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 [