Spouses

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United States of America , Appellee v. Francis Taylor, Defendant, Mary E. Taylor, Appellant.

U.S. Court of Appeals, 8th Circuit; 01-2874/3872, 338 F3d 947, July 31, 2003 .

Reversing and remanding an unreported DC Minn. decision; related opinion at DC Minn. 2002-1 USTC ¶50,198.

[ Code Secs. 6321 and 6323]

Tax liens: Priority: Conveyances made by taxpayer to ex-wife: Qualified domestic relations order: Employee plan proceeds: Relation back of interest in proceeds. --

A divorced wife became the owner of 90 percent of her former husband's interest in employee plan proceeds on the date when a state (Texas) court issued a domestic relations order (DRO), even though details of qualification remained to transform the DRO into a qualified domestic relations order (QDRO). Thus, as a judgment lien creditor, her interest in the proceeds had priority over an IRS tax lien against the husband that was filed subsequent to the entry of the DRO but before the order became a QDRO. On the date the DRO was granted, her identity was clear, the subject property was identified, the amount was fixed, and the husband no longer owned 90 percent of the plan proceeds at issue.

Before: Loken, Bye and Riley, Circuit Judges.

RILEY, Circuit Judge: This case arises out of an April 1996 Northwest Airlines (Northwest) interpleader of the United States and Mary Taylor (Mary) to determine whether the Internal Revenue Service (IRS) or Mary has priority and is entitled to the benefits of three Northwest sponsored employee benefits plans. On cross motions for summary judgment, the district court ruled generally for the IRS and against Mary, finding Mary's right to the plans under a Texas domestic relations order (DRO) was subject to a prior federal tax lien. We disagree and reverse.



I. BACKGROUND

As is often the case, the sequence of events is critical. Francis Taylor (Francis) worked as a pilot for Northwest from 1966 to 1994. During his employment, Francis participated in a retirement plan, a stock plan, and a savings plan admin istered by Northwest under ERISA. ¹ Francis retired from Northwest in September 1994, at which time he filed in a Texas state court for divorce from Mary, his wife of more than thirty years. The following month, in October 1994, a tax court concluded that Francis had not filed tax returns from 1981 through 1985. On May 1, 1995 , the IRS assessed deficiencies totaling approximately $984,310 (including penalties and interest) for those tax years. On July 28, 1995 , the Texas court entered a divorce decree and approved a marital settlement agreement. The agreement provided that "to settle all obligations of the marriage," Mary would receive a 90 percent interest in Francis's Northwest employee benefits proceeds (plan proceeds). Also in July, the court entered a purported qualified domestic relations order (QDRO), directing the plan admin istrator to distribute Mary's interest in the plan proceeds directly to her. The Texas court, in the July order, retained jurisdiction to amend or reform the order as necessary to conform with plan requirements and qualify as a QDRO.

In October 1995, Northwest informed Mary and Francis that the July DRO did not qualify as a QDRO. In December 1995, the IRS filed a lien against the plan proceeds in Texas , where Francis claimed he resided at the time of the divorce, and where the DRO issued. In October 1996, the IRS filed another lien in Minnesota , where the plans were admin istered. Meanwhile, Mary and Francis attempted to correct the DRO's identified deficiencies. Among other things, the order: (1) did not specify the period to which it applied; (2) did not address how to treat amounts accrued, but had not yet been credited to the account; and (3) would have required Northwest to make an extra payment. Twice the Texas court, at Mary's request, reformed the DRO to address Northwest's concerns. Northwest finally pronounced the DRO a QDRO in January 1997.

The district court dismissed Northwest from the interpleader action, and the IRS and Mary were left to determine who was entitled to the plan proceeds. The IRS claimed its interest in the plan proceeds was first in time, while Mary argued her interest had priority because she was both a "judgment lien creditor" and a "purchaser" under 26 U.S.C. §6323(a), ² a statute that in certain situations requires the IRS to file notice of its lien to obtain priority.

The district court concluded Mary was neither a purchaser nor a judgment lien creditor under section 6323(a). Specifically, the court determined Mary was not a purchaser because her consideration was not "adequate and full," as defined in 26 C.F.R. §301.6323(h)-1(f)(3) (2001) (consideration must have reasonable relationship to true value of interest in acquired property). Further, the district court found Mary was not a judgment lien creditor because there was no evidence she had perfected her lien by executing the judgment as required under Texas law. Because Mary was not entitled to the protections of section 6323, the district court held the IRS tax liens assessed on May 1, 1995, became effective against Mary as of that date and were first in time and entitled to priority.

On appeal, Mary argues: (1) the Texas divorce court had exclusive jurisdiction over this dispute; thus, there was no federal question and the interpleader action was not proper; (2) under Texas community property law, Mary had substantial property rights in the plan proceeds even before the divorce; (3) she was a purchaser under section 6323(a); and (4) she was a judgment lien creditor under section 6323(a).



II. DISCUSSION

This court reviews de novo the district court's grant of summary judgment. Mayberry v. United States [ 98-2 USTC ¶50,632], 151 F.3d 855, 858 (8th Cir. 1998). Initially, we reject Mary's first two arguments: (1) federal jurisdiction does exist, see 29 U.S.C. §1132(a)(3) (civil action may be brought by fiduciary to enjoin violations of ERISA plan, or to obtain appropriate equitable relief); and (2) Texas community property law does not vest her with an interest in the plan proceeds. See 29 U.S.C. §1144(a) (ERISA supersedes state law insofar as such law relates to ERISA-governed plans); Boggs v. Boggs, 520 U.S. 833, 850 (1997) (QDRO provisions define scope of nonparticipant spouse's community property interest in pension plans).

We turn next to whether Mary became a judgment lien creditor under section 6323(a) within sufficient time to have priority over the IRS. ³ An IRS lien attaches automatically on the date a penalty is assessed, 26 U.S.C. §6322 (lien arises at time of assessment), and is enforceable as of that date against creditors except any "purchaser," "holder of security interest," "mechanic's lienor," or "judgment lien creditor," within the meaning of section 6323(a). If the creditor falls into one of these categories, then the IRS must provide adequate notice to establish the priority of its lien. See 26 U.S.C. §6323(a); Rodeck v. United States [ 89-2 USTC ¶9401], 697 F.Supp. 1508, 1511 (D. Minn. 1988) (as to §6323(a) creditors, tax lien will have priority only if notice has been filed in accordance with §6323(f)).

A Treasury Regulation defines "judgment lien creditor" as follows:

... a person who has obtained a valid judgment, in a court of record and of competent jurisdiction, for the recovery of specifically designated property or for a certain sum of money. In the case of a judgment for the recovery of a certain sum of money, a judgment lien creditor is a person who has perfected a lien under the judgment on the property involved. A judgment lien is not perfected until the identity of the lienor, the property subject to the lien, and the amount of the lien are established. Accordingly, a judgment lien does not include an attachment or garnishment lien until the lien has ripened into judgment, even though under local law the lien of the judgment relates back to an earlier date.

 

...

 

If under local law levy or seizure is necessary before a judgment lien becomes effective against third parties acquiring liens on personal property, then a judgment lien under such local law is not perfected until levy or seizure of the personal property involved.

26 C.F.R. §301.6323(h)-1(g).

A state law created lien's priority depends on when it attaches and becomes choate, and federal law will determine when the lien has acquired sufficient substance and becomes so perfected as to defeat a later federal tax lien. United States v. Pioneer Am. Ins. Co. [ 63-2 USTC ¶9532], 374 U.S. 84, 88 (1963). Liens are perfected, under the federal rule, when there is nothing more to be done to have a choate lien, that is, "when the identity of the lienowner, the property subject to the lien, and the amount of the lien are established." Id. at 89 (citations omitted). Here, Mary obtained a valid judgment from a Texas divorce court for 90 percent of Francis's plan proceeds creating an exclusive property interest in the plan proceeds for Mary. On the date the Texas court granted the DRO, Mary's identity was clear, the subject property was identified, and the amount (90 percent) was fixed.

Mary was not required to comply with any state law requirements for purposes of establishing lien priority over the IRS's interest in the plan proceeds. ERISA provides a mechanism for enforcing QDROs, and this mechanism supersedes any contrary state law. See U.S. Constitution art. VI, cl. 2, Heart of Am. Grain Inspection Serv., Inc. v. Mo. Dep't of Agric., 123 F.3d 1098, 1103 (8th Cir. 1997) (under Supremacy Clause, federal laws are supreme law of land and may preempt state law); cf. Chevron U.S.A. Inc. v. Natural Res. Def. Council, Inc., 467 U.S. 837, 843-44 (1984) (agencies may elucidate, through regulations, specific provisions of statutes that agencies admin ister). Specifically, 29 U.S.C. §1056(d) provides for alienation of pension plan benefits in accordance with a QDRO, and gives plan admin istrators or courts eighteen months to determine whether a DRO qualifies as a QDRO, directing the plan admin istrator to segregate the amounts in question during that period. See 29 U.S.C. §1056(d)(3)(H). ⁴

In this case, Northwest determined, within eighteen months of the date the first payment would have been made under the DRO, that the DRO, as modified, was a QDRO. Thus, Mary satisfied ERISA's requirements for alienating pension plan proceeds. Requiring Mary to satisfy state law perfection requirements would conflict with ERISA's policy of ensuring that plan sponsors are subject to a uniform body of law. See Egelhoff v. Egelhoff, 532 U.S. 141, 148 (2001) (principal goal of ERISA is to establish uniform scheme with standard procedures; uniformity is impossible if plans are subject to different legal obligations in different states); Minnesota Chapter of Associated Builders & Contractors, Inc. v. Minn. Dep't of Pub. Safety, 267 F.3d 807, 810-11 (8th Cir. 2001) (ERISA's goal is to minimize admin istrative and financial burden of complying with conflicting state directives, and to prevent potential for conflicts in substantive law requiring tailoring of plans to peculiarities of multiple local laws), cert. denied, 122 S.Ct. 2292 (2002); Compagnoni [ 2001-2 USTC ¶50,626], 162 F.Supp.2d at 710 (imposing state law perfection requirements would create choice-of-law difficulties, frustrating objective of ensuring uniformity of ERISA admin istration).

We further conclude that Mary's interest in the plan proceeds relates back to the date of the initial DRO. See Nelson v. Ramette, 322 F.3d 541, 544 (8th Cir. 2003) ("A person awarded a lump-sum distribution from an ERISA plan pursuant to a divorce decree has a direct interest in plan funds while the plan reviews the DRO to determine whether it constitutes a QDRO."); Gendreau v. Gendreau, 122 F.3d 815, 818 (9th Cir. 1997) (wife's interest in pension plans was established at time of divorce decree; husband's interest was concomitantly limited at that time, or subject to being limited at any time wife obtained QDRO, much like property owner's rights may be subject to divestment by contingent interest); Compagnoni [ 2001-2 USTC ¶50,626], 162 F.Supp.2d at 711-12 (wife had possessory interest in benefits once first DRO had been entered although interest was unenforceable until QDRO was obtained); cf. 29 U.S.C. §1056(d)(3)(H) (any determination made within eighteen months of the order, or modification of the order, will be applied prospectively). Mary had eighteen months pursuant to section 1056(d)(3)(H)(ii) to qualify her DRO, and "[i]f within the 18-month period ... the order (or modification thereof) is determined to be a qualified domestic relations order, the plan admin istrator shall pay the segregated amounts ... to the person...." (Emphasis added). The plan admin istrator, by plan procedures, cannot shorten this eighteen month qualification period.

Because the DRO preceded the IRS's notice of tax lien, and Northwest determined within the requisite eighteen months that the DRO qualified as a QDRO, see 29 U.S.C. §1056(d)(3)(H)(v) (computation of time), Mary was a judgment lien creditor with priority as of July 1995, when the DRO was entered. She is thus entitled to the plan proceeds free of the IRS lien.

One other related issue should be addressed regarding the finality of the July 1995 Texas DRO. The Texas judge signed an order prepared and approved by the parties which stated:

The Court retains jurisdiction to amend this Order so that it will constitute a qualified domestic relations order under the Plan even though all other matters incident to this action or proceeding have been fully and finally adjudicated. If the Plan determines at any time that changes in the law, the admin istration of the Plan, or any other circumstances make it impossible to calculate the portion of a distribution awarded to Alternative Payee by this Order and so notifies the parties, either or both parties shall immediately petition the Court for reformation of this Order.

The intent of the July 1995 DRO, to qualify under the applicable Northwest plans, is clear. The parties and the court recognized the order may need changes to qualify. Northwest did require certain changes to qualify. Mary asked the Texas court twice to reform the DRO before Northwest accepted the DRO as a QDRO. This process is anticipated by the law, which provides for segregation of the funds by the plan admin istrator for up to eighteen months to qualify the DRO as a QDRO. See 29 U.S.C. §1056(d)(3)(H). Our holdings in Nelson and here, recognizing the DRO establishes a "direct interest in plan funds," and upon qualification, the interest relates back to the initial DRO date, further the statutory scheme to protect employee retirement benefits for beneficiaries of the plans, including divorced spouses.

As a legal matter, when the DRO issued, Francis was no longer the owner of 90 percent of the Northwest ERISA plans. Mary was awarded this share as part of the divorce. Mary, the property, and the amount were identified clearly, only the details of qualification remained to transform the DRO into a QDRO.



III. CONCLUSION

Since we conclude Mary was a judgment lien creditor, we do not address whether she was also a purchaser under section 6323(a). Accordingly, we reverse the summary judgment with regard to Mary Taylor, and remand with instructions to enter judgment in conformity with this opinion.

Dissenting Opinion

LOKEN, Circuit Judge, dissenting: The lien priority issue in this case involves the interplay of two federal statutory regimes, ERISA and the Internal Revenue Code. The Code provides that a judgment lien, when perfected, has priority over an existing federal tax lien unless notice of the tax lien has been filed in accordance with state law. See 26 U.S.C. §6323(a), (f). ERISA provides that a former spouse may acquire an enforceable right to a participant's pension plan benefits pursuant to the provisions of a "qualified domestic relations order" (QDRO). ⁵ Here, the IRS more or less concedes that the Texas divorce court's domestic relations order granted Mary Taylor a judgment lien on Francis Taylor's ERISA plan benefits. The issue, then, is whether her lien on those plan benefits is entitled to priority over the IRS's tax liens under §6323(a).

Federal law governs whether a judgment lien created by state law is perfected for purposes of §6323(a). The federal rule is that a lien is perfected, or choate, "when the identity of the lienor, the property subject to the lien, and the amount of the lien are established." United States v. Pioneer Am. Ins. Co. [ 63-2 USTC ¶9532], 374 U.S. 84, 89 (1963) (quotation omitted). A Treasury Regulation now codifies this principle. 26 C.F.R. §301.6323(h)-1(g). Though Mary Taylor's judgment lien was created by state law, ERISA provides that, to be perfected --that is, enforceable against Francis Taylor's plan benefits --the state court order must be a QDRO. And Congress's definition of a QDRO incorporates the substance of the federal law definition of a perfected lien: a domestic relations order qualifies as a QDRO if it clearly specifies the plan participant, the alternative payee (the lienholder), each plan to which the order applies, the amount or percentage of the benefits to be paid to the alternate payee, and the number of payments or period to which the order applies. 26 U.S.C. §414(p)(2).

Given this overlap between the judicially developed federal rule of perfection, and the statutory elements of a QDRO, I agree with the court that a QDRO is a perfected judgment lien for purposes of the priority rules of §6323(a). Like the court, I reject the IRS's argument that, to be perfected under §6323(a), the judgment lien created by a QDRO must also satisfy any levy or seizure requirements generally applicable to liens created by the laws of that State. Congress codified the perfection requirements for a QDRO in another section of the Internal Revenue Code, and ERISA would preempt any local law that interfered with its anti-alienation provisions. In the absence of a Treasury Regulation specifically addressing the relationship between Code §§6323(a) and 414(p)(2), I decline to apply a general reference to local law in a pre-existing Treasury Regulation, 26 C.F.R. §301.6323(h)-l(g), in a manner inconsistent with the QDRO perfection provisions of ERISA.

There remains the question whether Mary's judgment lien was perfected (acquired QDRO status) prior to the IRS filing notice of its tax liens in Dallas County , Texas , in late December 1995. Mary's judgment lien arose on July 28, 1995 , when the Texas divorce court entered a domestic relations order awarding her a 90% interest in Francis Taylor's ERISA plan benefits. Northwest Airlines as plan admin istrator determined that amended versions of that order qualified as QDROs, long after the tax liens were filed in December 1995. The court nonetheless concludes that Mary's QDRO-perfected lien has priority because "Mary's interest in the plan proceeds relates back to the date of the initial [divorce court order]." Ante at 7. I disagree.

ERISA provides that, when a domestic relations order is submitted for a QDRO determination, the plan admin istrator must make the determination "within a reasonable period after receipt of such order," 26 U.S.C. §414(p)(6)(A)(ii), and must segregate plan benefits that would be payable to the alternate payee (here, Mary Taylor) for up to eighteen months while it makes that determination, §414(p)(7). See Hogan v. Raytheon, Co., 302 F.3d 854, 857 (8th Cir. 2002). If the admin istrator determines within the eighteen-month approval period that the submitted order or a "modification" of that order is a QDRO, it must pay the segregated amounts to the alternate payee. 26 U.S.C. §414(p)(7)(B); see Trustees of the Dirs. Guild of Am.-Producer Pension Benefits Plans v. Tise, 255 F.3d 661, 2000 U.S. App. LEXIS 38507, at **16 (9th Cir. 2000). In that situation, although the issue is not free from doubt, I do not take issue with the court's conclusion that QDRO status should "relate back" to the entry of the initial domestic relations order for purposes of §6323(a) lien priority because ERISA has conferred a direct interest in the segregated plan funds at that earlier date. ⁶ Cf. Nelson v. Ramette, 322 F.3d 541, 544 (8th Cir. 2003) (for bankruptcy purposes, alternative payee acquires QDRO interest in plan funds on the date the domestic relations order is first entered); Gendreau v. Gendreau, 122 F.3d 815, 818 (9th Cir. 1997) (same), cert. denied, 523 U.S. 1005 (1998).

But assuming the court has adopted a correct relation-back principle, it has misapplied that principle to the facts of this case. Unlike the plan admin istrator in Cooper Indus., Inc. v. Compagnoni [ 2001-2 USTC ¶50,626], 162 F.Supp.2d 702 (S.D. Tex. 2001), Northwest Airlines did not invite Mary and Francis Taylor to submit a modified domestic relations order to cure defects in the July 28, 1995, order. Rather, Northwest Airlines as plan admin istrator issued three letters between October 16 and November 3, 1995, initially determining that the July 28, 1995, domestic relations order did not qualify as a QDRO with respect to any of the three plans, and advising the Taylors that these initial determinations would become final at the conclusion of the sixty-day appeal period provided for in the three plans. When the Taylors did not appeal, Northwest Airlines issued three final negative determinations. At that point, ERISA expressly provides that Mary as alternate payee had no further interest in any segregated plan benefits. 26 U.S.C. §414(p)(7)(C). Consistent with the statute, Northwest Airlines then paid the segregated benefits for the months from July 1995 to January 1996 to Francis Taylor. At that point, though the eighteen-month period had not expired, Mary's claim to a perfected judgment lien as of July 28, 1995 , was finally rejected. ⁷

As the court notes, the Texas court entered a modified domestic relations order on January 8, 1996 , after the plan admin istrator's final negative determinations. The Taylors submitted that order to Northwest Airlines as plan admin istrator. Northwest Airlines again issued three notices that it had received a domestic relations order (one notice for each plan), which is the first step in the QDRO-determination process. See 26 U.S.C. §414(p)(6)(A)(i). In June 1996, Northwest Airlines finally determined that the January 8, 1996, order qualified as a QDRO with respect to Francis Taylor's savings plan and stock plan benefits. However, on April 15, 1996 , Northwest Airlines initially determined that the January 8 order did not qualify as a QDRO with respect to Francis Taylor's retirement plan benefits. Again, the Taylors failed to appeal within the plan's sixty-day appeal period, and that determination became final. Again, after the appeal period expired, the Taylors submitted another modified domestic relations order, entered by the Texas court on August 29, 1996 , which Northwest Airlines finally determined to be a QDRO on January 7, 1997 .

On this undisputed record, I conclude that the plan admin istrator's QDRO determinations did not grant Mary Taylor a perfected judgment lien interest in Francis Taylor's plan benefits prior to January 8, 1996 . As the IRS properly filed notice of its liens in late December 1995, the federal tax liens have priority over Mary's judgment lien under §6323(a). Accordingly, I respectfully dissent.

¹ Employee Retirement Income Security Act of 1974 (ERISA), as amended, 29 U.S.C. §§1001-1461 (2000).

² 26 U.S.C. §6323(a) states: "Purchasers, holders of security interests, mechanic's lienors, and judgment lien creditors. The lien imposed by section 6321 shall not be valid as against any purchaser, holder of a security interest, mechanic's lienor, or judgment lien creditor until notice thereof which meets the requirements of subsection (f) has been filed by the Secretary [of the Treasury]."

³ The IRS has authority to proceed against Francis's interest in any ERISA plan benefits and "is not constrained by ERISA's anti-alienation provision." United States v. McIntyre [ 2000-2 USTC ¶50,613], 222 F.3d 655, 660 (9th Cir. 2000). After the DRO, Francis effectively no longer has any ownership interest in Mary's 90 percent share of the Northwest ERISA plans.

⁴ Pension benefit plans are distinguishable from welfare benefit plans, which do not provide an enforcement mechanism. See Mackey v. Lanier Collection Agency & Serv., Inc., 486 U.S. 825, 831-33 (1988); Cooper Indus., Inc. v. Compagnoni [ 2001-2 USTC ¶50,626], 162 F.Supp.2d 702, 709-10 (S.D. Tex. 2001).

⁵ Significantly, the QDRO provisions of ERISA appear in both the Internal Revenue Code and the Title 29 labor laws. See 29 U.S.C. §1056(d); 26 U.S.C. §414(p). I will cite to the Code provisions in this dissent.

⁶ My doubt stems from the fact that the initial domestic relations order, if seriously deficient, may not satisfy the QDRO requirements in §414(p)(2) that correspond to the elements that make a judgment lien choate under federal common law. Here, for example, the July 28, 1995, order did not identify to which of the three Northwest Airlines plans it applied and thus did not clearly define the 90% interest that Mary was awarded. In such a case, for purposes of priority against a federal tax lien, I am not sure whether QDRO status should only relate back to the date the deficient domestic relations order was modified, or all the way back to the entry of the initial, non-choate domestic relations order. I need not resolve that question here.

⁷ The court has no support for its assertion that "[t]he plan admin istrator, by plan procedures, cannot shorten [the] eighteen month qualification period." Ante at 7. The assertion is contrary to the plain language of the statute, which requires a QDRO determination "within a reasonable period," provides that affected benefits must be segregated while the determination is made, but places an eighteen-month limit on the plan admin istrator's duty to segregate. The assertion is also contrary to the Department of Labor's interpretation of the QDRO provisions: "the `18-month period' during which a plan admin istrator must preserve the `segregated' amounts ... is not the measure of the reasonable period for determining the qualified status of an order and in most cases would be an unreasonably long period of time to take to review an order." U.S. Dep't of Labor, Employee Benefits Sec. Admin., QDROs --The Division of Pensions Through Qualified Domestic Relations Orders, Question 2-12 at p.19, available online at <http://www.dol.gov/ebsa/Publications/qdros.html>.

 

[2002-2 USTC ¶50,493] Linda Carter, Plaintiff v. United States of America , Defendant

U.S. District Court, West. Dist. Tenn. , West. Div., 01-2304 G/A, 5/20/2002

[Code Secs. 6323 and 7426 ]

Civil suit: Liens and levies: Priority: Judgment lien creditor: Divorce: State law: Tennessee: Perfected interest.--The government's levy on a mutual fund account formerly held by an individual's bankrupt ex-husband was wrongful. She qualified as a judgment lien creditor and was awarded the fair market value of the account immediately prior to the levy, plus interest accruing from the date of liquidation. She was not required to register her divorce judgment to attach it to the account. Under state ( Tennessee ) law, all marital property is eligible for divestiture in satisfaction of a judgment. No formal execution was required, as the account was liable at law. Her interest was perfected upon issuance of the divorce agreement.

[Code Sec. 7433 ]

Civil suit: Liens and levies: Damages: Interest: Fair market value: Consequential damages: Exhaustion of admin istrative remedies.--The government's levy on a mutual fund account formerly held by an individual's bankrupt ex-husband was wrongful. However, she was not entitled to consequential damages because she failed to show that she exhausted admin istrative remedies. Nor did she prove the IRS's disregard for the tax code or that she suffered economic damages proximately caused by the IRS's actions. Moreover, she failed to mitigate her alleged damages.

ORDER GRANTING IN PART AND DENYING IN PART PLAINTIFF'S MOTION FOR SUMMARY JUDGMENT AND DENYING DEFENDANT'S MOTION FOR SUMMARY JUDGMENT

GIBBONS, District Judge:

Before the court are plaintiff's motion for summary judgment, filed on March 12, 2002 , and defendant's motion for summary judgment, filed on March 18, 2002 . Based on the following discussion, the former motion is granted in part and denied in part, and the latter motion is denied.

This case arises from a tax assessment against Todd F. Brooks, the former husband of plaintiff Linda Carter. (1st Carter Aff. ¶3.) On June 19, 1995 , while Brooks and Carter were married, the Internal Revenue Service ("IRS") assessed $516,924.15 in unpaid federal income taxes against Brooks--$229,434.45 for 1992 and $287,489.70 for 1993. (Answers to First Set of Pl.'s Interrog. at 5.) During their marriage, including 1992 and 1993, Carter and Brooks filed separate tax returns. Id. at 10-11.

Brooks initiated divorce proceedings in April or May 1996. Id. at 13. Carter learned of Brooks' federal tax liability during those proceedings. (Carter Dep. at 12-13.) On August 6, 1997 , the Circuit Court for Shelby County issued a judgment divorcing Carter and Brooks. Brooks v. Carter, No. 152550-3 R.D., at 1 (Circuit Court of Tennessee Aug. 6, 1997) (Final Judgment of Divorce). The judgment stated, in part, that ITT Hartford Mutual Fund Account No. 68901 ("Account No. 68901"), with a then-existing value of $247,045.04, "shall be the sole and separate property of [Carter], and [Brooks] is divested of all rights to ownership of said property." Id. at 6. The divorce judgment also stated that "any liability and/or debt that [Brooks] owes to the Internal Revenue Service is his separate property." Id. at 8. The judgment has not been filed with the Shelby County Register of Deeds. (Carter Dep. at 31-32.)

On March 30, 1998 , the IRS filed a Notice of Federal Tax Lien against Brooks with the Shelby County Register of Deeds. (Answers to First Set of Pl.'s Interrog. at 10.) The lien, amounting to $516,924.15, consisted of Brooks' federal income tax liability for 1992 and 1993, plus statutory additions. Id. at 5; Def.'s Mot. for Summ. J. Ex. 3. Carter did not become aware of the lien until 1999 or 2000. (1st Carter Aff. ¶5.)

On June 19, 1998 , the IRS served a levy on Hartford Life Insurance Company ("Hartford Life"), attaching all property or rights to property belonging to Brooks. (Answers to First Set of Pl.'s Interrog. No. 7.) By letter dated July 9, 1998 , Hartford Life advised the IRS that the levy, which lacked the required approval of the IRS District Director, would not be honored. (Def.'s Mot. for Summ. J. Ex. 7.) On June 16, 1999 , the IRS served Hartford Life with a levy which reflected the approval of the District Director. Id. Ex. 8. In response, on August 4, 1999 , Hartford Life issued two checks to the IRS totaling $527,261.00, including $350,403.12 from Account No. 68901. (Answers to First Set of Pl.'s Interrog. No. 6; Def.'s Mot. for Summ. J. Ex. 10.) The $350,403.12 consisted of the then-existing value of Account No. 68901, $390,958.24, less surrender charges of $1,621.44 and a tax withholding of $38,933.68. (Def.'s Mot. for Summ. J. Ex. 10.)

Carter filed the complaint in this case on April 18, 2001 . The sole claim advanced by Carter is that defendant United States of America ("the government") wrongfully levied upon and seized the contents of Account No. 68901. Pursuant to 28 U.S.C. §7426, Carter seeks a judgment in the amount of $390,958.24, plus interest and compensatory damages.

Both parties have filed motions for summary judgment. Carter argues in her motion that the government's levy was wrongful for two reasons. First, she contends that it was placed on property in which Brooks had no interest. Second, Carter claims that she qualifies as a judgment lien creditor pursuant to 26 U.S.C. §6323, making her interest in Account No. 68901 superior to the government's lien. In its motion for summary judgment, the government asserts that its levy was not wrongful because its lien on Account No. 68901 is superior to Carter's interest. Alternatively, in the event that the levy was wrongful, the government argues that Carter is only entitled to recover $350,403.12, the amount it received from Account No. 68901.

Under Federal Rule of Civil Procedure 56(c), summary judgment is proper "if the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to judgment as a matter of law." Fed. R. Civ. P. 56(c); Celotex Corp. v. Catrett, 477 U.S. 317, 322 (1986). So long as the movant has met its initial burden of "demonstrat[ing] the absence of a genuine issue of material fact," Celotex, 477 U.S. at 323, and the nonmoving party is unable to make such a showing, summary judgment is appropriate, Emmons v. McLaughlin, 874 F.2d 351, 353 (6th Cir. 1989). In considering a motion for summary judgment, "the evidence as well as all inferences drawn therefrom must be read in a light most favorable to the party opposing the motion." Kochins v. Linden-Alimak, Inc., 799 F.2d 1128, 1133 (6th Cir. 1986); Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 587 (1986).

When confronted with a properly-supported motion for summary judgment, the nonmoving party "must set forth specific facts showing that there is a genuine issue for trial." Fed. R. Civ. P. 56(e); Abeita v. TransAmerica Mailings, Inc., 159 F.3d 246, 250 (6th Cir. 1998). A genuine issue of material fact exists for trial "if the evidence [presented by the nonmoving party] is such that a reasonable jury could return a verdict for the nonmoving party." Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248 (1986). In essence, the inquiry 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." Id. at 251-52.

Section 6321 of the Internal Revenue Code ("the Code") provides:

If any person liable to pay any tax neglects or refuses to pay the same after demand, the amount . . . shall be a lien in favor of the United States upon all property and rights to property, whether real or personal, belonging to such person.

26 U.S.C. §6321. The lien generally arises when an assessment is made and continues until the taxpayer's liability "is satisfied or becomes unenforceable by reason of lapse of time." Id. §6322. Since a federal tax lien is not self-executing, the Code provides the government with two options for the collection of unpaid taxes. The first option, irrelevant to the matter at hand, is a lien-foreclosure suit. 26 U.S.C. §7403(a). The second option is the admin istrative levy, a provisional remedy which typically "does not require any judicial intervention." Id. §6331(a); United States v. Rodgers [83-1 USTC ¶9374] , 461 U.S. 677, 680-82 (1983).

Elaborating on the second option, in the event that a taxpayer's property is held by another, it is customary to serve notice of the levy upon the custodian. 26 U.S.C. §6332(a). Such notice gives the IRS the right to all property levied upon and creates a custodial relationship between the person holding the property and the IRS, bringing the property into the constructive possession of the government. United States v. Nat'l Bank of Commerce [85-2 USTC ¶9482] , 472 U.S. 713, 720 (1985). The levy, however, does not determine whether the government's rights to the seized property are superior to those of other claimants. Id. at 721. Its purpose is to allow the government to promptly secure revenues. Phillips v. Commissioner [2 USTC ¶743] , 283 U.S. 589, 596 (1931).

Carter brings her wrongful levy claim pursuant to 28 U.S.C. §7426, which states:

(a) Actions permitted.--

(1) Wrongful levy.--If a levy has been made on property or property has been sold pursuant to a levy, any person (other than the person against whom is assessed the tax out of which such levy arose) who claims an interest in or lien on such property and that such property was wrongfully levied upon may bring a civil action against the United States.

. . .

(c) Validity of assessment.--For the purposes of an adjudication under this section, the assessment of tax upon which the interest or lien of the United States is based shall be conclusively presumed to be valid.

Id. The Sixth Circuit has stated that a levy is wrongful if:

(1) it is placed on property exempt under §6334; (2) it is placed on property in which the delinquent taxpayer had no interest [at the time the lien arose or thereafter]; (3) it is invalid under §§6323 or 6324(a)(2) or (b); or (4) the plaintiff's interest in the property is senior to the federal tax lien and will be destroyed by the levy.

McGinness v. United State of America [96-2 USTC ¶50,434] , 90 F.3d 143, 147 (6th Cir. 1996) (citing 26 C.F.R. §301.7426-1(b)). Pursuant to §6323, a federal tax lien is not valid against a judgment lien creditor until notice of that lien has been properly filed. 26 U.S.C. §6323. ¹

Carter advances two bases for her assertion that the government's levy was wrongful. First, Carter claims that the levy was placed on property in which Brooks had no interest. Second, she contends that pursuant to §6323, she qualified as a judgment lien creditor before the government filed notice of its tax lien.

Carter's first argument misconstrues the law. Pursuant to 26 C.F.R. §301.7426-1(b), the critical consideration is whether the taxpayer had an interest in the levied property at the time the tax lien arose or thereafter, not whether the interest existed at the time the levy was issued. ² Id. Therefore, the court rejects Carter's first argument that the government's levy was wrongful.

Carter's second argument requires a more elaborate analysis. In adjudicating the priority of competing liens, federal common law prescribes that "the first in time is the first in right." United States v. City of New Britain [54-1 USTC ¶9191] , 347 U.S. 81, 85 (1954). However, this principle is modified by §6323, under which a federal tax lien has priority over a competing judgment lien only if the IRS serves proper notice of its lien before the judgment lien is perfected and attached. United States v. Estate of Romani [98-1 USTC ¶50,368 ; 98-1 USTC ¶60,311 ], 523 U.S. 517, 524 (1998).

The court is faced with the issue of whether, by virtue of the divorce judgment, Carter qualifies as a perfected and attached judgment lien creditor of Account No. 68901. Although the government's lien on Account No. 68901 arose on June 19, 1995 , notice of the lien was not filed until March 30, 1998 . (Answers to First Set of Pl.'s Interrog. at 5, 10.) The record reflects that on August 6, 1997 , Carter obtained an interest in Account No. 68901 upon the entry of the divorce judgment but took no further action to perfect this interest. ³ (2nd Carter Aff. ¶5.) If the divorce judgment made Carter a perfected and attached judgment lien creditor of Account No. 68901, the government's levy was wrongful pursuant to §6323 because the judgment was entered before the government filed notice of its tax lien. Otherwise, the government's levy was not wrongful.

Regulations promulgated by the IRS define "judgment lien creditor" as follows:

The term "judgment lien creditor" means a person who has obtained a valid judgment, in a court of record and of competent jurisdiction, for the recovery of specifically designated property or for a certain sum of money. . . . A judgment lien is not perfected until the identity of the lienor, the property subject to the lien, and the amount of the lien are established. . . . If under local law levy or seizure is necessary before a judgment lien becomes effective against third parties acquiring liens on personal property, then a judgment lien under such local law is not perfected until levy or seizure of the personal property involved.

26 C.F.R. 301.6323(h)-1(g). To create a state lien, a judgment creditor must first do what is required under state law to cause a judgment to attach to property. Redondo Constr. Co. v. United States [98-2 USTC ¶50,841] , 157 F.3d 1060, 1063 n.4 (6th Cir. 1998) (citing United States v. Pioneer Am. Ins. Co. [63-2 USTC ¶9532] , 374 U.S. 84, 89 (1963); City of New Britain, 347 U.S. at 84; S&S Gasket Co. v. United States [81-1 USTC ¶9115] , 635 F.2d 568, 570 (6th Cir. 1980)). However, federal law governs the issue of when a state-created lien is considered perfected or "choate" such that it will defeat a federal tax lien. Id.

Carter qualifies as a judgment lien creditor. A Final Judgment of Divorce was entered by the Circuit Court of Tennessee for the Thirteenth Judicial District at Memphis on August 6, 1997 . Brooks v. Carter, No. 152550-3 R.D., at 1 (Circuit Court of Tennessee Aug. 6, 1997) (Final Judgment of Divorce). The authority to decree divorce is vested in both the circuit and chancery courts of Tennessee . Tenn. Code Ann. §36-4-105. The judgment declared Account No. 68901, specifically designated personal property, to be "the sole and separate property of [Carter], and [Brooks] relinquishes and is divested of all rights to ownership. . . ." Brooks v. Carter, No. 152550-3 R.D., at 8 (Circuit Court of Tennessee Aug. 6, 1997) (Final Judgment of Divorce).

The government asserts, however, that Carter did not properly attach the judgment of divorce to Account No. 68901. It contends that Carter failed to register the judgment in Shelby County , as required by Tenn. Code Ann. §25-5-103. Carter asserts that §25-5-103 is inapplicable and that registration is not required to enforce the judgment's division of personal property.

Section 25-5-103 of the Tennessee Code states:

An execution thereon shall not bind the debtor's legal or equitable interest in stock, choses in action, or other personal property, not liable at law, unless a similar abstract or memorandum is registered within sixty (60) days from rendition of the judgment or decree, in the county where the debtor resides, if the debtor lives in this state, or, if not, then in the county in which the property is located.

Tenn. Code Ann. §25-5-103. ⁴ Execution is a process by which the sheriff or another officer satisfies a judgment by levying upon and selling the debtor's property. Alexander E. Conlyn, Enforcing Money Judgments in Tennessee , 4 Mem. St. Law Rev. 65, 67 (1973); Black's Law Dictionary 568 (6th ed. 1990). The process begins with a writ of execution, the typical vehicle for enforcing money judgments, which is an order directing an officer to levy upon and sell the judgment debtor's property identified in the writ. Tenn. Code Ann. §§26-1-103 to 26-1-104. A levy of execution is the officer's act of appropriating the debtor's property for satisfaction of the debt, resulting in the divestiture of the judgment debtor's title. Keep Fresh Filters, Inc. v. Reguli, 888 S.W.2d 437, 443 (Tenn. Ct. App. 1994).

Section 25-5-103 is inapposite in this case because a formal execution has not occurred. There is no evidence in the record indicating that a writ of execution was issued in connection with the divorce judgment. It appears that instead of transferring title to Account No. 68901 by means of execution, the circuit court used its statutory authority to award title to Carter in the divorce judgment. Tenn. Code Ann. §36-4-121(a); Thompson v. Thompson, 797 S.W.2d 599, 604 (Tenn. Ct. App. 1990). Therefore, Carter was not bound by the registration requirement in §25-5-103.

Assuming, arguendo, that the divorce judgment qualifies as an execution, an issue arises as to whether Account No. 68901 is property "liable at law." Two cases have addressed the meaning of this phrase. In Smith v. United States Ins. Co., the Supreme Court of Tennessee found that a corporation's choses in action were "liable at law" because §4765 of Shannon's Code provided that "an execution against a corporation may be levied of its choses in action as well as on goods and chattles," modifying the common law rule that an execution did not impose a lien upon a debtor's choses in action. 150 S.W. 97, 99 ( Tenn. 1912). More recently, a bankruptcy court held that choses in action are "liable at law" under Tenn. Code Ann. §26-2-202, which states that "[a]ll property, debts and effects of the defendant in the possession of the garnishee, or under his control, shall be liable to satisfy the plaintiff's judgment." Rob by's Pancake House of Florida v. R.K. Walker, 24 B.R. 989, 998 n.11 (Bankr. W.D. Tenn. 1982). The court reasoned that "property" encompassed choses in action. Id.

In light of these cases, the court finds that Tenn. Code Ann. §36-4-121(a) makes Account No. 68901 "liable at law." Section 36-4-121 states:

(a)(1) In all actions for divorce or legal separation, the court having jurisdiction thereof may, upon request of either party, and prior to any determination as to whether it is appropriate to order the support and maintenance of one (1) party by the other, equitably divide, distribute or assign the marital property between the parties without regard to marital fault in proportions as the court deems just.

. . .

(3) To this end, the court shall be empowered to effectuate its decree by divesting and reinvesting title to such property and, where deemed necessary, to order a sale of such property and to order the proceeds divided between the parties.

Tenn. Code Ann. §§36-4-121(a)(1), (3). To the extent that a divorce judgment qualifies as an execution for the purposes of §25-5-103, §36-4-121(a) makes all marital property, ⁵ including Account No. 68901, "liable at law" by explicitly identifying such property as eligible for divestiture in satisfaction of a judgment. The registration requirement in §25-5-103 appears to apply only to personal property which is not made expressly subject to divestiture by a separate provision of law. Thus, Carter was not required to register the divorce judgment to attach it to Account No. 68901.

The government also claims that Carter is not a perfected judgment lien creditor. It acknowledges that the divorce judgment reported the value of Account No. 68901 as $247,048.04. Brooks v. Carter, No. 152550-3 R.D., at 6 (Circuit Court of Tennessee Aug. 6, 1997) (Final Judgment of Divorce). Nevertheless, the government contends that since Account No. 68901 was comprised of mutual fund shares which fluctuated in value, it was impossible for the court to "establish" the value of the lien, as required by 26 C.F.R. 301.6323(h)-1(g). Carter contends that there is no legal support for the government's position, which, she argues, would have the practical effect of preventing anyone from obtaining a judgment lien under 26 C.F.R. 301.6323(h)-1(g) on personal property other than money.

Although sparse, there is some legal guidance regarding the conditions under which the amount of a lien is "established." The Sixth Circuit has held that this element of perfection is satisfied by a judgment in a court of record for a definite amount of money. S&S Gasket [81-1 USTC ¶9115] , 635 F.2d at 571. It has also indicated, in dictum, that a lien is perfected when "the underlying amount is fixed," "although the total balance of the lien may fluctuate." Hensley v. Harbin [99-2 USTC ¶50,961] , 196 F.3d 613, 616 (6th Cir. 1999). The Tenth Circuit determined that a bank possessed a perfected lien on a customer's accounts, despite their fluctuation in value, because the amount owed was a definite amount plus interest at a set rate and the bank monitored the accounts to assure the presence of funds which covered the obligation. Jefferson Bank and Trust v. United States [90-1 USTC ¶50,078] , 894 F.2d 1241, 1244 (10th Cir. 1990).

Applying this guidance to the case at hand, the court finds Carter's position more persuasive. The divorce judgment adequately identified Account No. 68901 and specified its value as of August 6, 1997 . Brooks v. Carter, No. 152550-3 R.D., at 6 (Circuit Court of Tennessee Aug. 6, 1997) (Final Judgment of Divorce). The foregoing cases indicate that perfection of a lien is not inhibited by fluctuation in the lien's value so long as the value can be easily calculated from a fixed underlying amount. The value of Account No. 68901, until it was levied upon by the government, was easily determined by multiplying the total number of mutual fund shares in Account No. 68901 by the then-existing value of each share, which was fixed by a well-defined market. Moreover, the government's position is contrary to the plain language of 26 C.F.R. 301.6323(h)-1(g), which clearly contemplates judgment liens on personal property other than money, despite the fact that such property often fluctuates in value. Therefore, in addition to identifying the lienor and property subject to the lien, the divorce judgment "established" the value of the lien and, thus, perfected it for the purposes of 26 C.F.R. 301.6323(h)-1(g).

To summarize, the court finds that pursuant to 26 C.F.R. 301.6323(h)-1(g), Carter is a judgment lien creditor of Account No. 68901. Moreover, Carter's interest in Account No. 68901 became perfected and attached upon the issuance of the divorce judgment on August 6, 1997. Consequently, pursuant to 26 C.F.R. §301.7426-1(b) and 26 U.S.C. §6323, the government's levy on Account No. 68901 was wrongful. ⁶

The court must now determine the relief to which Carter is entitled for the government's wrongful levy. Carter contends that pursuant to 26 U.S.C. §7426(g), her judgment should include the amount of $390,958.24 plus interest. In addition, she seeks consequential damages amounting to the costs of this action, including attorney's fees. The government claims that Carter is only entitled to an award of $350,403.24, the amount collected by the IRS from Account No. 68901, plus interest. The government also avers that Carter has not satisfied the statutory prerequisites for the recovery of consequential damages.

The first issue concerning relief is whether the judgment will include the value of Account No. 68901 on August 4, 1999 , $390,958.24, or the portion thereof transferred to the government by Hartford Life, $350,403.24. The only statutory guidance on this matter is 26 U.S.C. §7426(b), which states:

(b) Adjudication.--The district court shall have jurisdiction to grant only such of the following forms of relief as may be appropriate in the circumstances:

. . .

(2) Recovery of Property.--If the court determines that such property has been wrongfully levied upon, the court may--

(A) order the return of specific property if the United States is in possession of such property;

(B) grant a judgment for the amount of money levied upon; or

(C) if such property was sold, grant a judgment for an amount not exceeding the greater of--

(i) the amount received by the United States from the sale of such property, or

(ii) the fair market value of such property immediately before the levy.

Id.

Subsection (b)(2)(C) sets forth the remedies available to Carter. The record indicates that after receiving the government's second levy, Hartford Life sold the mutual fund shares in Account No. 68901 and transferred a portion of the proceeds to the government. (Answers to First Set of Pl.'s Interrog. No. 6; Def.'s Mot. for Summ. J. Ex. 8, 10.) Of the three options, subsection (b)(2)(C) is the only one which addresses the situation in which property is sold to satisfy an IRS tax levy. ⁷ Consequently, the court must award relief in accordance with this subsection.

On this issue, the court finds Carter's position more persuasive. Pursuant to subsection (b)(2)(C), the court has discretion over the award, bounded only by the requirement that the amount not exceed the greater of the funds received by the government, $350,403.12, or the fair market value of Account No. 68901 immediately before the levy, $390,958.24. In determining an appropriate figure, the court is guided by §7426(b)(2), which clearly evinces an intent to return a person whose property has been wrongfully levied upon to the financial position occupied before the levy. If adopted, the government's position would render Carter $40,555.12 poorer than she was before the wrongful levy because she presumably cannot recover the amounts retained by Hartford Life for the payment of taxes and surrender charges. Therefore, Carter's award will include the amount of $390,958.24.

The second matter concerning relief is interest. The court is permitted to award interest on the $390,958.24 in accordance with 26 U.S.C. §7426(g), which states:

(g) Interest.--Interest shall be allowed at the overpayment rate established under section 6621--

. . .

(2) in the case of a judgment pursuant to subsection (b)(2)(C), from the date of the sale of the property wrongfully levied upon to the date of the payment of such judgment.

Id. Section 6621 states that the overpayment rate shall be the sum of "(A) the federal short-term rate determined under subsection (b), plus (B) 2 percentage points." 26 U.S.C. §6621. Therefore, in addition to $390,958.24, Carter is entitled to interest calculated pursuant to §6621, accruing from the date on which Hartford Life sold the mutual fund shares in Account No. 68901 until the date on which the government satisfies the forthcoming judgment of this court.

The final matter concerning relief is the recovery of consequential damages. Carter claims that she is entitled to such damages pursuant to 26 U.S.C. §7426(h), which states in pertinent part:

(h) Recovery of damages permitted in certain cases.--

(1) In general.--Notwithstanding subsection (b), if, in any action brought under this section, there is a finding that any officer or employee of the Internal Revenue Service recklessly or intentionally, or by reason of negligence, disregarded any provision of this title the defendant shall be liable to the plaintiff in an amount equal to the lesser of $1,000,000 ($100,000 in the case of negligence) or the sum of--

(A) actual, direct economic damages sustained by the plaintiff as a proximate result of the reckless or intentional or negligent disregard of any provision of this title by the officer or employee (reduced by any amount of such damages awarded under subsection (b)); and

(B) the costs of this action.

(2) Requirement that admin istrative remedies be exhausted; mitigation; period.--The rules of section 7433(d) shall apply for the purposes of this subsection.

Id. Section 7433(d) states:

(d) Limitations.--

(1) Requirement that admin istrative remedies be exhausted.--A judgment for damages shall not be awarded under subsection (b) unless the court determines that the plaintiff has exhausted the admin istrative remedies available to such plaintiff within the Internal Revenue Service.

(2) Mitigation of damages.--The amount of damages awarded under subsection (b)(1) shall be reduced by the amount of such damages which could have been mitigated by the plaintiff.

(3) Period for brining action.--Notwithstanding any other provision of law, an action to enforce liability created under this section may be brought without regard to the amount in controversy and may be brought only within 2 years after the date the right of action accrues.

26 U.S.C. §7433(d).

The government argues that Carter is not entitled to consequential damages for four reasons. First, the government claims that the record is devoid of any evidence that Carter exhausted her admin istrative remedies. Second, it contends that Carter has not presented sufficient evidence of the IRS's intentional, reckless or negligent disregard of Title 26 of the United States Code. Third, the government asserts that Carter has not established that she suffered economic damages proximately caused by the IRS's actions. Finally, it avers that Carter has failed to mitigate any of her alleged damages.

The exhaustion of admin istrative remedies is addressed by 26 C.F.R. §7433-1. In pertinent part, this regulation states:

(d) No civil action in federal district court prior to filing an admin istrative claim--(1) Except as provided in paragraph (d)(2) of this section, no action under paragraph (a) of this section shall be maintained in any federal district court before the earlier of the following dates:

(i) The date the decision is rendered on a claim filed in accordance with paragraph (e) of this section; or

(ii) The date six months after the date an admin istrative claim is filed in accordance with paragraph (e) of this section.

(2) If an admin istrative claim is filed in accordance with paragraph (e) of this section during the last six months of the period of limitations described in paragraph (g) of this section, the taxpayer may file an action in federal district court any time after the admin istrative claim is filed and before the expiration of the period of limitations.

(e) Procedures for an admin istrative claim--(1) Manner. An admin istrative claim for the lesser of $100,000 or actual, direct economic damages as defined in paragraph (b) of this section shall be sent in writing to the district director (marked for the attention of the Chief, Special Procedures Function) of the district in which the taxpayer currently resides.

(2) Form. The admin istrative claim shall include:

(i) The name, current address, current home and work telephone numbers and any convenient times to be contacted, and taxpayer identification number of the taxpayer making the claim;

(ii) The grounds, in reasonable detail, for the claim (include copies of any available substantiating documentation or correspondence with the Internal Revenue Service);

(iii) A description of the injuries incurred by the taxpayer filing the claim (include copies of any available substantiating documentation or evidence);

(iv) The dollar amount of the claim, including any damages that have not yet been incurred but which are reasonably foreseeable (include copies of any available substantiating documentation or evidence); and

(v) The signature of the taxpayer or duly authorized representative. For purposes of this paragraph, a duly authorized representative is any attorney, certified public accountant, enrolled actuary, or any other person permitted to represent the taxpayer before the Internal Revenue Service who is not disbarred or suspended from practice before the Internal Revenue Service and who has a written power of attorney executed by the taxpayer.

26 C.F.R. §7433-1.

There is evidence in the record that Carter pursued admin istrative remedies before filing this lawsuit. Carter contends that she contacted the IRS in an effort to recover the funds on October 28, 1999 , and again on November 17, 1999 , at which time she was referred to the Taxpayer Advocate Office. ⁸ (2nd Carter Aff. ¶8.) On November 24, 1999 , Carter faxed documentation regarding her claim to the Taxpayer Advocate Office in Nashville , Tennessee , and learned that her claim was assigned to Patricia Debnam. Id. On January 7, 2000 , pursuant to her request, Debnam was faxed copies of court opinions in Carter's divorce proceeding. Id. On October 18, 2000 , Carter was notified that the IRS had rejected her claim. Id.

There is no evidence, however, which indicates that Carter complied with the detailed procedures set forth in 26 C.F.R. §7433-1(e). Carter has not established that she presented her admin istrative claim to the funds from Account No. 68901 in a writing sent to the district director (marked for the attention of the Chief, Special Procedures Function) of the district which encompasses Memphis . Moreover, there is no indication that Carter submitted her claim in the proper format. Therefore, since Carter has not demonstrated that she exhausted her admin istrative remedies before filing this suit as required by 26 U.S.C. §7426(h), she is not entitled to consequential damages, such as the costs associated with this action, for the government's wrongful levy upon Account No. 68901. ⁹

In summary, plaintiff's motion for summary judgment is granted in part and denied in part. Plaintiff is entitled to judgment on her claim of wrongful levy and an award of $390,958.24 plus interest. However, her request for consequential damages is denied. Defendant's motion for summary judgment is denied. This order disposes of the matter in its entirety.

IT IS SO ORDERED.

¹ Sections 6334 and 6324 are of no consequence in this case. Section 6334 lists property which is exempt from a tax levy. 26 U.S.C. §6334. Section 6324 pertains to special liens for estate and gift taxes. Id.

² The tax lien arose when unpaid taxes were assessed against Brooks on June 19, 1995 . See 26 U.S.C. §6322. The record contains evidence suggesting that Brooks possessed an interest in Account No. 68901 on that date or thereafter. In particular, on August 4, 1999 , Hartford Life disbursed funds from the account in response to a levy "attaching all property or rights to property" of Brooks. (Answers to First Set of Pl.'s Interrog. No. 6; Answers to First Set of Pl.'s Interrog. No. 6; Def.'s Mot. for Summ. J. Ex. 8.) In addition, in their briefs, neither of the parties contest that Brooks possessed an interest in Account No. 68901 until that interest was extinguished by the divorce judgment.

³ In the complaint, Carter argues, in the alternative, that the government's levy was wrongful because she possessed a one-half interest in Account No. 68901 before unpaid taxes were assessed against Brooks on June 19, 1995 . As suggested by the government, however, Carter has not offered any evidence which indicates that she possessed an interest in Account No. 68901 prior to the entry of the divorce judgment on August 6, 1997 .

⁴ A chose in action is "[a] thing in action; a right of bringing an action or right to recover a debt or money." Black's Law Dictionary 241 (6th ed. 1990).

⁵ There is no indication that, at the time during the divorce proceeding, Account No. 68901 was considered anything other than marital property.

⁶ Incidentally, two other federal district courts have determined that an individual can qualify as a judgment lien creditor under 26 C.F.R. 301.6323(h)-1(g) by virtue of a divorce judgment. Cooper Indus., Inc. v. Compagnoni [2001-2 USTC ¶50,626] , 162 F.Supp.2d 702, 707 n.2 (S.D. Tex. 2001); Estate of Harless v. United States [2000-1 USTC ¶50,526] , 98 F.Supp.2d 1337, 1343 (S.D. Ala. 2000).

⁷ Subsection (b)(2)(A) is inapplicable because Hartford Life provided the government with cash proceeds, not Carter's mutual fund shares. Likewise, subsection (b)(2)(B) is inapposite because the government levied upon Carter's mutual fund shares, not her money.

⁸ Incidentally, Carter has produced conflicting evidence regarding the time at which she learned that the IRS had recovered funds from Account No. 68901. In her first affidavit, Carter states that she obtained this information in January 2000. (1st Carter Aff. ¶7.) In her second affidavit, however, Carter asserts that the knowledge was acquired on October 20, 1999 . (2nd Carter Aff. ¶7.)

⁹ Having determined that Carter did not exhaust her admin istrative remedies, it is unnecessary for the court to address the government's remaining grounds for denying Carter's request for consequential damages.

 

 

[2001-2 USTC ¶50,626] Cooper Industries, Inc., Plaintiff v. Jacqueline M. Compagnoni and United States of America , Defendants

U.S. District Court, So. Dist. Tex. , Houston Div., CIV. H-00-0702, 8/29/2001

[Code Sec. 6323 ]

Validity of lien: Priority of lien: Judgment lien creditor: Divorce judgment: ERISA: QDRO.--A judgment creditor's perfected lien on a portion of her husband's pension plan benefits had priority over an IRS lien for the husband's unpaid taxes. While the IRS had assessed the tax liability a month before the final judgment of dissolution of the couple's marriage was entered, it did not issue its notice of lien until after the final judgment and the issuance of a qualified domestic relations order (QDRO) to effect the transfer of the benefits. At that time, the identity of the wife as the lienor, the property subject to the lien, and the amount of the lien was established by the divorce court's final judgment. Reg. Sec. 301.6323(h)-1(g) did not impose additional state law perfection requirements above and beyond the ERISA QDRO procedure, which specifies its own method for transferring benefits to an alternate payee.

ORDER

GILMORE, District Judge:

Pending before the Court is Defendant United States of America 's Motion for Summary Judgment (Instrument No. 20). Based on the submissions of the parties and the applicable law, the Court finds that the motion should be DENIED and that Defendant Jacqueline Compagnoni is entitled to summary judgment. Plaintiff Cooper Industries is ORDERED to file an application for attorney's fees within ten days of the date of this Order.

I.

This interpleader action arises from a lien interest taken by the United States Internal Revenue Service ("IRS") in the net accrued benefits of Luciano Compagnoni's pension and savings plan under his former employer, Plaintiff/Stakeholder Cooper Industries, Inc. ("Cooper"). Defendant/Claimant Jacqueline Compagnoni, Luciano's former spouse, was awarded the full amount of these benefits as part of a Qualified Domestic Relations Order issued in Dade County , Florida during their divorce proceedings in 1993. Compagnoni contends that her right to these funds is without restriction. The IRS is attempting to apply the proceeds from Luciano Compagnoni's benefits toward his assessed income tax deficiency for the 1987 year. Plaintiff has deposited the disputed pension plan benefits, $62,583.58, in the Court's registry and has interpled both Jacqueline Compagnoni and the united States pursuant to 29 U.S.C. §1335, seeking declaratory relief in determining which party's claim to the accrued benefits is superior. Cooper does not claim any interest in the funds, but requests its attorney's fees and costs. (Instrument Nos. 1, 30).

Luciano Compagnoni worked for Cooper from 1975 until 1991 and participated in the Salaried Employees' Retirement Plan ("Salaried Plan") and the Savings and Ownership Plan. This case concerns the proceeds from the Salaried Plan. Luciano and Jacqueline Compagnoni were married from 1975 to 1980, and was then remarried on December 28, 1987 . In 1990, Jacqueline Compagnoni filed for divorce in the Circuit Court for the 11th Judicial Circuit, Dade County , Florida .

In April 1991, Luciano Compagnoni received a refund check for the 1988 tax year from the United States Treasury made out to Luciano and Jacqueline Compagnoni for $73,324.07. (Order and Final Judgment on Mandate, Instrument, No. 45, Exh 1 at 3). The refund was the result of the IRS's erroneous application of a check in the amount of $84,850.00 toward the Compagnoni's 1988 taxes. Compagnoni v. United States [96-2 USTC ¶50,522], No. 94-0813, 1996 WL 696110, at *1 (S.D. Fla. Aug. 30,1996.). The check should have been applied toward their existing 1997 tax liability. Id. Luciano Compagnoni cashed the check in Venezuela without Jacqueline Compagnoni's consent and the money was never recovered. (Instrument No. 45, Exh 1 at 3).

A final judgment of dissolution of marriage was entered on April 18, 1991 . As part of that judgment, Compagnoni was awarded 50% of her husband's pension benefits and counsel was ordered to submit a qualified domestic relations order ("QDRO") to effect the transfer. (Instrument No. 20, Exh 2 ¶11). Jacqueline Compagnoni appealed the final judgment, which was reversed by the appellate court on December 31, 1991 and remanded with instructions to redistribute the assets of the parties based upon their ten years of marriage rather than a two and one-half year marriage. (Instrument No. 45, Exh 1 at 1).

On October 22, 1992 , the IRS assessed $61,173.00 in additional income taxes and $46,523.59 in interest against Luciano Compagnoni for the 1986 tax year. The IRS filed a notice of federal tax lien in Miami for this additional assessment on November 13, 1992 . On March 8, 1993 , additional income taxes of $59,798.00 and $38,181.09 in interest were assessed against the Compagnonis for 1987.

After the case was remanded, the Dade County court entered its order and final judgment distributing the assets on April 8, 1993 . (Instrument No. 45, Exh 1). The order was also recorded on that date. ( Id. ). The order directed counsel to prepare a QDRO to be entered that would award Jacqueline Compagnoni the "total value of the Cooper Industries pension account and savings plan," (Instrument No. 45, Exh 1 at 8). Mr. Compagnoni's attorney sent the IRS a copy of the April 8 order by letter dated April 19, 1993 . (Instrument No. 45, Exh 4). An order was entered on April 16, 1993 , granting Jacqueline Compagnoni the entire interest in Luciano Compagnoni's Salaried Plan pension benefits which was $56,331.53, and the Savings and Ownership Plan, which was $220,381.05, and giving Cooper the responsibility for deciding whether the domestic relations order ("DRO") was qualified. (Instrument No. 1, Exh J). Cooper made a "tentative determination" "pending receipt of additional information" that the DRO was deficient. (Instrument No. 20, Exh 6). Cooper faulted the DRO for neglecting to clearly identify the Savings and Stock Ownership Plan in the language of the order and for designating a beneficiary for the Salaried Plan despite the fact that it did not permit Jacqueline Compagnoni to do so. ( Id. ). Cooper informed Jacqueline Compagnoni's attorney that, "[o]nce the order or clarification is received, the Revised Domestic Relations Order will be reviewed once more pursuant to [Cooper's] QDRO Administrative Procedures in order to determine its qualified status. You will then be notified of its qualified or unqualified status." ( Id. ).

On May 10, 1993 , the IRS assessed Luciano Compagnoni $18,051.47 in income taxes for 1991. On May 21, 1993 , the IRS filed a notice of federal tax lien with respect to the Compagnonis' tax liability for 1987. (Instrument No. 45, Exh 5). The IRS then served a notice of levy upon the Plan Administrator at Cooper with respect to the additional assessment against the Compagnonis for 1987 as well as a notice of levy for Luciano Compagnoni's liability for 1991. On July 1, 1993 , the IRS served a notice of levy upon Citibank as trustee of the Savings and Ownership Plan, with respect to Luciano Compagnoni's liability for 1997. Citibank is not a party to this action. A similar notice of levy was served upon Citibank for the years 1986 and 1991. While the IRS attempted to serve a levy for the benefits at issue here, it was apparently unsuccessful. (Instrument No. 45, Exh 7).

On July 20, 1993 , the Dade County court issued an order clarifying its previous order with respect to the benefits. ("Order Clarifying Qualified Domestic Relations Order Dated April 16, 1993 ," Instrument No. 45, Exh 3). Cooper determined that the order, as clarified, was a QDRO. (Instrument No. 20, Exh 9). On July 29, 1993 , Citibank issued a $183,290.88 check to the IRS. The IRS applied those proceeds from the Saving and Ownership Plan to pay Luciano Compagnoni's income tax liability for 1986 and 1991 in full. (Instrument No. 20, Exh 10). For 1987, $47,794.61 was applied toward his liability. ( Id. ). ¹ Apparently, the IRS arbitrarily chose to apply the money from the levied Citibank benefits toward the 1991 liability rather than using all the remaining proceeds to reduce the 1997 liability.

In September 1993, the IRS released Jacqueline Compagnoni from liability for the additional assessments and interest for the year 1987. (Instrument No. 20, Exh 12). Pursuant to the innocent spouse provisions of the Revenue Code, the IRS filed a modified notice of federal tax lien that removed her name from the lien ( Id. ).

On February 29, 2000 , Cooper filed this action seeking a declaratory judgment as to which of the claimants, Jacqueline Compagnoni or the Government, is entitled to the funds at issue as well as attorney fees and costs. The United States filed a motion for summary judgment on September 15, 2000, arguing that pursuant to 26 U.S.C. §§6321, 6322, its lien against Compagnoni's pension benefits attached as of the time the tax was assessed, March 8, 1993. The United States asserts that because the division of the Compagnonis' assets was not final until the Final Judgment on Mandate after Remand was issued on April 8, 1993 and the QDRO had not been entered as of the date of the assessment, the IRS is entitled to the funds as a prior lien holder. The United States contends that the final judgment did not make Jacqueline Compagnoni a "judgment lien creditor" entitled to priority over the tax lien. Even if it did, the Government continues, it was not effective until the QDRO was entered on July 30, 1993 , which was after the IRS filed a notice of federal tax lien.

Jacqueline Compagnoni filed a response on October 10, 2000 , claiming that the final judgment in the divorce dated April 8, 1993 entitles her to her former spouse's pension benefits. (Instrument No. 28). A hearing was held on June 22, 2001 to clarify factual and legal issues for the Court. The parties filed supplemental briefing related to priority. The Government argues that Compagnoni failed to perfect her interest in the pension benefits and, as a result, the IRS is entitled to priority. (Instrument No. 46). Compagnoni argues that the recording of the final judgment was sufficient to perfect her interest. (Instrument No. 45). Compagnoni also requests that the Court grant her summary judgment sua sponte.

II.

Summary judgment is appropriate if no genuine issue of material fact exists and the moving party is entitled to judgment as a matter of law. FED. R. CIV. P. 56. A fact is "material" if its resolution in favor of one party might affect the outcome of the suit under governing law. See Anderson v. Liberty Lobby, Inc., 106 S.Ct. 2505, 2510 (1986); see also United States v. Arron, 954 F.2d 249, 251 (5th Cir. 1992). An issue is "genuine" if the evidence is sufficient for a reasonable jury to return a verdict for the nonmoving party. See Anderson, 106 S.Ct. at 2510. If the evidence rebutting the motion for summary judgment is only colorable or not significantly probative, summary judgment should be granted. Id. at 2511; see also Thomas v. Barton Lodge, Ltd., 174 F.3d 636, 644 (5th Cir. 1999). The summary judgment procedure, therefore, enables a party "who believes there is no genuine issue as to a specific fact essential to the other side's case to demand at least one sworn averment of that [specific] fact before the lengthy process continues." See Lujan v. Nat'l Wildlife Fed'n, 110 S.Ct. 3177, 3188-99 (1990).

Under Fed. R. Civ. P. 56(c), the moving party bears the initial burden of informing the district court of the basis for its belief that there is an absence of a genuine issue for trial, and for identifying those portions of the record that demonstrate such absence. See Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 106 S.Ct. 1348, 1355-56 (1986); Burge v. Parish of St. Tammany, 197 F.3d 452, 464 (5th Cir. 1999).

Where the moving party has met its Rule 56(c) burden, the nonmovant "must do more than simply show that there is some metaphysical doubt as to the material facts. . . . [T]he nonmoving party must come forward with 'specific facts showing that there in a genuine issue for trial.' " See Matsushita, 106 S.Ct. at 1356 (quoting Fed. R. Civ. P. 56(e)) (emphasis in original); see also Celotex Corp. v. Catrett, 106 S.Ct. 2548, 2552 (1986); Engstrom v. First Nat'l Bank, 47 F.3d 1459, 1462 (5th Cir. 1995). To sustain the burden, the nonmoving party must produce evidence admissible at trial. See Anderson, 106 S.Ct. at 2514; see also Thomas v. Price, 975 F.2d 231, 235 (5th Cir. 1992) ("To avoid a summary judgment, the nonmoving party must adduce admissible evidence which creates a fact issue. . . ."). The Court reviews the facts in the fight most favorable to the nonmovant and draws all reasonable inferences in favor of the nonmovant. See Brown v. Bunge Corp., 207 F.3d 776, 781 (5th Cir. 2000). "The mere existence of a scintilla of evidence in support of the plaintiff's position will be insufficient; there must be evidence on which the jury could reasonably find for the plaintiff." See Anderson, 106 S.Ct. at 2512.

III.

The question of whether the IRS or Jacqueline Compagnoni is entitled to the proceeds from Luciano Compagnoni's pension benefits ultimately depends on which party had the priority interest based on the applicable tax and employee benefits laws. To resolve the issue, this Court must enter "the tortured meanderings of federal tax lien law," Tex. Oil & Gas Corp. v. United States [72-2 USTC ¶9653], 466 F.2d 1040, 1043 (5th Cir. 1972), and address the interplay of Employee Retirement Income Security Act ("ERISA") with state execution of judgment law. The IRS contends that its lien filed on May 21, 1993 takes priority over Ms. Compagnoni's QDRO because she was not a judgment creditor with a perfected interest in the pension benefits. The IRS asserts that Compagnoni was not a judgment creditor until July 20, 1993 when the final QDRO was issued. Compagnoni argues that the April 8, 1993 entry and recording of the Dade County court order rendered her a judgment lien creditor with an interest superior to that of the IRS. The parties do not dispute the facts of the case but disagree as to the legal import of these facts.

The United States is entitled to impose a lien upon a person's real or personal property if that person fails to pay any tax owed the IRS. 26 U.S.C. §6321. The benefits at issue are governed by ERISA. While ERISA's anti-alienation clause prevents ordinary creditors from attaching pension funds, a federal tax lien or levy may be imposed upon ERISA-qualified pension plan funds such as those here. See Shanbaum v. United States [94-2 USTC ¶50,512], 32 F.3d 180, 183 (5th Cir. 1994). The lien arises "at the time the assessment is made." 26 U.S.C. §6322; see also Harris v. United States [85-2 USTC ¶9511], 764 F.2d 1126, 1128 (5th Cir. 1985). However, such a lien is not valid against several classes of creditors, including a "judgment lien creditor," until notice of the federal tax lien has been filed. 26 U.S.C. §6323(a), (f). The relative priority of a federal tax lien is a matter of federal law. United States v. Acri [55-1 USTC ¶9138], 75 S.Ct. 239, 241 (1954). Priorities may turn, however, on questions of state law such as whether property existed to which a lien might attach. S. Rock, Inc. v. B&B Auto Supply [83-2 USTC ¶9529], 711 F.2d 683, 695 (5th Cir. 1983).

The priority of federal tax liens is generally determined by the common law rule of "first in time, first in right." United States v. New Britain [54-1 USTC ¶9191], 74 S.Ct. 367, 370 (1954). To the extent that §6323(a) is applicable, it modifies the rule to require the IRS to have filed a notice of federal tax lien "first in time" to be "first in right" over a judgment lien creditor. See 26 U.S.C. §6323(a), (f).

As described in the Treasury Regulations, a "judgment lien creditor" is a "person who has obtained a valid judgment, in a court of record and of competent jurisdiction, for the recovery of specifically designated property or for a certain sum of money." ² 26 C.F.R §301.6323(h)-1(g); ³ Palandjoglou v. United Nat'l Ins. Co., 821 F.Supp. 1179, 1184 (S.D. Tex. 1993). Where the judgment is for the recovery of a certain sum of money, a judgment lien creditor must have perfected the lien under the judgment on the property involved. Id. If levy or seizure is required under state law before a judgment lien becomes effective against third parties acquiring liens on personal property, then levy or seizure is necessary for perfection. 26 C.F.R §301.6323(h)-1(g). Perfection requires compliance with the doctrine of choateness: the identity of the lienor, the property subject to the lien, and the amount of the lien must be established. See Palandjoglou, 821 F.Supp. at 1184. A lien that is "choate" has been described as a lien that is "specific and perfected" and for which "nothing more [need] be done." United States v. Equitable Life Assurance Soc'y [66-1 USTC ¶9444], 86 S.Ct. 1561, 1563-1564 (1966) (citation omitted). According to the Fifth Circuit, for a nonfederal lien to be considered choate, "the identity of the lienor, the property subject to the lien and the amount of the lien must be established beyond any possibility of change or dispute." Rice Inv. Co. v. United States [80-2 USTC ¶9654], 625 F.2d 565, 568 (5th Cir. 1980).

The IRS seems to suggest that because tax liens arise at the time of assessment, Compagnoni would have had to be judgment lien creditor before the IRS made its assessment for the 1987 taxes or else she would take the pension benefits to the tax lien. This argument does not track the superpriority language of §6323, which provides that "[t]he lien . . . shall not be valid as against any . . . judgment creditor until notice thereof . . . has been filed." 26 U.S.C. §6323(a). For purposes of priority, section 6323(a) has the effect of shifting the focus from the point in time when the lien arose to when the IRS filed notice. See United States v. McDermott [93-1 USTC ¶50,164], 113 S.Ct. 1526, 1530 (1993) ("under the language of §6323(a) . . . the filing of notice renders the federal tax lien extant for 'first in time' priority purposes regardless of whether it has yet attached to identifiable property"). The Government relies on United States v. Bess [58-2 USTC ¶9595], 78 S.Ct. 1054, 1058 (1958) for the proposition that Compagnoni took the benefits subject to the IRS lien. The case is inapposite as it dealt with insurance benefits that passed, subject to a tax lien, to a spouse at the beneficiary's death. Id. The spouse in Bess was not a potential judgment creditor as here. The IRS also argues that Compagnoni is not entitled to priority because she did not perfect her interest in the benefits as required by state law. Compagnoni contends that her lien was choate as of the time of the recording of the final judgment.

As of April 8, 1993 , the date of the final judgment of the Dade County court, the identity of the lienor, the property subject to the lien and the amount of the lien were fixed and that the judgment was recorded. The first DRO was issued on April 16, 1993 . This all transpired before the IRS filed its notice of lien on May 21, 1993 . While the QDRO in its final form was not issued until July 20, 1993 , after the IRS's notice of lien was filed, Compagnoni's interest was conveyed as of the first DRO on April 16, 1993 . This is because the July order simply clarified the earlier DRO. The IRS maintains that neither the issuance of the final judgment nor the QDRO was sufficient to perfect Compagnoni's interest in the benefits at issue because the Treasury Regulations required her to undertake execution as required by state law.

The Treasury Regulations specify that for personal property, a potential judgment creditor most place a levy on the property or seize it "if such action is required under state law to perfect the lien." 26 C.F.R. §301.6323(h)-1(g) (emphasis supplied). It is not immediately apparent that such further action would be required here. Some courts have required perfection under state law for liens involving specifically designated property, though these courts were not confronted with judgments involving ERISA-regulated pension benefits. See Miller v. Conte [99-2 USTC ¶50,980], 72 F.Supp.2d 952, 960 (N.D. Ind. 1999) (requiring that judgment lien be recorded in case of real property where state law so required); Smith Barney, Harris Upham & Co. v. Connolly [95-1 USTC ¶50,010], 887 F.Supp. 337, 344 (D. Mass. 1994) (same). See also Palandjoglou, 821 F.Supp. at 1185 ("In order to perfect a judgment lien in Texas on personal property [to satisfy a money judgment], a form of execution such as garnishment is required") (internal quotation and citation omitted). In Florida , a lien on personal property is not perfected until a writ of execution is delivered to the sheriff of the county in which the property is located. Interstate Funding Corp. v. Direct Link Cable, Inc., 826 F.Supp. 437, 439 (S.D. Fla. 1993). Ms. Compagnoni asserts diet she did not have to do anything further after recording of the final judgment to perfect her interest in the benefits. The IRS argues that Compagnoni failed to execute on the judgment and that as a result, its interest in the pension benefits is superior to hers.

This analysis completely ignores the fact that the property at issue is not stock shares or real property, but intangible pension benefits regulated by ERISA, which has its own procedure for transferring ownership to a spouse. Given the mechanism provided by ERISA and the clear Congressional intent that ERISA pension benefits not be alienated except under specific circumstances, the Court is not convinced that further measures that are prescribed by state law would be required to perfect the lien. There is no can law addressing whether ERISA would preempt any additional, state law-based requirements for perfecting a judgment involving pension benefits. This issue was not addressed by the parties. The Court believes this analysis is necessary to determine whether Compagnoni or the IRS has the priority interest in the benefits.

IV.

The primary purpose of ERISA is to protect plan beneficiaries. See, e.g., §§1001(b), (c), 1103(c)(1), 1104(a)(1), 1108(a)(2), 1132(a)(1)(B). A nonparticipant spouse may be conferred beneficiary status if a "qualified domestic relations order" awards the spouse an interest in the beneficiary's plan. 29 U.S.C. §1056(d)(3)(A); Boggs v. Boggs, 117 S.Ct. 1754, 1757 (1997). A QDRO is a limited exception to the pension plan anti-alienation provision and allows a court to recognize a non-participant spouse's community property interest in a pension plan. Boggs, 117 S.Ct. at 1759. ERISA sets forth the procedures for a plan admin istrator to follow to determine whether or not a domestic relations order is qualified. 29 U.S.C. §1056(d)(3)(A)-(H). Whether Treasury Regulations can institute additional state law perfection requirements above and beyond the ERISA QDRO procedure turns on whether such requirements would be preempted by ERISA.

ERISA supersedes state laws that "relate to" employee benefit plans covered by the statute. 29 U.S.C. §1144(a). Interpreting the "relate to" language is a difficult proposition. "[A]s many a curbstone philosopher has observed, everything is related to everything else." Calif. Div. of Labor Standards Enforcement v. Dillingham Constr., N.A., Inc., 117 S.Ct. 832, 843 (1997) (Scalia, J., concurring). Consistent with the comprehensive nature of ERISA, the preemption language has been read broadly. Manning v. Hayes, 212 F.3d 866, 870 (5th Cir. 2000) (characterizing the scope of ERISA's preemption provisions as "deliberately expansive"), cert. denied, 121 S.Ct. 1401 (2001). A state law relates to an ERISA plan "if it has a connection with or reference to such a plan." Shaw v. Delta Air Lines, Inc., 103 S.Ct. 2890, 2900 (1983). But see Boggs, 117 S.Ct. at 1760-1761 (finding that state law conflict with statute's provisions or objects was sufficient to resolve preemption question in favor of ERISA without resort to interpretation of statutory language). Execution of judgment statutes, such as those here, are generally applicable and would not refer specifically to ERISA. The Court will analyze whether the statutes conflict with ERISA, frustrate its objectives, or have an impermissible "connection with" ERISA plans.

One case that dealt with ERISA preemption and execution of judgments is Mackey v. Lanier Collection Agency & Serv., Inc., 108 S.Ct. 2182 (1988). In Mackey, the Supreme Court, in analyzing Georgia 's general garnishment statute, held that ERISA does not bar a garnishment action against a welfare benefit plan. Id. at 286. The benefit plan at issue here is a pension benefit plan, which distinguishes it from Mackey. The court specifically noted that ERISA does not provide an enforcement mechanism for collecting judgments against welfare benefit plans, which distinguishes Mackey from the case before this Court. Without looking to state law, there would be no effective process to collect on a successful suit for benefits by a participant or on an action where a welfare benefit plan had failed to pay its creditors. Id. at 2187. In the context of alienation of pension benefits, by contrast, ERISA has provided the QDRO mechanism to effectuate judgments. Importantly, Mackey involved ERISA welfare benefits which, through Congressional silence on the issue, are subject to alienation or garnishment, id. at 2189, whereas Luciano Compagnoni's benefits are ERISA pension benefits, which can only be alienated by a QDRO. The effect of any lien with respect to federal law governing the collection of debts owed the United States is a federal question. United States v. Acri [55-1 USTC ¶9138], 75 S.Ct. 239, 241 (1954). For this reason, "although a state court's classification of a lien as specific and perfected is entitled to weight, it is entitled to reexamination" by federal courts. United States v. Pioneer Am. Ins. Co. [63-2 USTC ¶9532], 83 S.Ct. 1651, 1655 n. 7 (1963).

As mentioned earlier, imposing state law perfection requirements upon judgment creditors attempting to make use of the superpriority provisions of 26 U.S.C. §6323(a) would create choice of law difficulties as well as enormous practical confusion where the company, plan trustee, and plan participant are located in different states, as here. In order to determine whether the IRS or a former spouse is entitled to benefits, a plan admin istrator would have to master execution procedures of fifty states as well as apply choice of law principles where applicable. One of the primary purposes of ERISA and for providing for pervasive federal preemption is to ensure uniformity of admin istration to protect participants and beneficiaries from the threat of conflicting and inconsistent state regulation. Fort Halifax Packing Co. v. Coyne, 107 S.Ct. 2211, 2216 (1987). Reading the Treasury Regulations to require a separate mechanism for perfection of a lien on pension benefits that varies from state to state would frustrate this objective.

The Supreme Court recently decided a related preemption issue, the logical underpinnings of which are instructive here. In Egelhoff v. Egelhoff, the court held that ERISA preempted a Washington statute that purported to automatically revoke a spouse's designation as beneficiary upon divorce. 121 S.Ct. 1322, 1325-1326 (2001). The court reasoned that the statute undermined uniformity, noting that "[p]lan admin istrators cannot make payments simply by identifying the beneficiary specified by the plan documents. Instead they must familiarize themselves with state statutes so that they can determine whether the named beneficiary's status has been 'revoked' by operation of law. And in this context the burden is exacerbated by the choice-of-law problems that may confront an admin istrator when the employer is located in one State, the plan participant lives in another, and the participant's former spouse lives in a third. In such a situation, admin istrators might find that plan payments are subject to conflicting legal obligations." Id. at 1328. The court also remarked that the admin istrative delay and uncertainty would create financial burdens that would ultimately be borne by beneficiaries. Id. at 1329.

The concerns raised in Egelhoff are relevant in this case. ERISA directs plan admin istrators to "establish reasonable procedures to determine the qualified status of domestic relations orders[.]" 29 U.S.C. §1056(d)(3)(G)(ii). The uniformity of the QDRO procedures would be eliminated if plan admin istrators were then required to took from state to state to determine whether the lien was perfected. Such would be the case if, as the IRS suggests, the issuance of the QDRO is insufficient to establish the judgment lien creditor's priority. Here, the IRS would require Compagnoni to obtain a writ of execution on the Dade County court judgment before she could be considered a "judgment lien creditor" with superpriority. The IRS does not specify which state's law Compagnoni would have to follow in order to perfect her judgment, and for good reason. It is not even apparent which entity Compagnoni would levy to perfect the judgment, assuming that levy is the appropriate method of execution. The IRS argues that it does not matter whether Florida , Texas or New York law applies, or, presumably, whether Compagnoni would proceed against her ex-spouse, his former employer, or the plan trustee to perfect her interest. The IRS claims that in this case, how Compagnoni would perfect her interest would be irrelevant because she took no action to perfect her interest beyond obtaining a QDRO.

The IRS's argument assumes that state law requires such additional measures in the first place. Because ERISA has spoken to how pension benefits are alienated, the Court interprets the Treasury Regulation language (requiring levy or seizure "if such action is required under state law to perfect the lien") as not mandating additional state law-based procedures to attain perfection. Should the language be construed a requiring further action on Compagnoni's part beyond issuance of the QDRO, such a requirement would be preempted by ERISA as it significantly interferes with the uniform admin istration of disbursing benefits and conflicts with the provision granting the plan admin istrator responsibility for determining whether a DRO is a QDRO. While a state's characterization of a lien as perfected is entitled to significant weight, Pioneer Am. Ins. Co. [63-2 USTC ¶9532], 83 S.Ct. at 1655 n. 7, this classification cannot modify a federal statute where reliance on state law would wreak havoc with the admin istration of pension plans nationwide.

Additionally, the entire perfection and priority analysis, however, presumes that the benefits were Luciano Compagnoni's to relinquish to the IRS in the first place. This issue was not addressed by the parties. It is a question of the extent to which Compagnoni had a property interest in his pension benefits at the time the Government imposed its lien. The imposition of a tax lien is limited to the actual property interest of the taxpayer. United States v. Rodgers [83-2 USTC ¶9572], 103 S.Ct. 2132, 2141 (1983); Aquilino v. United States [60-2 USTC ¶9538], 80 S.Ct. 1277, 1280 (1960). In federal taxation cases, the definition of the underlying property interests is left to state law, but the consequences that attach to those interests are determined by reference to federal law. Rodgers [83-2 USTC ¶9572], 103 S.Ct. at 2137. When the IRS imposed its lien for the 1987 tax liability, on March 8, 1993 , the divorce case was on remand from the appellate court. The final judgment was not issued until a month later. When the IRS issued its notice of lien on May 22, 1993 , the final judgment had been entered and the first domestic relations order had been issued. By the time the IRS imposed its lien, Jacqueline Compagnoni had a possessory interest in the pension benefits and they were no longer Luciano Compagnoni's to turn over to the IRS. See In re Gendreau, 122 F.3d 815, 818 (9th Cir. 1997) (finding that the state court order in divorce created the wife's interest in the husband's pension plan and correspondingly limited the husband's interest).

The QDRO provisions of ERISA do not suggest that the alternate payee has no interest in the plan until a QDRO is entered, " 'they merely prevent her from enforcing that interest until the QDRO is obtained.' " Trs. of the Dirs. Guild of Am.-Producer Pension Benefit Plans v. Tise, 234 F.3d 415, 421 (9th Cir. 2000) (quoting Gendreau, 122 F.3d at 819). See also Stewart v. Thorpe Holding Co., 207 F.3d 1149, 1156 (9th Cir. 2000) (holding that securing a DRO that creates an interest in the proceeds of pension plan gives the bearer "the right to obtain a proper QDRO"). In Tise, the Ninth. Circuit enforced an alternate payee's claim to benefits even though a QDRO was not entered until 1996, a year after the participant's death, and the participant had designated a different beneficiary. Tise, 234 F.3d at 426. In part because the state court had determined that the alternate payee was entitled to child support benefits and issued an order nunc pro tunc to 1991, the Tise court found that the alternate payee had an interest in the benefits that predated the participant's death. Id. at 421.

An analogy can be made to the case before the Court. The Florida state court created Jacqueline Compagnoni's interest in the pension benefits and as a result, limited Luciano Compagnoni's interest at the time of the divorce decree on April 8, 1993 . See Gendreau, 122 F.3d at 818. Because the interest of the IRS in the benefits extends only a far as the taxpayers, the interest of the IRS in the benefits was diminished as well. That Cooper determined that the first order did not meet the statutory requirements for a QDRO did not work to limit Jacqueline Compagnoni's interest in the benefits. The divorce decree and first payment order, even though inadequate under ERISA, permitted Jacqueline Compagnoni to claim an interest in the benefits, but one that could only be by obtaining a QDRO. ⁴ See Tise, 234 F.3d at 421.

V.

Whether the competing interests in Luciano Compagnoni's pension benefits are viewed from the vantage point of Ms. Compagnoni or the IRS, Ms. Compagnoni has the priority interest. The identity of the lienor, the property subject to the lien, and the amount of the lien was established as of the Dade County court's final judgment on April 8, 1993 . While the IRS had assessed a tax liability a month earlier, its lien was not effective against Ms. Compagnoni as a judgment lien creditor, which she was as of the entry of the first DRO on April 16, 1993 . See 26 U.S.C. §6323(a); 26 C.F.R. §301.6323(h)-1(g). While the Treasury Regulations specify that a judgment lien creditor must execute a judgment involving a lien on personal property where state law requires such action, ERISA, through the QDRO provisions, has specified its own mechanism for transferring benefits to an alternate payee, obviating the need for an additional state law procedure. Even if the Treasury Regulation is read to require compliance with state law, ERISA's QDRO procedure would supersede state execution procedures because forcing plan admin istrators to determine priority according to the laws of various states would run contrary to ERISA's goal of national uniformity and would present monumental admin istrative difficulties. See Egelhoff, 121 S.Ct. at 1328 (finding that ERISA preempted state statute in part because of admin istrative burdens and potential conflicting legal obligations it created). Accordingly, Compagnoni's compliance with Cooper's and ERISA's QDRO requirements was sufficient to render her judgment lien creditor with an interest superior to that of the Government. While the QDRO in its final form was not issued until July 20, 1993 , which was after the IRS filed its notice of levy on May 21, 1993 , Compagnoni's interest was conveyed as of the first DRO on April 16, 1993 . See Tise, 234 F.3d at 421. The July order only clarified the earlier order and did not alter the substance of the order. The same conclusion is reached by analyzing the property interest Luciano Compagnoni had in the benefits.

The IRS stands in the shoes of the taxpayer as far as the scope of its property interest. Rodgers [83-2 USTC ¶9572], 103 S.Ct. at 2141. In other words, the IRS cannot levy what the taxpayer does not own. Therefore, the IRS is limited to Luciano Compagnoni's interest in the pension benefits. As of the first DRO an April 16, 1993, Coopers was required by federal statute to segregate the money that Ms. Compagnoni would be entitled to once the QDRO could be entered. While Ms. Compagnoni could not enforce her interest in the benefits, securing a DRO, however imperfect, served to limit Mr. Compagnoni's interest in the benefits. Because the interest of the IRS extends only as far as that of Mr. Compagnoni, the IRS's interest in the pension benefits was similarly limited. See Gendreau, 122 F.3d at 818. The IRS did not have an interest superior to that of Ms. Compagnoni. Accordingly, the Government's motion for summary judgment is DENIED.

While Compagnoni did not file a motion for summary judgment, the Court has the power to enter summary judgment sua sponte where the losing party is on notice that it must produce all evidence in support of its position. See Celotex Corp. v. Catrett, 106 S.Ct. 2548, 2554 (1986). If a party moves for summary judgment, a court may grant summary judgment to the non-moving party on its own initiative if all the safeguards of Rule 56 are followed. McCarty v. United States [92-1 USTC ¶50,222], 929 F.2d 1085, 1088 (5th Cir. 1991). Here, the Government was on notice that it should submit all evidence required to support its position. It has submitted evidence related to the dates of assessments, notices and levies, which supplements the orders from the Florida court and the correspondence provided by Compagnoni. The Court conducted a hearing to discover relevant facts and the parties submitted additional briefing and evidence. Additionally, because the parties agree on the relevant facts of this case, but dispute the legal conclusions, summary judgment is proper. See Thomas, 975 F.2d at 235 (requiring evidence supporting a fact issue to avoid summary judgment). The procedural safeguards of Rule 56 have been followed and there are no material facts at issue that would justify a trial in this case. Consequently, the Court finds that Compagnoni is entitled to summary judgment and to the funds Cooper has deposited with the Court Registry.

VI.

The Court has discretion to award reasonable attorney's fees in an interpleader action, provided that the stakeholder is disinterested. Rhoades v. Casey, 196 F.3d 592, 603 (5th Cir. 1999). Because Cooper is not in controversy with either of the claimants in this case, Cooper a ORDERED to submit an application for attorney's fees, complete with an affidavit detailing counsel's work in this matter, within ten (10) days of the date of this order. Any response to Cooper's application must be filed within five (5) days of the date the application is filed.

¹ In 1994, Jacqueline Compagnoni filed an action against the United States in the Southern District of Florida pursuant to 26 U.S.C. §7426, challenging the levies filed with respect to the Savings and Ownership Plan, claiming that the property was not her husband's at the time the levies were filed, but instead was hers pursuant to the orders of the Dade County Circuit Court issued during the divorce proceedings. The court did not reach the merits of the case but dismissed it for lack of subject matter jurisdiction, finding that the United States was protected by sovereign immunity. Compagnoni v. United States [96-2 USTC ¶50,522], No. 94-0813, 1996 WL 696110, at *4 n.3 (S.D. Fla. Aug. 30, 1996).

² It is not clear whether the award of the pension benefits would qualify as an award "for the recovery of specifically designated property" or as an award "for a certain sum of money." The Dade County Circuit Court awarded Ms. Compagnoni $383,745.50 and distributed the marital assets to effectuate that award. (Instrument No. 45, Exh 1 at 4, 7-8). As part of the equitable distribution, the court awarded Compagnoni "the total value of the Cooper Industries pension account plan" and listed the amount of the award. (Instrument No. 45, Exh 1 at 7-8).

³ The Regulation provides:

"The term 'judgment lien creditor' means a person who has obtained a valid judgment, in a court of record and of competent jurisdiction, for the recovery of specifically designated property or for a certain sum of money. In the case of a judgment for the recovery of a certain sum of money, a judgment lien creditor is a person who has perfected a lien under the judgment on the property involved. A judgment lien is not perfected until the identity of the lienor, the property subject to the lien, and the amount of the lien are established. . . If under local law levy or seizure is necessary before a judgment becomes effective against third parties acquiring liens on personal property, then a judgment lien under such local law is not perfected until levy or seizure of the personal property involved. . ."

⁴ The QDRO procedures set forth in statute anticipate some time lag before a QDRO is attained. The Internal Revenue Code and ERISA require that during the time that the plan admin istrator is determining whether a DRO is "qualified," the admin istrator segregate the amount that would be payable to the alternate payee. 26 U.S.C. §414(p)(7)(A); 29 U.S.C. §1056(d)(3)(H). The plan admin istrator has a reasonable amount of time to make the determination. 26 U.S.C. §414(p)(6)(A)(ii); 29 U.S.C. §1056(d)(3)(G)(i)(II).

 

 

[2000-1 USTC ¶50,526] In the Matter of the Estate of Larry J. Harless, Deceased. Maurine K. Harless, Administratrix of the Estate of Larry J. Harless, Petitioner v. United States of America , Respondent

U.S. District Court, So. Dist. Ala. , So. Div., CIV. 98-1072-RV-S, 5/23/2000

[Code Sec. 6323 ]

Tax lien: Priority over third parties: Judgment lien: Divorce judgment: Perfection: State law: Recording: Amount of lien.--A divorce decree filed by the ex-wife of a decedent had priority over the government's subsequently filed tax lien. The ex-wife filed a certified copy of the divorce judgment in the county where the property was located, which satisfied the lien perfection requirements under state ( Alabama ) law. That a lien was not imposed in the divorce judgment did not preclude her from subsequently placing a lien on the property. Further, the government's contention that the divorce judgment was not properly perfected because it failed to identify the amount of the lien was rejected. The divorce judgment was for a specified sum and the fact that it was payable in installments was irrelevant. Thus, she was entitled to the proceeds from the sale of the decedent's real property since his estate lacked sufficient funds to satisfy both liens.

MEMORANDUM OPINION AND ORDER

VOLLMER, JR., District Judge:

This matter comes before the court on cross-motions for summary judgment by petitioner Maurine Harless, as admin istratrix of the estate of Larry J. Harless, and respondent United States as to whether a divorce judgment recorded in 1992 takes priority over a federal tax lien filed in 1996. After carefully reviewing the law and considering the submissions of the parties, ¹ the court concludes that Ms. Harless, acting in her individual capacity, perfected her lien under the divorce judgment before the government filed notice of its federal tax lien. The court will therefore grant Ms. Harless's motion and deny the government's motion.

I. BACKGROUND

The facts are not in dispute. On August 27, 1991 , the Circuit Court of Mobile County, Alabama, entered a judgment of divorce dissolving the marriage of Larry and Maurine Harless. Pursuant to the divorce judgment, Mr. Harless was required to make three $1,000,000.00 payments in January 1992, January 1993 and January 1994 into a trust for the benefit of Ms. Harless. In January 1992, Mr. Harless made his first and only payment into the trust. On February 13, 1992 , he recorded a quit claim deed in the Mobile County Probate Records for two parcels of real property he purchased on Springhill Avenue in Mobile , Alabama (the "Springhill Property"). On July 15, 1992 , Ms. Harless recorded a certified copy of the divorce judgment in the Mobile County Probate Records.

On August 3, 1992 , the Internal Revenue Service ("IRS") made an assessment against Mr. Harless for outstanding tax liabilities in the amount of $81,110.40. The IRS made subsequent assessments against Mr. Harless on September 26, 1994 , for $3,445,522.00, and on February 5, 1996 , for $1,360.47.

In 1995, Mr. Harless died. He had not paid the 1993 or 1994 alimony installments, nor had he satisfied his delinquent tax liabilities. Thus, at the time of his death, Mr. Harless owed at least $2,000,000.00 in alimony to Ms. Harless and more than $3,500,000.00 in income taxes to the United States .

On August 20, 1996 , the IRS filed a notice of federal tax lien in the Mobile County Probate Records for the outstanding tax liabilities of Mr. Harless in the amount of $3,527,993.62, plus accruals as provided by law.

On July 10, 1998 , Ms. Harless was appointed admin istratrix of the estate of Mr. Harless. On October 8, 1998, Ms. Harless, acting in her capacity as admin istratrix, filed a "Petition to Determine the Priority of Lien (Quiet Title) and to Convey Property in Satisfaction of Lien" in the Probate Court of Mobile County. Through this petition, Ms. Harless alleged that the judgment lien she filed in her individual capacity against the Springhill Property had priority over the government's subsequently-filed tax lien. Ms. Harless also asserted that the Springhill Property was the only asset in the Estate's possession and that there were no other assets with which to pay the upkeep, taxes and insurance premiums on the property. According to Ms. Harless, then, it would be in the Estate's best interests for the probate court to confirm that her individual judgment lien takes priority over the government's tax lien and to vest title to the Springhill Property (which was valued at less than either lien) in Ms. Harless in her individual capacity.

On October 28, 1998 , the United States removed Ms. Harless's quiet title petition pursuant to 28 U.S.C. §1444. ² Thereafter, the parties filed cross-motions for summary judgment as to which lien has priority. During the pendency of those motions, the Springhill Property was sold for $309,469.07. The proceeds of the sale were then deposited into the registry of the court.

II. SUMMARY JUDGMENT STANDARD

Summary judgment is proper "if the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to a judgment as a matter of law." Fed. R.Civ.P. 56(c). In reviewing a summary judgment motion, the court must view the evidence and all reasonable inferences drawn therefrom in the light most favorable to the non-moving party. See Alexander v. Fulton County , 207 F.3d 1303, 1335 (11th Cir. 2000).

The party seeking summary judgment has the initial burden of showing that there is no genuine issue of material fact. See Celotex Corp. v. Catrett, 477 U.S. 317, 324, 106 S.Ct. 2548, 2553, 91 L.Ed.2d 265 (1986). Once the moving party meets that burden, the non-moving party must set forth specific facts which demonstrate that there is a genuine issue of material fact for trial. See Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 585-86, 106 S.Ct. 1348, 1355, 89 L.Ed.2d 538 (1986). A genuine issue of material fact exists for trial if a reasonable jury could return a verdict in favor of the non-moving party. See Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248, 106 S.Ct. 2505, 2510, 91 L.Ed.2d 202 (1986).

To avoid an adverse ruling on a motion for summary judgment, the non-moving party "may not rest upon the mere allegations or denials of [its] pleading." Fed. R.Civ.P. 56(e). Nor may the non-moving party defeat summary judgment by providing a mere "scintilla" of evidence. See Burger King Corp. v. Weaver, 169 F.3d 1310, 1321 (11th Cir. 1999). Instead, there must be a genuine factual conflict in the evidence to support a jury question. See Continental Cas. Co. v. Wendt, 205 F.3d 1258, 1261 (11th Cir. 2000).

III. DISCUSSION

The sole question before the court is which lien has priority. Resolution of this issue is determinative of whether Ms. Harless, in her individual capacity, or the United States is entitled to the proceeds of the sale of the Springhill Property, as the Estate does not have sufficient funds to satisfy either lien. Ms. Harless asserts that the divorce judgment lien takes priority over the later-filed federal tax lien. The government counters that the prior recording of the divorce judgment did not create a choate (or "perfected") lien and that such "perfection" is necessary to obtain priority. To resolve this issue, the court has no choice but to confront "the tortured meanderings of federal tax lien law." Texas Oil & Gas Co. v. United States [72-2 USTC ¶9653], 466 F.2d 1040, 1043 (5th Cir. 1972).

A.

The Internal Revenue Code provides for the imposition of a federal tax lien against all "property and rights to property" belonging to a taxpayer who, after assessment and demand, fails to pay taxes to the United States . 26 U.S.C. §6321. Federal tax liens arise automatically upon assessment. See 26 U.S.C. §6322. But, such liens are "not valid against any . . . judgment lien creditor" until proper notice is filed. 26 U.S.C. §6323(a). Moreover, in determining the priority of competing liens, courts apply the general principle that a lien "first in time is the first in right." United States v. City of New Britain [54-1 USTC ¶9191], 347 U.S. 81, 84, 74 S.Ct. 367, 369, 98 L.Ed. 520 (1954). Therefore, a federal tax lien has priority over a competing judgment lien only if the IRS serves notice of its lien before the judgment lien is perfected under state law. See United States v. Estate of Romani [98-1 USTC ¶50,368; 98-1 USTC ¶60,311], 523 U.S. 517, 118 S.Ct. 1478, 140 L.Ed.2d 710 (1998).

B.

Ms. Harless argues that the divorce judgment lien has priority over the federal tax lien because she properly recorded the divorce judgment before the government recorded its lien. Specifically, Ms. Harless contends that she, in her individual capacity, became a judgment lien creditor by recording the divorce judgment in the Mobile County Probate Records. A "judgment lien creditor" is a person who (1) has obtained a valid judgment (2) in a court of record and of competent jurisdiction (3) for the recovery of a certain sum of money; and (4) has perfected a lien under that judgment. See Treas. Reg. §301.6323(h)-1(g). Thus, if Ms. Harless, in her individual capacity, satisfies all four requirements, then her divorce judgment lien takes priority over the subsequently-filed federal tax lien.

The government does not contest any of the first three elements. What the government does dispute is the fourth element, namely, that Ms. Harless, in her individual capacity, perfected a lien under the divorce judgment. To be perfected under federal law, a state-created judgment lien must establish: (1) the identity of the lienor; (2) the property subject to the lien; (3) and the amount of the lien. See Treas. Reg. §301.6323(h)-1(g). In this case, the government takes the position that the judgment lien does not satisfy the second and third criteria.

1.

The court will first address the government's assertion that the judgment lien was not perfected "inasmuch as the property subject to the purported lien could not be identified because no lien existed under state law." According to the government, because the circuit court did not exercise its discretion to impose a lien on the Springhill Property in the divorce judgment, Ms. Harless could not subsequently place a lien on the property herself.

It is well established that an Alabama state court "may secure payment of alimony by declaring a lien on the husband's property." Davis v. Davis, 147 So.2d 828, 830 (Ala. 1962) (citing Phillips v. Phillips, 129 So. 3 (Ala. 1930); Smith v. Rogers, 112 So. 190 (Ala. 1927)); see also Gibbs v. Gibbs, 653 So.2d 300, 301 (Ala. Civ. App. 1994) (holding that trial court's imposition of a judgment lien against husband's real property was not an abuse of discretion because "[o]ur courts have consistently upheld such liens to ensure that a spouse receives alimony"). The rationale behind this discretion is simple--by placing a lien on a spouse's real property directly in the judgment of divorce, the court can prevent any attempt by that spouse to become "judgment-proof" through the subsequent conveyance of his or her property.

However, simply because a state court has the authority to impose a lien on a spouse's real property does not mean that the other spouse cannot later obtain a lien whenever the court declines to exercise that discretion. Indeed, Alabama law expressly permits the "owner of any judgment entered in any court of this state" to record a certificate of that judgment with a county probate court. Ala. Code §6-9-210 (1975) (emphasis added). Once that judgment has been recorded, it "creates a blanket lien on all of the property of the defendant that is located in the county of recordation and is subject to levy and sale." Smith v. Arrow Transp. Co., 571 So.2d 1003, 1006 ( Ala. 1990) (citing Ala. Code §6-9-211 (1975)). Thus, Ms. Harless, in her individual capacity, created a lien against all real property owned by Mr. Harless in Mobile County when she recorded the certified copy of the divorce judgment in the Mobile County Probate Records. See Garrett v. Garrett, 628 So.2d 659, 660 (Ala. Civ. App. 1994) (holding that wife "did all that was required to obtain a lien on [her former husband's] property" when she filed with the probate court a certificate of a divorce judgment which did not impose a lien against the former husband's property). Accordingly, the government's contention that Alabama law precluded Ms. Harless from placing a lien on the Springhill Property is without merit. ³

2.

The government also argues that Ms. Harless, in her individual capacity, did not perfect her lien because the recorded judgment does not establish the amount of the lien. Though acknowledging that the divorce judgment awarded a certain sum of alimony, i.e., a $3,000,000.00 trust fund, the government contends that the amount of the lien itself was not established because the judgment does not identify which, if any, of the three $1,000,000.00 installments were outstanding at the time of recording.

This argument rests primarily upon the Alabama Supreme Court's decision in Miles v. Gay, 190 So.2d 686 (Ala. 1966), which held that a recorded certificate of a judgment awarding a wife $10.00 per week for an indeterminate period was insufficient to attach a lien against the former husband's property. According to the Miles court, a lien for past-due alimony "does not arise automatically as to each installment as it becomes due, but arises only when the court has formally determined the total amount due and has reduced the delinquent payments to judgment." Id. at 694 (quoting McClanahan v. Hawkins, 367 P.2d 196, 199 ( Ariz. 1961)). The fact that the wife's certificate repeated the terms of the judgment was therefore insignificant: "It is no answer to say that the amount is $10.00 for each week." Id. at 693. Rather, in the words of the Miles court, "a lien for periodic installment payments can be acquired only by a judicial ascertainment and declaration of the amount of past-due installments and filing a proper certificate showing such a judgment or decree." Id.

Applying the rationale of Miles to this case, the government contends that Ms. Harless's recorded divorce judgment does not identify the past-due amounts of alimony due under that judgment and therefore did not perfect a lien against the Springhill Property. To properly perfect her lien, the government argues, Ms. Harless should have reduced the past-due amount to a money judgment and recorded that judgment with the probate office.

This position is not without some support. In Dodd v. Lovett, 211 So.2d 799, 802 (Ala. 1968), the Alabama Supreme Court relied upon Miles to hold that a wife's claim for unpaid alimony installments ordered by a Georgia divorce decree could not be maintained against her deceased husband's estate unless the past-due amounts were first reduced to a money judgment in Alabama. Ten years later, the Alabama Supreme Court again invoked Miles to hold that past-due child support payments must be reduced to a money judgment before a claim could be brought against the deceased father's estate. See Austin v. Austin , 364 So.2d 301, 302-03 ( Ala. 1978).

The problem with the government's argument, however, is three-fold. First, as the government concedes, none of the installment payments were outstanding at the time Ms. Harless recorded her divorce judgment. Thus, there were no "past-due" alimony installments for Ms. Harless to reduce to a money judgment.

Second, the Alabama Supreme Court has since rejected the proposition that past-due alimony or child support installments are not final monied judgments as of the dates they become due. In Ex Parte Morgan, 440 So.2d 1069 ( Ala. 1983), the court held that a past-due installment of alimony or child support becomes a final monied judgment on the date of delinquency. Id. at 1072. Thus, the court concluded, it was unnecessary for a divorced mother to reduce past-due child support payments to a money judgment before she could begin garnishment proceedings against her former husband. Id. In making this determination, the Morgan court expressly declined to follow Miles and its progeny:

[M]ust past due installments for child support under an Alabama court decree be reduced to a monied judgment before garnishment proceedings can be instituted against the delinquent father? The answer to this question does not come from Austin, Miles, and Dodd. It comes from Armstrong v. Green, 260 Ala. 39, 68 So.2d 834 (1953), O'Neal v. O'Neal, 284 Ala. 661, 227 So.2d 430 (1969), and Andrews v. City National Bank of Birmingham, 349 So.2d 1 ( Ala. 1977).

Armstrong established the rule that installment payments decreed in a divorce for support and education of the minor children of the marriage become final judgments as of the dates due and may be collected as other judgments. O'Neal, citing Rochelle v. Rochelle, 235 Ala. 526, 179 So. 825 (1938), held that a decree for child support is a fixed monied judgment, as to past due installments, which can only be discharged as any other such judgments. In Andrews, the court held that alimony is a debt which becomes a final money judgment as to past due installments. Thus, being a final judgment, the past due installments of alimony were subject to being attached by a writ of garnishment filed by a creditor of the divorced wife.

Id. at 1071. Accordingly, by holding that delinquent installments of court-ordered alimony or child support are final money judgments as of the dates due, the Morgan court "rejected the reasoning behind Austin [v. Austin ], . . . Miles v. Gay, . . . and Dodd v. Lovett." Smith v. Estate of Baucom, 682 So.2d 1065, 1066 (Ala. Civ. App. 1996). Cf. Morgan, 440 So.2d at 1073 (Maddox, J., dissenting) ("The majority does not expressly overrule Austin v. Austin, 364 So.2d 301 (Ala. 1978), but the holding of the opinion has that effect."); accord Schoonheim v. Epstein, 506 N.Y.S.2d 713, 714 (N.Y. App. Div. 1986) ("Although the Morgan court does not expressly overrule Austin, it distinguishes it so sharply as to deprive it of all precedential force."). For these reasons, this court declines to follow Miles here.

Finally, even if the court were to apply the principle of Miles, this case is factually distinguishable. As the Alabama Supreme Court explained in Austin , 440 So.2d at 1071, the court's primary concern in Miles was that the certificate of judgment, which simply repeated that the wife was entitled to alimony at the rate of $10.00 per week for an indefinite period of time, was for an uncertain amount. Because a lien is insufficient under Alabama law unless the certificate identifies the amount of the judgment, ⁴ it was necessary for the wife to reduce the delinquent alimony installments to a money judgment for a sum certain before she could proceed in her claim against her former husband's property. Id. Unlike Miles, uncertainty as to the amount of the judgment is not a factor in this case. There is no dispute that the trial court awarded Ms. Harless $3,000,000.00 in alimony. The fact that this amount was payable in annual installments is therefore irrelevant because the divorce judgment itself is for a sum certain. Accordingly, the court rejects the government's argument that the recorded divorce judgment does not establish the amount of Ms. Harless's lien. ⁵

IV. CONCLUSION

Ms. Harless, in her individual capacity, meets all of the federal requirements of a judgment lien creditor. As such, her 1992 judgment lien against the Springhill Property has first-in-time priority over the competing 1996 federal tax lien. Thus, to the extent that the parties seek a determination of the priority of their competing liens, Ms. Harless's motion for summary judgment is GRANTED and the United States ' motion for summary judgment is DENIED. Given that the Springhill Property was sold during the pendency of those motions, the issue of whether the property should be conveyed to Ms. Harless in her individual capacity is MOOT.

Accordingly, no sooner than eleven business days after the date of entry of judgment, ⁶ the CLERK is DIRECTED to prepare a check payable to "Maurine K. Harless, as Administratrix of the Estate of Larry J. Harless, Deceased" in the amount of $309,469.07. Unless otherwise ordered by the court, counsel for Ms. Harless shall then personally retrieve the check from the clerk of court for an appropriate distribution through probate proceedings.

The CLERK is further DIRECTED to send a copy of this memorandum opinion and order to the Clerk of the Probate Court of Mobile County .

DONE.

JUDGMENT

Pursuant to Rule 58 of the Federal Rules of Civil Procedure, FINAL JUDGMENT is hereby entered in favor of petitioner Maurine K. Harless, in her capacity as admin istratrix of the Estate of Larry J. Harless, and against respondent United States . In accordance with the court's May 23, 2000 memorandum opinion and order granting Ms. Harless's motion for summary judgment and denying the United States' motion for summary judgment, it is ADJUDGED that the judgment lien recorded by Maurine K. Harless, in her individual capacity, has first-in-time priority over the tax lien filed by the United States. Each party shall bear its own costs.

¹ The court has considered the record as a whole, including the United States' motion for summary judgment (Doc. 7) and supporting brief (Doc. 8); Ms. Harless's motion for summary judgment (Docs. 10) and supporting brief (Doc. 11); and the reply briefs of the United States (Doc. 15) and Ms. Harless (Doc. 16).

² Section 1444 permits the United States to remove any state court action affecting property on which the United States has a lien.

³ Moreover, the government does not explain how the circuit court could possibly place a lien on the Springhill Property in the divorce judgment, given that the property was acquired almost six months after judgment was entered.

⁴ See Ala. Code §§6-9-210, 6-9-211 (1975). The relevant portions of these statutes are virtually identical to sections 584, 585, Tit. 7, Ala. Code 1940, which were in effect at the time Miles was decided. See 190 So.2d at 687-88.

⁵ Admittedly, the certified copy of the divorce judgment does not specify the amount of court costs or attorneys' fees that were assessed against Mr. Harless, as required by Alabama Code §6-9-210 (1975). Nonetheless, the Alabama Supreme Court has held that the omission of those costs simply precludes a lien for that unspecified sum; it does not extinguish an otherwise valid lien for the amount of the judgment itself. See Bowman v. SouthTrust Bank of Mobile, 551 So.2d 984, 988 ( Ala. 1989) ("a statement of the amount of court costs assessed against a judgment debtor is a material requirement of [section 6-9-210], because it is necessary to provide notice of the amount of the lien. Likewise, a statement of the amount of attorney fees assessed against a judgment debtor, such fees being a part of the judgment, is a material requirement of the statute. However, . . . we do not view the omission of a statement of these amounts as precluding the creation of a lien in the Bowmans' favor for the amount of the judgment stated.").

⁶ See Fed. R.Civ.P. 62(a); KRW Sales, Inc., v. Kristel Corp., 154 F.R.D. 186, 188 (N.D. Ill. 1994) (weekends and holidays are not counted for purpose of ten-day automatic stay from execution of judgment).

 

 

[94-1 USTC ¶50,180] United States of America v. Howard A. and Marjorie E. Brynes

U.S. District Court, Dist. R.I., Civ. 92-0018-T, 3/25/94, 838 FSupp 1096

[Code Sec. 6323 ]

Tax liens: Real estate: Purchaser: Judgment lien creditor.--A federal tax lien against a husband's undivided one-half interest in property continued to attach after a subsequent conveyance of the property to his wife even though the tax assessment was made against the husband. The wife waived future alimony payments upon the payment of the lien by the husband in connection with divorce proceedings. However, she was not considered a purchaser because the waiver did not take effect unless the lien was paid. Thus, adequate and full consideration was not given. Furthermore, the wife was not a judgment lien creditor because she did not obtain a judgment for unpaid support payments before the tax lien was filed.

[Code Sec. 7403 ]

Action to enforce lien: Foreclosure.--The government was entitled to foreclose a federal tax lien on property conveyed by a husband to his wife even though the assessment was made against the husband. Because the tax lien attached to the property when it was held by the couple in tenancy by the entirety, the subsequent conveyance of the property to the wife was subject to the lien. The wife should not have had any real expectation that the property would have been shielded from sale. Pursuant to state ( Rhode Island ) law, lien creditors of one spouse can force a sale once a tenancy in the entirety is terminated. Although foreclosure was warranted, the sale was delayed in order to provide the wife sufficient time to obtain financing or arrange for a sale on more favorable terms.

Everett C. Sammartino, 10 Dorrance St., Providence, R.I. 02903, George P. Elipoulos, Department of Justice, Washington, D.C. 20530, for plaintiff. Gerard McG. DeCelles, 245 Waterman St. , Providence , R.I. 02906 , for defendant (Brynes, H.). Alan T. Dworkin, 164 Airport Rd., Warwick, R.I. 02889, Rob ert M. Brady, One Grove Ave., East Providence, R.I. 02914, for defendant (Brynes, M.E.).

DECISION AND ORDER

TORRES, United States District Judge:

This is an action brought pursuant to 26 U.S.C. §7403 to reduce a federal tax assessment against Howard A. Brynes to judgment and to foreclose what the government contends is a lien on certain real property formerly owned by Howard and his wife, Marjorie. The issues presented are whether the property in question is subject to a tax lien and, if so, whether the United States should be permitted to foreclose that lien.

FACTS

This case was tried to the Court sitting without a jury. Marjorie Brynes was the only witness. Based on her testimony and the documentary evidence, I find the facts to be as follows. In 1971, Howard and Marjorie Brynes purchased a home at 143 Longview Drive in Cranston , Rhode Island as joint tenants. As the years passed, their marriage foundered. On April 4, 1985 , Howard was indicted for failing to file federal income tax returns and for attempting to bribe an IRS agent. The following day Marjorie filed a divorce petition.

One month later, in connection with the divorce proceeding, Howard and Marjorie executed a deed converting their ownership from joint tenancy to a tenancy by the entirety. The deed effecting that change was recorded on July 16, 1985 . The purpose of changing the form of ownership was to prevent creditors of one spouse from forcing a sale of the property to satisfy that spouse's debts. ¹ On November 25, 1985 , the IRS made an assessment against Howard A. Brynes in the amount of $9,804.74 plus interest and penalties for delinquent taxes.

In March, 1988, Howard and Marjorie executed and recorded a deed conveying 143 Longview Drive to Marjorie. Shortly thereafter, they entered into a property settlement agreement that was incorporated into an interlocutory divorce decree by the Rhode Island Family Court. ² Under the property settlement agreement Marjorie received exclusive use of 143 Longview Drive , and Howard assumed sole responsibility for paying the "federal tax lien upon said property." In return, Marjorie waived her right to alimony "upon the payment of the federal tax lien by [Howard]." Several months later, on August 23, 1988 , the IRS recorded a notice of its federal tax lien against Howard.

The government contends that the title received by Marjorie by virtue of the March, 1988, deed was subject to its lien on Howard's interest in the property. Alternatively, it argues that the transfer to Marjorie should be set aside as fraudulent. In either event, the government asserts that it is entitled to foreclose its tax lien by forcing a sale of the property.

DISCUSSION

I. PRIORITY OF THE FEDERAL TAX LIEN

Under 26 U.S.C. §6321 , the failure of any person to pay a tax liability after demand creates a lien upon that person's property. The lien arises "at the time the assessment is made." 26 U.S.C. §6322 . Generally speaking, such lien takes precedence over all other interests in the property. United States v. V & E Engineering & Constr. Co. [87-1 USTC ¶9355 ], 819 F.2d 331, 335-36 (1st Cir. 1987). However, §6323(a) carves out an exception to that general rule. It provides that a tax lien "shall not be valid as against any purchaser, holder of a security interest, mechanic's lienor, or judgment lien creditor until" the federal tax lien is properly recorded. 26 U.S.C. §6323(a) ; see United States v. Pioneer American Ins. Co. [63-2 USTC ¶9532 ], 374 U.S. 84, 88, 10 L.Ed.2d 770, 774, 83 S.Ct. 1651, 1654 (1963)

In this case, the tax lien arose on November 25, 1985 , the date of assessment. At that time, Marjorie and Howard owned 143 Longview Drive as tenants by the entirety. However, the lien was not recorded until August 23, 1988 , several months after the conveyance to Marjorie. Therefore, whether the lien may be enforced against the property now owned by Marjorie turns on whether her interest falls within one of the four exceptions enumerated in §6323 . Since Marjorie clearly is neither a mechanic's lienor nor the bolder of a security interest in the property, she is entitled to relief under §6323(a) only if she qualifies as a purchaser or judgment lien creditor.

A. PURCHASER

Section 6323 defines a purchaser as one who acquires an interest in property "for adequate and full consideration in money or money's worth." 26 U.S.C. §6323(h)(6) . The regulations promulgated pursuant to that section describe "[a]dequate and full consideration" as consideration that bears a "reasonable relationship to the true value of the interest in property acquired." 26 C.F.R. §301.6323(h)-1(f)(3) . The regulations also provide that "[a] relinquishment or promised relinquishment of . . . marital rights is not a consideration in money or money's worth." 26 C.F.R. §301.6323(h)-1(a)(3) . The validity of the latter provision is, at least, debatable. Like the relinquishment of any other valuable legal right, a waiver of alimony has been recognized as consideration. See, e.g., Law v. United States, 83-1 USTC (CCH) ¶13514, 51 A.F.T.R.2d (P-H) ¶83-1343 (N.D. Cal. 1982). Moreover, there is nothing in the statute indicating that Congress intended to exclude a bona fide waiver of alimony from the definition of consideration or to delegate to the Treasury Department the authority to create such an exclusion.

However, this Court need not decide the validity of §301.6323(h)-1(a)(3) . As already noted, Marjorie's "waiver" of alimony was contingent upon Howard's payment of the tax lien on 143 Longview Drive . Thus, the property settlement agreement provides that Marjorie "shall waive alimony permanently upon the payment of the federal tax lien by the husband, and at that point, alimony will be permanently waived by her." (Emphasis added). To put it another way, Marjorie's "waiver" does not take effect unless and until Howard pays the lien. Because the lien remains unpaid, Marjorie has not yet relinquished her right to alimony and her "waiver" does not constitute "adequate and full consideration in money or money's worth." Accordingly, Marjorie is not a "purchaser" within the meaning of §6323(h)(6) .

B. JUDGMENT LIEN CREDITOR

The regulations define a "judgment lien creditor" as a "person who has obtained a valid judgment, in a court of record and of competent jurisdiction, for the recovery of specifically designated property or for a certain sum of money." 26 C.F.R. §301.6323(h)-1(g) . They further provide that a judgment lien must be perfected and that perfection does not occur until "the property subject to the lien, and the amount of the lien are established." Id. ; see United States v. New Britain [54-1 USTC ¶9191 ], 347 U.S. 81, 84, 98 L.Ed. 520, 74 S.Ct. 367, 369 (1954). In the case of real property, the regulations state:

If recording or docketing is necessary under local law before a judgment becomes effective against third parties acquiring liens on real property, a judgment lien under such local law is not perfected with respect to real property until the time of such recordation or docketing.

26 C.F.R. §301.6323(h)-1(g) .

State law governs the determination as to whether a lien has been perfected. Don King Productions, Inc. v. Thomas [91-2 ustc ¶50,474 ], 945 F.2d 529, 533 (2d Cir. 1991); Air Power, Inc. v. United States [84-2 ustc ¶9732 ], 741 F.2d 53, 55 n.2 (4th Cir. 1984). However, the fact that a lien was perfected before a federal tax lien was recorded does not necessarily entitle it to priority over the federal tax lien. To enjoy priority, the previous lien also must be sufficiently choate under federal law. New Britain , supra; Treas. Regs. §301.6323(h)-1(g) ; see Air Power, Inc. [84-2 USTC ¶9732 ], 741 F.2d at 55 n.2.

In this case, there is no evidence that Marjorie had any judgment for recovery of a sum certain from Howard before the federal tax lien was recorded. Marjorie did testify that Howard failed to make support payments required by the Family Court's interlocutory order. Moreover, it is true that, under Rhode Island law, Marjorie could have reduced those arrearages to judgment. R.I. Gen. Laws §15 -5-16.2(d) (1988). However, there is no indication that Marjorie ever did that. Even if she had, there is no indication that Marjorie perfected any lien by recording it in the records of land evidence as required by Rhode Island law. See R.I. Gen. Laws §15 -5-28(A) (1988). Thus, Marjorie is not a judgment lien creditor within the meaning of §6323(h)(6) .

The fact that the assessment against Howard was made while 143 Longview Drive was owned as tenants by the entirety does not prevent the assessment from establishing a federal tax lien against Howard's undivided one-half interest in the property. As already noted, under Rhode Island law, a creditor of one spouse may attach that spouse's interest in property owned as tenants by the entirety and may compel a sale of the property once the tenancy is terminated. See In Re Gibbons, 459 A.2d 938, 940 (R.I. 1983); Cull v. Vadnais, 122 R.I. 249, 406 A.2d 1241 (1979). In this case, any tenancy by the entirety between Marjorie and Howard was terminated by both the March, 1988, conveyance to Marjorie and by the final divorce decree entered on October 23, 1993 , that dissolved their marriage.

In short, I find that the assessment made on November 25, 1985 , created a federal tax lien against Howard's undivided one-half interest in 143 Longview Drive and any subsequent conveyances of that interest to Marjorie were subject to the lien. Because of that finding, it is unnecessary to address the government's alternative contention that foreclosure should be permitted on the ground that the deed to Marjorie was a fraudulent conveyance.

II. FORECLOSURE SALE

The only remaining issue is whether a foreclosure sale should be ordered to satisfy the government's tax lien. IRC §7404(c) states that "The court, . . . in all cases where a claim or interest of the United States . . is established, may decree a sale of such property, by the proper officer of the court. . . ." (Emphasis added). The permissive language of the statute indicates that courts have some discretion to refuse to permit foreclosure. However, the Supreme Court has said that such discretion is very limited and should be exercised "rigorously and sparingly." United States v. Rodgers [83-1 USTC ¶9374 ], 461 U.S. 677, 710-11, 76 L.Ed.2d 236, 263-64, 103 S.Ct. 2132, 2151-52 (1983). It has listed four factors to be considered in making that determination.

First, a court should consider the extent to which the government's financial interests would be prejudiced if it were relegated to a forced sale of the partial interest actually liable for the delinquent taxes. . . .

Second, a court should consider whether the third party with a nonliable separate interest in the property would, in the normal course of events, have a legally recognized expectation that that separate property would not be subject to forced sale by the delinquent taxpayer or his or her creditors. . . .

Third, a court should consider the likely prejudice to the third party, both in personal dislocation costs and in . . . practical undercompensation. . . .

Fourth, a court should consider the relative character and value of the nonliable and liable interests in the property. . . .

Id.

In this case, there is no practical way to sell only Howard's interest in 143 Longview Drive . The property is not susceptible to physical partition, and it is doubtful that prospective purchasers would have any interest in buying a partial interest in a residence occupied by Marjorie. Nor is there any evidence that Howard has other assets that could be seized to satisfy the claim underlying the tax lien.

In addition, it is difficult to see how Marjorie could have had "a legally recognized expectation" that the property would not be subject to a forced sale. Howard was indicted before execution of the deed creating the tenancy by the entirety. Marjorie, herself, concedes that she was aware, then, that the IRS was seeking to recover money from her husband. Furthermore, she could not have had any real expectation that the creation of a tenancy by the entirety would permanently shield the property from a forced sale because Rhode Island law permits lien creditors of one spouse to foreclose when the tenancy is terminated. Since the tenancy was created pursuant to divorce proceedings initiated by Marjorie, she must have contemplated eventual dissolution of the marriage and a concomitant termination of the tenancy by the entirety. Finally, she must be deemed to have recognized the risk of a forced sale in April of 1988 when the property was conveyed to her alone. Because of that conveyance, any expectation she previously might have had disappeared.

The most difficult of the Rogers factors to apply is the one focusing on the adverse effect foreclosure is likely to have upon Marjorie. A foreclosure sale invariably has a detrimental effect on third parties having an interest in the property. That is particularly true when, as here, the property is the third party's residence. However, if those factors were sufficient to warrant denial of permission to foreclose, the foreclosure remedy provided by §7403(c) effectively would be negated. Clearly, something more is required.

That "something more" was present in United States v. Jensen [92-1 USTC ¶50,078 ], 785 F.Supp. 922 (D. Utah 1992), a case relied upon by Marjorie. In Jensen, the court declined to permit immediate foreclosure with respect to a residence belonging to the wife of a delinquent taxpayer on the grounds that the wife was unemployed, had no assets and was suffering from terminal cancer that left her with a limited life expectancy. The court concluded that the prejudice suffered by the wife in being unable to replace the "roof over her head" greatly outweighed the prejudice the government would suffer by delaying foreclosure for the balance of the wife's lifetime.

This case does not present such extenuating circumstances. Marjorie is a college graduate and has been employed as a psychologist since 1982. Although she does have some health problems, they are far less serious to those alluded to in Jensen. Moreover, there was evidence that the mortgage on 143 Longview Drive was paid in full during 1991. Therefore, there would appear to be a very real possibility that financing could be obtained for the value of Howard's one-half interest thereby preventing a foreclosure sale.

To summarize, the facts of this case do not permit the Court to exercise the very limited discretion accorded by §7403(c) by refusing to permit foreclosure. However, the Court will exercise that discretion for the limited purpose of mitigating the hardship to Marjorie by deferring the sale until August 1, 1994 . That delay should afford Marjorie an opportunity to either obtain financing or arrange for a private sale on more favorable terms. Furthermore, such a short delay will not significantly prejudice the government's right to satisfy its lien. See United States v. Young, No. C-89-2065 MPH, 1992 U.S. Dist. LEXIS 7908, at *11 (N.D.Cal. April 8, 1992) ("The court finds that discretion should be exercised under section 7403(c) and that a forced sale of the property * * * should not be ordered without first allowing defendant the opportunity to satisfy the obligation by some less draconian means."), rev'd on other grounds, No. 92-16007, 1993 U.S. App. Lexis 29044 (9th Cir. Nov. 1. 1993).

CONCLUSION

For all of the foregoing reasons, the clerk is directed to entered judgment in favor of the United States of America against Howard A. Brynes in the amount of $12,838.47 plus interest, costs and penalties. In addition, judgment shall enter against Howard A. Brynes and Marjorie E. Brynes permitting foreclosure of the federal tax lien on 143 Longview Drive, Cranston, Rhode Island, provided that:

1. Such foreclosure sale shall not be conducted prior to August 1, 1994 , and

2. The proceeds of such sale shall be distributed first to the United States of America in satisfaction of its federal tax lien against the undivided one-half interest of Howard A. Brynes, with the remainder of the proceeds to be distributed to Marjorie E. Brynes.

¹ Under Rhode Island law, when a husband and wife own real estate as tenants by the entirety, creditors of one spouse may attach that spouse's interest in the property but may not force a sale of the property to satisfy their liens until the tenancy is severed. In re Gibbons, 459 A.2d 938, 940 (R.I. 1983); Cull v. Vadnais, 122 R.I. 249, 406 A.2d 1241 (1979).

² Marjorie obtained a final divorce decree from the Rhode Island Family Court on October 23, 1993 .