Estoppel
Page2

(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 [