff-Appellant v. United States of America , Defendant-Appellee

(CA-9), U.S. Court of Appeals, 9th Circuit, 85-6030, 7/14/86, 794 F2d 484, Affirming and reversing unreported District Court decision

[Code Sec. 7425 ]

Lien for taxes: Redemption right: Claim for reimbursement.--Although the petitioner, the purchaser at a foreclosure sale under a second deed of trust, failed to comply with regulatory procedures in requesting reimbursement for his payments to a senior lienor under a first trust deed, the government's title upon redemption under the second trust deed remains encumbered by the first trust deed until the government reimburses the petitioner for his payment to the senior lienor. The government obtained a title upon redemption encumbered by the first trust deed and the subsequent foreclosure of the first trust deed, invalid as to the government, left the encumbered title undisturbed.

Kenneth G. Gordon, 2049 Century Park E., Los Angeles , Calif. , for plaintiff-appellant. Steven Frahm, Department of Justice, Washington , D.C. 20530 , for defendant-appellee.

Before WRIGHT and NELSON, Circuit Judges, and HOLLAND, ^* District Judge.

Opinion

WRIGHT, Circuit Judge:

In this case we must decide whether a property owner, holding title pursuant to a foreclosure sale under a second deed of trust, can obtain redemption reimbursement for preredemption payments to a senior lienor. We reverse the district court's conclusion that the property owner is collaterally estopped from seeking reimbursement. But we affirm its conclusion that the property owner failed to comply with valid Treasury Regulations in seeking reimbursement. We hold that, despite this noncompliance with reimbursement procedures, the government's title upon redemption is encumbered by the first deed of trust until it reimburses the property owner for his payment to a senior lienor.

FACTS AND PROCEEDINGS BELOW

Detailed factual background information is presented in this court's opinion in Little v. United States [83-1 USTC ¶9373 ], 704 F.2d 1100 (9th Cir. 1983). Key facts and proceedings through the prior appeal are summarized in the Appendix to this opinion.

In this appeal, Little seeks to enforce his right to receive reimbursement from the government for payments made to a senior lienor. On the previous appeal, we remanded the determination of the correct amount of the government's redemption tender under the Second Trust Deed foreclosure.

The district court heard argument on the parties' cross-motions for summary judgment. Based on stipulated facts, it found that Little had failed to follow Treasury Regulation §301.7425-4(b)(4) in requesting reimbursement for his purchase of the First Trust Deed. It concluded also that he was estopped from claiming reimbursement as a result of adverse rulings on this issue in two prior district court proceedings. Judgment was entered for the government.

Little timely appealed. He presents these issues for our review:

(1) Did the district court err in concluding that redemption price determinations in related district court actions barred further claims for reimbursement of payments to a senior lienor?

(2) Is Treasury Regulation §301.7425-4(b)(4) invalid as applied by the district court?

(3) Did the district court err in concluding that it lacked subject matter jurisdiction to consider reimbursement for Little's payments to a senior lienor because Little had failed to follow procedural requirements?

(4) Is the government's title free and clear of any claims of Little?

(5) Must the government reimburse Little for the value of removing the First Trust Deed encumbrance from its title?

ANALYSIS

I. Introduction. Section 7425(b) of the Internal Revenue Code provides that a non-judicial sale of real property to which the government claims a title derived from enforcement of a lien "shall . . . be made subject to and without disturbing such lien or title, if notice of such lien was filed . . . more than 30 days before such sale and the United States is not given [written] notice [at least 25 days prior to] such sale . . . ." 26 U.S.C. §7425(b)(1) . Both the First Trust Deed and Second Trust Deed foreclosures and sales at issue here were such non-judicial sales.

When Section 7425(b) applies, Section 7425(d)(1) gives the government a right to redeem the property within 120 days. The amount to be paid under such redemption is governed by 28 U.S.C. §2410(d). 26 U.S.C. §7425(d)(2) .

Under Section 2410(d), the redemption price "shall be the sum of--(1) the actual amount paid by the purchaser at such sale . . . (2) interest on the amount paid . . . and (3) . . . expenses necessarily incurred . . . ."

Treasury regulations implementing 26 U.S.C. §7425(d) and 28 U.S.C. §2410(d) provide that the amount to be paid under a Section 7425(d) redemption is to include "the amount, if any, of a payment made by the purchaser . . . after the foreclosure sale to a holder of a senior lien (to the extent provided under paragraph (b)(4) of this section)." Treas. Reg. §301.7425-4(b)(1) (iv).

Paragraph (b)(4) of the Regulations establishes the procedure by which the purchaser at a foreclosure sale can claim reimbursement from the government for payments made to a senior lienor after the foreclosure sale but prior to the government's redemption. ¹

II. Collateral Estoppel. Little initiated two related actions regarding this property while the prior appeal to this court was pending. In April 1982, Little filed a complaint in California Superior Court for declaratory relief and an equitable lien, alleging that the government was enriched $76,000 due to repair expenses ($16,000) and the foreclosure sale on the First Trust Deed ($60,000). He sought to have the sale rescinded or declared null and void. The action was removed to federal district court and was dismissed without prejudice in June 1982. Little v. United States , No. CV 82-2679, slip op. (C.D. Cal. June 30, 1982). Little did not appeal or attempt to amend his complaint.

In August 1982, Little filed an action in federal district court, Little v. United States, No. CV 82-4303, slip op. (C.D. Cal. Dec. 21, 1982 ), seeking the same declaratory and equitable relief. Again, he alleged that the government was unjustly enriched by his repair expenses and the foreclosure of the First Trust Deed. The action was dismissed with prejudice. The court found that Little had been paid the appropriate amount upon the government's redemption of the Second Trust Deed (purchase price plus interest). He did not appeal.

On remand in this action, the district court found that the issue of the correct government reimbursement for Little's payment to a senior lienor had been raised by Little in these two earlier proceedings. The court concluded that because it had already ruled that Little was fully paid, Little was estopped from asserting any further claims in the present action.

Whether collateral estoppel is available is a mixed question of law and fact in which the legal issues predominate. We review this question de novo. Davis & Cox v. Summa Corp., 751 F.2d 1507, 1519 (9th Cir. 1985).

Collateral estoppel bars relitigation of issues actually litigated and necessarily determined by a court. Montana v. United States , 440 U.S. 147, 153 (1979). The party asserting estoppel bears the burden of pleading and proving the identity of issues decided in the previous action. Hernandez v. City of Los Angeles , 624 F.2d 935, 937 (9th Cir. 1980). Here, the government "must introduce a record sufficient to reveal the controlling facts and pinpoint the exact issues litigated in the prior action." Davis & Cox, 751 F.2d at 1518.

The record indicates that the issue actually litigated in the two prior actions was whether to nullify the First Trust Deed foreclosure sale, not whether the government's tendered redemption under the Second Trust Deed was adequate to reimburse Little for his purchase of the First Trust Deed (prior to the foreclosure sale on the First Trust Deed). "Similarity between issues is not sufficient; collateral estoppel is applied only when the issues are identical." Shapley v. Nevada Board of State Prison Commissioners, 766 F.2d 404, 408 (9th Cir. 1985) (emphasis added). The district court's statement in 82-4303-WMB that Little had been appropriately paid upon redemption by the government makes this a close question.

"Necessary inferences from the judgment, pleadings and evidence will be given preclusive effect." Davis & Cox, 751 F.2d at 1518. But if there is doubt, collateral estoppel will not be applied, especially if the previous decision could have been rationally grounded on an issue other than that which the defendant seeks to foreclose from consideration. Id. at 1518-19.

We find that the government did not carry its burden of showing that the two previous dismissals necessarily decided the issue of the government's proper redemption reimbursement of Little's payment to a senior lienor. ²

III. Validity of Treasury Regulations. Little did not challenge the validity of the Treasury Regulations in district court. Issues not raised below will generally not be considered on appeal. Grauvogel v. Commissioner [85-2 USTC ¶9614 ], 768 F.2d 1087, 1090 (9th Cir. 1985). We conclude that this case falls within one of the narrow exceptions for exercising discretion to hear such an issue. See Bolker v. Commissioner [85-1 USTC ¶9400 ], 760 F.2d 1039, 1042 (9th Cir. 1985) ("issue presented is purely one of law and . . . the pertinent record has been fully developed").

Little claims that Equity Mortgage Corp. v. Loftus [74-2 USTC ¶9757 ], 504 F.2d 1071 (4th Cir. 1974), establishes a substantive right under 26 U.S.C. §7425(d) to receive reimbursement for payments made to a senior lienor. He claims that this statutory right to reimbursement cannot be limited by requiring compliance with procedural regulations.

Under 26 U.S.C. §7805(a) , "the Secretary or his delegate shall prescribe all needful rules and regulations for the enforcement of this Title . . . ." Little argues that, because Congress did not explicitly direct the Secretary to promulgate regulations implementing 26 U.S.C. §7425(d) or 28 U.S.C. §2410(d), the Treasury Regulations here are invalid.

Regulations promulgated under the Secretary's authority in Section 7805(a) "if found to 'implement the congressional mandate in some reasonable manner,' must be upheld." United States v. Cartwright [85-2 USTC ¶9686 ], 411 U.S. 546, 550 (1973) (quoting United States v. Correll [68-1 USTC ¶9101 ], 389 U.S. 299, 307 (1967)). The courts are "not in the business of admin istering the tax laws of the Nation." Id. That task has been delegated to the Secretary of the Treasury in 26 U.S.C. §7805(a) . Id.

"Treasury Regulations 'must be sustained unless unreasonable and plainly inconsistent with the revenue statutes.' " Commissioner v. Portland Cement Co. [81-1 USTC ¶9219 ], 450 U.S. 156, 169 (1981) (quoting Commissioner v. South Texas Lumber Co. [48-1 USTC ¶5922 ], 333 U.S. 496, 501 (1948).

Little has not shown that the procedures for requesting reimbursement are unreasonable or that requiring documentation for reimbursable expenses is plainly inconsistent with the redemption statutes. His challenge to the validity of the Treasury Regulations as applied here is rejected.

IV. Compliance with Treasury Regulations. The district court found that Little had failed to follow regulatory requirements in seeking reimbursement for his payments to a senior lienor. Little does not claim that his request satisfied the various requirements of Treas. Reg. §301.7425-4(b)(4) (ii). Instead, he argues that these "procedural regulations" could not divest the district court of its duty on remand to determine the factual issues relevant to the correct amount of the government's redemption payment.

Little suggests an unusually strict application of the general rule that "[o]n remand, a trial court may not deviate from the mandate of an appellate court." In re Beverly Hills Bancorp., 752 F.2d 1334, 1337 (9th Cir. 1984). On remand a trial court may consider issues not decided by the appellate court "explicitly or by necessary implication." Id. (quoting Liberty Mutual Insurance Co. v. EEOC, 691 F.2d 438, 441 (9th Cir. 1982)).

Here, we could not decide in the previous appeal the correct amount to be paid by the government to redeem the Second Trust Deed. The question of Little's compliance with procedural requirements for requesting reimbursement for payments to a senior lienor was left open by our mandate. The district court's consideration of this issue was within the scope of the remand and did not vary or exceed our mandate. See In re Sanford Fork & Tool Co., 160 U.S. 247, 255-56 (1895).

Little's assertion that the district court was required to ignore the Treasury Regulation procedures in considering the amount-of-redemption issue is without merit. We are aware of no authority in support of such a novel twist on the law of the case doctrine. The district court properly concluded that Little had failed to comply with the procedural requirements governing his request for reimbursement of a payment made to a senior lienor.

V. Application of the Law of the Case Doctrine to Previous Determinations of Government Title. Finding that Little failed to comply with valid Treasury Regulations in seeking reimbursement does not end our inquiry. His noncompliance with reimbursement procedures does not mean that the government's tendered redemption automatically conveyed clear title to the property, free of any encumbrance.

It is necessary to determine the government's interest in the property based on its tendered redemption under the Second Trust Deed.

In the previous appeal, we affirmed the district court as to the status of the government's title upon redemption and after foreclosure. Little v. United States [83-1 USTC ¶9343 ], 704 F.2d 1100, 1108 (9th Cir. 1983). We take this opportunity to resolve an apparent inconsistency between our prior holding and that of the district court.

That court apparently overlooked an important fact in determining the status of the goverment's title. The government's title after redemption under the Second Trust Deed was subject to the First Trust Deed. The court erred when it concluded that the government's title was "free and clear" of any encumbrances after the Trust Deed foreclosure and sale. The government's title remained subject to the First Trust Deed. Section 7425(b) does not require or permit the destruction of this First Trust Deed when the nonjudicial foreclosure sale was held without proper notice to the government. It provides only that such sale "shall . . . be made subject to and without disturbing [the government's] lien or title." 26 U.S.C. §7425(b)(1) .

In the prior appeal we correctly held that "the title acquired by the United States upon its redemption of the property [under the Second Trust Deed] was not disturbed by the subsequent [First Trust Deed] foreclosure and sale of the property." Little, 704 F.2d at 1107-08 (emphasis added). However, we failed to recognize explicitly that the government's title upon redemption was subject to the First Trust Deed and remained so encumbered after the First Trust Deed foreclosure (of which the government had no notice). We must interpret our prior holding to mean that the government's title was not "free and clear" of encumbrances (specifically the First Trust Deed). ³

This interpretation is compelled by the nature of our prior remand. We recognize Little's claim for reimbursement of the "$60,000 [Little paid] to obtain the beneficial interest in the first deed of trust, a senior encumbrance on the property which was not extinguished by the [Second Trust Deed] foreclosure sale." Id. at 1108 (emphasis added). We understood that the government obtained an encumbered title upon redemption and that the subsequent First Trust Deed foreclosure, invalid as to the government, left that encumbered title undisturbed. Id. at 1107-08. This conclusion should be read as a correction of the district court's erroneous conclusion that the government title was "free and clear" after the First Deed foreclosure.

We find that the government's title upon redemption under the Second Trust Deed was subject to the First Trust Deed. The subsequent foreclosure of the First Trust Deed and sale (invalid as to the government for lack of notice) did not disturb this title. The government's title remained subject to the First Trust Deed.

VI. Government's Interest Upon Redemption. The final question is what property interest was acquired by the government upon redemption. Because Little failed to comply with reimbursement procedures, the "correct" redemption amount is equal to the purchase price plus interest and excludes any payments to a senior lienor. The property interest redeemed and acquired by the government is equivalent to that held by Little after the Second Trust Deed foreclosure: title to the property, subject to the First Trust Deed. See 26 U.S.C. §7425(d)(3)(C) ; Treas. Reg. §301.7425-4(c)(3) ; Olympic Federal Savings & Loan Association v. Regan [81-2 USTC ¶9507 ], 648 F.2d 1218, 1220 (9th Cir. 1981) (when redeeming under §7425(d) , the government takes subject to encumbrances existing at the time the redemptionee acquired the property). This encumbered title is unaffected by the subsequent First Trust Deed foreclosure and sale of which the government had no notice. 26 U.S.C. §7425(b)(1) . The "correct" redemption amount does not convey clear title to the government.

The government may now obtain unencumbered title only by reimbursing Little for his payments to a senior lienor. See Treas. Reg. §301.7425-4(b)(4) (iii) (IRS discretion to reimburse "upon the resolution of the disagreement as to the amount properly payable"); Loftus, 504 F.2d at 1078 (where government made original tender under good faith belief that payments to senior lienor need not be reimbursed, government should be given reasonable period after decision upon remand to perfect its original redemption tender).

Despite our holding on the issue of Little's compliance with Treasury Regulations, the government's title upon redemption under the Second Trust Deed is encumbered by the First Trust Deed until it reimburses Little for his payments to the holder of that First Trust Deed. ⁴

CONCLUSION

We find that the district court erred in concluding that collateral estoppel barred Little's claim for reimbursement. However, it was correct in holding that Little failed to comply with regulatory procedures in requesting reimbursement for his payments to a senior lienor.

Although Little's request for reimbursement for senior lienor payments was improper, the government's title upon redemption is not unencumbered, but is subject to the First Trust Deed. To obtain a clear title, it must reimburse Little in the amount of $60,000 for his payments to the senior lienor.

Each party shall bear its own costs for this appeal. REVERSED IN PART. AFFIRMED IN PART.

APPENDIX

SUMMARY OF FACTS AND PRIOR PROCEEDINGS

8/25/78
  Rojas (owner) encumbered the subject property--First Trust Deed.

11/7/78
  Rojas further encumbered the property--Second Trust Deed.

5/6/80
   Rojas conveyed an undivided one-half interest to 

Bell

.

9/17/80
  IRS filed a federal tax lien against 

Bell

.

11/4/80
  IRS filed a second federal tax lien against 

Bell

.

10/27/80
 Maycock acquired the beneficial interests under the First Trust Deed,

         now in default.

12/16/80
 Second Trust Deed foreclosure sale. Property was sold to 

Mendoza

 for

         $23,670. Notice of sale was given to the IRS as to the September tax

         lien, but not as to the November tax lien.

12/17/80
 

Mendoza

 conveyed the property (subject to the First Trust Deed) to

         appellant Little.

12/19/80
 Maycock and Little entered an agreement for Little to purchase

         Maycock's beneficial interest under the First Trust Deed for $60,000.

1/13/81
  IRS officer Schneider notified Little of the government's right to

         redeem based on the Second Trust Deed foreclosure and advised him of

         the requirements for requesting reimbursement for payments to a

         senior lienor.

3/3/81
   Beneficial interest under the First Trust Deed was transferred from

         Maycock to Darmiento (Little's nominee).

3/9/81
   Little's attorney sent the IRS a letter listing as reimbursable

         expenses the purchase price paid to 

Mendoza

, repair expenses and

         $60,000 for the purchase of the First Trust Deed from Maycock.

3/13/81
  IRS denied Little's claim for reimbursement for failure to comply

         with proper procedures.

3/20/81
  IRS seized the property.

3/23/81
  Little filed this action in federal district court for a Temporary

         Restraining Order, a Preliminary Injunction, and to Quiet Title.

4/14/81
  The court granted a preliminary injunction restraining the government

         from exercising its right of redemption under the Second Trust Deed.

4/15/81
  (Final day of 120-day statutory redemption period) This court stayed

         the injunction order pending appeal. The government then timely

         redeemed the property by tendering $24,136.92 ($23,670 purchase price

         plus $466.92 interest).

5/14/81
  Trustee under First Trust Deed filed notice of trustee sale to be

         held on 
May 28, 1981
.

5/28/81
  First Trust Deed foreclosure sale. Darmiento, nominee of Little,

         purchased the property for $42,611.50. 

United States

, holder of title

         to the property (subject to the First Trust Deed) pursuant to its

         
April 15, 1981
 redemption, was not notified of this sale.

9/14/81
  Little filed a first amended and supplemental complaint in his

         district court action, claiming that (1) the government had no

         "property interest" to which the tax liens could attach, (2) if the

         tax liens did attach, the government failed to tender the proper

         amount upon redemption, and (3) if the redemption was proper, the

         government acquired the property subject to the First Trust Deed, and

         the subsequent First Trust Deed foreclosure divested it of the title

         it had acquired through redemption.

3/10/82
  The district court granted summary judgment for the government,

         holding that the government's redemption under the Second Trust Deed

         was proper and it had acquired title by operation of Section 7425(d).

         It also rejected Little's request to quiet title based on the

         foreclosure of the First Trust Deed, holding that this nonjudicial

         sale (without notice to the government) was made subject to and

         without disturbing the government's title. It declared that the

         government had title free and clear of any and all rights, title and

         interest of Little.

4/13/82
  Little filed a notice of appeal.

4/26/83
  We held that the government had a property interest to which the tax

         liens attached and that its title upon redemption "was not disturbed

         by the subsequent [First Trust Deed] foreclosure and sale of the

         property." Little, 704 F.2d at 1107-08. We concluded that the

         factual record was inadequate to decide the correctness of the amount

         tendered by the government, specifically whether the Second Trust

         Deed redemption price should include the amount of Little's

         post-foreclosure payment to a holder of a senior lien (First Trust

         Deed). We remanded this matter for further district court

         proceedings.

 

^* Of the District of Alaska.

¹ The relevant parts of Treas. Reg. §301.7425-4(b)(4) , involving these reimbursement procedures, are summarized here:

Under paragraph (b)(4)(ii), the district director of the IRS "shall, in any case where a [Section 7425(d) ] redemption is contemplated, send notice to the purchaser [prior to the end of the 120-day redemption period] . . . of his right . . . to request reimbursement . . . for a payment made to a senior lienor." The purchaser's request for reimbursement must be "mailed or delivered to the office specified" within 15 days.

The request for reimbursement "shall consist of--(A) [a] written itemized statement . . . of the amount claimed [as] payment to a senior lienor, together with the supporting evidence requested in the notice from the [IRS], and (B) [a] waiver or other document that will be effective upon redemption . . . to discharge . . . or transfer to the United States, any interest in or lien on the property that may arise under local law with respect to the payment made to a senior lienor."

Paragraph (b)(4)(ii) of the Regulations provides also that "[u]nless a request for reimbursement is timely submitted . . ., no amount shall be payable to the purchaser . . . [for] a payment made to a senior lienor . . . ."

Under paragraph (b)(4)(iii), a proper request for reimbursement "shall be considered to be approved for the total amount claimed by the purchaser . . . unless the [IRS] sends notice to the claimant . . . within [a prescribed time period]. The notification of denial shall state the grounds for denial." Upon denial, "the request for reimbursement for a payment made to a senior lienor shall be treated as having been withdrawn by the purchaser . . . and the [IRS] shall tender only the amount otherwise payable [for purchase price, interest and other necessarily incurred expenses]." Where a request is treated as withdrawn, reimbursement for payments to a senior lienor "may, in the discretion of the [IRS], be made after the redemption upon the resolution of the disagreement as to the amount [of such reimbursement]."

² Little contends that the law of the case doctrine required the district court to determine the correctness of the redemption amount tendered and precluded reliance on collateral estoppel. He contends also that the government waived its right to defend based on collateral estoppel and failure to exhaust admin istrative remedies by failing to raise these arguments in the prior appeal. He has cited no authority to support either proposition and we have found none. Moreover, collateral estoppel and exhaustion of admin istrative remedies are affirmative defenses, see Fed. R. Civ. P. 8(c), and must be pleaded in the trial court. Our prior opinion "should not be read to preclude assertion of the[se] affirmative defenses . . . on remand to the district court." Hernandez v. City of Lafayette , 649 F.2d 336, 337 (5th Cir. 1981).

³ Our prior decision is "to be interpreted reasonably and not in a manner to do injustice . . . ." Mobil Oil Corp. v. Department of Energy, 647 F.2d 142, 145 (Temp. Emerg. Ct. App. 1981) (quoting Wilkinson v. Massachusetts Bonding & Insurance Co., 16 F.2d 66, 67 (5th Cir. 1926)). Where our prior ruling is "unclear or open to conflicting interpretations," we may "presume that the ruling was not erroneous and was otherwise in accordance with law." Chapman v. NASA, 736 F.2d 238, 242 (5th Cir.), cert. denied, 105 S. Ct. 517 (1984).

⁴ Any difficulty in determining the amount of reimbursement owed Little for his payment to a senior lienor is eliminated by the parties' stipulation that Little paid $60,000 to the holder of the First Trust Deed.

 

 

[76-2 USTC ¶9483]Atlantic National Bank v. The United States

U.S. Court of Claims, No. 30-75, 210 CtCls 340, 536 F2d 1354, 6/16/76

[Code Secs. 6321 and 6323]

Lien for taxes: After-acquired property: Priority: Notice or knowledge of lien: Security interest: Marshalling of assets.--A bank, an assignee of the taxpayer, was not entitled to any funds due the taxpayers under contracts between the taxpayer and a Federal agency. Notices of Federal tax liens had been filed prior to the assignments of the funds to the bank. Even though these funds had not been earned at the time the liens were filed, the taxpayer had sufficient interest in the funds, even after making the assignments, for the liens to attach to them. The bank's interest was not entitled to priority because it failed to demonstrate that its interest was protected under local law as against a judgment lien arising out of an unsecured interest. The bank had constructive knowledge, with the same effect as actual knowledge, of the tax liens once they were filed. Thus, it could not claim ignorance of the facts and could not recover under a theory of equitable estoppel. Finally, the invocation of the doctrine of marshalling of assets was denied since it would have been inequitable to the government, which was unable to satisfy the total obligations owed by the taxpayer from the funds due him.

H. Joel Weintraub, Maurice Steingold, Steingolf, Steingolf & Friedman, for plaintiff. Leslie H. Wisenfelder, Rex E. Lee, Assistant Attorney General, Department of Justice, Washington, D. C. 20530, for defendant.

Before SKELTON, KASHIWA , and BENNETT, Judges.

On Defendant's Motion for Summary Judgment and Plaintiff's Cross Motion for Summary Judgment

KASHIWA , Judge, delivered the opinion of the court:

This case is before the court on cross motions for summary judgment. There is no genuine issue as to any material fact. The case involves the priority of federal tax liens over plaintiff-assignee's claim to contract proceeds. For the reasons below we hold for the defendant.

The General Services Administration (GSA) awarded contracts to Argus Security, Inc. (Argus) for the performance of uniform guard services. By June 4, 1974 , the Internal Revenue Service (IRS) had filed Notices of Federal Tax Lien Under Internal Revenue Laws relating to Argus as follows:

                          Date filed with State

Amount of                 Corporation Commission,

lien                          

Richmond
, 
Virginia

    $53,870.27              March 21, 1974

     32,702.75               
June 4, 1974

    $86,573.02

On June 5, 1974 , and July 9, 1974 , Argus made assignments to plaintiff of proceeds to be paid under its contracts. A more complete chronology of events is listed in the margin. ¹ As of January 31, 1976 , Argus' unpaid tax liability arising out of the two notices of tax lien filed by June 4, 1974 , totaled $78,527.93. The total due under the Argus contracts is $43,739.09. ²

Plaintiff first argues that the tax liens did not attach to the contract proceeds when the liens were filed because at that time the monies were not yet earned. Plaintiff contends that when the monies were earned, they were immediately encumbered by plaintiff's perfected security interest.

Section 6321, Int. Rev. Code of 1954, provides that upon refusal to pay a tax after demand, a lien arises in favor of the United States "upon all property and rights to property, whether real or personal," belonging to the delinquent taxpayer. Argus had a right to, and interest in, the subject due or to become due under the subject contracts to enable a federal tax lien to attach thereto. Even after the assignments to plaintiff, Argus retained a sufficient interest to which a federal tax lien could attach. In Texas Oil & Gas Corp. v. United States [72-2 USTC ¶9653], 466 F. 2d 1040, 1052 (5th Cir. 1972), cert. denied, 410 U. S. 929 (1973), the court held:

* * * a federal tax lien attaches immediately to after-acquired property without any further action required by the Government.

It has also been held that the fact that the taxpayer's right to contract proceeds was dependent on his satisfactory performance does not mean that the proceeds were not property or rights to property of the taxpayer under §6321. In City of Vermillion v. Stan Houston Equipment Co. [72-2 USTC ¶9496], 341 F. Supp. 707, 713 (D. S. D. 1972), the court stated:

The fact that the taxpayer's right to the proceeds of the contract was dependent upon his performance of the contract and acceptance by the City does not mean that the proceeds were not property or rights to property of the taxpayer under 26 U. S. C. A. Sec. 6321. Seaboard Surety Co. v. United States [62-2 USTC ¶9653], 306 F. 2d 855, 859 (9th Cir. 1962); Home Ins. Co. v. B. B. Rider Corp. [63-1 ¶9235], 212 F. Supp. 457, 462 (D. C. N. J. 1963). The taxpayer had more than a mere contingent right to the proceeds of the contract.

See Glass City Bank v. United States [45-2 USTC ¶9449], 326 U. S. 265 (1945); Corwin Consultants, Inc. v. Interpublic Group of Companies, Inc. [74-1 USTC ¶9401], 375 F. Supp. 186, 193 (S. D. N. Y. 1974), reversed and remanded on another question [75-1 USTC ¶9299], 512 F. 2d 605 (2d Cir. 1975); United States v. Blackett [55-1 USTC 9278], 220 F. 2d 21 (9th Cir. 1955).

Clearly under §6321 we must hold that plaintiff's argument cannot be sustained.

In Glass City Bank v. United States, supra at 267-69, the Court stated that there "is a plain intent to subject to the lien 'property owned by the delinquent' when suit is filed, rather than only that owned when the lien arose" and also: "Our conclusions is that the lien applies to property owned by the delinquent at any time during the life of the lien. This is in accord with all the cases that have directly passed upon this question." [Footnote omitted.] In Seaboard Surety Co. v. United States [62-2 USTC ¶9653], 306 F. 2d 855 (9th Cir. 1962), the taxpayer was awarded a Government contract on December 31, 1956 . On March 2, 1957 , a trust agreement was executed assigning the proceeds of the contract to a bank. Prior to the date of the agreement the Government had a fully perfected tax lien on all property and rights to property of the taxpayer. The court stated at 859:

* * * These tax liens attached immediately to all rights of taxpayer under the government contract awarded December 31, 1956 , including payments whenever earned. * * * [T]he trust agreement of March 2, 1957 , could not displace the tax liens, which had already attached to taxpayer's property rights in the contract. The fact that taxpayer's rights under the contract were dependent upon its performance did not affect the tax liens * * *.

In United States Fidelity & Guaranty Co. v. United States, 201 Ct. Cl. 1, 475 F. 2d 1377 (1973), this court held that where the IRS was owed taxes by a defaulted prime contractor and the amount was paid to the IRS by the contracting agency out of retained contract funds, the tax lien has priority over a surety that has paid laborers and materialmen on its payment bond. Accord, Seaboard Surety Co. v. United States , 107 Ct. Cl. 34 [47-1 USTC ¶9128], 67 F. Supp. 969 (1946), cert. denied, 330 U. S. 826 (1947).

Plaintiff also relies on §6323. ³ Plaintiff argues that as to monies earned under these contracts by Argus on and after June 28, 1974, the Federal Tax Lien Act of 1966 grants plaintiff a priority over earlier filed notices of tax lien as a holder of a security interest within the meaning of §6323. However, since plaintiff does in fact qualify for the priority status it claims for itself under §6323, plaintiff's reliance, based as it is on a fallacious premise, collapses for lack of support.

In Donald v. Modison Industries, Inc. [73-2 USTC ¶9623], 483 F. 2d 837, 842 (10th Cir. 1973), the Court of Appeals in an opinion by Senior Judge Laramore of this court held with relation to §6323 as follows:

Summarizing the foregoing definitions and rules as applicable herein, it is apparent that the appellant's security interest will take priority over the filed Federal tax lien if the following requisites are met:

1. The "security interest" stems from a written agreement which (a) was entered into before the Federal tax lien was filed, and (b) qualifies as a "commercial transactions financing agreement" under section 6323(c)(2)(A)(i); [Emphasis supplied.]

2. The loans were made pursuant to the written agreement within 45 days of the tax lien filing or prior to receiving actual notice or knowledge that the tax lien had been filed, i. e., disbursements or loans after receipt of actual notice or 45 days, whichever is sooner, are unprotected;

3. The written agreement covered "qualified property"--here inventory--which was "acquired" by the taxpayer within 45 days of the tax lien filing; and

4. State law gives the security interest holder priority over a judgment lien by an unsecured creditor, as of the time the Federal tax lien is filed.

Accord, 9 MERTEN'S LAW OF FEDERAL INCOME TAXATION §54.66.7 (1971). ⁴

With relation to the four requirements under §6323, we observe that plaintiff does not overcome the requirement that its security interest arise from a written agreement entered into before these tax liens were filed. The first of the written agreement, i. e., the assignments, was executed on June 5, 1974 . However, by June 4, 1974 , defendant had filed Notices of Tax Lien Under Internal Revenue Law relating to Argus which then totalled $86,573.02. In Donald v. Madison Industries, Inc., supra at 844, the court held as follows:

* * * Since these security agreements were entered into after the tax lien filing by some eight months or more (one day after would be just as fatal), appellant clearly can draw no support from these documents with respect to the December 1969 tax lien. Section 6323(c)(1). However, they would be relevant to any tax liens filed after their execution. (Emphasis in original).

Furthermore, plaintiff's position as to its having any priority under the Federal Tax Lien Act of 1966 fails because plaintiff has not demonstrated to this court that its "security interest" at any relevant time became "protected under local law against a judgment lien arising, as of the time of tax lien filing, out of an unsecured obligation" as required by §6323(c)(1)(B). Therefore, we hold that plaintiff is not entitled to any priority under §6323 over the tax liens filed before June 5, 1974 .

Plaintiff also argues that defendant is estopped to claim a lien having priority over plaintiff's rights. It bases its argument on this court's decision in Produce Factors Corp. v. United States, 199 Ct. Cl. 572, 467 F. 2d 1343 (1972). Plaintiff's position is that when it submitted its notices of the subject assignments and the assignments themselves to GSA as required by the Assignment of Claims Act, the failure to defendant's officials to advise plaintiff of the tax claims of which GSA had notice was a breach of the duty defendant owed to plaintiff as an assignee. As a result, so the argument goes, plaintiff is entitled to recover the monies it lent to Argus. The language of the Produce Factors Corp. decision on which plaintiff relies is as follows:

The assignee of Government contract rights is, of course, entitled to certain governmental protection of its interests. If at the time it receives notification of an assignment, the Government knows that the assignee's collateral is worthless, the Government must convey that information to the assignee so that he will not advance funds on the strength of proceeds that will never come due. * * * [199 Ct. Cl. at 582, 467 F. 2d at 1349.]

The assignee in Produce Factors Corp. was denied any recovery because it failed to establish that the Government had actual or constructive notice of a fact which it was duty bound to convey to the assignee and also because the assignee's knowledge was held to be superior to the Government's.

In order to establish an estoppel against the United States , four separate elements must be present. One of these essential requirements is for the party asserting the estoppel to be "ignorant of the true facts." Emeco Industries, Inc. v. United States , 202 Ct. Cl. 1006, 1015, 485 F. 2d 652, 657 (1973); United States v. Georgia-Pacific Co., 421 F. 2d 92, 96 (9th Cir. 1970). Plaintiff cannot set itself up as being ignorant of the IRS tax claims because it had constructive notice of the existence of said liens.

* * * The purpose of the filing of a notice of Federal tax lien is to give constructive notice. A purchaser is charged with constructive notice of all a person of ordinary intelligence and diligence would have discovered by an examination of the index to Federal tax liens in the appropriate local office. * * * 9 MERTEN'S LAW OF FEDERAL INCOME TAXATION §54.66.12 (1971). [Footnotes omitted.]

Accord, Richter's Loan Co. v. United States [56-2 USTC ¶9706], 235 F. 2d 753 (5th Cir. 1956); United States v. Sirico [66-1 USTC ¶9209], 247 F. Supp. 421 (S. D. N. Y. 1965); Goldstein v. Bankers Commercial Corp. [57-1 USTC ¶9596], 152 F. Supp. 856 (S. D. N. Y. 1957), aff'd per curiam sub nom. Goldstein v. United States [58-2 USTC ¶9662], 257 F. 2d 48 (2d Cir. 1958).

Once it is established that plaintiff was chargeable with contructive notice, that notice has the same legal significance as actual notice. In Simmons Creek Coal Co. v. Doran, 142 U. S. 417, 437 (1892), the Supreme Court stated:

* * * He is bound not only by actual, but also by constructive notice, which is the same in its effect as actual notice. * * * [Emphasis in original.]

Accord, 66 C. J. S. Notice §19(b) (1950):

* * * constructive * * * and actual notice have the same effect, and either constructive notice or actual notice is binding independently of the other. Accordingly, a person chargeable with constructive * * * notice is as much bound thereby as if the notice were actual. * * * [Emphasis supplied.] [Footnotes omitted.]

Accordingly, defendant's duty to "convey" information to an assignee is fully and completely discharged as to tax claims by the filing of tax liens. That it would perhaps have been a better course for defendant's officials to give plaintiff actual notice of the IRS claims is not a legally sufficient basis for plaintiff to recover. As a matter of law, defendant did not breach the duty imposed by Produce Factors Corp., supra. Plaintiff may not recover, therefore, on its theory of equitable estoppel.

The court need respond only briefly to plaintiff's final contention that the doctrine of marshaling assets should be invoked here to require defendant to collect its claims of offset against assets of Argus being withheld under contracts which are not in issue before this court before defendant can resort to the funds being withheld under the five contracts which are in issue in this case. ⁵ Defendant states that the total debts owed it by Argus far exceed the total monies defendant is withholding. Thus, to the extent defendant is unable to pay itself out of the $43,739.09 due and unpaid under the subject contracts ahead of plaintiff, defendant will not be reimbursed for the total of the obligations owed to it by Argus. There can be no marshaling when to do so would limit the double-fund creditor's ability to satisfy the total debt owed to it. This would be inequitable. New Bern Oil & Fertilizer Co. v. National Bank, 28 F. 2d 554, 556 (4th Cir. 1928); Caplinger v. Patty, 398 F. 2d 471, 476 (8th Cir. 1968); Victor Gruen Associates, Inc. v. Glass, 338 F. 2d 826, 829 (9th Cir. 1964).

Conclusion

For the above reasons, defendant's motion for summary judgment is granted, plaintiff's motion for summary judgment is denied, and the petition is dismissed.

¹ July 19, 1973--GSA awarded Contract number GS-03B-18175 to Argus.

February 1, 1974-GSA awarded Contract number GS-03B-18245 to Argus.

February 14, 1974 --GSA awarded Contract number GS-03B-18244 to Argus.

March 21, 1974 --IRS filed a notice of federal tax lien at Norfolk and Richmond , Virginia , for $53,870.27.

May 6, 1974 --GSA awarded Contract number GS-03B-18336 to Argus.

May 14, 1974 --IRS served a notice of levy on GSA stating that there was due, owing, and unpaid from Argus $60,803.46.

May 16 and June 4, 1974 --IRS filed a notice of federal tax lien at Norfolk and Richmond , respectively, for $32,702.75.

May 29, 1974 --GSA awarded Contract number GS-03B-18385 to Argus.

June 5, 1974 --Argus assigned to plaintiff "all monies due or to become due from the United States " under Contract numbers GS-03B-18175, GS-03B-18244, and GS-03B-18245. The assignments contained a warranty that the assignor is not indebted to the United States for taxes and is not otherwise engaged in a controversy with the United States which might give rise to a claim of a right to set-off.

June 19, 1974 --GSA received and acknowledged receipt of three documents entitled "Notice of Assignment."

June 20, 1974 --IRS filed notice of federal tax lien at Norfolk and Richmond for $52,034.22.

July 9, 1974 --Argus assigned to plaintiff the monies due under Contract numbers GS-03B-18336 and GS-03B-18385.

July 11, 1974 --GSA received and acknowledged receipt of two documents entitled "Notice of Assignment."

July 29, 1974 --Effective on this date, the five contracts were terminated by written agreement in accordance with an oral agreement of GSA and Argus on July 26, 1974 .

August 2, 1974 --IRS served GSA with a notice of levy stating that there was due, owing, and unpaid from Argus $132,422.78.

² There is a claim in the total amount of $23,656.98 by the Department of Labor to the withheld funds in suit. However, defendant has stated in its briefs that the court does not have to determine priorities between IRS and the Department of Labor. Since defendant prevails on the IRS claim and the IRS claim exhausts the available funds, we deem it unnecessary to discuss the Department of Labor claim.

³ Relevant portions of §6323 are as follows:

"SEC. 6323. VALIDITY AND PRIORITY AGAINST CERTAIN PERSONS.

"(a) PURCHASES, HOLDERS OF SECURITY INTERESTS, MECHANIC'S LIENORS, AND JUDGMENT LIEN CREDITORS.--The lien imposed by section 6321 shall not be valid as against any purchaser, holder of a security interest, mechanics' lienor, or judgment lien creditor until notice thereof which meets the requirements of subsection (f) has been filed by the Secretary or his delegate.

* * *

"(c) PROTECTION FOR CERTAIN COMMERCIAL TRANSACTIONS FINANCING AGREEMENTS, ETC.--

"(1) IN GENERAL.--To the extent provided in this subsection, even though notice of a line imposed by section 6321 has been filed, such lien shall not be valid with respect to a security interest which came into existence after tax lien filing but which--

"(A) is in qualified property covered by the terms of a written agreement entered into before tax lien filing and constituting--

"(1) a commercial transactions financing agreement,

"(ii) a real property construction or improvement financing agreement, or

"(iii) an obligatory disbursement agreement, and

"(B) is protected under local law against a judgment lien arising, as of the time of tax lien filing, out of an unsecured obligation.

"(2) COMMERCIAL TRANSACTIONS FINANCING AGREEMENT.--For purposes of this subsection.--

"(A) DEFINITION.--The term 'commercial transactions financing agreement' means an agreement (entered into by a person in the course of his trade or business)--

"(i) to make loans to the taxpayer to be secured by commercial financing security acquired by the taxpayer in the ordinary course of his trade, or business, or

"(ii) to purchase commercial financing security (other than inventory) acquired by the taxpayer in the ordinary course of his trade or business;

"but such an agreement shall be treated as coming within the term only to the extent that such loan or purchase is made before the 46th day after the date of tax lien filing or (if earlier) before the lender or purchaser had actual notice or knowledge of such tax lien filing.

"(B) LIMITATION ON QUALIFIED PROPERTY.--The term 'qualified property', when used with respect to a commercial transactions financing agreement, includes only commercial financing security acquired by the taxpayer before the 46th day after the date of tax lien filing.

"(C) COMMERCIAL FINANCING SECURITY DEFINED.--The term 'commercial financing security' means (i) paper of a kind ordinarily arising in commercial transactions, (ii) accounts receivable, (iii) mortgages on real property, and (iv) inventory.

* * *

"(d) 45-DAY PERIOD FOR MAKING DISBURSEMENTS.--Even though notice of a lien imposed by section 6321 has been filed, such lien shall not be valid with respect to a security interest which came into existence after tax lien filing by reason of disbursements made before the 46th day after the date of tax lien filing, or (if earlier) before the person making such disbursements had actual notice or knowledge of tax lien filing, but only if such security interest--

"(1) is in property (A) subject, at the time of tax lien filing, to the lien imposed by section 6321, and (B) covered by the terms of a written agreement entered into before tax lien filing, and

"(2) is protected under local law against a judgment lien arising, as of the time of tax lien filing, out of an unsecured obligation."

* * *

⁴ H. R. Rep. No. 1884, 89th Cong., 2d Sess. 45 (1966), provides as follows in pertinent part:

"* * * Thus, the security interest must arise out of a written agreement entered into before the notice of tax lien was filed * * *."

⁵ Defendant contends that the doctrine of marshaling assets does not apply to the United States but we need not rule on the question in view of the inadequacy of plaintiff's position.

Concurring Opinion

BENNETT, Judge, with whom SKELTON, Judge, joins, concurring:

I concur with Judge Kashiwa's opinion and in the decision reached, but find it necessary to discuss briefly one aspect of plaintiff's rebuttal to the two affirmative defenses set up by defendant in this litigation. When faced with these defenses, plaintiff promptly asserted that its recovery could not be diminished to th extent of its assignor's delinquent taxes or underpaid employee wages, because of the terms of the Assignment of Claims Act of 1940, as amended, 41 U. S. C. §15 (1970):

Any contract of * * * the General Services Administration * * * may, in time of war or national emergency proclaimed by the President * * * or by Act or joint resolution of the Congress and until such war or national emergency has been terminated in such manner, provide or be amended without consideration to provide that payments to be made to the assignee of any moneys due or to become due under such contract shall not be subject to reduction or set-off, and if such provision or one to the same general effect has been at any time heretofore or is hereafter included or inserted in any such contract, payments to be made thereafter to an assignee of any moneys due * * * shall not be subject to reduction or set-off for any liability of any nature of the a signor to the United States or any department or agency thereof which arises independently of such contract, * * *.

It should be noted that the statute confers discretion upon contracting agencies to include the appropriate language. A "no set-off" clause is not mandatory.

The record in this case does not include copies of the five contracts themselves which were assigned as security to this plaintiff, nor has plaintiff otherwise proved to my satisfaction that the contracts originally included the no set-off language which is authorized by 41 U. S. C. §15 (1970). In fact, plaintiff implicitly concedes that no such provision originally appeared in any of the five contracts by arguing in its main brief that the provisions of the Act became operative through an implied contract amendment when it as assignee delivered copies of the assignments themselves to GSA. The instruments of assignments, which we do have before us, contain a warranty running from the assignor to plaintiff that no outstanding claims existed which might result in a set-off, reducing payments otherwise due the contractor.

Thus, plaintiff finds itself reduced to the position that each of these contracts was amended during the course of performance, so as to include by operation of law a provision binding against the Government that payments to be made to the assignee of moneys due or to become due the contractor would not be subject to reduction or set-off for the assignor's liabilities to the United States or its agencies. Plaintiff finds such an amendment implied in fact from the following circumstances: (1) the instruments of assignment to it contained the contractor's warranty that no indebtedness existed in favor of the United States ; (2) the instruments were delivered to responsible officials at GSA; and (3) GSA acknowledged receipt of such instruments without exception.

I would go a step further than Judge Kashiwa's opinion and hold as well that, as a matter of law, none of these five contracts were amended to contain a no set-off provision. In order to amend a contract, as in the case of contracting in the first instance, the parties by words or actions must manifest assent to the term of the proposed bargain. RESTATEMENT CONTRACTS §52 (1932); RESTATEMENT, SECOND CONTRACTS §52 (T. D. No. 1 (1964)). I do not think that we reasonably can say that authorized Government officials manifested their assent to the inclusion of a no set-off provision in these contracts. The Government did nothing more than to acknowledge receipt of the papers embodying the various assignments. Such an acknowledgment alone on the facts of this case is insufficient to conclude a legally effective amendment of a contract.

I agree that the petition should be dismissed.