Summary Judgment Page1

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[2000-1 USTC ¶50,323] ContiMortgage Corp., Plaintiff v. United States of America, Gunther A. Schaaf, and Sandra Ondov Schaaf, Defendants

U.S. District Court, Dist. Minn., Civ. 98-1389 (DWF/AJB), 3/2/2000

[Code Secs. 6321 , 6323 and 7402 ]

Summary judgment: Lien for taxes: Security interest: Priority against third parties: Mortgage guarantor: Purchaser: Equitable subrogation: Issues of fact: Knowledge of tax lien.--A mortgage assignee's suit seeking a determination regarding the priority of adverse claims to real property and a declaration that its mortgage was superior to a previously recorded federal tax lien could not be resolved on the parties' motions for summary judgment. An unresolved factual issue existed as to whether the mortgage assignor had committed an excusable mistake of fact when it failed to discover the existence of the lien before issuing the mortgage. If the mistake were excusable, the doctrine of equitable subrogation would allow the assignee to assume the same priority position as the holders of the previous encumbrances on the property, and its claim would be superior to that of the IRS.

[Code Sec. 7402 ]

Summary judgment: Security interest: Priority against third parties: Jurisdiction: Quiet title action.--A mortgage assignee qualified as a real party in interest in its suit seeking a determination regarding the priority of adverse claims to real property, and the federal district court had jurisdiction over its action to quiet title to the real property. The government's contention that the assignee was not a proper party in interest because the company that provided a title insurance policy bore the risk of loss was rejected. The assignee, and not the title company, was the owner of the subject property.

Steven H. Bruns, Esther E. McGinnis, Peterson Fram & Bergman, 50 Fifth St. East, St. Paul, Minn. 55101, for plaintiff. Daniel R. Conrad, Department of Justice, Washington , D.C. 20530 , for defendants.

MEMORANDUM OPINION AND ORDER

Introduction

FRANK, District Judge:

Plaintiff ContiMortgage Corporation ("ContiMortgage") commenced the present suit under 28 U.S.C. §2410(a) to determine the priority of adverse claims to certain real property in Anoka County , Minnesota . ContiMortgage seeks a declaration that its mortgage is superior to Defendant United States ' previously recorded federal tax liens.

The matter is currently before the Court pursuant to the cross-motions of ContiMortgage and the United States for summary judgment. For the reasons stated, both motions are denied.

Background

The following facts are not in dispute.

In 1994, the subject property was owned by Defendants Gunther Schaaf and Sandra Ondov Schaaf (the "Schaafs"). During 1994 and 1995, the Schaafs engaged in improvements on their property, including an expansion of their house and other construction on the property. The Schaafs financed the new construction by obtaining a mortgage from Mercantile Mortgage, Inc. ("Mercantile").

Mercantile hired Strategic Mortgage Services ("SMS") to conduct the title work and perform the closing of the mortgage. SMS's abstractors and title examiners performed name searches and tract searches for the subject property on February 6, 1995 , April 24, 1995 , and May 2, 1995 .

On May 4, 1995 , the IRS filed a federal tax lien in the Anoka County Recorder's Office, in the amount of $441,489.38.

On May 9, 1995 , the Schaafs executed a $300,000 note in favor of Mercantile. The note was secured by a mortgage.

$168,747.72 of the $300,000.00 mortgage was paid to lien subcontractors who had worked on the subject property. $1,248.52 of the loan proceeds from Mercantile were applied to the Schaafs' outstanding real estate taxes. $65,943.46 of the loan proceeds were used to pay off a 1991 mortgage from Crosstown State Bank ("Crosstown").

On May 12, 1995 , Mercantile assigned its interest in the 1995 mortgage to Plaintiff ContiMortgage.

On May 19, 1995 , the mortgage was recorded in the Anoka County Recorder's Office.

In the summer of 1997, the Schaafs defaulted on their mortgage payments. ContiMortgage commenced mortgage foreclosure proceedings and the Schaafs failed to redeem within the mortgage redemption period. On October 6, 1998 , ContiMortgage purchased the subject property at a mortgage foreclosure sale held by the Anoka County Sheriff. The Schaafs' interest in the property terminated on April 6, 1999 , when the redemption period expired.

ContiMortgage commenced the present action on May 21, 1998 . ContiMortgage seeks a declaration that it is entitled to be equitably subrogated to the positions of the 1991 Crosstown mortgage and the mechanic lienholders, and that its mortgage is thus superior to the rights of the United States of America .

Discussion

A. Standard of Review

Summary judgment is proper if there is no genuine issue of material fact and the moving party is entitled to judgment as a matter of law. Fed.R.Civ.P.56(c). Enterprise Bank v. Magna Bank, 92 F.3d 743, 747 (8th Cir. 1996). The court must view the evidence and the inferences which may be reasonably drawn from the evidence in the light most favorable to the nonmoving party. Enterprise Bank, 92 F.3d at 747. However, as the Supreme Court has stated, "summary judgment procedure is properly regarded not as a disfavored procedural shortcut, but rather as an integral part of the Federal Rules as a whole, which are designed to 'secure the just, speedy, and inexpensive determination of every action.' " Fed. R. Civ. P. 1. Celotex Corp. v. Catrett, 477 U.S. 317, 327, 106 S. Ct. 2548, 2555, 91 L. Ed. 2d 265 (1986).

The moving party bears the burden of showing that there is no genuine issue of material fact and that it is entitled to judgment as a matter of law. Enterprise Bank, 92 F.3d at 747. The nonmoving party must then demonstrate the existence of specific facts in the record which create a genuine issue for trial. Krenik v. County of Le Sueur , 47 F.3d 953, 957 (8th Cir. 1995). A party opposing a properly supported motion for summary judgment may not rest upon mere allegations or denials, but must set forth specific facts showing that there is a genuine issue for trial. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 256, 106 S. Ct. 2505, 2514, 91 L. Ed. 2d 202 (1986); Krenik, 47 F.3d at 957.

B. Subject Matter Jurisdiction

The United States argues that ContiMortgage is not a real party in interest in this case and that subject matter jurisdiction is therefore lacking.

Plaintiff ContiMortgage commenced this action under 28 U.S.C. §2410(a)(1), which provides in relevant part as follows:

Under the conditions prescribed in this section and section 1444 of this title for the protection of the United States , the United States may be named a party in any civil action or suit in any district court, or in any State court having jurisdiction of the subject matter--

(1) to quiet title to,

. . . .

real or personal property on which the United States has or claims a mortgage or other lien.

28 U.S.C.A. §2410(a).

The words "quiet title," as used in the section above, are not intended to refer to a suit to quiet title in the limited sense in which that term is sometimes used, but rather, the term comprehends a suit to remove a cloud upon the title of a plaintiff. Progressive Consumers Federal Credit Union v. United States [96-1 USTC ¶50,160], 79 F.3d 1228, 1231 (1st Cir. 1996), citing United States v. Coson [61-1 USTC ¶9219], 286 F.2d 453, 457 (9th Cir. 1961). Where a plaintiff does not challenge the merits of the tax assessment itself, section 2410(a) has been recognized as a vehicle for determining lien priority. Progressive Consumers [96-1 USTC ¶50,160], 79 F.3d at 1233-34. Thus, in Progressive Consumers, where, as in the present matter, the plaintiff sought a declaration of the priority of its mortgage over the government's tax lien, the First Circuit held that subject matter jurisdiction was properly exercised. Progressive Consumers [96-1 USTC ¶50,160], 79 F.3d at 1230-34.

The United States claims that ContiMortgage is not a proper party in interest because Fidelity National Title Insurance, which provided a title insurance policy in the present matter, bears the risk of loss. In support of its argument, the United States cited Commonwealth Land Title Ins. Co. v. United States, in which the title insurer brought an action against the United States to determine the validity of a tax lien. Commonwealth Land Title Ins. Co. v. United States , 759 F. Supp. 87 (D. Conn. 1991). The Court concluded that the title insurance company could not bring a claim under section 2410 because it was neither in possession of nor was the private owner of the property in question. Commonwealth, 759 F. Supp. at 93.

In the present matter, however, ContiMortgage, not a title company, is the plaintiff. ContiMortgage is the owner of the subject property and the assignee of the mortgage at issue. ContiMortgage is seeking to determine the priority position of its own mortgage. Therefore, the present matter is analogous to Progressive Mortgage, rather than Commonwealth.

As the Plaintiff in the present matter is seeking a declaration of the priority of its mortgage over the United States' tax lien, subject matter jurisdiction is proper pursuant to 28 U.S.C. §2410(a)(1). See Progressive Consumers [96-1 USTC ¶50,160], 79 F.3d at 1231.

C. Equitable Subrogation

The doctrine of equitable subrogation allows a person who pays off an encumbrance to assume the same priority position as the holder of the previous encumbrance. Mort v. United States [96-1 USTC ¶50,315], 86 F.3d 890, 893 (9th Cir. 1996). Although equitable subrogation (also called "legal subrogation") is a highly favored doctrine, it is not an absolute right, but rather, one that depends on the equities and attending facts and circumstances of each case. Universal Title Ins. Co. v. United States [92-1 USTC ¶50,106], 942 F.2d 1311, 1315 (8th Cir. 1991). In general, the equity of the party seeking subrogation must be clear and substantial, and superior to that of other claimants. Universal Title [92-1 USTC ¶50,106], 942 F.2d at 1315. Finally, subrogation cannot be invoked where it would work an injustice, violate sound public policy, or result in harm to innocent third parties. Universal Title [92-1 USTC ¶50,106], 942 F.2d at 1315.

Unlike the present matter, Universal Title again involved a title insurer who brought an action against the government regarding a prior tax lien on the subject property. In that case, the Eighth Circuit noted that an insurer has no right of subrogation as against a third party who has not caused the insured's loss. Universal Title [92-1 USTC ¶50,106], 942 F.2d at 1319. The Eighth Circuit finally concluded that the plaintiff was not entitled to be subrogated to the rights of the prior lienholders because it made no payment that would entitle it to subrogation, its failure to discover the federal tax lien was not an excusable mistake of fact, and its subrogation rights, if any, did not apply as against the government, which was not responsible for the loss. Universal Title [92-1 USTC ¶50,106], 942 F.2d at 1320.

The present matter, however, was not commenced by a title insurer. Rather, the facts of the present matter more closely resemble the case of Mort v. United States, in which assignees of a promissory note secured by a deed of trust sought a declaration that their deed of trust was superior to a federal tax lien. Mort v. United States [96-1 USTC ¶50,315], 86 F.3d 890 (9th Cir. 1996). As in the present matter, the plaintiffs in Mort acquired their interest after the IRS filed a tax lien on the property, but argued that they were entitled to be equitably subrogated to the priority position of the lender whose loan was paid off by their assignor. Mort [96-1 USTC ¶50,315], 86 F.3d at 891.

The Ninth Circuit stated that equitable subrogation is generally appropriate where (1) the subrogee made the payment to protect his or her own interest, (2) the subrogee did not act as a volunteer, (3) the subrogee was not primarily liable for the debt paid, (4) the subrogee paid off the entire encumbrance, and (5) subrogation would not work any injustice to the rights of the junior lienholder. Mort [96-1 USTC ¶50,315], 86 F.3d at 894.

A person who lends money to pay off an encumbrance on property and secures the loan with a deed of trust on that property is not a volunteer for purposes of equitable subrogation. Mort [96-1 USTC ¶50,315], 86 F.3d at 891. Therefore, to the extent that Mercantile loaned the Schaafs money to pay off lien subcontractors and the 1991 Crosstown mortgage, Mercantile was not a volunteer for purposes of equitable subrogation.

In the present matter, Mercantile assigned its interest to Plaintiff ContiMortgage. Similarly, in Mort, the plaintiff was actually an assignee of the party that had paid off the prior note. Mort [96-1 USTC ¶50,315], 86 F.3d at 894. The Ninth Circuit noted that the general rule is that, where a valid assignment of a mortgage has been consummated with proper consideration, the assignee is vested with all the powers and rights of the assignor. Mort [96-1 USTC ¶50,315], 86 F.3d at 894. The Ninth Circuit thus held that the plaintiff had assumed the assignor's rights to equitable subrogation. Mort [96-1 USTC ¶50,315], 86 F.3d at 894.

Finally, the Ninth Circuit held that application of the doctrine would not work an injustice to the rights of the government:

At the time the IRS filed its tax lien, the tax lien was subordinate to the Kern mortgage. If the Morts are equitably subrogated to the priority position of the Kern mortgage, the IRS will be in the same position it was in at the time the tax lien was filed. If equitable subrogation is denied, however, the government will receive a windfall, moving up to a better position than it originally had.

Mort [96-1 USTC ¶50,315], 86 F.3d at 895.

Similarly, in the present matter, at the time the IRS filed the tax lien, it was subordinate to the Crosstown mortgage and the rights of the lien subcontractors. ¹ If ContiMortgage is equitably subrogated to the priority position of the Crosstown mortgage and lien subcontractors, the United States will be in the same position it was in at the time the tax lien was filed. If equitable subrogation is denied, however, the government will receive a windfall, moving up to a better position than it originally had, thereby reaping the benefits of the loan that Mercantile issued to pay off the Crosstown mortgage and the lien subcontractors.

Finally, however, for the doctrine of equitable subrogation to apply, Minnesota law requires the presence of an "excusable mistake of fact" in the failure to learn of the prior encumbrance on the property. Universal Title [92-1 USTC ¶50,106], 942 F.2d at 1316. As stated by the Eighth Circuit, it has long been recognized that purchasers of real property are expected to consult available records in regard to contemplated real property transactions to minimize the effect of any uncertainty of representation between vendor and vendee concerning existing incumbrances of record. Universal Title [92-1 USTC ¶50,106], 942 F.2d at 1318.

In the present matter, the mortgage was obtained on May 9, 1995 . On that date, the Schaafs signed an affidavit stating that there were no tax liens filed against them. (Pl.'s Ex. J.) SMS conducted title searches on February 6, 1995 , April 24, 1995 , and May 2, 1995 . The federal tax lien was recorded on May 4, 1995 . ContiMortgage asserts that no search of the available records could have discovered the lien by May 9, 1995, due to the existence of a "gap period" in the county recorder's records, meaning the time interval between the day when the county recorder received a document for recording and the time when that document has been processed and is thus discoverable in the real property records. (Pl.'s Ex. L at pp. 5-7.)

However, at his deposition, Mr. Schaaf testified that he had informed Mercantile that he was in negotiations with the IRS, specifically, that he had outstanding federal tax liabilities that he was trying to resolve. (G. Schaaf Dep. at p. 21.)

Later in his deposition, Mr. Schaaf stated that, to the best of his recollection, he did not believe he had actually spoken to anyone from Mercantile. (G. Schaaf Dep. at pp. 38-40.) Rather, Mr. Schaaf believed that he had made the statements in question to the representatives who brokered the transaction between the Schaafs and Mercantile. (G. Schaaf Dep. at pp. 38-40.)

As the matter is before the Court pursuant to the parties' cross-motions for summary judgment, neither party is entitled to have this conflict in the record construed in its favor. Therefore, an issue of fact remains whether Mercantile committed an "excusable mistake of fact" in failing to discover the existence of the federal tax lien before issuing its mortgage to the Schaafs.

Conclusion

This case is distinguishable from the Eighth Circuit's decision in Universal Title. Plaintiff ContiMortgage is not a title insurer, but rather is the mortgage assignee seeking a declaration as to the priority of its mortgage. ContiMortgage is therefore a proper party in interest and the Court may exercise subject matter jurisdiction.

Under the doctrine of equitable subrogation, ContiMortgage would be allowed to assume the same priority position as the holders of the previous encumbrances, specifically Crosstown and the lien subcontractors. However, as the record contains an issue of material fact regarding whether the federal tax lien should properly have been discovered, and as the doctrine depends on the equities and attending facts and circumstances of each case, neither party is entitled to summary judgment.

It is the position of the Court that it is in the best interests of the parties to pursue a settlement at this time, in the context of the Court's decision.

For the reasons stated, IT IS HEREBY ORDERED:

1. The Plaintiff's motion for an order stating that the Plaintiff is entitled to be equitably subrogated to Crosstown's mortgage and the subcontractors' liens and stating that the Plaintiff's mortgage is superior to the United States ' tax liens and to dismiss the United States ' counterclaims (Doc. No. 22) is DENIED.

2. The United States ' motion for summary judgment (Doc. Nos. 28, 32) is DENIED.

¹ According to the applicable federal statute, state law determines when a subcontractor's lien arises:

The term "mechanic's lienor" means any person who under local law has a lien on real property ... for services, labor, or materials furnished in connection with the construction or improvement of such property. For purposes of the preceding sentence, a person has a lien on the earliest date such lien becomes valid under local law against subsequent purchasers without actual notice, but not before he begins to furnish the services, labor, or materials.

26 U.S.C.A. §6323(h)(2) (emphases added).

Accordingly, Minnesota law provides as follows:

All liens, as against the owner of the land, shall attach and take effect from the time the first item of material or labor is furnished upon the premises for the beginning of the improvement, and shall be preferred to any mortgage or other encumbrance not then of record, unless the lienholder had actual notice thereof. As against a bona fide purchaser, mortgagee, or encumbrancer without actual or record notice, no lien shall attach prior to the actual and visible beginning of the improvement on the ground....

Minn. Stat. §514.05, subd. 1.

Consequently, to the extent that material or labor was furnished and visible improvements were made on the property in question before the recording of the tax lien, the subcontractors' liens would have had priority over the federal tax lien.

 

 

[97-1 USTC ¶50,321] Amwest Surety Insurance Company, Plaintiff-Appellant v. United States of America , Defendant-Appellee

(CA-9), U.S. Court of Appeals, 9th Circuit, 95-56571, 3/17/97, Affirming an unreported District Court decision

[Code Secs. 6323 and 7426 ]

Validity of lien: Priority: Subrogation rights: Wrongful levy.--An IRS tax lien on a third party's property interest in contract proceeds was superior to an insurance company's rights, as subrogee, to the third party's interest in the property; therefore, the insurance company's wrongful levy claim was rejected. The subrogation rights matured after the tax lien attached to the property. Furthermore, the subrogation rights were not accorded superpriority status because they did not constitute security interests acquired by contract.

Stanley Haren, Hillery & Berger, 6320 Canoga Ave. , Woodland Hills , Calif. 91365 , for plaintiff-appellant. Gary R. Allen, Randolph L. Hutter, Carol A. Barthel, Peter Sklarew, Department of Justice, Washington, D.C. 20530, for defendant-appellee.

Before: FARRIS, KOZINSKI and NELSON, Circuit Judges.

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

MEMORANDUM ^*

Amwest Surety Insurance Company appeals the district court's grant of summary judgment in favor of the government on Amwest's wrongful levy claim under 26 U.S.C. §7426. We review de novo, Bagdadi v. Nazar, 84 F.3d 1194, 1197 (9th Cir. 1994), and affirm.

Amwest does not contest that Counsel had a property interest in the contract proceeds to which a tax lien could attach. We reject Amwest's argument that this property interest was retroactively extinguished upon Counsel's later defaults. Amwest claims its own rights to the undisbursed proceeds through Counsel, either as assignee or subrogee. "Once a lien has attached to an interest in property, the lien cannot be extinguished . . . simply by a transfer or conveyance of the interest." United States v. Rodgers [83-1 USTC ¶9374], 461 U.S. 677, 691 n.16 (1983).

In the absence of a congressional rule to the contrary, the priority of a federal tax lien in relation to other liens and interests is determined under the federal common-law principle that "the first in time is the first in right." United States v. McDermott [93-1 USTC ¶50,164], 507 U.S. 447, 449 (1993). The federal liens attached upon assessment in 1993. 26 U.S.C. §6322. Amwest's right to be subrogated to Counsel's interest in the contract proceeds matured, for purposes of federal law, after Counsel's defaults in 1994. The federal liens were first in time. That Arnwest's equitable subrogation rights may relate back to the date of the suretyship agreement for purposes of state law is not relevant. See United States v. Security Trust and Savings Bank [50-2 USTC ¶9492], 340 U.S. 47, 50 (1950). Amwest has not demonstrated that it is otherwise subrogated to the rights of a person or entity whose rights are senior to the government's.

Amwest's equitable subrogation rights are not entitled to superpriority under 26 U.S.C. §6323(c) because its subrogation rights are not security interests acquired by contract. See 26 U.S.C. §6323(c) (granting superpriority to certain security interests); 26 U.S.C. §6323(h)(1) (defining security interest as an interest "acquired by contract").

AFFIRMED.

^* This disposition is not appropriate for publication and may not be cited to or by the courts of this circuit except as provided by 9th Cir. R. 36-3.

 

 

[95-1 USTC ¶50,140] Wiley P. Waldrep, Waldrep Dairy, Inc., and W&D Dairy, Inc., Plaintiffs v. Jewell Mae Detjen f/k/a Jewell Mae Bell and Roger Coleman, as Trustees, Beth W. Corporation, and United States of America, Defendants

U.S. District Court, So. Dist. Fla., 93-6858-CIV-ZLOCH, 12/1/94

[Code Sec. 6223 ]

Deficiencies: Collection: Lien against property: Validity and priority: Purchasers: Knowledge: Summary judgment.--A dairy company's motion for summary judgment against the IRS was denied because there was a genuine issue as to whether the company was a "purchaser" of certain real estate and whether it had sufficient knowledge of tax liens prior to obtaining a mortgage on the property by collateral assignment. Further, the IRS claimed that the amount paid by the company pursuant to the collateral assignment agreement was less than the fair market value of the property and, therefore, that the company did not purchase the property for fair and adequate consideration.

Russell A. White, Rogers, Morris & Ziegler, 1401 E. Broward Blvd., Ft. Lauderdale, Fla. 33301, for plaintiffs. Alvavrez L. LeCesne, Jr., Grisel Alonso, Department of Justice, Washington, D.C. 20530, for U.S.

ORDER

 

ZLOCH, District Judge:

THIS MATTER is before the Court upon Plaintiffs, Wiley P. Waldrep, Waldrep Dairy, Inc., and W & D Dairy, Inc.'s Motion For Summary Judgment (DE 17). The Court has considered the merits of said Motion, has reviewed the entire court file herein and is otherwise fully advised in the premises.

The Plaintiffs, Wiley P. Waldrep, Waldrep Dairy, Inc., and W & D Dairy, Inc.'s (collectively hereinafter "Waldrep") filed the instant action in state court to foreclose a Mortgage on real property, and to obtain a judgment on a Promissory Note secured by said Mortgage. The United States holds a tax lien on the real property which the Plaintiffs seek to foreclose. Pursuant to 28 U.S.C. Section 1444 , the United States removed the instant action to federal court.

The Court notes that Defendants Jewell Mae Detjen and Roger Coleman have not responded to the plaintiffs' Motion For Summary Judgment. The Court further notes that the Clerk of this Court entered a Default (DE 14) against the Defendant Beth W. Corporation on March 3, 1994. Therefore, the only argument which will be considered by the Court in opposition to the Motion For Summary Judgment will be that of Defendant United States.

FACTS

The following facts are undisputed. On or about March 19, 1987, Defendants Jewell Mae Detjen, Jeffrey H. Beck and Irwin A. Weiser, as Trustees under a Land Trust Agreement, purchased real estate in Broward County, Florida, from Defendant Beth W. Corporation. In exchange for said property, the Trustees executed and delivered a promissory Note and Mortgage to Beth W. Corporation, for the principal sum of $2,265,000.00.

The principal balance of said Note and Mortgage was due on March 19, 1990 . However, Defendants, Jewell Mae Detjen and Roger Coleman, as successor Trustees to Jewell Mae Detjen, Jeffrey H. Beck and Irwin A. Weiser, defaulted on the aforementioned Note and Mortgage by failing to pay the principal on or before March 19, 1990 . The subject real property was and is currently owned by Defendants, Jewell Mae Detjen and Roger Coleman, as Trustees under the Land Trust Agreement executed on March 19, 1987 .

On or about January 3, 1991 , Beth W. Corporation made a collateral assignment of said $2,265,000.00 Mortgage to Waldrep. In consideration for said collateral assignment, Beth W. Corporation executed three Promissory Notes in Waldrep's favor, for a total amount of $675,000.00.

SUMMARY JUDGMENT STANDARD

Under Rule 56(c), Fed. R. Civ. P., 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).

The party seeking summary judgment always bears the initial responsibility of informing the district court of the basis for its motion, and identifying those portions of the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, which it believes demonstrate the absence of a genuine issue of material fact.

To summarize, the moving party bears the initial burden to show the district court, by reference to materials on file, that there are no genuine issues of material fact that should be decided at trial. Only when that burden has been met does the burden shift to the non-moving party to demonstrate that there is indeed a material issue of fact that precludes summary judgment. Clark v. Coats & Clark, Inc., 929 F.2d 604, 608 (11th Cir. 1991).

The moving party is entitled to "judgment as a matter of law" when the non-moving party fails to make a sufficient showing of an essential element of the case to which the non-moving party has the burden of proof. Celotex Corp. v. Catrett, 477 U.S. 317 (1986); Everett v. Napper, 833 F.2d 1507 (11th Cir. 1987). The standard for granting summary judgment is the same as the standard for granting a directed verdict. Anderson v. Liberty Lobby, Inc., 477 U.S. 242 (1986). The Appellate Courts generally, therefore, will affirm the granting of summary judgment if on any part of the prima facie case there would be insufficient evidence to require submission of the case to a jury. Anderson, 477 U.S. at 252-256; Barnes v. Southwest Forest Industries, Inc., 814 F.2d 607 (11th Cir. 1987). The evidence of the non-movant is to be believed, however, and all justifiable inferences are to be drawn in his favor. Anderson, 477 U.S. at 255; Adickes v. S.H. Kress & Co., 398 U.S. 144 (1970); Barnes, 814 F.2d at 609; Borg-Warner Acceptance Corp. v. Davis , 804 F.2d 1580 (11th Cir. 1986).

ANALYSIS

Defendant United States claims to have a lien upon the subject property by virtue of purported taxable transfers made by the Decedent, Jewell E. Gray in 1987, in her capacity as a stockholder of the Beth W. Corporation. Said transfers allegedly resulted in gift and generation skipping tax liabilities as well as estate tax liabilities occasioned by her death. Plaintiffs assert that, as mortgage-holders to said property, the lien of their Mortgage is superior and paramount to any right, title or interest of the United States in and to said property.

The United States , however, disputes such a characterization of the plaintiffs' interest. The United States claims that the Plaintiffs were purchasers of the real property, and that pursuant to 26 U.S.C. Section 6323(h)(6) , the plaintiffs were required to purchase that property for fair and adequate consideration. Further, the United States asserts that the amount paid by Waldrep pursuant to the collateral assignment of the Mortgage by Beth W. Corporation did not constitute such fair and adequate consideration.

Further, according to the Internal Revenue Service, at the time the original Mortgage was entered into, on March 19, 1987 , the subject property allegedly had a fair market value of $5,277,840.00. The amount of consideration paid for the property, in 1987 amounted to $2,265,000.00. Consequently, the Internal Revenue Service maintains that on March 19, 1987, Jewell E. Gray, Deceased, and the Estate of Jewell E. Gray, Deceased, as a stockholder in the Beth W. Corporation, made a gift to the Trustees, Jewell Mae Detjen, Jeffrey H. Beck and Irwin A. Weiser, in an amount proportional to the Deceased's interest in the subject property. Nevertheless, no gift tax was paid upon the transfer of the real property. Consequently, on or about May 28, 1993 , the Internal Revenue Service determined that there was a gift tax deficiency from the year 1987 in the amount of $4,874,085.00, equalling Jewell E. Gray's proportionate interest in the subject property.

The Plaintiffs assert that they obtained their Mortgage on the subject property, without knowledge of the tax lien, and therefore, their interest is superior to that of the United States . The United States contends, however, that Plaintiffs did have knowledge of the tax lien at the time they received the property pursuant to the collateral assignment.

In light of the foregoing, the Court finds that there exist genuine issues of material fact, such as whether the Plaintiffs were "purchasers" of the subject property, and whether the Plaintiffs had sufficient knowledge of the tax liens prior to the collateral assignment of the Mortgage on January 3, 1991 . Therefore, the existence of such genuine issues of material fact precludes the entry of Summary Judgment as a matter of law.

Accordingly, after due consideration, it is

ORDERED AND ADJUDGED that the Plaintiffs, Wiley P. Waldrep, Waldrep Dairy, Inc., and W & D Dairy, Inc.'s Motion For Summary Judgment (DE 17) be and the same is hereby DENIED.

DONE AND ORDERED in Chambers at Fort Lauderdale , Broward County , Florida , this 1st day of December, 1994.

 

 

[91-2 USTC ¶50,492] Mel R. Eskanos and Rochelle Barkan, a partnership, d/b/a Eskanos & Co., Plaintiffs, and Elwood Henderson, d/b/a Henderson Auctioneer, Interpleader-Plaintiff v. Alpha 76, Inc., Mark R. Nigbur, Daniel Allen Nigbur and Daniel Alexander Nigbur, Defendants, and The United States of America, Defendant-Intervenor

U.S. District Court, Dist. Colo. , Civ. A. 87 N 435, 7/12/91 , 768 F.Supp. 759. Summary judgment denied government, 90-2 USTC ¶50,344 , 712 F.Supp. 819

[Code Sec. 6323 ]

Summary judgment: Liens: Priority.--The government was entitled, as a matter of law, to the proceeds from an auction of a tenant's property, as the landlords failed to establish that they had a super-priority security interest in the proceeds. The landlords failed to prove that the language in the unrecorded, unperfected lease created a security interest in the money; therefore, they could not rely on Code Sec. 6323(b)(1)(B) . Since the government recorded two out of five tax assessments against the tenant prior to the auction, these two liens received priority over the landlords' unsecured claims. Partial summary judgment was granted in favor of the government.

Mel R. Eskanos, pro se. William G. Pharo, Assistant United States Attorney, Denver, Colo. 80294, Karen Lynne Baker, Department of Justice, Washington , D.C. 20530 , for defendants.

MEMORANDUM OPINION AND ORDER

NOTTINGHAM , District Judge:

Defendant Alpha 76, Inc. is a failed business formerly run by the Nigburs, the other defendants. While it was in its death throes, Alpha agreed with plaintiffs, its landlords, to sell some of its personal property and apply the proceeds to arrearages in rental payments due under its lease with plaintiffs. Interpleader Plaintiff Elwood Henderson, an auctioneer, sold the property on April 27, 1985 , and had the net proceeds--some $4,693.56--in hand.

Before Henderson could do anything with the auction proceeds, the United States Internal Revenue Service served him with a notice of levy, demanding that he deliver the money to the IRS in partial satisfaction of Alpha's federal tax delinquencies. Faced with the conflicting demands of the landlords and the IRS, Henderson, after deducting $200.00 in attorney fees he incurred in dealing with the conflicting demands, delivered the balance of the money to the Colorado state court handling the litigation between plaintiffs and Alpha concerning Alpha's overdue rent payments. The IRS intervened and removed the case to this court. Through attrition, the lawsuit has narrowed to a contest between the landlords (who claim that Alpha owed them rent) and the IRS (which claims that Alpha owed it taxes) over the $4,493.56 in auction proceeds which has been deposited by this court's clerk into an interest-bearing account.

The matter is before the court on plaintiffs' motion for summary judgment, which was filed shortly after the court denied the Government's motion for summary judgment. See Eskanos v. Alpha 76, Inc. [90-2 USTC ¶50,344 ], 712 F.Supp. 819 (D.Colo.1989). The primary issue presented by both motions is whether, under the provisions of 26 U.S.C. §6323 (1988), plaintiffs' claim to the money now deposited in the registry of the court prevails over the Government's claim arising from federal tax liens. Plaintiffs rely specifically on section 6323(b)(1)(B) , arguing that this section applies because they hold a security interest in the money, having taken that security interest without actual notice or knowledge of the Government's liens. For reasons recited below, I deny plaintiffs' motion for summary judgment on the ground that plaintiffs do not have a security interest in the money and therefore cannot rely on section 6323(b)(1)(B) . I also reconsider the ruling denying the Government's motion for summary judgment and hold that the Government is entitled, as a matter of law, to satisfy any liens recorded before April 27, 1985 (the date Alpha's personal property was auctioned), out of the money on deposit with the court. As to tax liens recorded after April 27, 1985 , disputed questions of fact preclude entry of summary judgment for either party. A trial will be necessary to resolve the parties' rights in any money which may remain after the Government has satisfied its liens recorded before April 27, 1985 .

FACTS

Most of the pertinent facts are recited in Judge Carrigan's prior opinion for the court. See Eskanos [90-2 USTC ¶50,344 ], 712 F.Supp. at 820-21. Instead of repeating them here, I will simply underscore certain matters for clarity and provide additional detail which I regard as significant. Much of this detail has to do with the exact nature and status of the respective claims.

The Factual Basis for Plaintiffs' Claim

Plaintiffs owned a shopping center in El Paso County , Colorado . Alpha rented a store in the center to carry on its business of selling silk screen prints. The document defining plaintiffs' basic relationship with Alpha, their erstwhile tenant, is a five-page lease demising the real property on which the store sat. The lease requires monthly rental payments and outlines the landlords' remedies for the tenant's breach of the covenant to pay rent or any other covenant in the lease. The lease, however, does not mention tenant's personal property located on the premises or elsewhere, much less grant the landlords any interest in that property. The lease was not recorded with the Colorado Secretary of State or the El Paso County Clerk ad Recorder.

Alpha failed to pay all rent due under the lease. Its default commenced in March 1984 and continued through April 1985. On April 16, 1985 , plaintiffs demanded possession of the premises, and, on April 19, 1985 , Alpha surrendered physical possession of the premises. On May 17, 1985 , plaintiffs filed this lawsuit (in state court) to recover damages caused by Alpha's failure to pay rent and other breaches of the lease.

As matters were coming to a head during April of 1985, a sale of Alpha's personal property was arranged. As noted earlier, Elwood Henderson auctioned the property on April 27, 1985 , and received the money which is now in the court registry. The circumstances leading up to the auction are disputed. The Government asserts that Alpha initiated the auction and hired Henderson . Memorandum of Law in Support of United States' Motion for Summary Judgment at 4 (filed Sept. 11, 1987 ) (hereinafter cited as "Government's Brief"). Therefore, the Government implies, Henderson was acting at all times on behalf of Alpha, and plaintiffs never acquired any sort of interest in the personal property or the money netted by the sale. Plaintiffs, however, assert that they had an agreement with Alpha, pursuant to which they were permitted to take possession of Alpha's personal property and sell it in partial satisfaction of rent arrearages. According to plaintiffs, they took physical possession of the personal property on April 19, 1985 (the same day they got possession of the premises) and then arranged with Henderson to sell the property on April 27, 1985 . Plaintiff's [sic] Response in Opposition to United States ' Motion for Summary Judgment at 4-5 (filed Nov. 12, 1987 ). Both parties rest their positions on statements in their respective briefs and fail to offer evidence. To the extent that these disputed versions of events are material to any claim, then, the dispute will preclude summary judgment on that claim.

The Factual Basis for the Government's Claim

At about the same time it got behind in its rental payments, Alpha also failed to make its quarterly payments of federal withholding and unemployment taxes. As of April 27, 1985 , the date of the auction, the Government had made five separate assessments against Alpha, its taxpayer and plaintiffs' lessee. Ex. C and D to Declaration of Mark G. Fraase (filed Sept. 11, 1987 ). (In its brief, the Government claims there were six, Government's Brief at 4, but an assessment for $129.35 does not appear in the IRS Certificates of Assessments and Payments for Alpha; I therefore ignore the claim in the Government's Brief.) Two were made on May 21, 1984 ; three were made on January 25, 1985 . Only the first two of these assessments were recorded as of April 27, 1985 . Ex. E to Declaration of Mark G. Fraase. According to the recording document, they were filed with both the Colorado Secretary of State and the El Paso County, Colorado, Clerk and Recorder on October 3, 1984 . Id. The remaining three assessments were not recorded until May 8, 1985 . Id.

ANALYSIS

Landlords' Claim to Super-Priority Status Under Section 6323(b)(1)(B)

Plaintiffs argue that they have a "super-priority" security interest in the auction proceeds which, under 26 U.S.C. §6323(b)(1)(B) (1988), trumps all of the Government's tax liens, whenever they were recorded. Section 6323(b)(1)(B) protects a "holder of a security interest" in a "security" from both recorded and unrecorded federal tax liens, provided that the holder takes his interest without "actual notice or knowledge" of the federal tax liens. All of these quoted terms are defined in sections 6323(h) and 6323(i) . The term "security" is defined to include "money," as well as other documents more commonly regarded as "securities," such as bonds, debentures, notes, shares of stock etc. See 26 U.S.C. §6323(h)(4) (1988).

Plaintiffs' theory for applying section 6323(b)(1)(B) rests on the proposition that Alpha's agreement to relinquish possession of its personal property, to acquiesce in sale of the property, and to have the proceeds used in satisfaction of Alpha's rent arrearages effectively gave plaintiffs an interest in that property to secure payment of the arrearages. The security interest was perfected, according to plaintiffs, when they took possession of the property. When the property was sold, plaintiffs continue, that interest became a security interest in the "money" obtained. Thus, plaintiffs conclude, they have the type of "super-priority" security interest protected by section 6323(b)(1)(B) , if they took the interest without "actual notice or knowledge" of the Government's tax liens.

Plaintiffs claim that they lacked actual knowledge of the tax liens, and they have supported their claim with affidavits. The Government does not appear to contest this claim; at any rate, it has not met its burden to supply factual material suggesting that the claim is in dispute. See, e.g., Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 250, 106 S.Ct. 2505, 2510, 91 L.Ed.2d 202 (1986) (where moving party has carried the initial burden of production placed on it by rule 56, non-moving party must set forth specific facts showing a genuine issue for trial). I will therefore assume the claim to be true and proceed to consider whether plaintiffs have a "super-priority" interest in the auction proceeds and are entitled to summary judgment awarding the proceeds to them.

I have concluded that plaintiffs are not entitled to summary judgment on their "super-priority" claim, for two reasons. First, as I indicated earlier, plaintiffs' claim to any sort of an interest in Alpha's personal property or the proceeds thereof rests on factual assertions supported only by their briefs, not by evidence they have submitted. The Government disputes these factual assertions in its own brief. The burden of proving the existence of a security interest protected under section 6323(b)(1)(B) is on the party invoking the protection of that statute. Plaintiffs' failure to carry their evidentiary burden precludes summary judgment in their favor. See, e.g., Celotex Corp. v. Catrett, 477 U.S. 317, 324, 106 S.Ct. 2548, 2553, 91 L.Ed.2d 265 (1986).

Even if plaintiffs could prove the truth of their assertions about events leading up to the sale of the personal property, section 6323(b)(1)(B) cannot sensibly be applied to give plaintiffs "super-priority" in this situation. Even if one assumes (1) an agreement between plaintiffs and Alpha in April 1985 to secure rent arrearages by a pledge of Alpha's personal property and (2) perfection of plaintiffs' interest by possession, plaintiffs thereby acquired, at most, a perfected security interest in goods. See United States v. Hunt [75-1 USTC ¶9327 ], 513 F.2d 129, 133 (10th Cir.1975) (state law characterizes the nature of property right competing with federal tax lien); Colo.Rev.Stat. §4 -9-105(1)(h) (1973 & 1990 Cum.Supp.) (definition of "goods"). Plaintiffs promptly sold these goods at auction, effectively exercising remedies available to a secured party under the Uniform Commercial Code when a debtor is in default. See Colo.Rev.Stat. §4 -9-504 (1973) (secured party has right to sell collateral). When the goods were sold and the money collected, plaintiffs did not, contrary to their contention, retain a security interest which somehow attached to the money; rather, their security interest in the goods was discharged and the money was taken in satisfaction of that security interest. See Colo.Rev.Stat. §4 -9-504(4) (1973) (disposition of collateral "discharges the security interest under which it is made"). To put the matter in terms of the controlling definition of a "security interest" in section 6323(h)(1) , plaintiffs did not acquire their interest in the money proceeds of the auction "for the purpose of securing payment or performance of an obligation," 26 U.S.C. §6323(h)(1) (1988); they acquired that interest in satisfaction of the obligation. Since they did not have a "security interest" in the money, they are not entitled to the "super-priority" status conferred by section 6323(b)(1)(B) .

Landlords' Claims to Priority Status Under Section 6323(a)

Although I do not think plaintiffs' claim to "super-priority" status under section 6323(b)(1)(B) can possibly enable them to defeat any of the Government's tax liens on any state of facts which they could prove in this case, there remains a question concerning the parties' relative priority under section 6323(a) . Section 6323(a) applies to holders of security interests in all types of property belonging to a taxpayer, not just in "securities" and other types of property covered by section 6323(b) . Section 6323(a) , however, provides less protection to the security interests which it covers: whereas a security interest in property covered by section 6323(b) defeats recorded and unrecorded tax liens, a security interest in property covered by section 6323(a) defeats only unrecorded liens. Part of the basis for the Government's motion for summary judgment, which was denied by the court's prior opinion in this case, was the argument that plaintiffs have no "security interest" which would have priority under section 6323(a) . Having reviewed the matter and concluded that the Government was partly right (although not for the reasons it advances), I have decided to reconsider parts of the prior opinion.

Plaintiffs argue that the lease between them and Alpha was intended to give them a security interest in Alpha's personal property on the premises. They point to a lease provision requiring Alpha to insure "all the building contents" and to the fact that plaintiffs were named as additional insureds under the policy insuring the contents. This is insufficient to create a "security interest" as that term is defined in section 6323(h)(1) . I agree with Judge Carrigan (Eskanos [90-2 USTC ¶50,344 ], 712 F.Supp. at 823) that, at least with respect to the lessee's personal property which was sold to produce the money in dispute here, the lease gives plaintiffs no "security interest," because the lease was not recorded anywhere, remained unperfected, and was therefore not "protected under local law against a subsequent judgment lien arising out of an unsecured obligation." 26 U.S.C. §6323(h)(1) (1988). See also Colo.Rev.Stat. §4 -9-301(1)(2) (1973 & 1990 Cum.Supp.) (unperfected security interest loses to hypothetical lien creditor). Moreover, I have reviewed the lease and found that it does not mention the lessee's personal property, much less describe the property. It is thus insufficient to create a security interest in that property, notwithstanding plaintiffs' contention that it was the parties' unexpressed intention to do so. Colo.Rev.Stat. §4 -9-203(1)(b) (1973 & 1990 Cum.Supp.) (security interest not enforceable unless debtor [lessee here] signed a security agreement which contains a "description of the collateral").

Until Alpha agreed in April of 1985 to relinquish possession of the personal property and permit it to be sold in partial satisfaction of rent arrearages, then, plaintiffs were nothing more than unsecured creditors of Alpha. It is clear that the two tax assessments which were properly recorded on October 3, 1984 , are prior to plaintiffs' unsecured claims, since such recorded liens defeat even perfected security interests. 26 U.S.C. §§6323(a) , 6323(h)(1) (1988). The Government is thus entitled, as a matter of law, to judgment satisfying the remaining amounts of these two liens out of the money in the registry of the court.

The situation is different with respect to the tax liens which were unrecorded as of April 27, 1985 , the date of the auction. Those liens may be defeated by a "purchaser" of the goods or by the "holder of a security interest" in the goods, the terms "security interest" and "purchaser" having been defined in section 6323(h)(1) . As I have indicated, the question of how the events immediately preceding the sale are to be characterized in a disputed issue which I cannot resolve as a matter of law on the record before me. Viewing the facts in a light most favorable to plaintiffs, they may have a security interest (perfected by possession) which would be entitled to priority over the Government's unrecorded liens. If money remains in the court's registry after the Government's two recorded liens are paid, resolution of the parties' rights in the remaining money will need to await trial or further proceedings in the case.

On the basis of the foregoing, it is

ORDERED as follows:

1. Plaintiffs' motion for summary judgment is denied.

2. The Government's motion for summary judgment is granted, in part. The Government will have judgment awarding it such part of the money in the registry of the court as will satisfy the current balance on the two assessments made on May 21, 1984 , and recorded on October 3, 1984 .

3. To assist the clerk in calculating amounts due under the preceding paragraph, the Government will, within 15 days of the date of this order, submit a certificate of assessments and payment or similar evidence establishing the balance of the two assessments made on May 21, 1984 . If plaintiffs object to the Government's submission, they will file a response within 11 days after the Government's material is served.

4. Except as provided in paragraph 2, the Government's summary judgment motion is denied.

 

 

[74-2 USTC ¶9526] United States of America , Appellant, Cross-Appellee v. Joseph C. Eaves, Mary Marie Eaves, and Gulf Coast Investment Corporation, Appellees, Cross-Appellants

(CA-10), U. S. Court of Appeals, 10th Circuit, Nos. 73-1911-12, 499 F2d 869, 6/19/74, Aff'g District Court, 73-1 USTC ¶9431

[Code Secs. 6323 and 7403]

Tax liens: Action to enforce: Sale of property held in joint tenancy.--Under Code Sec. 7403 the lower court did not abuse its discretion in confining the sale to the taxpayer-husband's undivided one-half interest in property held in joint tenancy with his wife. The lower court in its sound discretion could have ordered the outright sale of the jointly held property or it could have refused to foreclose on the lien altogether. Further, the taxpayer-wife was not entitled to a lien in her favor for claimed mortgage payments made by her after a 1964 fraudulent conveyance since the evidence showed only that since 1964 she had the task of making the monthly payments but did not disclose the source of the funds for such payments.

Libero Marinelli, Jr., Scott P. Crampton, Assistant Attorney General, Meyer Rothwacks, Michael L. Paup, Department of Justice, Washington, D. C. 20530, Victor R. Ortega, United States Attorney, Mark C. Meiering, Assistant United States Attorney, Albuquerque, N. Mex., for appellant, cross-appellee. Kendall O. Schlenker, Schlenker, Parker, Payne & Wellborn, 925 Public Service Bldg., P. O. Box 925, Midtown Office, 425 Citizens Bank Bldg., Albuquerque, N. Mex., for appellees, cross-appellants.

Before HILL, SETH, and DOYLES, Circuit Judges.

SETH, Circuit Judge:

This is an appeal and cross-appeal from the judgment of the district court [73-1 USTC ¶9431] ordering the sale of Joseph C. Eaves' undivided one-half interest as joint tenant in property which has been the residence of him and his wife, Mary Marie Eaves. The sale was ordered pursuant to 26 U. S. C. §7403 to satisfy a now undisputed tax lien amounting to $128,118.68 against the property of Joseph C. Eaves. It has been resolved that the tax liabilities are those of Mr. Eaves alone, and for which his wife is in no way responsible. The United States contends on the appeal that the district court should have ordered the sale of the entire property with Mrs. Eaves to receive the value of her one-half interest from the proceeds. Mr. and Mrs. Eaves assert that Mrs. Eaves is entitled to a prior lien for payments which she made on the mortgage following a 1964 conveyance by which she purportedly gained absolute title to the property.

The material facts are largely undisputed. Mr. and Mrs. Eaves purchased the residence in 1962 for $48,000, taking title as joint tenants. The parties now agree that title is held on joint tenancy rather than by the community. By the terms of the purchase, Mr. and Mrs. Eaves were to make a downpayment of $10,000 with a like payment due in two years. They also agreed to assume the seller's mortgage held by the codefendant, Gulf Coast Investment Corporation. On October 12, 1964 , by which time Mr. Eaves had become legally insolvent and his tax difficulties had become apparent, a conveyance was effected without consideration whereby Mr. and Mrs. Eaves deeded title to the residence to a trustee who then deeded it back to Mrs. Eaves as the sole owner. The district court determined the conveyance to be in fraud of the rights of the United States under New Mexico Stat. Ann. §50-14-4, and set it aside. That action is not challenged on appeal. Since the 1964 conveyance Mrs. Eaves has apparently made the mortgage payments.

The district court's findings and conclusions as to the amount of the deficiency, the form of ownership of the residence, the priority of the mortgage held by Gulf Coast Investment Corporation, and the invalidity of the 1964 conveyance are not disputed. We are asked only to determine whether the court should have ordered the sale of the entire property rather than of Mr. Eaves' undivided one-half; also whether a prior lien in Mrs. Eaves should have been decreed for the mortgage payments made after the 1964 conveyance.

26 U. S. C. §7403(a) allows the Attorney General to file a civil action to enforce a tax lien in favor of the United States, and to subject "any property, of whatever nature, of the delinquent, or in which he has any right, title, or interest, to the payment of such tax or liability." (Emphasis added.) Subsection (c) of that section then provides that after adjudicating the merits of the claim the district court "may decree a sale of such property, by the proper officer of the court, and a distribution of the proceeds of such sale according to the findings of the court in respect to the interests of the parties and of the United States." (Emphasis added.)

The United States contends that while the court has some discretion under the statute to order or deny a foreclosure sale, if a sale is ordered it must be of the entire property and not simply the interest of the taxpayer. Although other Circuits have considered the meaning of section 7403 in somewhat related circumstances, we know of none which has confronted it in precisely the situation with which we are faced.

The Fifth Circuit evidently had the first opportunity to consider whether section 7403 enables the United States to force the sale of property to which the taxpayer does not hold absolute title. In Folsom v. United States [62-2 USTC ¶9648], 306 F. 2d 361 (5th Cir.), that court held that the United States could not compel the outright sale of real estate in which the taxpayer held only an undivided one-sixth interest. While noting that the United States could "obtain the last vestige of title and every right which such taxpayer owns," the court observed that the law does not authorize it to force a sale "of the property of other joint owners, deny them the right to seek a partition in kind, and to tax them with the costs incurred by the Government in pursuing the delinquent taxpayer."

Since the Folsom decision, other Circuits have considered the limits of the power conferred by section 7403 and have uniformly rejected the Fifth Circuit's position. The first such case and the one after which subsequent decisions have been patterned is United States v. Trilling [64-1 USTC ¶9292], 328 F. 2d 699 (7th Cir.). In that case the Seventh Circuit held that section 7403 authorized the forced sale of property, an interest in which the taxpayer held in joint tenancy, and also the assessment of the costs and expenses of sale according to the respective interests of the owners. Trilling has since been followed by the Fourth Circuit in Washington v. United States [68-2 USTC ¶15,864], 402 F. 2d 3 (4th Cir.) (wife's inchoate dower interest); the Ninth Circuit in United States v. Overman [70-1 USTC ¶9342], 424 F. 2d 1142 (9th Cir.) (community property); and the Second Circuit in United States v. Kocher [72-2 USTC ¶9730], 468 F. 2d 503 (2d Cir.) (tenancy in common). Later developments in the Fifth Circuit cast some doubt on the continued validity of Folsom in that Circuit as well. See Broday v. United States [72-1 USTC ¶9269], 455 F. 2d 1097 (5th Cir.), holding that despite a Texas statute exempting community property from antenuptial debts, a lien would attach to the wife's interest in a community checking account for a tax deficiency assessed prior to her marriage.

To the extent necessary in this case we adopt the construction of section 7403 developed in United States v. Trilling, supra. However, in so doing we note that those cases dealt with the limit of authority conferred by section 7403. The issue before us is whether, acknowledging that the district court had authority to order the sale of Mrs. Eaves' interest in the residence, it was compelled by the statute to exercise the full measure of its authority. We do not believe it was.

Section 7403 has traditionally been interpreted as conferring flexibility and broad discretion upon the courts in fashioning a remedy thereunder. As the use of the term "may" in subsection (c) implies, this discretion and flexibility extends to the decision whether or not to order foreclosure once the validity of the lien has been established. United States v. Hershberger [73-1 USTC ¶9289], 475 F. 2d 677 (10th Cir.); United States v. Boyd [57-2 USTC ¶9791], 246 F. 2d 477 (5th Cir.). It has been said that Congress intended the court to "function with the full traditional flexibility of the Chancellor." United States v. Boyd [57-2 USTC ¶9791], 246 F. 2d 477 (5th Cir.); United States v. Overman, [70-1 USTC ¶9342], 424 F. 2d 1142 (9th Cir.). In many respects we feel the equitable considerations inherent in this case parallel those present in United States v. Hershberger, supra. In that case we held, party in deference to the laws of Kansas, that a wife's undivided one-half interest in the homestead was immune from a foreclosure sale to satisfy a tax deficiency owed by the husband, and that so long as the wife continued to occupy the property as her home, the immunity extended even to foreclosure on the lien against the husband's undivided one-half interest.

In sum, despite the protestations of the United States , we do not believe that section 7403 makes foreclosure an "all or nothing" proposition. We believe it to be well established that the district court in its sound discretion could have ordered the outright sale of the Eaves' residence, but we express no opinion as to the division of costs. Likewise it could have refused to foreclose on the lien altogether. Instead it chose a course bracketed by these two alternatives. Given the flexibility conferred on it by section 7403 we do not believe the court abused its discretion in confining the sale to Mr. Eaves' undivided one-half interest. The trial court must direct and gear the remedies to the factual situation and legal relationships or interest in the property to best accomplish the statutory aims and the rights and equities of the owners.

Turning to the question of the mortgage payments made by Mrs. Eaves after the 1964 conveyance, we can find no basis in the record for a lien in her favor or any other form of special recognition. Mrs. Eaves' testimony shows only that since 1964 she had performed the task of making the monthly payment, but it does not disclose the source of the funds. The refusal to decree such a lien was justified.

The judgment is Affirmed.

 

 

[67-2 USTC ¶9602] United States of America , Plaintiff v. Max B. Cohen, et al., Defendants

U. S. District Court, So. Dist. Fla., No. 66-1496-Civ.-CF, 271 FSupp 709, 7/13/67

[1954 Code Sec. 6323, prior to amendment by P. L. 89-719]

Lien for taxes: Priority: Property subject to lien: Equitable interest in mortgage: Marshaling of assets.--Under Florida law an equitable interest in a mortgage is intangible personal property, subject to a tax lien. Since the government's lien on the personalty was properly filed in the county of taxpayer's residence, its lien was prior to the claim of a subsequent judgment creditor and its later interest as a purchaser. The Court also refused to subject the government to a requirement that it marshal assets in favor of the junior lienor..

[1954 Code Sec. 6323]

Lien for taxes: Collateral estoppel: Final judgment in creditor's suit: Petition for intervention.--Neither the denial of the government's petition for intervention nor the final judgment in a Florida county circuit court creditor's suit estopped the government from pursuing its claim for unpaid taxes because the government was not a party to that law suit nor was it privy to any party to the lawsuit.

[1954 Code Sec. 6321]

Lien for taxes: Defenses against lien: Release of lien.--The defense of a release of the government's tax lien was not allowed where the government effectively denied any release of the lien and the moving party submitted nothing in support of its defense.

Harry Shapiro, Department of Justice, Washington , D. C. 20530, Lavinia L. Redd, Assistant U. S. Attorney, Main Post Office Bldg., Miami , Fla. , for plaintiff. Levine & Freedman, 725 E. Kennedy Blvd., Tampa, Fla., Bernard Wieder, 407 Lincoln Rd., Miami Beach, Fla., W. Max Smiley, P. O. Box 527, Bradenton, Fla., Jack G. Goldberg, 295 Academy St., Jersey City, N. J., Corneal B. Myers, 130 Central Ave., Lake Wales, Fla., Rob ert Manuel, 620 Shoreham Bldg., Washington, D. C., Theodore R. Nelson, 605 Lincoln Rd., Miami Beach, Fla., W. A. Gllen, P. O. Box 1438, Tampa, Fla., Philena Cohen, 711 Hillcrest Drive, Harbor Hills, Bradenton, Fla., Elwyn Middleton & Annie Middleton, 250 Beach, Fla., W. Max Smiley, P. O. Box 527,

Order

FULTON, District Judge:

THIS CAUSE came on to be heard before the Court upon the Government's Motion for Partial Summary Judgment on the issue of priority of liens as between the Government and the Defendant, Fontainebleau . The Court has heard argument of counsel, has carefully studied the memoranda of law and pleadings filed herein, as well as the affidavit submitted by the Government in support of said motion, and is otherwise fully advised in the premises.

By virtue of a contract of purchase and sale between defendant Middleton as Trustee and defendant Myers dated September, 1962, and the consummation of that transaction, defendant Cohen, the taxpayer herein, has owned a beneficial interest in a mortgage indebtedness owed by defendant Myers to defendant Middleton as Trustee. Middleton, a resident of Palm Beach County , Florida , holds this indebtedness for the benefit of Cohen and others. The mortgage covers property situate in Citrus and Levy counties, and it is Cohen's interest in this indebtedness upon which the Government now claims and seeks foreclosure of its tax lien.

As Judge Gewin of the Court of Appeals for the Fifth Circuit observed when confronted with a similar problem,

This is a case in which the Government is diligently pursuing the taxpayer in an effort to satisfy tax liens for delinquent taxes, penalties and interest; but in doing so, it is challenged by others who claim to be innocent bystanders, admitting the right of the Government to collect, but contending that they are being seriously injured by the procedure, and that their property rights are being jeopardized to satisfy tax liens against another. The case is drawn down to the narrow margin that sometimes arises between the rights of the Government to have its taxes paid and its liens satisfied, and the rights of individuals who do not owe the tax but who claim they are injured by the efforts of the Government to collect. Folsom v. United States [62-2 USTC ¶9648], 306 F. 2d 361 (5th Cir. 1962.)

The facts which gave rise to this controversy are not disputed. According to Cohen's uncontroverted affidavit, from September, 1963 to December, 1964, he was a domiciliary and resident of Manatee County , Florida , and from December, 1964 to October, 1965, he was a domiciliary and resident of Dade County , Florida . He has never resided in Citrus, Levy or Palm Beach counties, Florida .

Inasmuch as the chronology of the accrual and recording of the Government and Fontainebleau liens are the crux of this litigation, these undisputed facts are probably most clearly set forth in time-line fashion.

May 12, 1961 --District Director of the Internal Revenue Service made an assessment of income tax liability of defendant, Max Cohen, in the amount of $83,639.48, of which a balance remains due of $39,415.40.

September 7, 1961 --District Director caused notice of tax lien, based on the first assessment, to be filed with the Clerk of the Manatee County Circuit Court.

September 8, 1961 --District Director caused notice of tax lien based on the first assessment to be filed with the Clerk of the Dade County Circuit Court.

July 14, 1963 --District Director of the Internal Revenue Service made a second assessment of income tax liability of defendant, Max Cohen, in the amount of $257,732.38.

September 5, 1963 --District Director caused notice of tax lien based on the second assessment to be filed with the Clerk of the Manatee County Circuit Court. Notice of tax lien based on both assessments was filed with the Clerk of the Citrus County Circuit Court.

October 23, 1963 --District Director caused notice of tax lien based on both assessments to be filed with the Clerk of the Hillsborough County Circuit Court.

October 24, 1963 --District Director caused notice of tax lien based on the second assessment to be filed with the Clerk of the Dade County Circuit Court.

October 30, 1963 --District Director caused notice of tax lien based on both assessments to be filed with the Clerk of the Levy County Circuit Court.

April 20, 1965 --The Defendant Fontainebleau Hotel Corp. obtained a personal judgment against the defendant taxpayer Max Cohen in the Dade County Circuit Court.

April 22, 1965 --Fontainebleau Hotel Corp. recorded that judgment in Citrus County .

July 26, 1965 --Execution having been returned nolla bona, Fontainebleau Hotel Corp. filed a complaint in the nature of a creditors bill in the Citrus County Circuit Court, seeking to reach Cohen's beneficial interest in the Myers-Middleton mortgage.

November 17, 1965 --The Citrus County Circuit Court issued a temporary stay order, enjoining Cohen from encumbering or transferring any funds held by Middleton as trustee for Cohen's benefit.

December 17, 1965 --District Director caused notice of tax liens based on both assessments to be filed with the Clerk of the Palm Beach County Circuit Court.

May 18, 1966 --The Fontainebleau Hotel Corp. obtained a final decree in its Citrus County creditors suit, which decree declared Fontainebleau 's lien on Cohen's equity in the mortgage indebtedness. Cohen's interest was ordered to be sold by a special master.

Thereafter, but prior to the sale of Cohen's interest in the mortgage indebtedness, the Government attempted to intervene in the Citrus County Circuit Court proceedings. The intervention was strenuously and successfully opposed by Fontainebleau, on the grounds that (1) the Fontainebleau's final decree in the creditors suit in no way affected the Government's rights because the Government could maintain a separate and independent suit to test the priority of its claim as against Fontainebleau, (2) intervention after the final decree was not timely, and (3) the proposed intervention was not subordinate to and in recognition of the propriety of the main proceedings, as required by the Florida Rules of Civil Procedure.

Cohen's beneficial interest in said mortgage was sold at public outcry, pursuant to the Citrus County Circuit Court final decree. For the price of $50,000, Fontainebleau purchased Cohen's interest in the mortgage, the purchase price being applied towards satisfaction of Fontainebleau 's judgment against Cohen.

After being thwarted in its Citrus County attempt to reach Cohen's interest in said mortgage, the Government filed its complaint herein. Plaintiff now seeks a judgment against Cohen in the amount of the two unpaid assessments, foreclosure of its tax liens on Cohen's equitable interest in the mortgage, sale of that interest, and if appropriate, a deficiency judgment against Cohen for the balance.

The taxpayer in his answer admits his indebtedness to the Government and not only asserts that the tax liens are prior to any other liens claimed by defendants to this cause, but joins in the Government's prayer for relief. Fontainebleau raises the following defenses to foreclosure of the Government's lien:

1. Priority of Fontainebleau 's lien or interest as purchaser.

2. Estoppel by judgment, arising by virtue of the Government's failure to appeal the denial of its petition for intervention and the final judgment in the Citrus County creditors suit.

3. Release of its claim of lien by the Government.

By way of counterclaim, Fontainebleau asks this Court to marshal all of Cohen's assets subject to the Government's tax lien in accordance with equity and good conscience.

I. The Government's Lien

26 U. S. C. §6321 creates a lien in favor of the Government on "all property and rights to property, whether real or personal" belonging to a taxpayer who, after demand, neglects or refuses to pay his income tax. Whether the taxpayer has an interest in property to which a lien can attach is a matter of state law. United States v. Bess [58-2 USTC ¶9595], 78 S. Ct. 1054 (1958). That the Government has made demand, and Cohen has neglected or refused to pay his income tax is uncontroverted.

In the instant case, the Government seeks to levy upon its tax lien imposed on the taxpayer-Cohen's interest in said mortgage indebtedness. Florida law determines whether this interest in "property" or a "right to property" within the meaning of §6321, and under Florida law, an equitable interest in a mortgage is intangible personal property, which may be reached by a creditor. Evins v. Gainesville National Bank, 85 So. 659 ( Fla. 1920); Ratliff v. Nowery, 136 So. 895 ( Fla. 1931); Thalheimer Bros. v. Tischler, 55 Fla. 796, 46 So. 514 ( Fla. 1908). Thus it may be subject to a tax lien.

II. Priority as Between the Government and Fontainebleau

The tax lien created by §6321 arises automatically upon the ripening of the taxpayer's tax liability and attaches to all property and rights to property then owned and subsequently acquired by the taxpayer. Once the tax lien has attached to the taxpayer's property or rights to property, Federal law determines the priority of competing liens asserted to that interest. Aquilino v. United States [60-2 USTC ¶9538], 363 U. S. 509 (1960). However, in order to enforce its lien as against certain persons designated in the statute, the Government must first give notice of its lien.

Thus under §6323, the lien created by §6321 shall not be valid as against any purchaser or judgment creditor until proper notice is filed by the Secretary of the Treasury or his delegate. Before §6323 was amended in November, 1966, it had been held that a "judgment creditor" for purposes of that statute had to be a judgment lien creditor, for until the state-created lien became choate in the Federal sense, it had no protection against a recorded tax lien. Fore v. United States [65-1 USTC ¶9101], 339 F. 2d 70 (5th Cir. 1964). This requirement has been confirmed and made statutory by the 1966 amendment, which imposes upon the Government the duty of giving notice as against judgment lien creditors in order to enforce its tax lien. So, §6323 protects a creditor against a tax lien only when the creditor's judgment becomes a specific lien against the property to which the tax lien has attached.

The notice required by §6323 is to be filed under state laws in the office in the state, county, or other governmental subdivision in which the property subject to the lien is situated, designated by the laws of that state. §28.20, Florida Statutes, designates the office of the clerk of the circuit court for the filing of federal tax liens.

The 1966 amendment to §6323 specifies that real property is deemed to be situated at its physical location, and personal property, whether tangible or intangible, is deemed to be situated at the residence of the taxpayer at the time the notice of lien is filed. The taxpayer is the person whose tax liability is the basis for the lien and against whose property the lien is imposed, in this case being the defendant Max Cohen. The committee report concerning this amendment indicates that the provision was designed to clarify already existing law. Most courts had already held that the filing of a tax lien imposed on the taxpayer's personal property was valid when filed at the taxpayer's domicile.

§114 of Public Law 87-719 provides that this amendment shall apply after the date of enactment (November 2, 1966), regardless of when a lien of the United States arose or when the lien or interest of any other person was acquired. However, the amendment shall not apply in any case in which its application would impair a priority enjoyed by a person other than the United States holding a lien or interest prior to the date of enactment. As will be seen, application of §6323 both before and after the amendment yields the same result in this case.

Applying §6323 as amended in November, 1966, the situs of Cohen's beneficial interest in this mortgage, which is intangible personal property, is his residence at the time the notice of lien was filed. The uncontroverted affidavit of defendant Cohen states that he was a resident of Manatee County on September 5, 1963 , when notice of tax lien based on the second assessment was filed with the Clerk of the Manatee County Circuit Court. Notice of lien based on the first assessment had previously been filed in that county. Thus, the Government's lien based upon both assessments attached to this property on September 5, 1963 , prior to Fontainebleau 's obtaining its judgment against Cohen. Thus, the Government's lien, based on both assessments, is prior to any interest the Fontainebleau may have in said property. Although Cohen later moved his residence from Manatee, a lien once properly filed remains valid against judgment creditors and purchasers even if the taxpayer later severs all connection with his former residence. §6323(f)(2)(B); Grand Prairie State Bank v. United States [53-2 USTC ¶9481], 206 F. 2d 217 (5th Cir. 1963).

Even applying the former §6323 and case law thereunder, the result is still the same. Case law had established that the situs of intangible personal property was the domicile of its owner. See Campbell v. Bagley [60-1 USTC ¶9340], 276 F. 2d 28 (5th Cir. 1960); United States v. Goldberg [66-2 USTC ¶9523], 362 F. 2d 575 (3rd Cir. 1966); and cases cited therein. Under Florida law, a mortgage is a specific lien on property and thus is a chose in action, Evins v. Gainesville National Bank, 85 So. 659 ( Fla. 1920); Ratliff v. Nowery, 136 So. 895 ( Fla. 1931) which is intangible personal property, Vogel v. New York Life Insurance Co., 55 F. 2d 205 (5th Cir. 1932). The same holds true of an equitable interest in a mortgage. Thus, under the former §6323 the notice required of the Government still had to be filed in the county in which Cohen was domiciled, again being Manatee County in 1963.

It is the taxpayer, Cohen's domicile which is critical in this case, for it is Cohen's equitable interest in the mortgage which is sought to be subjected to the Government's lien here, and to which Fontainebleau claims a prior right, and not the Trustee's legal interest in said mortgage. The domicile of the Trustee-holder of legal title to the mortgage indebtedness is irrelevant for this purpose of determining whether Cohen's beneficial interest is to be subject to the Government's lien.

So under either the former §6323 or the November, 1966 amendment, the Government's lien based on the second assessment is still prior to Fontainebleau 's interest as a judgment lien creditor and its later interest as a purchaser.

Even assuming Fontainebleau 's premise that the Government had to record its lien on Cohen's beneficial interest in said mortgage in Palm Beach County , where the Trustee resides, Fontainebleau must still be subordinated to the Government lien.

Until Fontainebleau obtained its judgment against Cohen, it could not assert any priority as against the Government. Even though as a judgment creditor it had an immediate lien on Cohen's real property located in Florida, §55.08, Florida Statutes, it had to take further steps to establish a lien on Cohen's intangible personal property, by bringing an equitable action in the nature of a creditors bill and obtaining a decree therein.

Although §6323 before amendment imposed the notice requirement upon the Government as against a taxpayer's "judgment creditors," the courts had interpreted that language to mean "judgment lien creditors." Determination of whether a creditor attains this status is reached first by reference to state law to ascertain the effect of the judgment as a lien on the taxpayer's property, and then by reference to federal standards to ascertain whether the state-created lien is "choate," specific and perfected for purposes of §6323. United States v. Equitable Life Assurance Society [66-1 USTC ¶9444], 384 U. S. 323 (1966); United States v. Pioneer American Insurance Co. [63-2 USTC ¶9532], 83 S. Ct. 1651 (1964); 9 Mertens §54.42 at pg. 105 and cases cited therein.

The leading case, which led to amendment of the statute to recite the "judgment lien creditor" requirement is Fore v. United States [65-1 USTC ¶9101], 339 F. 2d 70 (5th Cir. 1964). Fore had obtained a Texas judgment, which under Texas law entitled him to a lien on the debtor's Texas real estate but not to a lien on the debtor's personalty located in Texas . Inasmuch as under Texas law, Fore had no possessory lien, attachment lien or execution lien on the debtor's personalty, his lien was not choate in the Federal sense.

Similarly, under Florida law, Fontainebleau 's judgment on the note constitutes a lien against Cohen's realty located in Florida . However, a judgment at law is not a lien on land to which the judgment debtor has no legal title. Equitable interests in property are ordinarily not subject to levy and sale under writ of execution in Florida ; they must either be reached by supplemental proceedings or by creditors suit. Huttig v. Hoffman, 9 So. 2d 506 ( Fla. 1942). Furthermore, a mortgage on real estate, being a contract lien on the land, is not subject to levy and sale under writ of execution, and must likewise be reached by supplemental proceedings or by creditor's suit. Evins v. Gainesville National Bank, 85 So. 659 ( Fla. 1920); Ratliff v. Nowery, 136 So. 895 ( Fla. 1931). Under Federal concepts a lien is not perfected if its existence, amount or enforcement is contingent upon the outcome of a suit. United States v. Acri [55-1 USTC ¶9138], 348 U. S. 211; United States v. Security Trust and Savings Bank [50-2 USTC ¶9492], 71 S. Ct. 111 (1950).

State-created liens are perfected or choate for priority purposes when the identity of the lienor, the property subject to the lien, and the amount of the lien are established. United States v. Pioneer American Insurance Co. [63-2 USTC ¶9532], 83 S. Ct. 1651 (1964); Regulations §301.6323(1)(a)(2). Whether Fontainebleau 's judgment on the note against Cohen constituted a lien on his beneficial interest in said mortgage was not determined under state law until Fontainebleau obtained its decree in its Citrus County creditors suit. It was only when that decree was entered that the property subject to Fontainebleau's judgment lien was determined, and thus it was only when that decree was entered that Fontainebleau's judgment became choate in the Federal sense and Fontainebleau became a judgment lien creditor for purposes of §6323. This was on May 18, 1966 and the Government had previously recorded its notice in Palm Beach County on December 17, 1965 .

Subject to the §6323 notice requirement, the transfer of property subject to a tax lien subsequent to the attachment of that lien does not affect the tax lien, for it is the very nature and essence of a lien that no matter into whose hands the property goes, it passes cum onere. United States v. Bess [58-2 USTC ¶9595], 78 S. Ct. 1054 (1958). Michigan v. United States [43-1 USTC ¶9225], 63 S. Ct. 302 (1943). The taxpayer's lien liability is based upon the Government's claim on the property of the taxpayer until the tax debt is discharged and the property passes into the hands of a subsequent party subject to the lien regardless of the transferee's status as a creditor or purchaser. Exhaustion of remedies against the taxpayer and the taxpayer's insolvency or solvency are irrelevant in a proceeding to enforce a Government tax lien. United States v. Hoper [57-1 USTC ¶9508], 242 F. 2d 468 (7th Cir. 1957). So the transfer of Cohen's equitable interest in said mortgage to Fontainebleau by judicial sale after the tax lien based on the second assessment attached thereto did not affect the already established priority of the federal tax lien.

The United States may be named a party in a state mortgage or lien foreclosure suit. However, if the Government is not made a party to a suit concerning property which is subject to an income tax lien, then

. . . a sale to satisfy a lien inferior to one of the United States shall be made subject to and without disturbing the lien of the United States, unless the United States consents that the property may be sold free of its lien and the proceed divided as the parties may be entitled. 28 U. S. C. §2410.

In the instant case, the Government gave no such consent to the sale following Fontainebleau 's suit in the Citrus County Circuit Court, so that the sale was subject to the Government's lien.

III. Marshaling Assets

By way of counterclaim, Fontainebleau has asked the Court to marshal Cohen's other assets and use Cohen's other assets to satisfy the Government's tax lien, leaving Cohen's interest in the Myers-Middleton mortgage to the Fontainebleau .

The equitable doctrine of marshaling rests on the principle that a creditor having two funds to satisfy his debt, may not by his application of them to his demand, defeat another creditor who may resort to only one of the funds. Meyer v. United States [64-1 USTC ¶9111], 375 U. S. 233 (1963).

In United States v. Pollack, a New York District Court did use a marshaling type approach where two sources existed for satisfaction of a tax lien and a junior creditor had resort to only one of those sources. The Court stayed the lien foreclosure proceedings directed at the assets which was subject to the lien of the junior creditor pending the outcome of other Government lien foreclosure proceedings directed at the taxpayer's other assets.

The Supreme Court has not yet been faced with a case in which marshaling was sought against the federal government in an income tax case, although it was asked by the Government to apply the doctrine in Meyer v. United States, supra.

In Meyer, the Government had sought to impose and foreclose a tax lien upon the proceeds of life insurance policies which insured the life of the taxpayer. A bank had a senior lien on the entire proceeds of the policies, while the Government's tax lien attached only to the cash surrender value of the policies, subject to the bank's claim. The Government invoked the doctrine of marshaling assets, asking the Court to satisfy the tax lien from the cash surrender value and the bank's claim from the remainder of the proceeds.

After citing lower court cases holding that the doctrine will not be applied where state-created exemptions would thereby be destroyed or where one of the funds is exempt under state law, the Supreme Court adopted the state rules and refused to extend the doctrine to this situation. New York has a statute exempting insurance benefits of a widow from the claim of her husband's creditors, so that the proceeds other than the cash surrender value were not subject to the tax lien. The Supreme Court refused to enlarge the statutory lien by application of the doctrine of marshaling assets.

Lower federal courts have been confronted with situations where creditors of the taxpayer have invoked the doctrine, and have reached varying results. The Second Circuit has refused to subject the Government to a requirement that it marshal assets in favor of junior lienors because "this would create an extreme burden on collection of revenue, unauthorized by statute." United States v. Herman [63-1 USTC ¶9135], 310 F. 2d 846 (2nd Cir. 1962).

The Eighth Circuit adopted a similar position in United States v. Stutsman County Implement Co. [60-1 USTC ¶9224], 274 F. 2d 733 (8th Cir. 1960). It did not find in any of the cases cited by the creditor-appellee a holding that the Court may discharge a valid tax lien imposed by the statute merely because it appears to the Court that the existence of the lien bears harshly on those who have dealt with the taxpayer in disregard of the lien.

A district court, interpreted a Supreme Court per curiam reversal as disallowing the doctrine of marshaling assets, and therefore refused to apply it upon remand of the case. United States v. Wintner [64-1 USTC ¶9168], 84 S. Ct. 451 (1964); on remand [65-2 USTC ¶9642], 247 F. Supp. 47 ( Ohio 1964). Mertens has also noted that the Government is not required to seek its taxes from any particular source. 9 Mertens §54.52 at p. 161.

Refusal to apply the doctrine is based upon construction of the tax lien statutes in the following manner. The statute creates the tax lien and prescribes its duration. After the notice has been duly given, the power of the Court to determine the rights of the parties in respect to the lien is limited by statute. There is no statutory authority conferred on the Court to discharge or terminate the lien already attached to specific property without satisfaction of the tax or exhaustion of the property. The Court's usual equity powers are said to be limited by the special statutory provisions of §6325 regarding discharge of tax liens, which provisions make no mention of discharge by marshaling other assets of the taxpayer. That rationale is analogous to a similar refusal to apply the doctrine in levy situations.

This Court finds the line of cases refusing to apply the doctrine of marshaling assets to be more convincing. This is especially so in view of the equities appearing in the instant case.

Before it obtained the final judgment in its creditor's suit, Fontainebleau stood as any other judgment creditor and could attempt to execute on or reach any of Cohen's assets not exempt by state statute just as it now wants the Government to do. It chose to reach for the beneficial interest which is the subject of this lawsuit. In so doing, it chose not to join the Government as a party defendant, as it could have under 26 U. S. C. §2410. If Fontainebleau had joined the Government as a defendant in its suit, this controversy would have been dsposed of without further adieu.

When the Government attempted to intervene in the creditor's suit, Fontainebleau , through its attorney, stated to that Court:

We did not adjudicate the Government's rights and no effort to adjudicate the Government's rights was made and the final decree in no way affects the Government's rights. They have lost nothing by the sale we are going to make and I see that they have no standing in this Court, even if there has been a final decree which forecloses them out . . ..

It again reiterated this position in its Memorandum Reply herein filed on March 2, 1967 , in response to Cohen's Motion to Dismiss Fontainebleau's Counterclaim. It states that the State Court denied the Government's petition to intervene on two theories:

1. The United States claimed to have a first lien in its petition to intervene on the equity created by the Middleton agreement. If this were true, the State Court felt that the foreclosure by the Fontainebleau Hotel would not affect the Government.

2. If the Government's lien was inferior and it had not been made a party to the foreclosure proceedings, it was still free to maintain a suit to test the priority of its claim and that of the Fontainebleau Hotel by an independent proceeding.

However, now Fontainebleau attempts to use its judgment and purchase obtained on the above representation to take a contradictory position. In effect it is asking this Court to consider the Citrus County proceedings as going to the merits of the Government's claim. Furthermore, as a general creditor of Cohen, Fontainebleau may still try to reach Cohen's other assets, just as may the Government. Thus there is no reason to apply the quitable doctrine of marshaling assets, for Fontainebleau is not a creditor who has resort to only one of the funds available for satisfaction of the Government's claim--it can resort to the same funds which the Government may attempt to reach. By reason of the foregoing, this Court will not require the Government to satisfy its tax lien from other assets the taxpayer may own.

IV. Estoppel of Judgment

Finally, Fontainebleau contends that the Government is estopped to bring this action by virtue of the final judgment and denial of its petition for intervention in the creditor's suit, which the Government has failed to appeal.

In order for an estoppel by judgment to arise, there must be a final judgment or decree rendered on the merits, which will be conclusive of the rights, questions and facts, the determination of which was necessary to the judgment rendered. A judgment or decree rendered on any grounds which do not involve the merits of the action may not be used as the basis for the operation of this doctrine. Armstrong v. Manatee County , 49 Fla. 273, 37 So. 938 ( Fla. 1905); Tilton v. Horton, 103 Fla. 497, 137 So. 801 ( Fla. 1931); Universal Construction Co. v. Ft. Lauderdale , 68 So. 2d 366 ( Fla. 1953).

As Fontainebleau itself admitted and even argued as a basis for denial of leave to intervene, the Citrus County Circuit Court's denial of the Government's petition was not an adjudication of the merits of its claim.

The final judgment rendered by the Citrus County Circuit Court cannot estop the Government to pursue its claim because the Government was not a party to that lawsuit nor is it privy to any party to the lawsuit.

As Fontainebleau contended in the argument on the Government's petition, a mortgagee is not bound by any judgment or decree rendered in a suit to which it was not made a party, where its interest antedates the action. Logan v. Stieff, 36 Fla. 473, 18 So. 767; Stokely v. Conner, 80 Fla. 89, 85 So. 678.

If the Government had been permitted to intervene, it would have been bound, but even the right to intervene does not subject one to the doctrine of estoppel by judgment. Merriman v. Lewis, 141 Fla. 832, 194 So. 349 ( Fla. 1940). Thus, no estoppel arises by virtue of either the denial of the Government's petition or the final judgment in the Citrus County creditor's suit.

V. Release

Although defendant Fontainebleau has alleged the defense of a release of the Government's lien in its answer, it has not submitted anything in support thereof in response to the Government's Motion for Summary Judgment. When such a motion is made and supported, an adverse party may not rest upon the mere allegations or denials of his pleading, but his response, by affidavits or as otherwise provided in Rule 56, must set forth specific facts showing that there is a genuine issue for trial. Rule 56(e), Federal Rules of Civil Procedure. The Government has effectively denied any release of this lien by affidavit of the District Director of the Internal Revenue Service at Jacksonville , and Fontainebleau has failed to meet its burden. It cannot under the rules rest on its naked allegation to attempt to create a fact issue.

THEREUPON, there being no genuine issue of any material fact, it is ORDERED and ADJUDGED as follows:

The Government's Motion for Summary Judgment be and the same is hereby granted. However, this judgment is limited to a determination that the Government's tax lien on Cohen's beneficial interest in the Myers-Middleton mortgage is prior to the Fontainebleau 's claim as Cohen's creditor and purchaser of said property.

 

 

[59-2 USTC ¶9733] United States of America v. Theodore W. Breihan, Southern Equipment Company, and Maryland Casualty Company

U. S. District Court, West. Dist. Tex., San Antonio Div., Civil Action No. 2752, 9/23/59

[1954 Code Sec. 6323]

Liens for taxes: Validity against third parties: Tax debtor's failure to appear at trial: Disclaimers to fund by third party defendants.--In a suit by the United States for unpaid withholding taxes, penalties and interest, judgment was entered ordering a party defendant in possession of a fund due and owing to the tax debtor, to pay over the fund to the Government, where the latter had a valid and subsisting lien for the taxes in question, the tax debtor defaulted in appearance, and others made party defendants to the suit disclaimed any interest in the fund.

House, Mercer & House, 1007 National Bank of Commerce Building, San Antonio, Tex., for Maryland Casualty Company. Dodson, Duke, Branch & Davis, 1901 Transit Tower, San Antonio, Tex., for Southern Equipment Company. Russell B. Wine, United States Attorney, 347 Federal Bldg., San Antonio, Texas, for plaintiff.

Judgment

RICE, District Judge:

On this day came on to be heard the above entitled cause and it appearing that the defendant, Theodore W. Breihan, though duly summoned, failed to appear, plea or otherwise defend herein, but wholly made default; that the defendant, Southern Equipment Company, entering its appearance herein, claims no interest in the sum of $3,300.07 in its possession and admits said fund is due and owing the Defendant Theodore W. Breihan; and the defendant, Maryland Casualty Company, entering its appearance herein, claims no interest in said fund in the possession of said Southern Equipment Company and has been dismissed from this action with prejudice;

WHEREFORE, plaintiff should recover judgment against the defendants by occasion of the premises.

It is, accordingly, found that the defendant taxpayer, Theodore W. Breihan, is liable to the United States and the United States is entitled to recover for withholding taxes, with penalties and interest, in the amount of $4,253.99; that there is in the possession of and due and owing by the defendant, Southern Equipment Company, to the defendant taxpayer, Theodore W. Breihan, the sum of $3,300.07; that the United States has valid and subsisting liens for unpaid withholding taxes, with penalties and interest, in the amount of $4,253.99, said liens being prior superior and subsisting claims on said fund due and owing by the defendant, Southern Equipment Company, to the defendant taxpayer, Theodore W. Breihan.

IT IS, THEREFORE, ORDERED, ADJUDGED and DECREED that the plaintiff, United States of America, do have and recover from defendant taxpayer, Theodore W. Breihan, the sum of $4,253.99, with interest thereon at the legal rate of interest from date of judgment until paid, and that the fund of $3,300.07 in the possession of the defendant Southern Equipment Company be paid over to the plaintiff, United States of America, by the said defendant Southern Equipment Company, and be applied to satisfy this judgment in favor of the plaintiff, United States of America, and that the United States have judgment against the defendant, Theodore W. Breihan, for all costs incurred in this action, plus costs of court and attorney's docket fee, and for such other relief as plaintiff may show it is entitled, and that execution issue for the amount recovered herein.

 

 

[90-2 USTC ¶50,584] The First National Bank of Boston , Plaintiff v. The United States of America , Defendant

U.S. District Court, Dist. Mass. , CA 89-1379-T, 10/23/90

[Code Secs. 6323 and 7426 ]

Lien for taxes: Priority: Summary judgment.--An IRS levy on an automobile in which a bank claimed a priority interest was not wrongful. The bank's failure to protect its security interest in accordance with state ( Massachusetts ) law subordinated the bank's interest to the IRS' tax levy. The IRS' levy was entirely proper and the government was entitled to the proceeds of the auction sale of the automobile as a matter of law. The government's motion for summary judgment was, therefore, allowed.

MEMORANDUM

TAURO, District Judge:

The plaintiff, The First National Bank of Boston (the "Bank") sued the defendant, the United States of America , alleging that the Internal Revenue Service ("IRS") had wrongfully levied on a Porsche in which the Bank claimed a priority interest. The United States has moved for summary judgment, arguing that the Bank's failure to protect its security interest in accordance with Massachusetts law subordinates that interest to the IRS's tax levy.

The parties agree on the material facts. In December 1985, John Tuttle, president of the Yellow Maize Corporation ("Yellow Maize" or the "Corporation") approached one of the Bank's loan officers and requested an automobile loan to finance the Corporation's purchase of a 1986 Porsche. Tuttle then received a $24,932 loan from the Bank and applied the proceeds to the sale price of $31,165. In exchange for the loan, Tuttle, on behalf of Yellow Maize, signed a promissory note for the loan amount and an agreement pledging the Porsche as collateral. Although it intended to obtain a security interest in the car, the Bank did not require Yellow Maize to provide it with the title before it issued the funds. The Bank later demanded that Yellow Maize deliver the title to it. Yellow Maize never did so. As a result, the Bank was never listed as a lienholder on the Porsche's title certificate.

Yellow Maize defaulted on this automobile loan and never repaid the money due under the promissory note. Yellow Maize also failed to pay certain federal withholding and other taxes. As a consequence, the IRS made assessments and filed notices of tax liens, between June, 1987 and August, 1988, totalling $13,961.77. In May, 1989, the IRS levied on the Porsche. ¹ The IRS then auctioned the vehicle on June 28, 1989 and received $14,000. ² Following that auction, the Bank amended its complaint to allege a wrongful levy pursuant to 26 U.S.C. §7426 .

The priority of a federal tax lien with respect to other property rights is controlled by federal law. Rodriguez v. Escambron Development Corp. [84-2 USTC ¶9698 ], 740 F.2d 92 (1st Cir. 1984); United States v. Equitable Life Assurance Society [66-1 USTC ¶9444 ], 384 U.S. 323, 328 (1966). Congress has enacted rules that govern the priority of tax liens relative to other security interests. See 26 U.S.C.§6323(a). The Internal Revenue Code (the "Code") defines a "security interest" as "any interest in property acquired by contract for the purpose of securing payment or performance of an obligation or indemnifying against loss or liability." 26 U.S.C.§6323(h). The Code qualifies this definition by adding that a security interest exists only if "the interest has become protected under local law against a subsequent lien arising out of an unsecured obligation." Id. Under Massachusetts law, the exclusive method for perfecting a security interest in an automobile is through notation of the lien on a valid certificate of title. M.G.L. ch. 90D §21 ; City of Boston v. Rockland Trust Co., 391 Mass. 48, 51 (1984).

The Bank admits that it did not follow the Commonwealth's procedure for perfecting claims. It contends, however, that Yellow Maize's refusal to cooperate with the Bank's attempts at perfecting its lien entitles the Bank to a priority on equitable grounds. In essence, the Bank seeks the same protection that it would have received if it had properly perfected its interest. Yet, Yellow Maize's alleged malfeasance had absolutely no effect on the Bank's ability to perfect its interest when it should have, namely at the time that it advanced the money. Instead of following this financially prudent course, the Bank chose instead simply to trust Yellow Maize. Now that this trust has proven ill-placed, the Bank seeks the protection of a security procedure that it failed to follow.

The Bank is entitled to the protection of the federal/state statutory scheme and no more. To grant the Bank the equitable protection it now seeks would be to ignore the salutary statutory purpose of allowing individuals to protect security interests in property only if they give notice to the world that they indeed have such an interest. ³ See M.G.L. ch. 106, §9-301(1)(d) (unperfected security interest is subordinate to a lien arising before the security interest is protected). See In re Gringeri Bros., 14 B.R. 396 (Bankr. D. Mass. 1981) (failure to comply with statutory scheme for perfection not excused by reliance on debtor when creditor could have insisted on compliance as a precondition to sale).

For these reasons, the court holds that the Bank's interest is nothing more than a competing lien and, in that competition, the tax lien prevails. Rodriguez [84-2 USTC ¶9698 ], 740 F.2d at 98. As a consequence, the IRS's levy was entirely proper and the United States is entitled to the proceeds of the sale as a matter of law.

The motion of the United States for summary judgment is therefore ALLOWED.

¹ The Bank, which had been granted an attachment on the vehicle by the Boston Municipal Court, learned about the anticipated sale and sought a restraining order from this court. This court entered an order dated June 27, 1989 denying the Bank's application for a temporary restraining order for failure to demonstrate irreparable harm.

² The sale proceeds have been held in escrow, pending the outcome of this litigation.

³ Indeed, such a rule would protect a negligent lender against subsequent creditors who would have no way of knowing of the prior obligation.

 

 

[88-1 USTC ¶9333] Farrow, Schildhause & Wilson, et al., Plaintiffs v. Kings Professional Basketball Club, et al., Defendants Harold R. Farrow, et al., Plaintiffs v. Omer L. Rains, et al., Defendants

U.S. District Court, East. Dist. Calif., Civ. S-86-1012 RAR, Civ. S-86-1459 RAR, 2/24/88

[Code Secs. 6321 and 6323 --Result unchanged by the Tax Reform Act of 1986 ]

Lien for taxes: Partnerships: Ownership of property: Summary judgment.--An IRS motion for reconsideration of a court order denying its original motion for summary judgment was granted and summary judgment was entered in favor of the IRS. For purposes of the execution of a tax levy, it was irrelevant whether a receivable owned by a law partnership's client was owned by the law partnership, which owed federal withholding taxes to the government, or by the former general partner of the law firm who did the actual legal work for the client. In either event, the levy attached to the receivable because a levy against partnership property attaches also to the property of the general partners. It was irrelevant that the IRS never levied or assessed tax liabilities against the general partner individually. Since it was shown that the "genuine issue of fact" regarding ownership of the receivable was actually immaterial and this is what provided the basis for denial of the IRS' original motion for summary judgment, the motion for reconsideration was granted and summary judgment was granted in favor of the IRS in the amount of the assessment plus interest and penalties.
Order

RAMIREZ, District Judge:

Previously pending on this court's law and motion calendar for February 22, 1988 was a motion for reconsideration brought by defendant-in-interpleader INTERNAL REVENUE SERVICE. Opposition and reply briefing was timely filed. E.D. Cal. L.R. 230(c). A review of the record convinced the court that oral argument would not be of material assistance. Accordingly, the court ordered the matter submitted on the moving papers. E.D. Cal. L.R. 230(h).

BACKGROUND

The complex factual background of this action is detailed in the court's order of October 27, 1986 and is incorporated by reference as though set forth herein. For purposes of the present motion, the court emphasizes the following pertinent and undisputed facts:

(1) Defendant-in-interpleader OMER RAINS was a partner in the law firm of FARROW, SCHILDHAUSE & RAINS (FS&R) from December 1, 1982 through February 24, 1986 (Response to Request for Admission No. 1).

(2) In June of 1985, FS&R contracted with the KINGS PROFESSIONAL BASKETBALL CLUB (Kings) for the performance of certain legal work. Omer Rains was the partner who handled these particular legal tasks on behalf of FS&R. The legal work was completed by the time of Rains' withdrawal from the firm on February 24, 1986 . (Declaration of Donald Heller).

(3) The FS&R partnership became delinquent in paying its federal withholding and FICA contributions for the fourth quarter of 1985 and the first quarter of 1986. On March 24, 1986 and June 30, 1986 , defendant-in-interpleader INTERNAL REVENUE SERVICE (IRS) produced its first assessments for these quarters. Including interest through November 18, 1987 , the assessments total $67,254.24. (Certificate of Assessments and Payments, Form 4340; IRS Exhibit F).

(4) On July 2, 1986 , a Notice of Levy was served on the Kings. This levy states that all property in the possession of the Kings belonging to FS&R are levied upon for the payment of a tax liability. (Notice of Levy; IRS Exhibit G).

(5) The Kings has admitted that it owes approximately $84,000 for the legal work performed by Omer Rains while he was a partner with FS&R. (Kings Motion for Interpleader).

Based on these facts, the IRS contends that the account receivable from the Kings is subject to the tax levy served to collect the unpaid tax liability of FS&R. Other than this execution of its levy, the IRS has no other interest in the underlying action. Thus, the predicates for federal jurisdiction are 28 U.S.C. §1442 (federal officers sued or prosecuted) and 28 U.S.C. §2410 (actions affecting property on which the United States has a lien).

On December 21, 1987 , the IRS' motion for summary judgment came before the court for hearing. At that time, the IRS argued that the receivable from the Kings at all pertinent times was owned by FS&R. In opposition thereto, however, Rains presented evidence tending to show that ownership of the receivable was orally transferred to him on February 24, 1986 . (Declaration of Rains; Rains Exhibits B, C, D, and E). Determining that a genuine issue of fact was raised with regard to the ownership of the receivable, the court orally denied the IRS' motion for summary judgment.

DISCUSSION

By the present motion, the IRS seeks reconsideration of the court's order denying its motion for summary judgment. For purposes of the present motion, the IRS assumes, arguendo, that ownership of the receivable was orally transferred to Omer Rains on February 24, 1986 . Regardless, the IRS contends that a levy upon a custodian of property of the partnership reaches such property even after transfer of the property from the partnership to an individual partner. Therefore, the IRS concludes, the receivable, even if transferred to Rains, is nevertheless subject to the tax levy served upon the Kings to collect the unpaid tax liability of FS&R.

Pursuant to 26 U.S.C. §6323 , a tax lien arises upon "all property and rights to property" of one who neglects or refuses to pay federal tax after demand therefor. The tax lien attaches to all property then in existence, as well as after-acquired property. Glass City Bank v. United States [45-2 USTC ¶9449 ], 326 U.S. 265, 267 (1945); Seaboard Surety Co. v. United States [62-2 USTC ¶9653 ], 306 F.2d 855 (9th Cir. 1962). In discussing the phrase "all property and rights to property", the Supreme Court has held that "stronger language could hardly have been selected to reveal a purpose to collect federal taxes." Glass City Bank, 326 U.S. at 267.

Under basic principles of common law, a general partner is liable for all debts of the partnership. F.P. Baugh, Inc. v. Little Lake Lumber Co. [61-2 USTC ¶9726 ], 297 F.2d 692, 696 (9th Cir. 1962). ¹ Therefore, it has universally been held that a federal tax lien for unpaid taxes of the partnership attaches as well to the property of the general partners. Lidberg v. United States [74-1 USTC ¶9287 ], 375 F. Supp. 631, 633 (D. Minn. 1974) ("Liens for taxes incurred by a partnership or a joint venture attach not only to partnership property, but also to property individually owned by the partners or joint venturers."); In re Rob by's Pancake House of Florida, Inc., 24 Bankr. Rptr. 989, 997 (Bankr. Tenn. 1982) ("Since R.K. Walker is liable for the payment of this tax against the partnership, a lien arose against his property as of the date of the assessment."); see also, Young v. Riddell [60-2 USTC ¶15,322 ], 283 F.2d 909, 910 (9th Cir. 1960). ("Having been found a general partnership, appellant is personally liable for the debts and liabilities of the partnership, including its tax liabilities."). Based on this authority, the IRS concludes that its tax levy, concerning the property of FS&R, encompasses the property of Rains as a general partner.

In opposition, Rains simply points out that the IRS never levied or assessed tax liabilities against him individually. This statement merely begs the point. As discussed above, tax liens arise upon "all property and rights to property" of the partnership, which includes the property of the general partners. Therefore, a levy against partnership property attaches also to the property of the general partners. Lindberg, 375 F. Supp. at 633; In re Bobby's, 24 Bankr. Rptr. at 997. The general partner need not actually be named in the assessment or levy against the partnership. Id.

Consequently, for purposes of the execution of the IRS levy, it matters not whether the Kings receivable was or is owned by FS&R or Rains. In either event, the levy attaches to the receivable. Therefore, having demonstrated that the "genuine issue of fact" regarding ownership is actually immaterial, the IRS' motion for reconsideration shall be granted and summary judgment entered in favor of the IRS.

Having by this order granted judgment for the federal party, the court, sua sponte, considers whether it should exercise jurisdiction over the remaining pendent state law claims. As a general rule, when the claims providing a predicate for federal jurisdiction are dismissed before trial, the pendent state law claims should also be dismissed. United Mine Workers v. Gibbs, 383 U.S. 715 (1966); Jones v. Community Redevelopment Agency, 733 F.2d 646 (1984). Accordingly, the court, in its discretion, shall dismiss all pendent state law claims without prejudice.

For the foregoing reasons, and good cause appearing therefor,

IT IS HEREBY ORDERED that the hearing scheduled in this matter for February 22, 1988 is VACATED.

IT IS FURTHER ORDERED that the motion for reconsideration brought by defendant-in-interpleader INTERNAL REVENUE SERVICE (IRS) is hereby GRANTED. Accordingly, summary judgment is hereby GRANTED in favor of the IRS in the sum of $67,254.24, plus legal penalties and interest accruing since November 18, 1978 , said judgment to be satisfied from the interpleader funds.

IT IS FURTHER ORDERED that all remaining state law claims are, sua sponte, DISMISSED without prejudice.

IT IS SO ORDERED.

¹ At one time, Rains asserted an argument that he was a limited, as opposed to a general, partner. Rains now appears to have abandoned this argument. In any event, it is clear that Rains cannot be considered a limited partner of FS&R. Not only was no certificate of limited partnership filed on behalf of FS&R, as required by Cal. Corp. Code §1521(a), but the name of the partnership contained Rains' name, a circumstance prohibited for limited partners by Cal. Corp. Code §1561 2. Failure to substantially comply with the limited partnership provisions confers general partnership status on the entity. Tiburon National Bank v. Wagner, 265 Cal.App. 2d 868, 875, 71 Cal. Rptr. 832 (1968).

 

 

[2000-1 USTC ¶50,154] United States of America, Plaintiff v. Darrell L. Bolton, Maureen L. Bolton, Commercial Federal Mortgage Corporation, a Nebraska corporation, Nationsbank, a nationally chartered banking institution, and Ford Motor Credit Company, a Delaware corporation, Defendants

U.S. District Court, No. Dist. Okla. , 98-C-351-B(M), 12/8/99

[Code Secs. 6321 and 7403 ]

Summary judgment: Liens: Real property: Forced sale of: Nondelinquent spouse: Insufficient evidence to compel.--A district court denied summary judgment on the government's request for a forced sale of homestead real property that a taxpayer owned with his nondelinquent wife. There was insufficient evidence to determine whether such a sale would unduly harm the spouse's interest in the property. Therefore, an evidentiary hearing was set in order to determine whether a forced sale was appropriate in light of the interests of the government and of the taxpayer's spouse.

[Code Secs. 6323 , 7402 and 7403 ]

Summary judgment: Assessments: Failure to contest: Liens: Enforcement of: Real property: Nondelinquent spouse: Homestead exemption: State ( Oklahoma ) law: Forced sale.--The government was entitled to summary judgment in connection with its assessments of an individual's liability for taxes and penalties. The taxpayer failed to respond to the summary judgment motion and, thus, did not dispute the amount of the tax assessments or that he received proper and timely notice of each assessment. Consequently, federal tax liens securing the liability attached to homestead real property that the taxpayer owned with his nondelinquent spouse. Although state ( Oklahoma ) law exempted homestead residences from attachments or forced sales, the exemption did not prevent a district court from forcing the sale of homestead property under Code Sec. 7403 . L.M.B. Rodgers, SCt., 83-1 USTC ¶9374 , relied upon.

ORDER

BRETT, District Judge:

Before the Court is the motion for summary judgment filed by the plaintiff United States of America (Docket No. 23). Plaintiff United States asks the Court to determine as a matter of law (1) it is entitled to reduce the federal tax assessments made against defendant Darrell L. Bolton to judgment; (2) the federal tax liens against Mr. Bolton attach to certain real property; and (3) to order a foreclosure of the federal tax liens with the proceeds of the sale to be applied, after the claims of the prior lien claimants, to Mr. Bolton's tax liability for the 1987 through 1994 tax years.

Statement of Undisputed Facts

The following facts are undisputed. Plaintiff brought this action pursuant to 26 U.S.C. §7403(b) against defendants Darrell L. Bolton and his spouse Maureen L. Bolton, joint tenants with the right of survivorship of the residential real property (hereinafter referred to as the "subject real property"), as well as defendants who claimed or may claim an interest in the subject real property, i.e., Commercial Federal Mortgage Corporation ("CFMC"), Nationsbank and Ford Motor Credit Company ("Ford"). On April 19, 1999 , the Clerk of the Court entered default against Ford for failure to plead or otherwise defend; thus Ford claims no interest in the subject real property. CFMC and Nationsbank are owners and holders of notes and mortgages on the subject real property and do claim an interest in the property. CFMC's interest is entitled to first priority, Nationsbank's to second priority and the United States ' interest is entitled to third priority.

By virtue of a deed dated April 5, 1977 , Mr. and Ms. Bolton each own an undivided one-half interest in the subject real property as joint tenants with a right of survivorship. Based on actuarial computations, Mr. Bolton's interest in the subject real property is 48.886% and Ms. Bolton's interest is 51.114%. The subject real property was recently re-surveyed and appraised by the Tulsa County Assessor's office to have a value of $87,426.00. Mr. and Ms. Bolton reside in the subject home.

The Internal Revenue Service ("IRS") assessed Mr. Bolton a total amount of $59,940.86 in unpaid taxes, penalties and interest for tax years 1987 through 1994. Proper notice of the assessments and demand for payment were timely sent to Mr. Bolton. The assessments remain due and owing. On May 15, 1995 , a notice of federal tax lien securing the tax liabilities of Mr. Bolton for tax years 1987-1993 was filed with the County Clerk for Tulsa County , Oklahoma . On January 30, 1996 , a notice of federal tax lien securing the tax liability of Mr. Bolton for the 1994 tax year was filed with the County Clerk for Tulsa County , Oklahoma .

As of the date of its answer, the principal amount owed CFMC on its lien was $17,068.67. As of August 25, 1998 , the principal amount owed NationsBank on its lien was $14,930.65.

Ms. Bolton has no tax liability to the IRS and occupies the subject real property with her husband as their homestead. She is 50 years old and in good health. Ms. Bolton is employed by Progressive Supply Company in Tulsa , handling the company's accounts receivables, accounts payables and billings. Her gross annual income from her employment is approximately $33,000. Ms. Bolton has been contributing to her pension plan at work and plans to continue working at Progressive Supply Company until she retires at age 65. She owns two cars, a 1994 Mazda 626 and a 1997 Infinity.

Standard on Summary Judgment

Summary judgment pursuant to Fed.R.Civ.P. 56 is appropriate where "there is no genuine issue as to any material fact and that the moving party is entitled to judgment as a matter of law." Celotex Corp. v. Catrett, 477 U.S. 317, 322-23 (1986); Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 250 (1986); Windon Third Oil & Gas v. FDIC, 805 F.2d 342, 345 (10th Cir. 1986). In Celotex, the Supreme Court stated:

[t]he plain language of Rule 56(c) mandates the entry of summary judgment, after adequate time for discovery and upon motion, against a party who fails to make a showing sufficient to establish the existence of an element essential to that party's case, and on which that party will bear the burden of proof at trial.

477 U.S. at 322.

A party opposing a properly supported motion for summary judgment must offer evidence, in admissible form, of specific facts sufficient to raise a "genuine issue of material fact." Anderson, 477 U.S. at 247-48.

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.

Id. at 252. Thus, to defeat a summary judgment motion, the nonmovant "must do more than simply show that there is some metaphysical doubt as to the material facts." Matsushita v. Zenith, 475 U.S. 574, 585 (1986).

In essence, the inquiry for the Court 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." Anderson, 477 U.S. at 250. In its review, the Court must construe the evidence and inferences therefrom in a light most favorable to the nonmoving party. Committee for the First Amendment v. Campbell , 962 F.2d 1517, 1521 (10th Cir. 1992).

Analysis

Plaintiff United States first requests the Court enter summary judgment as to Mr. Bolton's tax liability for the 1987 through 1994 tax years and determine the federal tax liens against Mr. Bolton attach to the subject real property. As Mr. Bolton did not respond to the United States' summary judgment motion and therefore did not dispute the amount of the tax assessments or that proper notice of each assessment was timely received and tax liens securing his tax liabilities were filed with the Tulsa County Clerk, the Court hereby enters summary judgment in favor of the United States and against Darrell L. Bolton as follows: Mr. Bolton is liable to the United States for the unpaid balance of $59,940.86 in taxes and assessed penalties and interest for the tax years of 1987 through 1994 and the federal tax liens securing this liability attach to Mr. Bolton's property, including the subject real property. Tillery v. Parks [80-2 USTC ¶9661], 630 F.2d 775, 776 (10^th Cir. 1980) (holding federal tax liens arising solely through the tax liability of one spouse may attach to his interest in the homestead of both spouses in Oklahoma ).

The only remaining issue is whether a foreclosure sale should be ordered to satisfy the government's tax lien under 26 U.S.C. §7403(c). Section 7403 states that "[t]he Court . . . in all cases where a claim or interest of the United States therein is established, may decree a sale of such property, by the proper officer of the court, and a distribution of the proceeds of such sale according to the findings of the court in respect to the interests of the parties and of the United States." As noted above, Mr. and Ms. Bolton own the subject real property as joint tenants with a right of survivorship and occupy the property as their homestead. Under Oklahoma law, a homestead residence is "exempt from attachment or execution and every other species of forced sale for the payment of debts." 31 O.S. §1; Okla. Const. art. XII, §2. However, in United States v. Rodgers [83-1 USTC ¶9374], 461 U.S. 677 (1983), the United States Supreme Court determined a state homestead exemption does not prevent a district court from forcing the sale of homestead property under §7403.

If §7403 is intended, as we believe it is, to reach the entire property in which a delinquent taxpayer has or had any "right, title, or interest," then state-created exemptions against forced sale should be no more effective with regard to the entire property than with regard to the "right, title or interest" itself.

Id. at 701. Further, the Rodgers Court held that a district court may order the sale of both the delinquent taxpayer's interest and a third-party's interest in jointly held homestead property if the third-party receives a share of the proceeds commensurate with the value of his or her interest. Id. at 692-700. The Supreme Court, however, recognized the district court may exercise a degree of equitable discretion to balance "the Government's interest in prompt and certain collection of delinquent taxes and the possibility that innocent third parties will be unduly harmed by that effort." Id. at 709. However, the Court emphasized the "limited discretion accorded by §7403 should be exercised rigorously and sparingly." Id. at 711.

The Rodgers Court listed four factors to be considered by the district court in exercising this discretion:

(1) 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;

(2) whether the third party with a non-liable separate interest in the property would, in the normal course of events, . . . have a legally recognized expectation that that the separate property would not be subject to forced sale by the delinquent taxpayer or his or her creditors;

(3) the likely prejudice to the third party, both in personal dislocation costs and in the [possibility of] undercompensation; and

(4) the relative character and value of the non-liable and liable interests held in the property.

Id. at 710-11. This list, however, is not meant to be a " 'mechanical checklist' " to the exclusion of common sense and consideration of special circumstances." Id. at 711.

The evidence before the Court on summary judgment is insufficient to allow the Court to determine whether the government is entitled to a forced sale of the subject real property. Therefore, the Court sets this matter for hearing on the above Rodgers factors as well as any "special circumstances" Mrs. Bolton intends to present.

In accordance with the above, the Court grants summary judgment in favor of the United States and against Darrell L. Bolton on his federal tax liabilities for 1987-94 and the attachment of federal tax liens securing this liability to Mr. Bolton's property, including the subject real property; but denies summary judgment on the government's request for a forced sale of the subject real property. (Docket No. 23). The issues relating to the government's request for a forced sale are set for an evidentiary hearing on the 17^th day of December, 1999 at 3:15 o'clock p.m.

DATED this 8th day of December, 1999

 

 

[88-2 USTC ¶9468] Paul Rochester Investment Co., Plaintiff v. United States of America , et al., Defendants

U.S. District Court, No. Dist. Tex., Dallas, Div., CA 3-84-0867-G, 6/7/88, 692 FSupp 704

[Code Sec. 6323 --Result unchanged by the Tax Reform Act of 1986 ]

Liens: Priority: Summary judgment: Texas.--A government tax lien on the taxpayer's property had priority over certain amounts paid ahead of its tax lien that were not secured by such property. An amount paid out of the sales proceeds of such property to satisfy a personal loan of the taxpayer was not secured by a deed of trust on such property because it did not arise directly out of transactions between the parties to the mortgage, namely the bank and the trust, of which the taxpayer was a trustee-beneficiary and the owner of record. Amounts used to make interest and principal payments on the loan of a corporation controlled by the taxpayer and another entity were not secured by a deed of trust on such property because the corporation and the other entity lacked an ownership interest in the property. The government lien also attached to excess amounts credited to the seller's bank account. Thus, the government's motion for summary judgment for the enforcement of its tax lien was granted, and the purchaser's motion for summary judgment to quiet title to such property was denied. However, the purchaser's motion for relief against the seller for breach of warranty was granted.

W. Edward Walts II, Strasburger & Price, 901 Main St. , Dallas , Tex. 75202 , for plaintiff. Grover Hartt III, Department of Justice, Dallas , Tex. 75242-0599 , for defendants. Rob ert F. Bentley, 7525 E. Camelback Rd. , Scottsdale , Ariz. 85252 , for C&A Development Co.

MEMORANDUM ORDER

FISH, District Judge:

This case is before the court on cross motions for summary judgment. The parties have agreed that all of the facts necessary to dispose of this case are undisputed. ¹

After reviewing the motions and briefs of all parties, the court concludes that as a matter of law, there being no genuine issue for trial, the United States is entitled to judgment against plaintiff Paul Rochester Investment Co. (" Rochester ") and Rochester is entitled to judgment against defendant C&A Development Co. ("C&A Development").

I. Background

A. Nature of the Case

This is a dispute over title to a 118-acre tract of land in Lubbock County , Texas ("the property"). ² Rochester purchased the property on November 1, 1983 from C&A Development. Rochester seeks to quiet its title against the United States ' claim that it has a prior and valid tax lien against the property. In the alternative, Rochester seeks relief against C&A Development for breach of warranty. The United States seeks enforcement of its tax lien.

B. Purchase of the Quaker Mall Property.

On March 27, 1979, a Declaration of Trust naming Frank S. Campbell ("the taxpayer") ³ as "Trustee" was executed by the taxpayer, two of his sons (F. Richard Campbell and Rob ert A. Campbell), one of his sons-in-law (Gary D. Jones), and the attorney for the various Campbell entities ( Rob ert F. Bentley). The taxpayer signed as trustee and as an individual beneficiary. ⁴

The stated purpose of the Trust was to hold the Quaker Mall property, which had been purchased for more than two million dollars (F. Campbell dep. at 30), on behalf of the beneficiaries and a partnership to be formed--the Quaker Mall Partnership.

C. The Quaker Mall Partnership.

Although the Quaker Mall property was purchased in March 1979, the Quaker Mall Partnership was not actually established until January 2, 1980 . The "Agreement of Partnership" reflected, in Exhibit A thereof, that each of the beneficiaries of the Trust, including the corporation, had a corresponding share in the partnership, i.e., 15 percent each for the five individuals, 25 percent for the corporation. See Appendix B in Support of the Motion for Summary Judgment of the United States ("Appendix B"). Although the Partnership Agreement was filed in the deed records of Lubbock County , Texas , record title to the property remained in the Trustee until shortly before it was sold in 1983. See Appendix E.

D. Financing the Purchase.

To finance the purchase of the Quaker Mall property, the Trust obtained a series of loans from the Fort Worth National Bank, which later became known as the Texas American Bank/Fort Worth, N.A. (McDonald dep. at 9). The bank made a total of four loans to the Trust, each in the amount of $600,000 and each secured by a portion of the Quaker Mall property. The first two were paid off before the third was made in July, 1981 (McDonald dep. at 16, 41-43). This third loan, as well as a fourth made in June, 1982, were paid in July, 1983 when the 42-acre parcel was sold to Rochester (McDonald dep. at 37-38, 45).

E. The $1,000,000 Loan.

In addition to these four loans, another loan in the amount of one million dollars was made to the Trust in February, 1982. Although this money was borrowed by the Trust, it was actually used by another of the Campbell family entities, ⁵ C&A Camelback Equities, to build some time-share condominiums in Arizona (McDonald dep. at 55, lines 1-10). This note, its several extensions, and a deed of trust dated September 21, 1983 were recorded in the deed records of Lubbock County (McDonald dep. ex. 12). ⁶

F. The Permaloy Loan.

Yet another Campbell enterprise was Permaloy Corporation, a publicly-traded Utah corporation in which the Campbells own controlling interest (49.99 percent) (F. Campbell dep. at 22-23). Permaloy never owned an interest in the Quaker Mall property ( Id. at 51). In January 1982, however, it did receive a $1,500,000 loan from the Texas American Bank, which was secured in part by a deed of trust on the Quaker Mall property. This loan was also secured by a $750,000 certificate of deposit belonging to the taxpayer; Permaloy's receivables; guaranties from various Campbells and C & A Companies; and by a deed of trust on the Quaker Mall property (McDonald dep. at 24-27).

After the July sale of part of the Quaker Mall property, $700,000 of the proceeds were applied to the principal of the Permaloy loan (McDonald dep. at 37-38). Ultimately, the $750,000 certificate of deposit was also applied, and the remaining $50,000 was rolled over into a loan to the taxpayer individually (McDonald dep. at 35). In between these two events, $33,349.64 of proceeds from the November sale of the property was applied to interest due on this note (McDonald dep. at 33 and McDonald dep. ex. 7).

Apparently, the deed of trust was to have been executed by Frank S. Campbell as trustee of the trust which owned the Quaker Mall property. Nevertheless, the deed of trust was actually executed by Frank S. Campbell, Trustee--Permaloy Corporation, Rob ert F. Bentley, Secretary--Permaloy Corporation, and Frank S. Campbell, President--Permaloy Corporation (McDonald dep. at 83-86 and F. Campbell dep. at 97-99).

G. Sale of the Property to Rochester .

As mentioned previously, the Quaker Mall property was sold to Rochester in two parcels. Both transactions were structured in the same manner: the Quaker Mall Partnership executed a quitclaim deed to Frank S. Campbell, Trustee, who in turn executed a warranty deed to C & A Development, which finally made the conveyance to Rochester (Brandt dep. at 17-20, 53, 63; F. Campbell dep. at 42; Appendix E).

H. The Tax Lien.

Between the dates of these two sales, the tax lien involved in this suit was duly filed in Lubbock County on September 30, 1983 . Appendix F. It secured the assessment against Frank S. and Lula H. Campbell for 1982 income taxes, penalty, and interest in the amount of $1,044,455.85. ⁷

I. The Bank's Distribution of the November Sale Proceeds.

After the sale of the property in November, the bank received proceeds of $1,704,615.88. Of this total, $1,111,443.69 (representing principal of $1,000,000 and interest of $111,443.69) was applied to pay off the remaining debt of Frank S. Campbell, Trustee, i.e., the $1,000,000 loan (McDonald dep. at 31, lines 9-25, and McDonald dep. ex. 7). Additionally, $37,812.46 was applied to interest on a Frank S. Campbell personal loan in the principal amount of $500,000. Although not secured by a deed of trust, the bank had a "question" whether this debt, owed by the taxpayer individually, might be secured by the "Mother Hubbard clause" of its deeds of trust signed by Frank S. Campbell, Trustee (McDonald dep. at 32, 33). ⁸

As mentioned earlier, $33,349.64 was applied to interest on the Permaloy loan. In addition, a total of $510,154.17 was applied to two loans the bank made to the Campbells for the Permian Mall in Odessa , Texas . The bank has never contended that these loans were in any way secured by the Quaker Mall property, even by means of its "Mother Hubbard clause" (McDonald dep. at 33-35, 65 lines 21-23, and 76 lines 8-11).

J. The Title Company Learns of the Tax Lien.

Both sales to Rochester of the Quaker Mall property were closed by Western Title Co. of Lubbock, Texas ("Western"). Western first became aware of the tax lien on October 24, 1983 , i.e., before the November sale (Brandt dep. at 15, lines 7-17). As the issuer of the title insurance policy in its capacity as agent of the title insurance company, Western Title was understandably concerned about its exposure because of the tax lien. After discussion, it was decided by Western and the Campbell interests to withhold $91,329.80 for the tax lien (Brandt dep. at 42-45). As a further precaution, Western obtained an indemnity agreement from C & A Development (Brandt dep. at 57-58 and Brandt dep. ex. 10).

K. The Title Company's Payment to the Bank.

With regard to the funds due the bank, the title company received the $1,704,615.88 figure referred to above from Ms. McDonald, via a telephone call which was confirmed by letter (Brandt dep. at 36-38 and Brandt dep. ex. 7). As Mr. Brandt explained, an extra day's interest ($977.78) was added to the amount shown on the letter (Brandt dep. at 37). This total amount was apparently decided upon by Ms. McDonald and one of the taxpayer's sons, Rob ert A. Campbell (McDonald dep. at 75). Since the title company had found deeds of trust amounts in excess of the figure requested by the bank, it evidently made no further inquiry into the constituent elements of the total figure related by Ms. McDonald (Brandt dep. at 39).

L. The Internal Revenue Service Investigation of the Extent of Its Interest.

The Internal Revenue Service ("IRS") undertook an investigation to determine what amount of the proceeds it was entitled to receive in satisfaction of its lien. This investigation began when the IRS received a hand-delivered letter from the Campbells on November 1, 1983 (the date of the sale) seeking to have the property discharged from the lien (Williams dep. at 4, 15-16). At the time of closing, the IRS, which had no prior information about the sale, advised that if the facts proved to be as represented, the $91,329.80 withheld from the proceeds would be accepted in satisfaction of its lien interest (Brandt dep. at 66-67). During the next few months, the IRS attempted to investigate the transactions described above. By February 1984, it had concluded that its interest was greater than the amount withheld at the closing and therefore advised the parties of its intent to seize the property (Brandt dep. at 48-51; Brandt dep. ex. 9).

II. Analysis

The United States is entitled to a lien for unpaid taxes against "all property and rights to property" of the taxpayer. 26 U.S.C. §6321 . This lien includes not only the unpaid tax itself, but also "any interest, additional amount, addition to tax, or assessable penalty, together with any costs that may accrue in addition thereto." Id. By virtue of Section 6322 , this lien arises on the date of assessment.

26 U.S.C. §6323 establishes the method for perfecting this lien against third parties and a regime of lien priorities. During the period between assessment and filing of a notice of federal tax lien in accordance with Section 6323(f) , the lien is sometimes referred to as a "secret lien" because its existence is known only to the IRS and the taxpayer. After filing of the notice, the priority of the lien vis-a-vis other creditors is determined by resort to Section 6323 .

Unlike liens which perfect security interests in specific items of property, the federal tax lien is a general lien attaching to all property and rights to property of the taxpayer. As the Supreme Court observed in United States v. National Bank of Commerce [85-2 USTC ¶9482 ], 472 U.S. 713, 105 S.Ct. 2919, 2924 (1985), the language of Section 6321 "is broad and reveals on its face that Congress meant to reach every interest in property that a taxpayer might have." Accord, Glass City Bank v. United States [45-2 USTC ¶9449 ], 326 U.S. 265, 267 (1945) ("[s]tronger language could hardly have been selected to reveal a purpose to assure the collection of taxes").

The nature and extent of the taxpayer's property interests have traditionally been recognized as matters to be determined by State law. Aquilino v. United States [60-2 USTC ¶9538 ], 363 U.S. 509, 513 (1960); United States v. Bess [58-2 USTC ¶9595 ], 357 U.S. 51, 55 (1958). Nevertheless, the Fifth Circuit has held that any interest in property at all, no matter how extensive under State law, is sufficient for the tax lien to attach. Broday v. United States [72-1 USTC ¶9269 ], 455 F.2d 1097, 1101 (5th Cir. 1972). Once it is determined that State law recognizes that the taxpayer has an interest in the property, the federal tax lien will attach to that interest no matter how limited or restricted the taxpayer's rights with respect to the property may be as a matter of State law. United States v. Mitchell [71-1 USTC ¶9451 ], 403 U.S. 190 (1971).

However, once the tax lien has attached to the taxpayer's state-created interests, we enter the province of federal law, which we have consistently held determines the priority of competing liens asserted against the taxpayer's "property" or "rights to property."

Aquilino, above, 363 U.S. at 513-514.

In the present case, it is undisputed that the Trust held legal title to the property when the tax lien was filed on September 30, 1983 . See paragraphs I(B), (C), and (G), above. It was not until October 4, 1983 that the Quaker Mall Partnership quitclaimed whatever interest it had in the property to the Trust and the Trust in turn conveyed the property to C & A Development for eventual conveyance to Rochester . ⁹

The November sale to Rochester produced a gross amount due the seller of $2,501,522.39. See Seller's Statement ("Seller's Statement") in Appendix E. Of course, various charges were deducted from this gross amount until a "net amount" due to seller was produced.

Realizing that the United States would be entitled to 15 percent of the net proceeds, the parties first calculated an amount of $76,329.00 to satisfy the tax lien, viz:

Net Proceeds ................................................... 508,865.31

Taxpayer's interest ............................................       x.15

                                                                 ----------

Amount to be withheld ..........................................  76,329.80

Brandt dep. at 42-43.

This $76,329.80 was subtracted from the $508,865.31 figure to produce a figure of $432,535.51 as the "net amount due to seller." The $508,865.31 was the amount left after paying all of the amounts on the Seller's Statement between the gross and net figures except for the tax lien (Brandt dep. at 42). At the closing, however, the parties realized that the $100,000 payment to the United Bank of Arizona was subordinate to the tax lien. Therefore, they added another $15,000 (15 percent of $100,000) to the amount withheld for the tax lien. The effect of this change was to acknowledge that the lien attached to $608,865.31, viz:

Original Net ................................................... 508,865.31

Amount paid to United Bank of 

Arizona

 .......................... 100,000.00

                                                                 ----------

                                                                 608,865.31

Taxpayer's interest ............................................       x.15

                                                                 ----------

Amount withheld ................................................  91,329.80

The $417,535.51 net to seller figure shown on the Seller's Statement is obtained by subtracting full payment to the United Bank of Arizona ($100,000) and the money withheld for the tax lien ($91,329.80) from $608,865.31 (Brandt dep. at 43-44).

The $91,329.80 which the Campbells and the title company agreed to withhold was subsequently paid to the United States and applied to the taxpayer's assessment. ¹⁰ The United States now challenges only one of the amounts paid ahead of its tax lien: the $1,704,615.88 paid to the Texas American Bank. The other items, such as the real estate commission, paving lien, etc., are not disputed. Not all of the amount paid to the bank is challenged--only that portion not secured by the property. The United States contends that because an excessive amount was paid to the bank, the amount from which the taxpayer's 15 percent was determined was too small.

The McDonald letter of November 2, 1983 (Appendix G) advised the Campbells how the money received by the bank from the closing was applied. According to Ms. McDonald, the $1,704,615.88 paid to the bank was applied in the following manner:

Loan Style                                    Note No.          Amount

Frank Campbell, Trustee ........................ #6    Prin. $1,000,000.00

                                                       Int.  111,443.69

Frank S. Campbell .............................. #1    Int.  $   37,812.46

Permaloy Corporation ........................... #1    Int.      33,349.64

Permian Mall ................................... #2    Prin. $  488,148.36

                                                       Int.  11,009.88

Permian Mall ................................... #3    Int.      10,995.93

                                                             -------------

     TOTAL ................................................. $1,692,759.96

                                                             -------------

          Difference (deposited into #1-05999) .............     11,855.92

 

When the property was sold in November 1983, all of the loans to the Trust to finance the purchase of the Quaker Mall property had been repaid. It appears that as a result of conversations between the Campbells and the bank (see, e.g., McDonald dep. at 33-34, 73, and 75), an attempt was made to pay amounts on other indebtedness owed by various other Campbell interests. The United States maintains that only the first item in the McDonald letter (the $1,111,443.69 principal and interest for the Frank Campbell, Trustee, Note No. 6) was properly secured by the property and that the remaining payments to the bank should not have been made until after calculation and payment of the amount due on the tax lien.

A. The $1,000,000 Loan

The payment of $1,111,443.69 to the bank paid off the $1,000,000 loan described in paragraph I(E) above. Although it appears that the proceeds from this loan were used to finance the Campbell 's time-share condominium project in Arizona , the United States does not dispute that the loan was properly secured by the Quaker Mall property.

Initially, no new deed of trust was executed when this loan was made. Instead, the note executed on February 26, 1982 referred to the July 1981 deed of trust, which had been executed to secure the third $600,000 note. See note 6, above. Most of the acreage described in this deed of trust was sold to Rochester in the July sale. The bank, apparently concerned about its collateral position, obtained a new deed of trust which covered the remaining acreage. This deed of trust recites that it is "an addition to and not to the exclusion of" the July 1981 deed of trust and a deed of trust executed in June 1982 to secure the fourth $600,000 note (McDonald dep. ex. 12). This final deed of trust was executed on September 21, 1983 but not filed until October 11, 1983 , i.e., after the tax lien was recorded on September 30, 1983 .

Since the July 1981 deed of trust did not describe much of the property and the October 1983 deed of trust was junior to the tax lien, the critical item is the June 1982 deed of trust (F. Campbell dep. ex. 28). It did not mention the $1,000,000 note. Like all of the other deeds of trust executed by Frank S. Campbell, Trustee (all of which are exhibits to the Frank S. Campbell deposition), it did contain a provision referred to by Ms. McDonald as a "Mother Hubbard clause." This provision, which is usually denominated a "dragnet clause," ¹¹ is found in Section 1.2(C) of each of these deeds of trust.

1.2 The term "Obligations" means:

* * *

C. All other indebtedness and liabilities of all kinds of Mortgagor to Bank now existing or hereafter arising, whether fixed or contingent, joint and/or several, direct or indirect, primary or secondary, and regardless of how created or evidenced . . .

* * *

This provision in the June 1982 deed of trust would have included the February 1982 loan of $1,000,000 to the Trust. Although the extent to which dragnet clauses will be enforced seems to vary, Texas courts are among those which will give them effect. See, e.g., Moss v. Hipp, 387 S.W.2d 656 ( Tex. 1965). The Eleventh Circuit has stated that dragnet clauses are "generally disfavored and are narrowly construed." Uransky v. First Federal Savings & Loan Ass'n, 684 F.2d 750, 756 n.5 (11th Cir. 1982). Uransky applied Florida law, but the Court noted that Texas law was "analogous." 684 F.2d 755. Nevertheless, the United States does not attach the payment of the principal and interest on the $1,000,000 loan.

B. The Frank S. Campbell Personal Loan

As explained in paragraph I(I) above, the bank also applied $37,812.46 to interest due on a separate loan it had made to Frank S. Campbell individually. This loan was secured by a $200,000 certificate of deposit. Ms. McDonald was equivocal about the uses to which the Campbells put the money loaned to them. (McDonald dep. at 21, lines 9-19.) What is unequivocal, however, is that this loan was not secured by a deed of trust on the Quaker Mall property. ( Id. at 32, lines 5-7). According to Ms. McDonald, the bank did have a "question" as to whether the dragnet clause in the Quaker Mall deeds of trust might cover this loan. ( Id. at 32, lines 11-16). Nevertheless, this question was never "researched" ( Id. at 32, line 24), nor did the bank's attorneys ever conduct an "investigation." ( Id. at 33, lines 6-10).

This expansive reliance on the dragnet clause is at odds with the narrow construction given such clauses. Recently the requirements for enforcing a dragnet clause in Texas were summarized in In re Stone, 49 B.R. 25 (Bkrtcy N.D. Texas 1985). Among them was the requirement that the "subsequent indebtedness must arise directly out of transactions between the parties to the mortgage." Id. at 27. Moreover, the "subsequent indebtedness must be of the same class or character as the first indebtedness." Id. These criteria from Stone were condensed from a more extensive consideration in Kimbell Foods, Inc. v. Republic National Bank, 557 F.2d 491, 494-497 (5th Cir. 1977), aff'd, 440 U.S. 715 (1979).

Also germane is Airline Commerce Bank v. Commercial Credit Corporation, 531 S.W.2d 171 (Tex. Civ. App.--Houston [14th Dist.] 1975, writ ref'd n.r.e.). In that case, the bank foreclosed on a deed of trust. Besides paying the debt secured by that deed of trust, the bank also claimed that excess proceeds from the foreclosure could be applied to a partnership debt because its debtors on the foreclosed note were also partners in the partnership. The United States , a tax lien claimant in state court, countered that while the bank had priority on its deed of trust, its attempt to use a dragnet clause to apply the excess proceeds to the partnership debt was not justified. As in the present case, the bank had maintained separate records for these loans. The bank's expansive interpretation of its dragnet clause was rejected. 531 S.W.2d at 175.

In the instant case, the parties to the deed of trust were the bank and the Trust, of which the taxpayer was trustee. The Campbells were always careful to adhere to the formalities of this trust designation. Ms. McDonald's suggestion that "Frank S. Campbell , Trustee" equates to "Frank S. Campbell, individually" (McDonald dep. at 19) is mistaken. Therefore, the Stone requirement that the transactions be between the same parties was not satisfied. Nor was the indebtedness of the trust and the taxpayer individually of the same class or character. The amount paid on this loan, therefore, was inferior to the tax lien.

C. The Permaloy Loan

The details of the bank's loan to Permaloy are provided in paragraph I(F) above. Unlike the other Campbell corporations, Permaloy was a publicly traded corporation in which the Campbells purchased the controlling interest and installed themselves as officers. Like many of the other Campbell entities, Permaloy obtained a loan from the Texas American Bank. This loan for $1,500,000 was secured by a certificate of deposit for $750,000 in the name of the taxpayer; Permaloy's receivables; guaranties from C & A Companies (the parent corporation of C & A Development) and various other Campbell entities; and a deed of trust. After the July sale, $700,000 was applied to the loan's principal. After the November sale, $33,349.64 was applied to interest.

The United States argues that this interest payment did not have priority over the tax lien. The deed of trust (Appendix D) was filed before the tax lien and does describe a portion of the Quaker Mall property. Nevertheless, the deed of trust was executed by Permaloy. This corporation never owned an interest in the property. (F. Campbell dep. at 51) Apparently, the Campbells may have intended to pledge the Quaker Mall property on behalf of the Trust. See F. Campbell dep. at 97-99 and McDonald dep. at 83-86. Whatever their subjective intentions may have been, however, the documents actually executed were by Permaloy Corporation and by Frank S. Campbell, "Trustee of Permaloy Corporation," with corresponding acknowledgements. Page one of the deed of trust identifies Permaloy as the borrower instead of the mortgagor, but the Trust which owned Quaker Mall appears nowhere in the instrument.

"[I]t is almost black letter law that the federal government . . . must depend upon record title of property for the satisfaction of its lien." United States v. Truss Tite, Inc., 285 F.Supp. 88, 92 (S.D. Tex. 1968). The Fifth Circuit has held that the United States is entitled to the protection of the Texas recording statutes. United States v. Creamer Industries, Inc. [65-2 USTC ¶9527 ], 349 F.2d 625, 628 (5th Cir.), cert. denied, 382 U.S. 957 (1965). See also Prewitt v. United States [86-2 USTC ¶9513 ], 792 F.2d 1353, 1355 (5th Cir. 1986). Creamer Industries also held that the rights between the parties to a transaction may differ from those of third-party creditors and the taxpayer. 349 F.2d at 628. Moreover, it is of no moment that the failure to record properly did not mislead the United States and that the United States would not have acted differently if the lien in question had been recorded. Truss Tite, above, 285 F.Supp. at 91-92.

The situation with respect to the Permaloy loan also brings into play the doctrine of choateness. In essence, this doctrine requires a state law lien to be "choate" as well as prior in time before it will be accorded priority to the tax lien. ¹² See, e.g., Truss Tite above, 285 F.Supp. at 91. A state-created lien is not choate until the identity of the lienor, the property subject to the lien, and the amount of the lien are established. Kimbell Foods, above, 440 U.S. at 721. "Failure to meet any one of these conditions forecloses priority over the federal lien, even if under state law the non-federal lien was enforceable for all purposes when the federal lien arose." Id.

In the instant case, the identity of the lienor was not established. Although the Campbells and the bank may have intended for the Trust which owned the property to be the lienor, no such intention was reflected in the documents. Because the Permaloy loan was not secured by a deed of trust executed by the owner of the Quaker Mall property, it is subordinate to the federal tax lien.

D. The Permian Mall Loans

The details of the transaction involving Permian Mall in Odessa are not included in the record, but there is no indication that the partnership or entity which owned Permian Mall ever owned any interest in the Quaker Mall property. When asked why payments were made to the loans from Quaker Mall proceeds, the banker responded:

Q: Now, what was the basis for applying Quaker Mall funds to those two loans?

A: I don't really know how to answer your question. It was some verbal agreements with the Campbells .

(McDonald dep. at 33, lines 20-23.) The bank does not suggest that any dragnet clause is applicable here. (McDonald dep. at 76, lines 8-11.) Only the oral arrangements between the bank and the Campbells are offered as a justification. ¹³

E. The $11,855.92 "Difference"

The final amount contained in the money paid to the bank is the $11,855.92 which was left over after all the other payments had been made. Unable to find any more loans to which this money could be applied, the bank simply credited the Campbells with it (McDonald dep. at 82). The lien obviously attached to this amount.

F. The amount due to the United States

The amount challenged by the United States is shown below:

Total Paid to Bank .......................................... $1,704,615.88

Less amount secured by Quaker Mall property (the $1,000,000

  loan plus interest) ....................................... -1,111,443.69

                                                                 ----------

Amount challenged by 

United States

 .......................... $  593,172.19

Using this figure, the amount due to the United States can be calculated as follows, viz:

Amount used to calculate $91,329.80 already paid to United

  States (see p. 12 above) .................................. $  608,865.31

Additional amount to which the lien attached (i.e., the

  unsecured payment to the bank) ............................   +593,172.19

                                                              -------------

     TOTAL .................................................. $1,202,037.50

Taxpayer's interest (15 percent) ............................          x.15

                                                              -------------

Amount due United States .................................... $  180,305.63

Less amount already paid ....................................    -91,329.80

                                                              -------------

Balance due United States ................................... $   88,975.83

 

Therefore, the United States should be awarded the remaining money it was entitled to on November 1, 1983: $88,975.83, plus interest after that date. ¹⁴

III Conclusion

Because the United States is entitled to judgment against Rochester for $88,975.83 (plus interest from November 1, 1983 to date of payment), its motion for summary judgment is GRANTED. Rochester 's motion for summary judgment against the United States is DENIED, but its alternative prayer for relief against defendant C & A Development is GRANTED. ¹⁵

The parties are directed to submit, within twenty days of this date, a proposed form of judgment consistent with this memorandum order. If agreement cannot be reached, each party may submit its own version.

SO ORDERED.

¹ See Joint Motion to Extend Discovery and Set Date to Submit Case on Summary Judgment, filed August 30, 1985 , and Response to Order of August 6, 1987 , filed August 24, 1987 .

² The property was part of an original tract of approximately 167 acres. Deposition of Frank S. Campbell ("F. Campbell dep.") at 26. This original 167-acre tract was sold to Rochester in two parcels. Rochester bought the first parcel, consisting of 41.330 acres, for $3,005,818 in July, 1983. It then bought the second parcel, the 118.394 acres at issue here, for $2,500,000 in November, 1983 (the remaining acreage out of the original tract apparently being conveyed to the city of Lubbok for street improvements).

Because only the second parcel is in controversy here, the 118.394 acres involved in that transaction will be referred to as "the property." To minimize confusion, the entire original 167-acre tract will be referred to as the "Quaker Mall property."

³ The unpaid taxes which are involved in this case are income taxes owed by Frank S. and Lula H. Campbell. Mrs. Campbell, however, did not play a role in these events and, for this reason, references to "taxpayer" will be to Frank S. Campbell.

⁴ F. Campbell dep. at 34 and F. Campbell dep. ex. 1.

⁵ The Campbells owned and operated a number of business entities. The taxpayer was president of C&A Companies, Inc., which owned and operated the following subsidiaries:

C&A Development Co., Inc. (a defendant herein)

C&A Realty Co., Inc.

C&A Investment Co.

United Phoenix Companies

C&A Manufacturing Co.

(F. Campbell dep. at 11-17).

Besides these companies, the Campbells operated several partnerships:

Quaker Mall Partnership (described above)

C&A Camelback Equities (described above and in F. Campbell dep. at 15; see also C&A's Answer to Interrogatory No. 2, at 4-5, in Appendices in Support of Rochester 's Motion for Summary Judgment)

Permian Mall Partnership (apparently, according to the McDonald deposition, a partnership)

South Plains Mall Partnership (F. Campbell dep. at 30)

Beginning in 1985, the Campbells appear to have begun conducting their business affairs through another corporation, Design Construction, Inc. (F. Campbell dep. at 18-21; Rob ert Campbell dep. at 16-19).

⁶ This note was originally secured by the July 1981 deed of trust given in connection with the third $600,000 note. Later the September 1983 deed of trust was executed to secure this loan (Mc Donald dep. at 57).

⁷ This amount resulted from a self-assessment, i.e., the amount reported by the taxpayers, not a deficiency assessed after an audit (F. Campbell dep. at 8-9).

⁸ Apparently another $500,000 loan to Frank S. Campbell, Trustee, was made in September 1981 and repaid before February 1982. This is a different $500,000 loan from the personal one on which interest was paid. The personal loan was only secured by a $250,000 certificate of deposit (McDonald dep. at 46-48). Evidently this personal loan was used to provide working capital for some of the Campbell entities (McDonald dep. at 21-22).

⁹ Because it is undisputed that the taxpayer had a 15 percent interest in the Trust as an individual beneficiary and a 15 percent interest in the Quaker Mall Partnership, it is unnecessary to decide whether the lien attached to the taxpayer's interest in the Trust or in the Partnership.

¹⁰ As a result of this and other credits, the amount owed by the taxpayer for 1982 was reduced to $313,465.87 as of October 1, 1985 . The affidavit of Revenue Officer Douglas G. Gray (see Appendix I) explains the components of this total amount.

¹¹ Actually the term "Mother Hubbard clause" is more commonly used to describe a standard provision in oil and gas leases which cover minor defects in the property description. See, e.g., 42 Tex. Jur. 2d, Oil & Gas, §65 (1963). The provision relied upon by the bank is more frequently termed a "dragnet clause." Occassionally, cases refer to a subset of dragnet clauses called "future advances clauses." Uransky v. First Federal Savings & Loan Ass'n, 684 F.2d 750, 756, n.5 (11th Cir. 1982). The broader dragnet clause includes prior as well as later loans.

¹² The Fifth Circuit has discussed choateness on a number of occasions. See e.g., Texas Oil & Gas Corp. v. United States [72-2 USTC ¶9653 ], 466 F.2d 1040, 1059-1052 (5th Cir. 1972), cert. denied, 410 U.S. 929 (1973), and Rice Investment Company v. United States [80-2 USTC ¶9654 ], 625 F.2d 565, 568-69 (5th Cir. 1980). In Southern Rock, Inc. v. B & B Auto Supply [83-2 USTC ¶9529 ], 711 F.2d 683 (5th Cir. 1983), the Court held that choateness has been supplanted by Section 6323 to the extent that the statute "provides an unambiguous federal law answer." 711 F.2d 689. In the instant case, the problem under consideration is not even addressed by Section 6323 , much less answered unambiguously. Therefore, the doctrine of choateness is fully applicable.

¹³ "They [the Campbells] were saying, 'This money is available, how much do you want?' " (McDonald dep. at 73, lines 23-24.)

¹⁴ Since the lien provided by 26 U.S.C. §6321 also provides for interest, an additional amount calculated pursuant to the rates provided by Section 6621 should be determined for the period from November 1, 1983 until the date of payment.

¹⁵ Rochester seeks relief against C & A Development for breach of the warranty of title given when the property was conveyed. C & A Development has not briefed the summary judgment motions, but it is obvious, based upon the court's conclusion herein, that Rochester did not receive good title, i.e., title unencumbered by the tax lien of the United States , to the property. C & A Development therefore breached its warranty of title.