Wrong Name Page2

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Therefore, a trustee may avoid a statutory lien pursuant to Section 545(2) on property only to the extent that such lien is not perfected or enforceable at the time of the commencement of the case. The issue to be determined by this Court is whether the Federal Tax Lien of May 13, 1988 was valid as against a hypothetical bona fide purchaser as of August 12, 1988 when the debtor filed for bankruptcy relief.

The validity and priority of federal tax liens are governed by the provisions of 26 U.S.C. §6321 , et seq., and are a matter of federal law. United States v. Brosnan [60-2 USTC ¶9516 ], 363 U.S. 237 (1960); United States v. Union Central Life Insurance, Co. [62-1 USTC ¶9103 ], 368 U.S. 291 (1961). When a taxpayer neglects or refuses to pay a tax liability after assessment, notice, and demand, the amount due becomes "a lien in favor of the United States upon all property and rights to property, whether real or personal, belonging to such person". 26 U.S.C. §6321 .

Once a proper notice of federal tax lien is filed, the lien is valid against a subsequent purchaser of the encumbered property, provided that the purchaser is given notice of the encumbrance. 26 U.S.C. §6323(a) . The requirements for proper notice are set forth in Section 6323(f) which provides in pertinent part:

Place for filing notice; form.--

(1) Place for filing.--The notice referred to in subsection (a) shall be filed--

(A) Under state laws.--

(i) Real property.--In the case of real property, in one office within the State (or the county, or other governmental subdivision), as designed by the laws of such State, in which the property subject to the lien is situated; and

. . .

 

(3) Form.--The form and content of the notice referred to in subsection (a) shall be prescribed by the Secretary. Such notice shall be valid notwithstanding any other provision of law regarding the form or content of a notice of lien.

(4) Indexing required with respect to certain real property.--In the case of real property, if--

(A) under the laws of the State in which the real property is located, a deed is not valid as against a purchaser of the property who (at the time of purchase) does not have actual notice or knowledge of the existence of such deed unless the fact of filing of such deed has been entered and recorded in a public index at the place of filing in such a manner that a reasonable inspection of the index will reveal the existence of the deed, and

(B) there is maintained (at the applicable office under paragraph (1)) an adequate system for the public indexing of Federal tax liens, and

then the notice of lien referred to in subsection (a) shall not be treated as meeting the filing requirements under paragraph (1) unless the fact of filing is entered and recorded in the index referred to in subparagraph (B) in such a manner that a reasonable inspection of the index will reveal the existence of the lien.

26 U.S.C. §6323(f) .

Under the public records doctrine in Louisiana , third parties are only required to look at the public records to determine what interests and claims affect immovable property. La.R.S. 9:2721; Cardinal Federal Savings Bank v. Corporate Tower Partners, Ltd., 564 So.2d 1282, 1288 (La.App.3rd Cir. 1990). All persons are held to have constructive notice of the existence and contents of recorded instruments affecting immovable property. Id. The Orleans Parish Recorder of Mortgages provides an indexing system for the public indexing of federal tax liens. Therefore, in accordance with the provisions of Section 6323(f)(4) , the validity of the Federal Tax Lien of May 13, 1988 depends upon whether "a reasonable inspection of the index will reveal the existence of the lien".

Few courts have treated in detail the legal standards of what constitutes a reasonable inspection. In Kivel v. United States [89-2 USTC ¶9415 ], 878 F.2d 301, 304 (9th Cir. 1989), the Ninth Circuit stated:

The parties have agreed that what title companies in fact do is not itself decisive of the question of reasonableness. The district court heard conflicting expert testimony and then reached its own conclusion as to what was reasonable. Clearly, "reasonable" is a mixed question of fact and law.

In determining the extent of a "reasonable search", the Kivel Court stated:

At the outset we must decide whether a "reasonable inspection of the index" means that a searcher need only look at the index and has no obligation to go from the index to the actual conveyances that are indexed. Such a literal construction of language would not make sense.

[89-2 USTC ¶9415 ], 878 F.2d at 304. The Court concluded that a reasonable inspection would have required the title searcher to look at the actual conveyances, and would have revealed an additional name used by a taxpayer, and a federal tax lien listed under that additional name. Although the Kivel holding is not directly applicable to the case at bar in which the taxpayer's name on the federal tax lien was misspelled, it does indicate that a reasonable inspection requires something more than merely examining the index under the taxpayer's name.

A recent Louisiana case summarized the type of search required by the Clerk of Court and ex officio Recorder of Mortgages for Lafayette Parish:

The Clerk of Court is only required to search his records under the names furnished him by a party seeking a mortgage certificate. [citations omitted]. The Clerk is not required to check encumbrances against property under the names of previous owners when not provided with those names. [citations omitted].

Cardinal Federal Savings Bank v. Corporate Tower Partners, Ltd., 564 So.2d 1282, 1289 (La.App.3rd Cir. 1990). Cardinal Federal Savings recognizes that a mortgage certificate obtained in a particular name only shows privileges and mortgages recorded under that name, and does not necessarily show all encumbrances against an immovable. Id. at 1288. The Court further stated:

Merely obtaining a mortgage certificate in the incorrect name of Corporate Towers Partners, Ltd. is not an adequate search of the records to show all encumbrances existing on the immovable property and, if Cardinal Federal or any third party chooses to rely on such a search, it does so at its own peril. The Clerk of Court is only required to list in a mortgage certificate those encumbrances shown under the names given and variations of the name by middle name or initial.

564 So.2d at 1290. Therefore, a search performed by the Recorder of Mortgages Office is not necessarily a reasonable search under Section 6323 .

A misspelling in the taxpayer's name does not automatically render a tax lien invalid. A federal tax lien is not invalid due to lack of adequate notice when only a slight error in misspelling of the taxpayer's name exists which would not have mislead someone searching the record. See Richter's Loan Company v. United States [56-2 USTC ¶9706 ], 235 F.2d 753 (5th Cir. 1956), (Holding federal tax lien is valid under Florida law even though it incorrectly spelled the taxpayer's name as "Freidlander" instead of "Friedlander"); United States v. Feinstein, et al. [89-2 USTC ¶9547 ], 717 F.Supp. 1552 (D. Fla. 1989 (Slight misspelling of "Tarragon" as "Taragon" did not invalidate federal tax lien). The test frequently cited in the jurisprudence for the notice required by a federal tax lien was made in United States v. Sirico [66-1 USTC ¶9209 ], 247 F.Supp. 421, 422 (S.D. N.Y. 1965): "[t]he essential purpose of the filing of the lien iS to give constructive notice of its existence. The test is not absolute perfection in compliance with the statutory requirement for filing the tax lien, but whether there is substantial compliance sufficient to give constructive notice and to alert one of the government's claims". See also In re Hudgins [92-2 USTC ¶50,341 ], 967 F.2d 973 (4th Cir. 1992).

With these principles in mind, the Court shall examine the facts of the present case.

The parties agree that the Federal Tax Lien of May 13, 1988 was prepared on the correct Form 668, and filed in the correct location with the Recorder of Mortgages for the Parish of Orleans. The parties further agree that the Federal Tax Lien contained the following errors: (1) incorrect spelling of the first name as "Hughes", instead of "Hugues"; (2) incorrect spelling of the last name as "Verone", instead of "Vergne"; and (3) addition of the term "Payroll Account" after the taxpayer's name.

John Jagot IV, senior deputy clerk in the office of the Recorder of Mortgages for the Parish of Orleans, testified as to the proper method of indexing used by the Recorder of Mortgage's Office. Mr. Jagot testified that because the term "Payroll Account" followed the taxpayer's name, the Federal Tax Lien was indexed under the first name on the lien, i.e. "Hughes". Mr. Jagot stated that indexing under "H" is required because the guidelines of the Recorder of Mortgages Office require that an entry against a business or corporate entity be indexed under the first name listed. The term "Payroll Account" indicated a business entity separate from the individual that was subject to the lien. As an example, Mr. Jabot stated that " Rob ert Dozier, A Professional Law Corporation" would be indexed under the first name, " Rob ert". Mr. Jagot further testified that when the Recorder of Mortgages Office issues a mortgage certificate, the certificate only includes liens listed under the exact names furnished by the person requesting the certificate.

On July 21, 1988 , during the course of the Trustee's admin istration, the Trustee filed an application for private sale of the Emlah Court Apartments, owned in indivision by the debtor and his wife. The Trustee requested a mortgage certificate from the Orleans Parish Recorder of Mortgages on the property under the names: "Beatrice Badger wife of and Hughes J. Delavergne II". The mortgage certificate did not disclose the Federal Tax Lien of May 13, 1988 . (Tr. Ex. 5). The Trustee also requested other mortgage certificates on various properties owned by the debtor on later occasions. See Tr. Ex. 11, 12, 13, 14, 15, & 16. The mortgage certificates were requested under the names: (1) "Hugues J. de la Vergne, II"; (2) "Hughes J. de la Vergne, II"; or (3) "Hughes J. de la Vergne, II and Hugues J. de la Vergne, II". None of the mortgage certificates requested by the Trustee listed the Federal Tax Lien of May 13, 1988 . See Tr. Ex. 11, 12, 13, 14, 15, & 16.

Jerald L. Curtner, an employee of the Internal Revenue Service, testified that he has routinely conducted searches of the records of the Recorder of Mortgages for the last fifteen years. Mr. Curtner was asked to conduct a search of the records of the Orleans Parish Recorder of Mortgages as he would normally and regularly do, and determine whether there were any tax liens against the debtor. Mr. Curtner was aware of the Federal Tax Lien at the time of his search. He stated that his standard procedure in searching the records of Orleans Parish led him to employ alternative syllabications of "delaVer" coupled with the omission of the final three characters and "II", and the inclusion or exclusion of the initial "H". He indicated that the computer index in Orleans Parish includes an automatic feature that searches the index alphabetically for all characters beyond those furnished as part of a name, thus revealing a range of names including and following the characters a searcher actually inputs. The inclusion of this feature in the computer program of the Recorder of Mortgages was designed to compensate for errors, including misspellings, of names. This feature allows an abstractor to find errors that would have been disclosed to the human eye by glancing at pages of an index that could not otherwise be done in a computerized index system. Mr. Curtner stated that one using the computerized index must suppress this feature in order to search for encumbrances by precise, literal names. By using variations of "delaVer" and omitting the final three characters and "II", Mr. Curtner was able to ascertain all encumbrances that began with "delaVer" and were followed by any additional characters, including "gne" or "one". (D. Ex. 44).

Mr. Curtner concluded that had the records of Orleans Parish included any other encumbrances against individuals with last names spelled beginning in "de la Ver", such encumbrances would have appeared in his search. Therefore, if the Federal Tax Lien had been indexed under "de la Verone II", it would have appeared on the same or an adjacent computer screen as the seventeen encumbrances Mr. Curtner discovered when he searched under "de la ver H.". Mr. Curtner also testified his search would have found the Federal Tax Lien if it had been indexed under "Verone" when he searched for variations of "Ver". Mr. Curtner concluded that the Recorder of Mortgages made an error in indexing the Federal Tax Lien under "H", rather than under "D", because nothing on the lien indicated that it applied to any entity other than the individual debtor, "Hughes J. de la Verone II".

Based upon the testimony of Mr. Curtner, the United States argues that the Federal Tax Lien would have been found by a reasonable search of the records of the Recorder of Mortgages, despite the misspellings, if the lien had been properly indexed. The United States asserts that a mortgage which has been properly filed and recorded is effective against third persons even if it has not been indexed properly. See Progressive Bank & Trust Co. v. Dieco Specialty Company, Inc., 421 So. 2d 345 (La. App. 1st Cir. 1982). The United States further contends that the credibility of Mr. Jagot is questionable because the Recorder of Mortgages is liable for injuries resulting from omissions in mortgage certificates attributable to errors made by the office, including errors in indexing. See La.C.C. art. 3394; Housing Authority of Lafayette v. Fidelity & Deposit Company of Maryland, Inc., 309 So. 2d 920, 927 (La. App. 3rd Cir. 1975). In support, the United States refers to two other federal tax liens filed against "Hugues J. de la Vergne, II--Payroll Accountant", and indexed under "de la Vergne" rather than "Hugues". (D. Ex. 43-A, 43-B). ³

This Court is not persuaded by the arguments made by the United States . Mr. Jagot's testimony that inclusion of the term "Payroll Account" on the Federal Tax Lien resulted in indexing of the lien under "H" rather than "D" or "V" is credible. The term "Payroll Account" could reasonably be interpreted as a business individual or entity, resulting in indexing under the first name, while "Payroll Accountant" clearly indicates an individual, resulting in indexing under the last name. Any mistake in the indexing of the Federal Tax Lien results from an error made by the Internal Revenue Service in identifying the taxpayer's name. The Court is convinced that in this case it is not improper indexing by the Recorder of Mortgages but instead the erroneous preparation and filing of the Federal Tax Lien by the United States that lead to the problem.

Even if a hypothetical third party purchaser had searched the records themselves and discovered the existence of the Federal Tax Lien of May 13, 1988 against "Hughes J. de la Verone II Payroll Account", this would not have put the party on notice of the existence of a tax lien against "Hugues J. de la Vergne II". The error resulting from inserting an "O" for a "G" in "de la Vergne" is material enough to result in the conclusion that "de la Verone" was not the same individual as "de la Vergne".

The errors in the Federal Tax Lien of May 13, 1988 , unlike the errors in Richter's Loan Company, Feinstein, supra at p. 9, are significant. This case is similar to Haye v. United States [79-1 USTC ¶9192 ], 461 F. Supp. 1168 (C.D. Cal. 1978), in which the court held that a federal tax lien erroneously listed under "Manual de J. Castello" instead of "Manuel de J. Castillo" did not provide a third party purchaser with constructive notice of the lien.

The Court concludes that a reasonable search of the records of the Orleans Parish Recorder of Mortgages would not have disclosed the existence of the Federal Tax Lien of May 13, 1988 . Because the existence of the Federal Tax Lien would not have been disclosed, the lien was not perfected or enforceable at the time of the commencement of the case, and is avoidable by the Trustee under the provisions of Section 545(2) of the Bankruptcy Code.

B. ALTERNATIVE ARGUMENTS OF THE TRUSTEE

The Trustee makes three alternative arguments to his position under Section 544 and Section 545 , as follows:

(1) the Federal Tax Lien is avoidable under Section 547 and 548 of the Bankruptcy Code as a preferential transfer;

(2) the United States is an undersecured creditor, and the interest on the Federal Tax Lien stopped accumulating after commencement of the bankruptcy case; and

(3) the Trustee has effectively avoided the inscription of a judgment held by Louis V. de la Vergne against the debtor's estate by virtue of a compromise agreement entered into between the Hibernia National Bank, Louis V. de la Vergne, and the estate. As such the Trustee steps into the shoes of this avoided judgment holder in priority to any junior encumbrances, i.e. the Federal Tax Lien. Consequently, Louis de la Vergne's lien ranking is preserved for the benefit of the debtor's estate under Section 551 of the Bankruptcy Code, and prevents the United States from benefitting in rank or priority from the compromise agreement.

Having found in favor of the Trustee on his claim under Section 545(2) , the Court need not consider and address the Trustee's alternative arguments.

A judgment in accordance with this opinion will be entered.

¹ This Memorandum Opinion constitutes this Court's findings of fact and conclusions of law in accordance with Bankruptcy Rule 7052. The Court has jurisdiction over this matter pursuant to 28 U.S.C. §1334. The matter is a core proceeding under 28 U.S.C. §157(b)(2).

² To be valid against third parties, the Federal Tax Lien had to be filed with the Recorder of Mortgages for the Parish of Orleans. See La.R.S. 52:52:B. However, the three day delay between the filing with the Custodian of Notarial Records of Orleans Parish and the Recorder of Mortgages for the Parish of Orleans is of no significance to the issues presented.

³ The two additional federal tax liens were subsequently withdrawn by the United States as having been erroneously filed while the stay was in place. supra, at p. 3.

 

 

[93-1 USTC ¶50,223] James A. and Catherine L. Brightwell, Plaintiffs v. United States of America , Defendant

U.S. District Court, So. Dist. Ind., Indianapolis Div., IP 89-59-C, 11/10/92, 805 FSupp 1464

[Code Sec. 6323 ]

Tax liens: Jurisdiction: Action to quiet title: Strict foreclosure.--A federal district court had jurisdiction over a lien priority dispute that had been removed from state (Indiana) court because the amended complaint stated a valid action to quiet title against the United States. The court also had jurisdiction over the strict foreclosure component of the complaint because a judicial sale of the property was sought. Although Indiana had never ordered a judicial sale in a strict foreclosure action, case law supported the idea that judicial sale is a proper remedy in actions that begin or are labelled as strict foreclosures.
[Code Sec. 6323 ]

Tax liens: Validity of notice.--A notice of federal tax lien filed with the appropriate county recorder's office was statutorily adequate despite the fact that it listed the property owner's middle initial incorrectly and inserted an extra space in his last name. The notice substantially complied with statutory requirements because the taxpayer's first name was correctly listed, the error concerning his middle initial arguably involved the least important aspect of his name, and the index card for the notice was filed exactly where it would have been if the extra space had not been inserted in his last name.

[Code Sec. 6323 ]

Tax liens: Mortgage liens: Merger: Priority.--A properly filed federal tax lien had priority over the rights of subsequent purchasers who bought property without actual notice of the tax lien. Under state ( Indiana ) anti-merger law, an original mortgagee's mortgage did not merge with property's legal title when the original mortgagee purchased the property at foreclosure. However, subsequent purchasers of the property were not the equitable assignees of the original mortgagee's right to assert its mortgage against junior lienholders who were inadvertently omitted from a foreclosure action.

A. Donald Wiles II, Jeffrey W. Scripture, Harrison & Moberly, 320 N. Meridian St., Indianapolis, Ind. 46204, for plaintiffs. Sue Hendricks Bailey, Assistant United States Attorney, Indianapolis, Ind. 46204, Charles M. Greene, Peter Sklarew, Department of Justice, Washington, D.C. 20530, for defendant.

ORDER ON MOTIONS FOR SUMMARY JUDGMENT

MCKINNEY , District Judge:

This case addresses two issues: (1) whether a federal tax lien is valid, when the notice of lien lists an incorrect middle initial for the taxpayer, and inserts an extra space in his last name; and (2) whether the senior lien of a mortgagee, who forecloses and buys the property at a foreclosure sale, can be asserted by the mortgagee's transferee against a junior lienholder who was not a party to the foreclosure action.

I. FACTS AND PROCEDURAL BACKGROUND

The key facts are undisputed. William B. VanHorn purchased three parcels of real property from the Indianapolis Spring Corporation ("ISC") on November 10, 1982, executing a purchase money mortgage in ISC's favor. ¹ On May 24, 1984, VanHorn was assessed for $10,247.53 in unpaid federal tax liabilities. On July 13, 1984 the Internal Revenue Service ("IRS") executed a lien against VanHorn for this amount (the "first lien"), and filed a Notice of Federal Tax Lien (the "first notice") in the Marion County, Indiana Recorder's Office.

Every tax lien notice filed in the recorder's office before 1987 was indexed according to a standardized procedure: office staffers would transcribe information from the notice onto a card, which then was placed in the county's federal tax lien index. ² These cards contained only basic information--the taxpayer's name, a reference number, and the filing date--and were filed alphabetically according to the last name of the taxpayer. The first notice was indexed no differently, but unbeknownst to the IRS, it contained a mistake: it listed the taxpayer's name as "William S. Van Horn," rather than "William B. VanHorn." ³ When it was transcribed onto the index card, this error found its way into the lien index.

The IRS executed a second tax lien against VanHorn and his wife for $875.82 in late 1984 (the "second lien"), and filed a corresponding notice on December 11, 1984 (the "second notice"). The second notice correctly identified the taxpayer(s) as "William B. VanHorn & Carlotta VanHorn." As a result, it was correctly indexed, and its index card was filed immediately in front of the card for the first lien. Both cards are still in the index, right next to one another.

By June 1986, VanHorn defaulted on his mortgage payments, so ISC brought an action to foreclose. ISC hired the Lawyer's Title Insurance Company to research the status of VanHorn's title, but the company failed to discover either of the two tax liens against the property, even though the second notice was correct and properly indexed. Therefore, the IRS never learned of, and did not become a party to, ISC's foreclosure action. ISC eventually achieved a consent judgment foreclosing the interests of VanHorn, a second mortgagee, and a judgment creditor in the property. ISC then purchased the property at a sheriff's sale on September 18, 1986 .

Sometime afterward ISC, in preparing the property for sale to a third party, hired the Chicago Title Insurance Company to research title and provide insurance. This time a search revealed the second notice, but the first notice remained undiscovered. ISC's attorney checked with the IRS about satisfying the second lien, and was told that it would be released upon payment of the total deficiency ($875.82) and interest. ISC paid this amount, and the IRS released the lien--never mentioning that a prior, larger tax lien still encumbered the property.

On July 1, 1987 , ISC sold the property by warranty deed to plaintiffs James and Catherine Brightwell, representing that no tax liens encumbered its title. As a result, the plaintiffs believed that the property was theirs free and clear. Before long, however, they learned about the first lien, the first notice, and the mistake the IRS had made in naming VanHorn as the taxpayer.

So, the plaintiffs decided to sue. On December 27, 1988 , they filed a strict foreclosure petition in Marion County Superior Court, seeking to cut off the government's lien on the property. The government removed the case to federal court on January 20, 1989 , where it was assigned to Judge John Daniel Tinder. On April 24, 1989 , the plaintiffs amended their complaint to add a claim to quiet title. The government thereafter filed a motion for summary judgment, ⁴ which became ripe for ruling on August 22, 1989. The plaintiffs moved for summary judgment on August 7, 1989 , and this motion became ripe on September 18, 1989 . In November 1991, the case was transferred from Judge Tinder to the docket of this Court, which ordered the parties to file superseding briefs on their motions. This briefing was finished on March 20, 1992 .

The plaintiffs assert that the first lien is invalid, because they never received constructive notice of its existence. ⁵ Their claim hinges on one contention: that the difference between the name "William S. Van Horn," which was on the first lien's index card, and "William B. VanHorn," which is the correct taxpayer name, is so great that no reasonable search of the index for liens against "Williams B. VanHorn" would have led to the first lien's discovery. The IRS disagrees, claiming that the two names are substantially identical, and that a reasonable searcher, noticing this similarity, would have looked at the actual lien notices and discovered the existence of the first lien. Alternatively, the plaintiffs contend that even if the first lien is valid, their interest nevertheless has priority, because they are equitable assignees of ISC's mortgage lien against the property.

II. LEGAL STANDARD

Rule 56(c) of the Federal Rules of Civil Procedure provides that a motion for summary judgment shall be granted "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." A party moving for summary judgment initially has the burden of showing the absence of any genuine issue of material fact. Adickes v. S.H. Kress & Co., 398 U.S. 144, 157 (1970); Covalt v. Carey Canada, Inc., 950 F.2d 481, 482 (7th Cir. 1991). If the moving party carries this burden, the opposing party then must "go beyond the pleadings" and present specific facts which show that a genuine issue exists. Celotex Corp. v. Catrett, 477 U.S. 317, 323 (1986); Matsushita Elec. Indus. Co. v. Zenith Radio Co., 475 U.S. 574, 586-87 (1986); Becker v. Tenenbaum-Hill Assocs., 914 F.2d 107, 110 (7th Cir. 1990). The opposing party, however, must do more than create a mere "colorable" factual dispute to defeat summary judgment; disputed facts must be outcome determinative. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248-49 (1986); International Bhd. of Boilermakers v. Local D354, 897 F.2d 1400, 1406 (7th Cir. 1990); Clampitt v. Ft. Wayne , 682 F.Supp. 401 (N.D. Ind.), aff'd, 864 F.2d 486 (7th Cir. 1988).

In considering a summary judgment motion, a court must draw all reasonable inferences "in the light most favorable" to the opposing party, Bank Leumi Le-Israel, B.M. v. Lee, 928 F.2d 232, 236 (7th Cir. 1991), and must resolve any doubt against the moving party. Becker, 914 F.2d at 110. Still, if the opposing party fails to meet the standards of Rule 56(c), summary judgment becomes mandatory. Celotex, 477 U.S. at 322-23; Anderson, 477 U.S. at 248-50. Summary judgment is not a disfavored procedural shortcut; rather, it is an integral part of the federal rules, which are designed to secure the just and expeditious determination of every action. Celotex, 477 U.S. at 327; see Patrick v. Jasper County, 901 F.2d 561, 565 (7th Cir. 1990); Spellman v. Commissioner [88-1 USTC ¶9302 ], 845 F.2d 148, 151-52 (7th Cir. 1988).

III. DISCUSSION

A. Jurisdiction

Initially, the Court must now determine if it has jurisdiction over the plaintiffs' suit. The United States cannot be sued, and no court can have jurisdiction over a suit against it, unless its sovereign immunity has been waived in the area at issue. Raulerson v. United States [86-1 USTC ¶9458 ], 786 F.2d 1090, 1091 (11th Cir. 1986). In cases that involve tax liens against property, sovereign immunity has been waived, at least in part:

[T]he 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,

(2) to foreclose a mortgage or other lien upon,

(3) to partition,

(4) to condemn, or

(5) of interpleader or in the nature of interpleader with respect to,

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

28 U.S.C. §2410(a).

To the extent that the plaintiffs seek to quiet title, this Court clearly has jurisdiction. Traditionally, actions to quiet title have sought determinations of who owns particular property, by forcing adverse claimants--i.e., those whose claims are "clouds" on the plaintiff's title--to establish them or be estopped from asserting them ever again. Black's Law Dictionary 255, 1249 (6th ed. 1990); see Raulerson v. United States [86-1 USTC ¶9458 ], 786 F.2d 1090, 1092 (11th Cir. 1986). Under federal law, the definition is somewhat broader; a party may maintain a quiet title action against the United States when the government asserts that a federal tax lien exists against property, 28 U.S.C. §2410(a), and thus lien priority disputes have been considered "quiet title" actions. McEndree v. Wilson , 774 F.Supp. 1292, 1295-96 (D. Colo. 1991). Under this standard, the plaintiffs' amended complaint states a valid action to quiet title against the United States .

The strict foreclosure component of the plaintiffs' complaint poses a thornier problem. If a suit involves foreclosure of a mortgage, a waiver of sovereign immunity will be effective only to the extent that the plaintiff seeks a "judicial sale" of the property--i.e., a sale directed by judicial order, decree, or judgment. Id. §2410(c); Kasdon v. G.W. Zierden Landscaping, Inc., 541 F.Supp. 991, 996 (D. Md. 1982), aff'd, 707 F.2d 820 (4th Cir. 1983). The plaintiffs seek a judicial sale of the property, ⁶ but the government claims that such sales are not recognized remedies for strict foreclosure actions in Indiana.

The government's assertion is correct, at least on one level. Strict foreclosure permits a party who acquired title through or after a foreclosure sale to cut off the interests of any junior lienholders who, for some reason, were not parties to the foreclosure action. Strict foreclosure, therefore, is quite different from judicial foreclosure, where a mortgagee sells the property to satisfy an underlying secured debt. See Jackson v. Weaver, 138 Ind. 539, 38 N.E. 166 (1894) (strict foreclosure case); Jefferson v. Coleman, 110 Ind. 515, 11 N.E. 465 (1887) (same).

However, the fact that Indiana has never ordered a judicial sale in a strict foreclosure action does not mean that such a remedy is barred. The United States Supreme Court, in fact, has upheld an order for judicial sale in a strict foreclosure action, finding it appropriate under the plaintiff's prayer for general relief. Sage v. Central R.R. Co., 99 U.S. 334, 338-44 (1878). Courts in other states also have been friendly to the idea. See, e.g., Williams v. Williams, 32 Ariz. 164, 256 P. 356, 357-58 (Ariz. 1927) (vacating foreclosure and ordering new sale); Johns v. Wilson, 6 Ariz. 125, 53 P. 583, 585 (Ariz. 1898) (allowing second foreclosure sale to cut off interest of lienholder not joined originally), aff'd, 180 U.S. 440 (1901); Deming Nat'l Bank v. Walraven, 133 Ariz. 378, 651 P.2d 1203, 1205-06 (Ariz. App. 1982) (allowing foreclosure sale to follow initial execution action where lienholder was not joined); McGraw v. Premium Fin. Co. of Missouri, 7 Kan. App. 32, 637 P.2d 472, 477 (Kan. App. 1981) (recognizing that second foreclosure might be necessary where junior lienholder was not joined initially); Western Bank v. Fluid Assets Dev. Corp., 111 N.M. 458, 806 P.2d 1048 (N.M. 1991) (recognizing that in "proper case," new sale might follow first where junior lienholders were not joined); Moulton v. Cornish, 138 N.Y. 133, 33 N.E. 842 (1893) (finding that redemption cannot be compelled in strict foreclosure, but that new sale can be ordered).

The exact facts of these cases vary, but they still support the idea that judicial sale is a proper remedy in actions that begin or are labelled as strict foreclosures. Accordingly, the Court holds that it has jurisdiction over both the plaintiffs' claims under 28 U.S.C. §2410.

B. Validity of the First Lien

Federal tax liens are "wholly . . . creature[s] of federal law," Atlantic States Const., Inc. v. Hand, Arendall, Bedsole, Greaves & Johnston [90-1 USTC ¶50,065 ], 892 F.2d 1530, 1534 (11th Cir. 1990), ⁷ and federal law governs all their aspects, including scope, attachment, and priority. 26 U.S.C. §6323(f) ; Kivel v. United States [89-2 USTC ¶9415 ], 878 F.2d 301, 303 (9th Cir. 1989); United States v. Polk [87-2 USTC ¶9432 ], 822 F.2d 871, 873 (9th Cir. 1987); Eskanos v. Alpha 76, Inc. [90-2 USTC ¶50,344 ], 712 F.Supp. 819 (D. Colo. 1989).

According to 26 U.S.C. §6323(a) , a tax lien is not valid against any purchaser, secured party, statutory lienor, or judgment creditor that lacks actual notice of the lien until "constructive" notice--i.e., notice which meets the requirements of 26 U.S.C. §6323(f) --has been filed by the IRS. Section 6323(f) requires constructive notice to meet certain form and content requirements, ⁸ and in the case of real property, mandates filing in one office within the county in which the property is situated, as designated by the laws of the state. If state law provides that deeds must be recorded and indexed to be valid, and "there is maintained . . . an adequate system for public indexing of Federal tax liens," then

the notice of the lien . . . shall not be treated as meeting the filing requirements . . . unless the fact of filing is entered and recorded in the index . . . in such a manner that a reasonable inspection of the index will reveal the existence of the lien.

26 U.S.C. §6323(f) . In other words, if a state indexes federal tax lien notices, and determines priorities based on its indexing system, the IRS must use the system to give constructive notice of its lien. Indiana uses such an indexing system.

The parties agree that the first notice was filed in the correct place and on the correct form. They disagree, however, about whether it was filed in such a manner that a "reasonable inspection of the index" would have "reveal[ed] the existence of the [first] lien," so as to charge the plaintiffs with constructive notice of the lien. This issue embraces two distinct questions. First, what constitutes a "reasonable inspection of the index"? Second, if a reasonable inspection had been made in this case, would it have failed to reveal the first lien due to errors in VanHorn's name as transcribed in the first notice and its index card?

As to the first question, the available case law makes clear that a searcher, upon seeing information in the index that would cause a reasonable person to go outside the index and examine the lien notices themselves, must look at those notices. As the Ninth Circuit has stated:

[W]e must decide whether a "reasonable inspection of the index" means that a searcher need only look at the index and has no obligation to go from the index to the actual conveyances that are indexed. Such a literal construction [of §6323 ] would not make sense. It is evident that as to documents that are in the actual chain of title the searcher must at least look at such documents as may have a current effect and must then act on the notice imparted.

Kivel [89-2 USTC ¶9415 ], 878 F.2d at 304; see also Richter's Loan Co. v. United States [56-2 USTC ¶9706 ], 235 F.2d 753, 755 (5th Cir. 1956).

This leads to the second question. Would a reasonable inspection of the index (or in this case, the first lien's index card) have failed to give a reasonable searcher any cause to look at the lien notices themselves? Stated differently, would a searcher have been so misled by the errors in VanHorn's name as to think the liens involved completely different taxpayers? The answer, according to the weight of well-reasoned authority, appears to be "no."

Initially, it is clear that lien notices and index cards need to comply only substantially, rather than perfectly, to convey adequate notice of a lien:

The mere fact that a full name is not given or that there is an addition, omission or substitution of letters in a name, or even errors, does not, in and of itself, invalidate the notice. The essential purpose of the filing of the lien is to give constructive notice of its existence. The test is not absolute perfection in compliance with the statutory requirement for filing the tax lien, but whether there is substantial compliance sufficient to give constructive notice and to alert one of the government's claim.

United States v. Sirico [66-1 USTC ¶9209 ], 247 F.Supp. 421, 422 (S.D.N.Y. 1965). Numerous courts have applied this standard, and each decision indicates that the first notice here was statutorily adequate. In Sirico, for example, the court gave effect to a lien when the notice listed "Sirico, George" and "Sirico, A." as taxpayers, but title documents listed "Assunta Sirico" as the property's owner. Id. at 422. In Richter's Loan, the notice and index entry transposed two letters in the taxpayers' name, listing it as "Freidlander" rather than "Friedlander." The court enforced the lien, however, holding that "the slight difference in spelling the name 'Freidlander' instead of 'Friedlander' could not mislead searchers of record, who were contemplating doing business with [the taxpayers]." Richter's Loan [56-2 USTC ¶9706 ], 235 F.2d at 755. In Hannus v. United States , 60-2 USTC (CCH) ¶9574 (W.D. Wash. 1958), a tax lien against "Andy Johnston" was held valid against property titled in the name of "Andrew Johnston." See also Kivel [89-2 USTC ¶9415 ], 878 F.2d at 304 (giving lien notices naming "Bobbie Morgan" effect against property owned by " Bobbie Morgan Lane "); Polk [87-2 USTC ¶9432 ], 822 F.2d at 873-74 (enforcing lien notices naming "Roy Bruce Polk" against property held by "Bruce Polk").

The errors in these cases did not greatly affect the location of index entries, but courts have forgiven mistakes of a much greater magnitude under the substantial compliance standard. For example, in Weeks v. United States, 87-1 USTC (CCH) ¶9246 (D. Md. 1987), a lien notice against "Kenneth Gardner Contracting, Inc." was held effective against property deeded to "K.P. Gardner Contracting, Inc.," even though the mistake caused the notice to be indexed over 100 pages from where it should have been. The court held that a reasonable inspection of the index required examination of older, differently arranged index volumes that would have put a searcher on notice of a link between the named entities. Id. at 87,469.

The plaintiffs respond to this by arguing that the substantial compliance standard, at least as it was applied in Sirico, Richter Loan, Weeks, and Hannus, does not govern this case because the facts are drastically different. According to the plaintiffs, those cases dealt with index entries that listed not only taxpayer names, but correct taxpayer and/or property addresses; as a result, an index searcher could have found other entries and liens against the taxpayers at issue by cross-referencing the additional information. ⁹ Marion County , in contrast, uses a "name-only" index--i.e., its cards provide taxpayer names only, without addresses or any other information. Under such circumstances, the plaintiffs contend, searchers are forced to rely strictly on the taxpayer names as listed, and the law "demands a strict standard for correct spelling of the name[s]."

This argument, though not unappealing, has two major problems. First, the cases relied upon by the plaintiffs--Continental Investments v. United States [53-2 USTC ¶9625 ], 142 F.Supp. 542 (W.D. Tenn. 1953); United States v. Ruby Luggage Corp. [54-2 USTC ¶9512 ], 142 F.Supp. 701 (S.D.N.Y. 1954); Haye v. United States [79-1 USTC ¶9192 ], 461 F.Supp. 1168 (C.D. Cal. 1978); and Fritschler, Pellino, Schrank & Rosen , S.C. v. United States [89-1 USTC ¶9111 ], 716 F. Supp. 1157 (E.D. Wis. 1988)--are distinguishable from this case, and do not support their argument. In Continental, the IRS filed a lien notice against one "W.B. Clark, Sr." when the taxpayer's correct name was "W.R. Clark, Sr.," and thereafter seized and sold the taxpayer's car. The plaintiff, a mortgagee of the car, sued for conversion and won. The court, without citation to any authority, held that the mortgagee was "not charged with notice of anything beyond" what the lien records "purport[ed] to be on their face." Continental [53-2 USTC ¶9625 ], 142 F.Supp. at 544. In Continental, however, the taxpayer's initials were used in place of both his first and middle "Christian name[s]," which prompted the court to require perfectly correct initials. Id. Here, VanHorn's first name was correctly listed on both index cards, so any potential for confusion was much smaller than in Continental. In addition, Continental was decided in 1953, well before Congress enacted §6323 with its "reasonable inspection" standard, and the court appears to have applied a higher standard of exactness than the current law requires.

In Ruby Luggage, the government filed notice against "Ruby Luggage Corporation" instead of "S. Ruby Luggage Corporation." The court examined whether the missing "S." materially affected priority under New York 's indexing system, and held that it did. The circumstances of that case, however, made the error much more critical than the one here. New York law required judgment dockets to have separate volumes for each letter of the alphabet, and provided that liens against corporations be filed in the volume corresponding to the first letter of the corporate name. The notice against "Ruby Luggage Corporation" was indexed in the "R" volume; consequently, no search of the "S" volume --where the notice should have been indexed--would have revealed the lien's existence. Ruby Luggage [54-2 USTC ¶9512 ], 142 F.Supp. at 702. The error here, like the one in Ruby Luggage, did concern an initial; however, it affected arguably the least important part of the taxpayer's name, and resulted in no serious indexing error. In fact, the index cards were (and are) right next to one another.

Haye, too, involved more significant errors than the one at issue here. There, the notice referred to the taxpayer as "Manual de J. Castello," when his correct name was "Manuel J. de Castillo." The court held that a reasonable search of the index would not have disclosed the lien, because these two errors, coupled with the relative commonness of the taxpayer's last name, caused the notice to be indexed "approximately nine pages and one thousand names prior to its proper location" --a scope well beyond the "reasonable inspection" required by statute. Haye [79-1 USTC ¶9192 ], 461 F.Supp. at 1173-74. By contrast, the mistake in VanHorn's name left the index card for the first notice exactly where it would have been, even if perfect: right next to the card for the second notice.

Fritschler is the plaintiffs' strongest case. There, the court held that a lien notice filed in Florida under the name "Allen G. Casey" failed to give constructive notice of a lien against "Allen J. Casey," because it "was not in compliance with the statute." Fritschler [89-1 USTC ¶9111 ], 716 F.Supp. at 1160. The court appeared to recognize the governance of the "reasonable inspection" standard, but held that the government had "failed to support its assertion that a reasonably prudent person conducting a tax lien search . . . would have realized that Alan G. Casey was really Alan J. Casey." Id. at 1161-62 (citing Haye, Continental, and Richter's Loan).

Despite its apparent helpfulness to the plaintiffs, however, Fritschler ultimately falls short. It appears that the decision there did not hinge on the issue of constructive notice, because the property subjected to the tax lien--cash--is treated differently under the lien statute, as the court pointed out:

Even if the filing of a notice of tax lien which misspells the taxpayer's name does not make the notice ineffective, 26 U.S.C. §6323(b)(1) protects a purchaser of "securities" including cash [from assertion of the lien] when the purchaser has no actual knowledge or notice of the existence of the lien.

Id. at 1160. In other words, one who receives money that is subject to a tax lien cannot have the lien enforced against her, unless she actually knows of the lien's existence. This protection is wholly unavailable to a purchaser of realty, who is charged with constructive notice of a lien if it is properly recorded. See 26 U.S.C. §6323(a) , (f) . In light of this difference, Fritschler's constructive notice discussion carries less weight.

The plaintiffs' argument, besides lacking support in the case law, has a second serious problem: it is logically contradictory. The name-only/cross-reference argument implicitly concedes that an index searcher would always have to look beyond those entries bearing the exact name sought, because cross-referencing information such as addresses would be helpful only where examined cards have incorrect taxpayer names. If a searcher were to find a card with a perfectly matching name, cross-referencing information would be irrelevant; the lien would be discovered. On the other hand, if the searcher were to find a technically non-matching name, he or she would have to look at other cards to see if non-name information matches. This logical difficulty seriously undercuts the plaintiffs' contention that one need look no further than exact names on cards to reasonably inspect an index.

In light of all the case law, this Court concludes that the first notice, as filed by the IRS and indexed in the Marion County federal tax lien index, substantially complied with the requirements of §6323 . Accordingly, the plaintiffs had constructive notice of the first lien, and the lien is valid and enforceable against them.

C. Priority

Determining that the tax lien is valid does not end the inquiry, however, because the plaintiffs still claim to have rights in the property superior to those of the government. Their argument runs like this: ISC's mortgage did not merge with the property's legal title when ISC bought it at the foreclosure sale. Instead, the lien was preserved so that ISC could assert it against any junior lienholders who inadvertently were not joined in the foreclosure action, and who consequently might try to "step up" and foreclose against ISC. When the plaintiffs bought the property, they became "equitable assignees" of ISC's preserved mortgage interest. Therefore, they may assert ISC's lien against any omitted junior lienholders, including the government. This argument, because it deals with the nature of the parties' interests, must be examined according to state law. Acquilino v. United States [60-2 USTC ¶9538 ], 363 U.S. 509, 512-14 (1960); United States v. Brosnan [60-2 USTC ¶9516 ], 363 U.S. 237, 240-42 (1960); Tompkins v. United States [91-2 USTC ¶50,540 ], 946 F.2d 817, 819 (11th Cir. 1991); First American Title Ins. Co. v. United States [88-2 USTC ¶9408 ], 848 F.2d 969, 972 (9th Cir. 1988); United States v. Polk [87-2 USTC ¶9432 ], 822 F.2d 871, 874 (9th Cir. 1987); see Southern Bank of Lauderdale County v. Internal Revenue Serv. [85-2 USTC ¶9670 ], 770 F.2d 1001, 1007 (11th Cir. 1985), cert. denied, 476 U.S. 1169 (1986).

1. Merger

In Indiana , a mortgagee's acquisition of fee simple title to mortgaged property generally results in a merger of the mortgage with the title, thus extinguishing the mortgage lien. Ellsworth v. Homemakers Finance Serv., Inc., 424 N.E.2d 166, 168 (Ind. Ct. App. 1981). Merger will not occur, however, and the lien will be preserved, where merger would harm the interests of the mortgagee. Id. (citing Swatts v. Bowen, 141 Ind. 322, 40 N.E. 1057 (1894)); see Zilky v. Carter, 226 Ind. 396, 402-03, 81 N.E.2d 597, 599 (1948); Evansville Gas-Light v. State, 73 Ind. 219, 222 (1881). The key factor in deciding if merger has occurred is determining what the parties to the sale--primarily the mortgagee--intended. Ellsworth, 424 N.E. 2d at 168. If intent is not express, but circumstances indicate that preservation will "benefit" the mortgagee, the court will presume that no merger was intended. Id. (citing Egbert v. Egbert, 226 Ind. 346, 80 N.E.2d 104 (1948)).

The underlying purpose of this "anti-merger" rule--i.e., the benefit it is meant to confer--is protection of the mortgagee's priority. Specifically, the rule allows the mortgagee to prevent junior lienholders from stepping up in priority, foreclosing, and reducing the mortgagee's already-diminished recovery, because it bars all but the mortgagee from re-foreclosing or reselling the property, and guarantees the mortgagee's priority in any proceeds. Ellsworth, 424 N.E. 2d at 168 ("[t]here would be no reason to prevent merger except to foreclose the mortgage, if necessary, to protect the mortgagee's interest"). Put simply, the anti-merger rule gives a mortgagee first crack at any money generated by foreclosures on the property, ahead of any junior lienholders, until it has been paid what it is owed in full.

In this case, there is no clear evidence that ISC intended for there to be no merger, but the circumstances clearly support an inference of such intent. To borrow the language of the Tenth Circuit:

By purchasing the property at the auction, the [mortgagee] intended to protect its lien, and perhaps junior lienholders, by preventing the property from being purchased at below market value. It would be an absurd result to conclude that the [mortgagee] intended to destroy its own lien . . . by taking action that arguably benefitted junior lienholders. Absent evidence to the contrary, we therefore presume that the [mortgagee] intended to preserve its lien.

United States v. Colorado [89-1 USTC ¶9260 ], 872 F.2d 338, 340 (10th Cir. 1989). ¹⁰

2. Transfer of the Mortgage-Assertion Right

This leaves one crucial question to answer. Did ISC's ability to assert its mortgage against junior lienholders pass to the plaintiffs when they bought the property? There is apparently no case on point, but this Court is constrained to answer "no." Initially, Indiana cases seem to hold that the anti-merger rule is designed to benefit only the foreclosing mortgagee who is a party to the original sale; the law says nothing about subsequent transferees. See Ellsworth, 424 N.E. 2d at 168; see also Swatts, 40 N.E. at 1058 (purpose is to "prevent[ ] injury to the interests of the parties to the transaction") (emphasis added); Hanlon v. Doherty, 109 Ind. 37, 9 N.E. 782, 785 (1887) ("[i]t is presumed . . . that the party must have intended to keep on foot his mortgage title when it was essential to his security") (emphasis added). Moreover, the rule, as noted above, is meant to give the mortgagee first crack at a full recovery, and this is exactly what ISC appears to have gotten when it consummated the sale to the plaintiffs. ¹¹ After this sale, ISC no longer had any interest in the property to protect, so there was no reason for its mortgage-assertion right to pass to the plaintiffs.

The plaintiffs rely on Oldham v. Noble, 117 Ind. App. 68, 66 N.E. 2d 614 (Ind. Ct. App. 1946) in arguing that ISC's right did indeed pass to them. In that case, Selig bought property from Iverson, and conveyed a mortgage to him. Selig then conveyed the property to Walker for life, with the remainder to Walker 's daughters. Iverson then foreclosed on the mortgage, joining Selig and Walker as defendants, but he failed to join Walker 's daughters. Iverson bought the property at a sheriff's sale, then sold it to Noble, who believed that he was getting a fee simple. Later, Walker died, and his daughters sued Noble for possession.

The court held that Walker 's daughters were fee simple owners of the property, because the foreclosure action had no effect on their remainder interest. In effect, Iverson had purchased (and conveyed to Noble) Walker 's life estate, and nothing more. However, the court also held that Walker 's daughters were still liable on the debt secured by the mortgage. Therefore, in order to prevent unjust enrichment to the daughters at Noble's expense, the court held that Noble, as the "equitable assignee" of Iverson's mortgage, could foreclose against the daughters and recover part of what he paid Iverson. Oldham , 66 N.E. 2d at 617-18.

Oldham does have similarities to this case, but it differs in one dispositive respect. The parties against whom the mortgage was asserted in Oldham-- Walker 's daughters--actually were liable on the underlying debt. As a result, failing to allow Noble to enforce Iverson's mortgage "would [have] len[t] sanction to an unjust enrichment of the [daughters'] estate at the expense of others [i.e., Noble] . . . by virtue of their own default in an obligation they justly owe." Id. Here, by contrast, the party against whom the plaintiffs want to assert the mortgage--the government--owes nothing to anybody, and is not in a position of being unjustly enriched. Therefore, the equitable concerns addressed in Oldham are not present here, and that case does not control.

In sum, the Court holds that ISC's mortgage was preserved after it bought the property at foreclosure, but holds further that ISC's right to assert the mortgage against junior lienholders did not pass to the plaintiffs when they bought the property. As a result, the government's lien has priority.

IV. CONCLUSION

For the reasons discussed, the government's motion for summary judgment is GRANTED, and the plaintiffs' motion for summary judgment is DENIED. This cause is DISMISSED WITH PREJUDICE.

SO ORDERED this 10th day of November, 1992.

¹ Each document discussed in this order is attached as an exhibit to the Amended Complaint or some other pleading in the record.

² Since 1987, notices have been indexed on computer.

³ An authenticated photocopy of the actual index entry is attached as Exhibit B to Plaintiffs' Memorandum In Opposition to Defendant's Motion to Dismiss and in Support of Motion for Summary Judgment (Aug. 7, 1989). Apparently, there is no taxpayer or property owner named "William S. Van Horn" against whom a federal tax lien has been recorded.

⁴ The government's motion actually sought dismissal. However, because the motion was supported by declarations and other extra-pleading materials, the Court will treat it as one for summary judgment. See Sheldon v. Munford, Inc., 660 F.Supp. 130, 136 (N.D. Ind. 1987); Mac's Eggs, Inc. v. Rite-Way Agri Distribs., Inc., 656 F.Supp. 720, 727-28 (N.D. Ind. 1986).

⁵ No one disputes that the plaintiffs lacked actual notice of the first lien.

⁶ The plaintiffs expressed their desire to seek judicial sale in a conference with the Court earlier in this case, and the government agreed to address the claim without formal amendment of the complaint. The Court since has proceeded since on the assumption that a judicial sale is sought.

⁷ Tax liens are powerful; once created, they reach "all property and rights to property, whether real or personal, belonging to [the taxpayer]," 26 U.S.C. §6321 , and may be enforced from the moment attachment occurs at assessment. 26 U.S.C. §6322 . Moreover, tax liens can attach to particular items of property, encumbering title even after the items are transferred to a third party, provided that statutory notice requirements are met. 26 U.S.C. §6323(a) , (f) .

⁸ IRS regulations promulgated pursuant to 26 U.S.C. §2363[6323](f) require the IRS to use Form 668, "Notice of Federal Tax Lien Under Internal Revenue Laws," to file a lien notice in a state indexing system. Treas. Reg. §301.6323-1(3).

⁹ Presumably, the presence of an address allows a researcher to find a lien notice through recognition of the street address on the incorrect index entry, or through discovery that the incorrect entry's address matches the address on a technically correct card (which assumes more than one outstanding lien against the taxpayer).

¹⁰ The government attempts to draw a distinction between cases involving judicial sales, which it claims "invariably divest or extinguish the liens of all parties to the action," and nonjudicial sales, where merger may not occur. See Defendant's Superseding Brief at 24-25. The Court, however, is aware of no cases (and defendants have cited none) that relied on this distinction. Moreover, it appears that Indiana courts might act to preserve a mortgage in equity even where the foreclosure sale is judicial (i.e., ordered by a court). See, e.g., Watson v. Strohl, 220 Ind. 672, 691 46 N.E.2d 204, 211 (1943).

¹¹ The sheriff's deed issued to ISC shows that it paid $49,000 for the property at the foreclosure sale. See Amended Complaint, Ex. H. The title insurance policy issued by Chicago Title Insurance Company indicates that the plaintiffs paid the same amount to ISC on July 1, 1987 . See Plaintiffs' Superseding Brief, Ex. E.

 

 

[89-2 USTC ¶9547] United States of America , Plaintiff v. Jack Feinstein, Mark Feinstein, Reuben Klugman, Mildred Klugman, and The Manufacturers Life Insurance Company, a Canadian Corporation, Defendant

U.S. District Court, So. Dist. Fla., 87-916-CIV-SPELLMAN, 8/15/89, 717 FSupp 1552

[Code Sec. 6323 ]

Lien for taxes: Subsequent purchasers of property: Notice of tax lien: Name misspelled on notice: Reasonable inspection.--Summary judgment was granted to the government after a finding that the notice of tax lien filed against a corporation for unpaid employment taxes was sufficient. The defendants, subsequent purchasers of the real property, the buildings and improvements once owned by the corporation, argued that the notice failed to provide them with constructive notice of the lien due to a misspelling of the corporate name. As the error was slight, the court noted that a reasonable inspection of the index maintained by the county would have revealed the existence of the lien. The court further determined that two of the parties had no interest in the real property as they had conveyed it and held only a nonrecourse promissory note in exchange, and that a mortgage company's mortgage was prior to the interest of the government as it had been recorded in the index before the tax lien was filed.

MEMORANDUM OPINION

ORDER GRANTING PLAINTIFF'S MOTION FOR SUMMARY JUDGMENT AND DENYING DEFENDANTS' CROSS MOTION FOR SUMMARY JUDGMENT

SPELLMAN, District Judge:

THIS CAUSE comes before the Court upon Cross Motions for Summary Judgment filed by the Plaintiff, UNITED STATES OF AMERICA , and the Defendants, JACK FEINSTEIN, MARK FEINSTEIN, REUBEN KLUGMAN, MILDRED KLUGMAN, and THE MANUFACTURERS LIFE INSURANCE COMPANY, a Canadian Corporation. Plaintiff, the UNITED STATES OF AMERICA, has filed a Motion for Summary Judgment, and therein requests that this Court enter summary judgment in its favor and (1) determine that the United States holds valid tax liens on the real property at issue, the buildings and improvements thereon; (2) order the foreclosure of the federal tax liens upon the property at issue; (3) direct the sale of the property in accordance with law; and (4) distribute the proceeds of the sale in accordance with the Court's findings.

Defendants have filed a Cross Motion for Summary Judgment, and therein request that this Court determine as a matter of law that the system for the public indexing of Federal Tax Liens, as maintained by Dade County, Florida, is not "adequate", as required by Section 6323(f)(4) of the Internal Revenue Code, in circumstances where the taxpayer's name is misspelled on the lien.

Upon review of the Cross Motions for Summary Judgment filed by the parties, it is the opinion of this Court that there is no genuine issue of material fact, and that Plaintiff is entitled to judgment as a matter of law. It is further the opinion of this Court that Defendants' Cross Motion for Summary Judgment should be denied on both substantive and procedural grounds.

Facts

1. Hyde, Tarragon & Co. was a corporation incorporated in Florida in 1974.

2. By warranty deed dated March 15, 1979 , Silco, Inc. conveyed to Hyde, Tarragon & Co. the real property described as follows:

Lots 18 and 19 of ARCH CREEK, a subdivision of the east 1/2 of the northeast 1/4 of the southwest 1/4 of Section 29 , Township 52 south, Range 42 east, according to the plat thereof recorded in Plat Book B, at Page 121 of the Public Records of Dade County, Florida; less the west 25 feet of Lots 18 and 19 and that portion of said Lot 19, lying external to a 25.00 foot radius arc concave to the northeast, tangent to a line 25.00 feet east of and parallel to the west line of said Lot 19 and tangent to the south line of said Lot 19.

3. A delegate of the Secretary of the Treasury timely made the following assessment against taxpayer, Hyde, Tarragon & Co. for unpaid federal employment taxes, penalties, and interest and gave notice and demand for payment thereof as set forth in the following schedule. These amounts do not include interest as allowed by law.

                     Date of

Type of   Taxable    Assessment,                           Assessed

  Tax      Period    Notice and Demand                      Amount

WH/FICA   1st Qtr.   
11/02/81
 ......................... $16,688.28 (1)

            1981                                          1,020.50 (2)

                                                          2,503.24 (3)

                                                            834.41 (4)

                                                            333.77 (5)

WH/FICA   2nd Qtr.   
09/07/81
 ......................... $18,034.49 (1)

            1981                                            225.31 (2)

                                                            901.72 (4)

                                                            180.34 (5)

WH/FICA   3rd Qtr.   
12/07/81
 ......................... $18,474.41 (1)

            1981                                            224.73 (2)

                                                            923.72 (4)

                                                            184.74 (5)

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

                               Total .................. $60,529.72

(1) Tax

(2) Interest

(3) Delinquency Penalty

(4) Failure to Deposit Penalty

(5) Failure to Pay Penalty

 

4. The Internal Revenue Service sent notices of the assessments and demands for payment to Hyde, Tarragon & Co., at 12355 N.E. 13th Ave. , N. Miami , Florida 33161 .

5. To date, the assessments against Hyde, Tarragon & Co. remain unsatisfied and are outstanding.

6. Interest and penalties continue to accrue on these liabilities, and there remains due and owing $153,649.41 as of January 1, 1989 .

7. On March 4, 1982, the Internal Revenue Service filed a Notice of Federal Tax Lien in the official records of Dade County, Florida, against Hyde, Tarragon & Co. for assessed, unpaid federal employment taxes, for the first, second, and third quarters of 1981.

8. The Notice of Federal Tax Lien listed the name as Hyde, Taragon & Co. [with 1 "r"].

9. The proper spelling of the taxpayer's name is Hyde, Tarragon & Co. [with 2 "r's"].

10. The filing of the Notice of Federal Tax Lien was recorded in the Dade County, Florida Official Records Index. The Official Records Index for the period of January 1, 1980 , through December 31, 1984 , lists the Notice of Federal Tax Lien against the name "Hyde, Taragon & Co." [with 1 "r"].

11. The Notice of Federal Tax Lien against "Hyde, Taragon & Co." [with 1 "r"] appears on the same page as instruments filed against the name of Hyde, Tarragon & Co. [with 2 "r's"].

12. At the time the Notice of Federal Tax Lien was filed, Hyde, Tarragon & Co. was the title holder of the real property, buildings and improvements thereon located at 12355 N.E. 13th Ave., N. Miami Beach , in Dade County , Florida .

13. On May 17, 1982, subsequent to the filing of the Notice of Federal Tax Lien, Hyde, Tarragon & Co. conveyed by warranty deed, the real property described in paragraph 2, less all buildings and improvements thereon, to Royal E. Blakeman, Esq., Trustee.

14. On May 17, 1982 , Hyde, Tarragon & Co. conveyed, by warranty deed, the buildings and improvements thereon, to Jack Klugman, Reuben Klugman and Mildred Klugman.

15. Subsequently, on or about December 31, 1984, Royal E. Blakeman, as Trustee and individually, and Reuben Klugman and Mildred Klugman transferred their respective interests in the real property, buildings and improvements thereon to Jack Feinstein and Mark Feinstein, the current title holders to the property.

16. On or about January 21, 1985 , Jack Klugman conveyed his interest in the buildings and improvements on the real property described in paragraph 2 to Jack Feinstein and Mark Feinstein.

17. Mildred and Reuben Klugman hold a promissory note from the Feinsteins as part of the financing of the purchase price for the property; the note, however, is unsecured and thus, the Klugmans have no recourse to the real property, buildings and improvements thereon.

18. Manufacturers Life Insurance Company is the owner and holder of a first mortgage on the real property at issue. The balance due on this mortgage is approximately $433,538.15 as of August 1, 1988 .

19. Said mortgage originated and was recorded in the official records of Dade County , Florida in 1979, prior to the filing of the Notice of Federal Tax Lien on March 4, 1982 .

Plaintiff, the United States of America , seeks to satisfy its federal tax lien by foreclosing upon the real property, buildings and improvements thereon located at 12355 N.E. 13th Ave., North Miami Beach , in Dade County , Florida . Defendants oppose this foreclosure, and maintain that the Notice of Federal Tax Lien failed to provide the Defendants with actual or constructive notice of the lien due to the misspelling of the taxpayer's name.

Statutes Involved

Section 6321 of the Internal Revenue Code (26 U.S.C.A.).

Section 6322 of the Internal Revenue Code (26 U.S.C.A.).

Section 6323(a) of the Internal Revenue Code (26 U.S.C.A.).

Section 6323(f)(4) of the Internal Revenue Code (26 U.S.C.A.).

Question Presented

Whether a reasonable inspection of the Index to the Dade County Official Records would have revealed the existence of the federal tax liens against Hyde, Tarragon & Co.

Standard for Summary Judgment

Rule 56(c), Federal Rules of Civil Procedure, provides that summary judgment shall be rendered 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 material fact and that the moving party is entitled to judgement as a matter of law." Summary judgment is mandated against a party who, after adequate time for discovery and upon motion, fails to make a showing sufficient to establish the existence of an element essential to the party's case, and on which that party will bear the burden of proof at trial. Celotex Corp. v. Catrett, 477 U.S. 317 (1986). In ruling on a motion for summary judgment, it is the Court's obligation to review the facts in the light most favorable to the adverse party and to allow the adverse party the benefit of all reasonable inferences to be drawn from the evidence. Adickes v. S.H. Kress & Co., 398 U.S. 144, 157 (1970). A ruling on summary judgment should be guided by the substantive evidentiary standard of proof that would apply at the trial on the merits. Anderson v. Liberty Lobby, Inc., 477 U.S. 242 (1986). If there is no genuine issue of material fact, summary judgment is proper because it avoids needless and costly litigation and promotes judicial efficiency. Trustees of the Plumbers Local No. 519 Health and Welfare Trust Fund v. Garcia, 677 F.Supp. 1554, 1556 (S.D. Fla. 1988). However, summary judgment is an extreme remedy which should not be granted, unless the moving party has established his right to judgment beyond controversy.

Id.

Discussion

I.

A Reasonable Inspection of the Dade County Official Records Index Would Have Revealed the Existence of the Federal Tax Liens

A Federal Tax Lien attaches to all property and rights to property of a taxpayer who neglects or refuses to pay any tax for which he is liable. Section 6321 of the Internal Revenue Code. The lien arises at the time of assessment and continues until the liability for the amount assessed is satisfied or becomes unenforceable by reason of time. Section 6322 of the Internal Revenue Code. In the instant case, the Internal Revenue Service made assessments against Hyde, Tarragon & Co. on September 7, 1981 , November 2, 1981 , and December 7, 1981 . On those same dates, the Service gave notice of the respective assessments and demanded payment. In spite of the demands for payment, Hyde, Tarragon & Co. has neglected or refused to pay the Federal employment taxes for which it is liable. Thus, Federal Tax Liens against all the property of Hyde, Tarragon & Co., including the real property at issue in this case, arose on September 7, 1981 , November 2, 1981 , and December 7, 1981 , and remain in effect.

Once a proper Notice of Federal Tax Lien is filed, the lien is valid against a subsequent purchaser of the encumbered property, provided that the purchaser is given notice of the encumbrance. Section 6323(a) of the Internal Revenue Code. ¹ The requirements for proper notice of a Federal Tax Lien are set forth in Section 6323(f) of the Internal Revenue Code and are a matter of federal law. United States v. Union Central Life Insurance Co., 368 U.S. 291 (1961). ² Section 6323(f)(1) of the Internal Revenue Code provides that in the case of real property, a Notice of Federal Tax Lien is to be filed in one office of the state (or county, or other governmental subdivision) as designated by the laws of such state, in which the property is located. Pursuant to Section 6323(f)(1) , the Internal Revenue Service filed a Notice of Federal Tax Lien against Hyde, Tarragon & Co. in the Circuit Court of Dade County, Florida.

In addition thereto, Section 6323(f)(4) of the Internal Revenue Code imposes the additional requirement that the filing of the Notice of Federal Tax Lien be entered in the index of the local government. Pursuant to Section 6323(f)(4) the Notice of Federal Tax Lien must be indexed in such a manner that a reasonable inspection of the index will reveal the existence of the lien if:

(a) state law provides that a deed is not valid against a bona fide purchaser unless it has been "recorded in a public index at the place of the filing in such a manner that a reasonable inspection of the index will reveal the existence of the deed"; and if

(b) the state maintains an adequate system for the public indexing of federal tax liens. ³

Florida law governs the instant dispute and provides that a deed is not valid against a bona fide purchaser unless it has been recorded and indexed. Fla. Stat. Ann. Section 28.222(2)-(3); Fla. Stat. Ann. Section 695.01. ⁴ Florida also maintains an adequate system for the public indexing of Federal Tax Liens. United States v. Clark, 81-1 USTC ¶9406 at p. 87,119 (S.D. Fla. 1981). The governments filing of lien notices where there is an adequate state system of indexing real property, as there is here, must be done "in such a manner that a reasonable inspection of the index will reveal the existence of the lien." Section 6323(f)(4) of the Internal Revenue Code. Thus, the central issue in this case becomes whether a reasonable inspection of the index to public records would reveal the existence of the Notice of Federal Tax Lien.

Despite the misspelling of the word "Tarragon," a reasonable inspection of the public records would have revealed the existence of the Notice of Federal Tax Lien, for misspelling of the taxpayer's name was slight. The Fifth Circuit has held that a minor error in filing a federal tax lien does not invalidate the notice of the lien. See Richter's Loan Co. v. United States, 235 F.2d 753 (5th Cir. 1956), wherein the Fifth Circuit held that a Notice of Federal Tax Lien filed under the name of "Freidlander" constituted adequate notice of a federal tax lien against a taxpayer whose name was properly spelled "Friedlander". ⁵ Such a slight misspelling--the omission of one "r" in the name "Tarragon"--could not mislead the searchers of the record, and thus, should not invalidate the Notice of the Federal Tax Lien.

Furthermore, a reasonable inspection of the public records would have revealed the existence of the Notice of Federal Tax Lien, for the Notice of Federal Tax Lien which was filed against "Hyde, Taragon & Co." was indexed and appeared on the same page as the instruments filed against "Hyde, Tarragon & Co." Accordingly, the Notice of Federal Tax Lien at issue is sufficient, and therefore, valid against the subsequent purchasers, the Feinsteins.

II.

 

Klugmans Have No Interest or Claim to the Real Property at Issue

As a final matter, this Court hereby finds that the Klugmans have no interest in the real property at issue. Mildred and Reuben Klugman hold a promissory note from the Feinsteins as part of the financing of the purchase price of the property; the note, however, is unsecured and thus, the Klugmans have no recourse to the property at issue. Furthermore, the Klugmans, by interrogatory, have conceded that they have no claim or interest in the real property at issue. In accordance with these admissions, this Court finds that the Klugmans have no interest in the subject real property and the buildings and improvements thereon.

III.

First in Time, First in Right

Manufacturers Life Insurance Co. is the owner and the holder of the first mortgage on the real property at issue and the buildings and improvements thereon. Said mortgage originated and was recorded in the official records of Dade County , Florida in 1979, prior to the filing of the Notice of Federal Tax Lien. As Manufacturers Life Insurance Company recorded its mortgage on the subject property prior to the recordation of the notice of federal tax lien, the mortgage is prior in right to the interest of the United States . Accordingly, the proceeds realized from the foreclosure and sale of the property at issue must first be distributed to Manufacturers Life Insurance Company in satisfaction of its first mortgage.

Conclusion

Plaintiff, THE UNITED STATES OF AMERICA, has established to the satisfaction of this Court that there is no genuine issue of fact, and that Plaintiff is entitled to judgment as a matter of law. This Court hereby finds that Plaintiff has complied with the provisions of Section 6323 of the Internal Revenue Code, which sets forth the requirements for the filing of a Notice of Tax Lien. Consistent with this determination, this Court further finds that (1) the system employed by Dade County for the indexing of federal tax liens is "adequate" as required by Section 6323(f)(4) of the Internal Revenue Code; (2) that a reasonable inspection of the Index to the Dade County Official Records would have revealed the existence of the federal tax lien against Hyde, Tarragon & Co.; and (3) that the United States holds valid tax liens against the subject real property and buildings and improvements thereon to the extent of $153,649.41, as of January 1, 1988. Accordingly, this Court hereby grants Plaintiff's Motion for Summary Judgment.

Upon review of Defendants' Cross Motion for Summary Judgment, it is the opinion of this Court that said motion should be denied as it lacks merit and was untimely filed. ⁶

Upon careful review of this matter, it is hereby

ORDERED AND ADJUDGED that Plaintiff's Motion for Summary Judgment is GRANTED. It is further ORDERED AND ADJUDGED that Defendants' Cross Motion for Summary Judgment is DENIED. Consistent with the Findings of Fact and Conclusions of Law herein entered, this Court hereby orders the foreclosure of the Federal Tax Liens upon the property at issue, and further orders that the property be sold in accordance with law, and the proceeds of the sale be distributed in accordance with the findings of this Court.

¹ Thus, Hyde, Tarragon & Co.'s transfer of the subject real property, subsequent to the filing of the federal tax lien, does not destroy that lien.

² "The filing requirements for a Notice of Tax Lien exist to protect the wary. See I.R.C. Sections 6323(a) , 6323(f) . The failure of a person to find a properly-filed Notice will not render the government's claim inferior to that of a subsequent purchaser or mortgagee. . . ." United States v. Clark, 81-1 USTC ¶9406 at p. 87,119 (S.D. Fla. 1981).

³ Section 6323(f)(4) of the Internal Revenue Code provides:

(4) Indexing required with respect to certain real property.--In the case of real property, if--

(A) under the laws of the State in which the real property is located, a deed is not valid as against a purchaser of the property who (at the time of purchase) does not have actual notice or knowledge of the existence of such a deed unless the fact of filing of such deed has been entered and recorded in a public index at the place of the filing in such a manner that a reasonable inspection of the index will reveal the existence of the deed, and

(B) there is maintained (at the applicable office under paragraph (1)) an adequate system for the public indexing of Federal tax liens,

then the notice of lien referred to in subsection (a) shall not be treated as meeting the filing requirements under paragraph (1) unless the fact of filing is entered and recorded in the index referred to in subparagraph (B) in such a manner that a reasonable inspection of the index will reveal the existence of the lien.

⁴ In the instant case, Plaintiff complied with Florida law and Section 6323(f)(4) of the I.R.C. and filed its Notice of Federal Tax Lien in the Index of the local government.

⁵ In Bonner v. City of Pritchard, 661 F.2d 1206, 1207 (11th Cir. 1981), this Circuit held that decisions handed down by the old Fifth Circuit prior to October 1, 1981, constitute binding precedent in the Eleventh Circuit.

⁶ By Order dated August 15, 1988 , this Court established January 24, 1989 , as the last day for filing motions in this case. Defendants' Motion for Summary Judgment was filed after this deadline, and thus, it is untimely.

 

 

[89-2 USTC ¶9415] Joseph Kivel, Marilyn B. Mansour, Plaintiffs-Appellants v. United States of America , Defendant-Appellee

(CA-9), U.S. Court of Appeals, 9th Circuit, 87-6347, 6/26/89, 878 F2d 301, Affirming an unreported District Court decision

[Code Sec. 6323 ]

Tax liens: Notice filing requirements: Wrong name.--A tax lien was valid, despite being filed under a variant of the taxpayer's name, where the lien was properly filed and recorded in the correct index and where a reasonable inspection of the index and chain of title would have revealed the existence of the lien. Under these circumstances, the subsequent purchasers of the property who had no actual knowledge of the lien, therefore, took their interest in the property subject to the lien.

Lawrence R. Lieberman, Levinson & Lieberman, Inc., 9401 Wilshire Blvd., Beverly Hills, Calif. 90212, for plaintiffs-appellants. Gary R. Allen, Department of Justice, Washington , D.C. 20530 , for defendant-appellee.

Before BROWNING, SCHROEDER and NOONAN, JR., Circuit Judges.

OPINION

NOONAN, Circuit Judge:

Joseph Kivel and Marilyn B. Mansour (the plaintiffs) brought suit under 26 U.S.C. §7426(a)(1) and (b)(1) seeking relief from the seizure of their property by the Internal Revenue Service. The case turns on what, under federal tax law, is "a reasonable inspection" of the public index of deeds to real property in Orange County , California . The district court gave judgment in favor of the United States . We affirm.

FACTS

The relevant chain of title begins with Bobbie Morgan Lane , who was born Bobbie Maurene Fines. She was married in 1972 to Creal Morgan, subsequently deceased. She was married September 10, 1976 to Benjamin Ryan Lane . She subsequently used the names Bobbie Morgan Lane and Bobbie Morgan. The relevant history of her property is as follows:

1. On December 10, 1976 Benjamin R. Lane and Bobbie Morgan Lane , as husband and wife, purchased the residential real property at 33 Mainsail Drive , Newport Beach , County of Orange , California .

2. On September 12, 1977 the Internal Revenue Service recorded a federal tax lien against the property in the name of "Bobbie M. Morgan also known as Lane."

3. On November 14, 1977 the Internal Revenue Service recorded a Certificate of Release of this lien in the name of "Bobbie M. Morgan also known as Lane."

4. On June 23, 1981 Benjamin R. Lane conveyed the property to Bobbie Morgan Lane as her sole and separate property.

5. On June 29, 1981 a Notice of Federal Tax Lien against the property was recorded in the names of Bobbie Morgan, the Morgan Employment Agency, and Morgan Nurses Registry for employment taxes unpaid by these entities after notice and demand for payment.

6. On July 16, 1981 a second Notice of Federal Tax Lien was filed describing a second unpaid assessment against Bobbie Morgan, Morgan Employment Agency and Morgan Nurses Registry.

7. On October 27, 1981 Bobbie Morgan Lane recorded a Declaration of Married Person's Separate Homestead. A box at the top of the form indicated that recording was requested by Bobbie Morgan.

8. On October 13, 1981 Bobbie Morgan Lane obtained a loan from Precision Mortgage Services, secured by a deed of trust which was recorded on November 19, 1981 .

9. On December 16, 1981 a Notice of Federal Tax Lien was recorded in the names of Bobbie Morgan Lane , Morgan Employment Agency and Morgan Nurses Registry. Among the assessments described in this notice were the assessments previously indicated in the Notices of Federal Tax Liens filed in June and July 1981.

10. On January 28, 1982 a Notice of Default under the Precision Mortgage Services deed of trust was recorded as a result of the default of Bobbie Morgan Lane .

11. On April 8, 1982, the Title Insurance and Trust Company, at the time the insurer of the title for the Precision Mortgage trust, wrote the Internal Revenue Service to declare that "the federal tax liens recorded against Bobbie Mor gan, Morgan Employment Agency and Morgan Nurses Registry do not impart constructive notice to any one dealing with property owned by Bobbie Morgan Lane" and that in the event of foreclosure, a purchaser of the property "would take free and clear of these liens, subject, of course, to the redemption laws." The Internal Revenue Service did not reply to this letter.

12. On May 11, 1982 a notice of a Trustee's sale was recorded, indicating that the property would be sold at public auction without warranties.

13. On June 7, 1982 a Notice of State Tax Lien was recorded as to Bobbie M. Morgan also known as Bobbie Morgan Lane .

12. On June 18, 1982 a notice of sale by the trustee was recorded under the deed of trust of Bobbie Morgan Lane .

15. On October 31, 1984 the plaintiffs purchased the property from the purchasers from the trustee. The plaintiffs had no knowledge of the two federal tax liens recorded on June 29, 1981 and July 16, 1981 .

16. On August 6, 1985 the Internal Revenue Service levied on the property.

ANALYSIS

A federal tax lien is wholly a creature of federal statute. Federal law establishes what is a sufficient filing. United States v. Polk [87-2 USTC ¶9432 ], 822 F.2d 871, 873 (9th Cir. 1987). The proper form of filing a tax lien is left to the Secretary to the Treasurer and defined in the regulations as Form 668, "Notice of Federal Tax Lien Under Internal Revenue Laws." As provided under 26 U.S.C. §6323(f)(3) , such a form, if properly filled out and filed in the correct location, is "valid notwithstanding any other provision of law regarding the form or content of a notice of lien." Polk, 822 F.2d at 873. There is no dispute that the notices of liens here were filed in the correct location and on Form 668.

In Polk we distinguished United States v. Clark, 81-1 USTC ¶9406 (S.D. Fla. 1981), which had held a tax lien invalid because not filed under the new legal name of the taxpayer. Our distinction was on two grounds, first that Clark relied on 26 U.S.C. §6323(f)(4) , which was not enacted when the Internal Revenue Service filed its notice of lien on Clark's property and second, on the ground that the purchaser in Clark relied on the taxpayer's correct legal name and failed to find notice of a lien. In short we made the correct legal name determinative and rejected the idea that the Internal Revenue Service had to record its liens under every known name of the taxpayer. We said at 874: "If Congress had intended to impose upon the Internal Revenue Service the duty to investigate what property is owned by a delinquent taxpayer, record the name under which it was acquired, and file a separate notice of tax lien for each such name, it could have done so." We held that Congress had not created such a requirement.

Under the law established by Polk, the case might end here if it were clear that "Bobbie Morgan" was the correct legal name of Bobbie Morgan Lane at the time the notices of lien were filed. We need not decide whether a tax lien filed under the taxpayer's full legal name is valid against a subsequent purchaser. See Polk at 874. In our case, although the liens give the names under which Bobbie Morgan Lane did business, it is not clear whether these names were the correct legal names of the taxpayer. "Bobbie Morgan" was neither the taxpayer's maiden name nor legal name. There is no evidence that she had established "Morgan Employment Agency" or "Morgan Nurses Registry" as business names.

We therefore have to ask whether the way the notices were filed complied with 26 U.S.C. §6323(f)(4) . This statute governs the validity of liens in a state, such as California, whose laws hold that a deed is valid against a purchaser of property only if the deed has been entered and recorded in the public index in such a manner that a reasonable inspection of the index will reveal the existence of the deed and whose recording system provides an adequate system for the public indexing of federal tax liens. In such a state, the federal requirements are not met unless the fact of filing is recorded in the index "in such a manner that a reasonable inspection of the index will reveal the existence of the lien." Id.

The parties have agreed that what title companies in fact do is not itself decisive of the question of reasonableness. The district court heard conflicting expert testimony and then reached its own conclusion as to what was reasonable. Clearly, "reasonable" is a mixed question of fact and law. We review the question de novo and make our own determination of what is reasonable.

The plaintiffs in the present case contend that their title depended on a chain which went back to Bobbie Morgan Lane and that a reasonable inspection of the index would never have led them to the name Bobbie Morgan. The United States contends that there were documents that a search would have uncovered that would have disclosed that Bobbie Morgan Lane was also known as Bobbie Morgan and that on discovering this fact a reasonable searcher would have searched under Bobbie Morgan and discovered the tax liens.

At the outset we must decide whether "a reasonable inspection of the index" means that a searcher need only look at the index and has no obligation to go from the index to the actual conveyances that are indexed. Such a literal construction of language would not make sense. It is evident that as to documents that are in the actual chain of title the searcher must at least look at such documents as may have a current effect and must then act on the notice imparted.

The plaintiffs here argue that when the searcher saw the declaration of a separate homestead in the index, the searcher had no obligation to look at the document because the homestead was no longer of significance once Bobbie Morgan Lane was out of the title. Similarly, they argue that the searcher would have had no obligation to look at the actual June 7, 1982 notice of a state tax lien, which was recorded too late to affect the foreclosure sale and so could not affect the validity of the sale. Again they argue there was no need for the searcher to look at the September 12, 1977 federal tax lien, because it was released by the Certificate of Release on November 14, 1977 . Finally, they contend that there was no need for the searcher to look at the notices of federal tax lien filed on July 16, 1981 , October 27, 1981 and December 16, 1981 because under California law a foreclosure sale by a trustee has a presumption of regularity. Hohn v. Riverside County Flood Control Water Conservation District, 228 Cal. App. 2d 605, 652, 39 Cal. Rptr. 647 (1964). The trustee recited that "all requirements of law" regarding notice had been given, and under California Civil Code §2924, such a recital is "conclusive evidence" in favor of a bona fide purchaser. The plaintiffs add that since a California title often goes back to the King of Spain there is often a number of documents in the chain of title that time has rendered obsolescent and void, and it would be unreasonably burdensome to ask an examiner to read each document to ascertain the incidental information it might contain.

The plaintiffs' argument has a good deal of appeal. Accepted, it would make the lives of title examiners easier and title insurance less expensive. On the other hand, to accept the argument is to impose on the Internal Revenue Service, if it wants to be sure of its liens, the difficult burden of checking whether the taxpayer has acquired property under a different name from the name under which the taxpayer has filed a return.

We need not decide in this case whether liens would always be valid simply because they are in the names used in the returns. We need not decide the outer limits of a reasonable inspection of the index. Without accepting or rejecting the broader arguments of either side, we decide on a narrower ground. The district court found credible the testimony of the government's expert, Daniel Cox, as to what a reasonable search in this case would have entailed, and we find the practice he described reasonable. We summarize Cox's testimony:

Cox went to the Orange County Recorder's office on February 2, 1987 . First, he used the trustee's deed recorded on June 18, 1982, by which Bobbie Morgan Lane conveyed the subject property to Precision Reconveyance Corporation, and the grant deed recorded on December 22, 1976, by which Benjamin R. Lane and Bobbie Morgan Lane, husband and wife, as joint tenants, acquired the subject property from Walter and Jewel Keusder, to define the chronological scope of his title search.

Second, he inspected the grantor/grantee index for the period December 22, 1976-June 18, 1982. The purpose of this inspection was to determine whether actions by Benjamin and Bobbie Morgan Lane placed any encumbrances or clouds on the title before it was conveyed to Precision. The grantor/grantee index and numerous entries under "Lane, Benjamin R. and Bobbie Morgan." Cox abstracted those encumbrances by listing on his workpapers the information contained in each entry. He then turned to "Lane, Bobbie M." and "Lane, Bobbie Morgan" in the grantor/grantee index and abstracted each entry found under these names. Cox testified that it would be the practice of California title searchers to abstract the information under both "Lane, Bobbie M." and "Lane, Bobbie Morgan" because the middle name or middle initial is not dispositive as to legal title in California . If, for example, one was examining the ownership of property whose title was held by John Arthur Smith, and the grantor/grantee index listed John A. Smith and John Smith, it would be incumbent upon the searcher to look under those names as well.

Third, Cox went to the viewing machine and looked at each of the documents listed on his workpapers. One of these documents was the November 14, 1977 Certificate of Release of the September 12, 1977 tax lien. Cox was asked why he would look at such a release and replied, "You can't tell from the index . . . [The index] only indexes a release. It can be any other lien. You have to look at that release to identify what it is referring to." By looking at this release one discovers that the certificate referred to a lien against property "in the name of Bobby M. Morgan also known as Lane." This document put the searcher on notice that Bobbie Morgan Lane was also known as Bobbie M. Morgan. This view would be confirmed because the address of the property subject to the lien was 33 Mainsail Drive and this property was the property conveyed by Bobbie Morgan Lane .

Judge Tevrizian asked if Cox would have come to the conclusion that Bobbie Morgan Lane was also known as Bobbie M. Morgan even if he had not known in advance that there was a dispute as to whether Bobbie Lane and Bobbie Morgan were one and the same. Cox responded, "No question, absolutely yes. I've done this hundreds of times and hundreds of titles." Once on notice, the searcher, Cox indicated, would go back to the grantor/grantee index and search under "Bobbie M. Morgan" and "Bobbie Morgan." In the grantor/grantee index under "Bobbie Morgan" are the June 29, 1981 and the July 16, 1981 Notices of Federal Tax Lien. It is these liens that now encumber the plaintiff's property.

The district court did not err in concluding that a reasonable inspection of the grantor/grantee index would have disclosed the existence of these liens.

AFFIRMED.

 

 

[88-2 USTC ¶9408] First American Title Insurance Co., a Calif. Corp., Provident Savings Bank, a Federally Chartered Savings Bank, Plaintiffs-Appellants v. United States of America, Department of the Treasury, Internal Revenue Service, Mark A. Moss, Provident Financial Corp., a California Corp., Defendants-Appellees

(CA-9), U.S. Court of Appeals, 9th Circuit, 87-6190, 6/2/88, 848 F2d 969, Reversing and remanding unreported District Court decision

[Code Secs. 6323 and 7425 --Results unchanged by the Tax Reform Act of 1986 ]

Collection: Validity of lien: Judicial sale: Wrong name: Priority of recorded mortgage: Remanded cases: Discharge of liens: Other state foreclosure proceedings.--A bank could have proven a set of facts which would have entitled it to retain its pre-sale status as senior lienor over the government's federal tax lien with regard to certain real estate. Therefore, the court of appeals reversed the district court's grant of a motion to dismiss and remanded the case to afford the bank an opportunity to establish that its perfected lien survived the sale. Mark A. Moss acquired real estate in which the deed was mistakenly recorded in the name Mark H. Moss. He gave a deed of trust in the property to the bank in order to secure payment of a promissory note which the bank recorded. Subsequently, the name on the original deed was corrected without notifying the bank. Later, the IRS filed federal tax liens on the property recorded under the name Mark A. Moss. Due to its ignorance of the correction of the name, the bank failed to notify the IRS of the nonjudicial foreclosure sale in which it purchased the property. In determining the nature of the bank's property interest after the nonjudicial foreclosure sale pursuant to state law (California), the court found that existing case law and Code Sec. 7425(b)(1) did not preclude the availability of equitable relief recognized under state law whereby the bank's senior lien could survive the sale rather than be extinguished through merger into the fee.

Barry R. Laubscher, Sanford P. Shatz, Rutan & Tucker, 611 Anton Blvd., Costa Mesa, Calif. 92628, for plaintiffs-appellants. William S. Rose, Jr., Acting Assistant Attorney General, Michael L. Paup, William S. Estabrook, B. Paul Klein, Department of Justice, Washington, D.C. 20530, for defendants-appellees.

Before FARRIS, BOOCHEVER and REINHARDT, Circuit Judges.

OPINION

FARRIS, Circuit Judge:

First American Title Insurance Co. and Provident Federal Savings Bank appeal from the district court's grant of a motion to dismiss for failure to state a claim. We reverse and remand.

BACKGROUND

This appeal concerns the status of various liens on real property located in Grand Terrace, California . Mark A. Moss acquired the property in July 1983. He mistakenly recorded the deed under the name Mark H. Ross. In October 1983, Moss gave Provident a deed of trust in the property in order to secure payment of a $156,000 promissory note. Provident recorded the deed on October 19, 1983 . In January 1984, Moss corrected the name on the original deed, but failed to notify Provident of the change.

In November 1985 and January 1986, the Internal Revenue Service recorded tax liens against all of Moss's property, including the Grand Terrace property. The liens on the Grand Terrace property were junior to Provident's lien. On March 10, 1986 , Provident initiated foreclosure proceedings against the property and conducted a title search under the name Mark H. Moss. Provident never discovered the federal tax liens because they were recorded under the name Mark A. Moss. Provident consequently failed to notify the IRS of the upcoming nonjudicial sale. At the sale, Provident purchased the property for $159,444.

Provident's failure to notify the IRS of the sale meant that the property remained subject to the federal tax liens. See 26 U.S.C. §7425(b)(1) . When Provident later discovered the federal liens, it received indemnity from First American Title Insurance Co. Both entities then instituted this action. They conceded that Provident's failure to notify the IRS meant that the sale was "made subject to and without disturbing" the tax liens. They argued, however, that equitable principles would have allowed Provident, and now First American, to retain the senior lien on the property. The district court disagreed. It held that Provident's senior lien was extinguished when Provident purchased the property, leaving the property subject only to the federal tax liens. ¹

STANDARD OF REVIEW

We review de novo the district court's grant of a motion to dismiss for failure to state a claim upon which relief can be granted. Fort Vancouver Plywood Co. v. United States , 747 F.2d 547, 552 (9th Cir. 1984). Dismissal was proper only if Provident and First American could not have proven any set of facts that would have entitled them to relief. Conley v. Gibson, 355 U.S. 41, 45-46 (1957).

DISCUSSION

The issue on appeal is whether Provident and First American could have proven any set of facts which would have entitled Provident to retain its pre-sale status as senior lienor over the government. Our resolution of the issue involves two steps. First, we must determine the nature of Provident's property interest after the sale. Second, if Provident's lien survived the sale, we must determine whether the lien has priority over the tax liens. See Aquilino v. United States [60-2 USTC ¶9538 ], 363 U.S. 509, 512-14 (1960). Each step is analytically distinct. If our resolution of the property issue reveals that Provident's lien did not survive the sale, then we need not reach the priority issue because there would be no lien competing for priority with the tax liens. If Provident's lien survived the sale, however, then, and only then, would we reach the priority issue.

Federal law governs the resolution of each issue. United States v. Brosnan [60-2 USTC ¶9516 ], 363 U.S. 237, 240 (1960). If federal statutes do not address the issue, the Supreme Court has specified the source of federal law. We adopt state law as the federal common law when deciding to what extent an individual has an interest in property to which a federal tax lien has attached. Id. at 240-42; Aquilino, 363 U.S. at 512-13; see also United States v. Polk [87-2 USTC ¶9432 ], 822 F.2d 871, 874 (9th Cir. 1987). We generate uniform nationwide federal rules, however, when deciding priority issues. Brosnan, 363 U.S. at 240.

A. The Property Issue

Whether Provident's lien survived the sale requires us to determine the extent of Provident's interest in the Grand Terrace property after the sale. We adopt California law as the federal common law to make this determination. See Aquilino, 363 U.S. at 512-13; Brosnan, 363 U.S. at 240-42; Polk, 822 F.2d at 874. Under California law, the general rule is that a mortgagee's lien is extinguished when the mortgagee purchases the property to which his or her lien was attached. Cal. Civ. Code §2910 (West 1974); Cornelison v. Kornbluth, 15 Cal. 3d 590, 125 Cal. Rptr. 557, 568 (1975); Strike v. Trans-West Discount Corp., 92 Cal. App. 3d 735, 155 Cal. Rptr. 132, 137 (1979). The theory is that the mortgagee's lesser interest (the lien) has "merged" into the greater interest (the fee). If the merger rule applies to Provident, then Provident's lien did not survive the sale and the tax liens are the only encumbrances on the property.

We are not convinced, however, that the merger rule necessarily applies to Provident. California law recognizes an equitable exception to the rule:

Equity will prevent or permit a merger as will best subserve the purposes of justice and the actual and just intent of the parties. . . . In the absence of an expression of intention, if the interest of the person in whom the several estates have united, as shown from all the circumstances, would be best subserved by keeping them separate, the intent to do so will ordinarily be implied.

Ito v. Schiller, 213 Cal. 632, 3 P.2d 1, 2 (1931) (quoting Jameson v. Hayward, 106 Cal. 682, 39 P. 1078 (1895)).

If Provident and First American are entitled to equitable relief, then Provident's lien survived the sale. Before we consider this issue, however, we first address the government's contention that equitable relief is simply unavailable to a senior lienor such as Provident who has failed to notify the IRS of a nonjudicial sale.

1. Does existing case law foreclose the availability of equitable relief?

On the basis of Southern Bank v. I.R.S. [85-2 USTC ¶9670 ], 770 F.2d 1001 (11th Cir. 1985), cert. denied sub nom. Mid-State Homes, Inc. v. United States , 476 U.S. 1169 (1986), the district court concluded that equitable relief was unavailable to Provident and First American. In Southern Bank, two senior lienors conducted nonjudicial foreclosure sales without notifying the IRS. Each lienor purchased the property at the respective sales. The Eleventh Circuit held that the senior liens were extinguished, leaving the property subject only to the government's liens. Id. at 1009.

In reaching this decision, the court applied Alabama 's rule of merger, Id. at 1007. When the lienors contended that elevating the government's junior liens would be inequitable, they did not argue that Alabama law would allow an equitable exception to the merger rule. Instead, after the court determined that the liens did not survive the sale, the lienors apparently argued that Alabama law would provide equitable relief on the priority issue. The court disagreed, stating "we cannot permit states to nullify the effectiveness of the federal tax lien . . . by applying various equitable principles recognized by the state." Id. at 1009.

We agree with the Eleventh Circuit that, as to priority issues, state equitable principles do not apply. If a federal statute does not address a priority issue, courts generate a federal rule to decide the issue. Brosnan, 363 U.S. at 240. In the case before us, however, we deal with a property issue because we must determine whether Provident's lien survived the sale. Aquilino v. United States [60-2 USTC ¶9538 ], 363 U.S., 509, 512-14 (1960), and United States v. Brosnan [60-2 USTC ¶9516 ], 363 U.S. 237, 240-42 (1960), both specify that courts look to state law to determine the extent of an individual's property interest in cases involving the federal tax liens. Aquilino makes clear that the property issue is analytically distinct from the priority issue. 363 U.S. at 512-14. Because Southern Bank dealt with a priority issue, the case does not apply here.

We reject the government's contention that United States v. Polk [87-2 USTC ¶9432 ], 822 F.2d 871 (9th Cir. 1987), precludes the availability of equitable relief on the merger issue. In Polk, the senior lienors conducted a foreclosure sale without notifying the IRS. Id. at 872. The court held that, under Arizona law, the senior liens were extinguished regardless of the senior lienors' intent. Id. at 874 (quoting Best Fertilizers of Arizona, Inc. v. Burns, 116 Ariz. 492, 493, 570 P.2d 179, 180 (1977)). Polk deals with Arizona law and has no bearing on whether equitable relief is available under California law. The senior lienor's intent is irrelevant under Arizona law, but not under California law. See Ito v. Schiller, 213 Cal. 632, 3 P.2d 1, 2 (1931); Strike v. Trans-West Discount Corp., 92 Cal. App. 3d 735, 155 Cal. Rptr. 132, 137-38 (1979). Polk therefore does not preclude the availability of equitable relief.

2. Does 26 U.S.C. §7425(b)(1) preclude the availability of equitable relief?

The government contends that granting equitable relief to Provident would be inconsistent with §7425(b)(1) . We disagree. Before Congress enacted §7425(b)(1) , some state laws allowed senior lienors to conduct nonjudicial sales without notice to junior lienors. Junior liens held by the government could be extinguished by operation of state law even though the government had not been notified of a sale. S. Rep. No. 1708, 89th Cong., 2d Sess., reprinted in 1966 U.S. Code Cong. & Admin. News 3722, 3748. To prevent the extinction of government liens under these circumstances, Congress enacted section 7425(b)(1) to assure that the government received notice of these sales so that it could "review its position and determine the appropriate action . . . ." Id. this would assure that the government could protect its interest in having a fair sale. In the event the government did not receive notice, Congress intended only to shield the government's junior liens from extinction so the government could protect its interest at a later date.

Granting equitable relief to Provident would not undermine Congress's intent. If Provident's lien survives the sale, the government's junior liens still are unaffected by the sale, and the government can protect its interest in having a fair sale in the future when Provident sells the property or when the government forecloses on it. Granting equitable relief also will not discourage senior lienors such as Provident from notifying the government of future sales. Senior lienors have a strong incentive to notify the government because doing so will extinguish the government's junior liens when the property is sold. See 26 U.S.C. §7425(b)(2) and Sohn v. California Pacific Title Ins. Co., 124 Cal. App. 2d 757, 269 P.2d 223, 230 (1954). If notice is not given, the government's liens survive the sale, leaving an encumbrance of the property. We believe that this is the penalty that Congress intended to impose on senior lienors such as Provident. Granting equitable relief to Provident is not inconsistent with that intention. Section 7425(b)(1) therefore does not preclude the availability of equitable relief.

3. Availability of equitable relief under California law

As we understand California law, equitable relief is available to Provident and First American if three conditions are met: (1) Provident's best interests would be best served by preventing a merger of the lien and the fee; (2) the purposes of justice would be served; and (3) the government cannot prove by a preponderance of the evidence that Provident actually intended to merge the lien into the fee. Ito v. Schiller, 213 Cal. 632, 3 P.2d 1, 2 (1931) (quoting Jameson v. Hayward, 106 Cal. 682, 39 P. 1078 (1895)); see also Strike v. Trans-West Discount Corp., 92 Cal. App. 3d 735, 155 Cal. Rptr. 132, 137-38 (1979). We need not discuss the first condition, because there is no dispute that Provident's best interests would be served by preventing a merger.

a. Purposes of justice. To determine whether justice would be served by allowing Provident's lien to survive the sale, we consider how our resolution of the issue would affect the parties. We presume that Provident did not act in bad faith when it failed to discover the government's liens. If we do not grant equitable relief, Provident would lose $159,444 (the amount Provident paid for the property) because the property would be subject to tax liens totalling $534,000. The government, on the other hand, would realize $159,444 which it otherwise would not have received had Provident notified it of the sale. We recognize that any money received by the government would go towards satisfaction of legitimate tax liens. If Provident had notified the government, however, the government's junior liens would have been extinguished, see 26 U.S.C. §7425(b)(2) and Sohn v. California Pacific Title Ins. Co., 124 Cal. App. 2d 757, 269 P.2d 223, 230 (1954), and the government would not have received any proceeds from the sale because the sale yielded only enough money to satisfy a portion of Provident's senior lien, see Caito v. United Calif. Bank, 20 Cal. 3d 694, 144 Cal. Rptr. 751, 754 (1978) (junior lienor draws from proceeds only after foreclosing senior lienor paid off). Under these circumstances, the equities favor Provident, particularly since 26 U.S.C. §7425(b)(1) eliminates virtually any harm the government suffered when it did not receive notice of the sale.

Because Provident failed to notify the government, section 7425(b)(1) provides that the sale was "made subject to and without disturbing" the government's lien. Even if Provident's senior lien survives the sale, the government is virtually in the same position it was in before the sale. If Provident sells the land, or if the government forecloses on it, the proceeds from the sale first go towards satisfaction of Provident's lien and any remaining proceeds go towards satisfaction of the government's liens.

We therefore conclude that Provident and First American could prove a set of facts which would show that the purposes of justice would be served if equitable relief were granted.

b. Intent. The final condition for receiving equitable relief involves the question of Provident's intention on the issue of merger. Because Provident did not express any intention on the merger issue, equity will presume that Provident did not intend to merge its lien with its fee interest if two conditions are met: (1) Provident's best interests would be served by preventing the merger, and (2) the purposes of justice would be served. Ito v. Schiller, 213 Cal. 632, 3 P.2d 1, 2 (1931); Strike v. Trans-West Discount Corp., 92 Cal. App. 3d 735, 155 Cal. Rptr. 132, 137-38 (1979). We have concluded that Provident and First American could prove a set of facts to fulfill these conditions. We have also presumed that Provident intended to prevent a merger of its interests. On remand, the presumption is rebuttable if the government can prove by a preponderance of the evidence that Provident actually intended to merge its interests. See Sheldon v. La Brea Materials, 216 Cal. 686, 15 P.2d 1098, 1101 (1932) (merger rule not applied when no direct or circumstantial evidence of an express intention to merge); see also Strike, 92 Cal. 3d 735, 155 Cal. Rptr. at 137 (placing burden of proof on person arguing that merger occurred).

B. The Priority Issue

If the district court ultimately determines that Provident's lien survived the sale, then the only remaining issue is whether the lien has priority over the tax liens. The Federal Tax Lien Act squarely addresses this issue and therefore obviates the necessity of relying on the federal common law to resolve the issue. See Manalis Finance Co. v. United States [80-1 USTC ¶9158 ], 611 F.2d 1270, 1273 (9th Cir. 1980); AETNA Ins. Co. v. Texas Thermal Industries, Inc. [79-1 USTC ¶9287 ], 591 F.2d 1035, 1037-38 (5th Cir. 1979) (per curiam). If Provident's lien survived, the Tax Lien Act gives priority to it because Provident had perfected its lien before the government recorded its tax liens. See 26 U.S.C. §§6323(a) , (h)(1) ; Manalis, 611 F.2d 1273; AETNA Ins. Co., 591 F.2d at 1038.

CONCLUSION

 

We hold that the district court erred in granting the government's motion to dismiss. We have viewed the facts in the light most favorable to Provident and First American. Whether they can actually prove their case is a matter for the district court to decide on remand.

Reversed and Remanded.

¹ The district court also rejected the contention that 26 U.S.C. §7425 allowed a "taking." We need not address this issue.

 

 

[87-1 USTC ¶9246] Jeffrey D. Weeks, et al., Plaintiffs v. The United States of America , et al., Defendants

U.S. District Court, Dist. Md. , R-86-2280, 1/23/87

[Code Sec. 6323(f)(4) --Result unchanged by the Tax Reform Act of 1986]

Tax liens: Existence of: Different name: Reasonable inspection.--A tax lien recorded against "Kenneth Gardner Contracting, Inc." (the name under which the Employer's Identification Number had been issued) was valid as against a purchaser who had acquired title to the property in question from "K.P. Gardner Contracting, Inc." A reasonable inspection of the tax liens in the appropriate county index would have revealed the existence of the lien. BACK REFERENCES: 87FED ¶5362.28

Michael L. Wilsman, Rob ert W. Warfield, 4 Evergreen Road, Severna Park, Md. 21146-3897, R. Calvert Stuart, Inglewood Business Community, 9200 Basil Court, Landover, Md. 20785, for plaintiffs. Larry Adams, Rob ert Gordon, Assistant United States Attorney, Washington , D.C. 20530 , for defendants.

OPINION

RAMSEY, District Judge:

This is an action to quiet title to real property known as 2 Sunset Drive, Severna Park, in Anne Arundel County , Maryland .

Findings of Fact

The facts of this case are largely undisputed. Plaintiffs Jeffrey and Trudy Weeks acquired title to the property on December 14, 1984 , by virtue of a duly recorded deed from K.P. Gardner Contracting, Inc. K.P. Gardner Contracting, Inc., was a Maryland corporation operated by Kenneth P. Gardner. No pending tax lien was recorded against K.P. Gardner Contracting, Inc. However, on June 20, 1984 , the Internal Revenue Service has filed a lien for approximately $15,000 against "Kenneth Gardner Contracting, Inc. (a corporation)," listing the address as 2 Sunset Dr., Severna Park , Md. 22146 . "Kenneth Gardner Contracting, Inc." was the name under which Mr. Gardner had applied for and received an Employer's Identification Number ("EIN") for the business whose delinquent tax returns gave rise to the lien.

The Circuit Court for Anne Arundel County maintains a federal tax lien index in three volumes.

The volume covering January 1, 1976 , through June 30, 1983 , listed liens against all corporations according to the first letter of the corporate name. Within each alphabetic division, liens were listed in chronological order. A reasonable inspection of the index in this case would thus have required looking at all four pages (pages 109, 110, and two successive unnumbered pages) of liens under the letter "K". While no liens were filed against "K.P. Gardner Contracting, Inc.," two liens were listed as filed against "Kenneth Gardner Contracting, Inc.," and as having been satisfied on August 28, 1984 .

The volume covering liens filed after July 1, 1983 , was further subdivided, so that corporations whose names begin with a letter were placed in one category and corporations whose names begin with a word were placed in a category according to the first two letters of their name. Thus liens against corporations whose names begin with the initial "K." were placed on page 109, while liens against corporations beginning "Ke" were placed on page 233. As of December 14, 1984 , page 109 contained a single lien against "K.P. Gardner Contractor [sic] Co et al," whose address was listed as 3855 Stevens Way , Severna Park , Maryland 21144 . This lien was listed as discharged on February 15, 1984 . The second and fourth of four entries on page 233 as of December 14, 1984, were liens against "Kenneth Gardner Contracting Inc," whose address was listed as 2 Sunset Drive, Severna Park, Maryland 21146. The second entry was listed as discharged on August 28, 1984 , but there was no indication of any discharge of the fourth entry, filed on June 20, 1984 .

Section 6323(f)(4) of the Internal Revenue Code, 26 U.S.C. §6323(f)(4) , states that a tax lien against real property shall be valid if its filing is entered and recorded in a local public Federal tax lien index "in such a manner that a reasonable inspection of the index will reveal the existence of the lien."

This case essentially boils down to a question of whether a reasonable inspection of the tax lien index in the Circuit Court for Anne Arundel County would have revealed the June, 1984, lien filed by the Internal Revenue Service.

A reasonable title search would have included an inspection of all three tax lien volumes. Looking first under the name "K.P. Gardner Contracting, Inc.," such a search would have discovered the satisfied lien against "K.P. Gardner Contractor Co et al" in the most recent volume and the satisfied liens against "Kenneth Gardner Contracting, Inc." in the previous volume (since, in the previous volume, the searcher would have had to look through all of the listings beginning with "K"). Even if a reasonable inspection of the most recent index would not have initially included the "Ke" listings (and it might have), certainly after having been put on notice that the seller or corporations with names very similar to the seller had several liens placed against them in the past, and that some of those liens were listed under the name "Kenneth Gardner Contracting, Inc.," a reasonable inspection would then have looked under "Ke" and found the June, 1984, lien, which listed the corporation's address as 2 Sunset Drive. Having found that that lien had not been satisfied, a reasonable searcher would, on further inquiry, have ascertained that the tax lien applied to the property being sold.

Conclusions of Law

Defendants cite Pioneer National Title Insurance Co. v. United States, 81-2 USTC ¶9482 (N.J. May 18, 1981), for the proposition that, so long as the I.R.S. properly files, and the index properly records, its lien under the name the taxpayer used in its dealings with the I.R.S., the lien is valid against all property owned by the taxpayer under whatever name. Such a holding would support the defendant's position. But we need not reach that far in this case. Rather, the Court finds that a reasonable inspection of the index would have revealed the existence of the lien, as required by 26 U.S.C. §6323(f)(4) , and that the lien was therefore valid as against the plaintiffs.

A final judgment incorporating the decision herein will be entered contemporaneously with the filing of this Opinion.

JUDGMENT ORDER

In accordance with the Opinion dated January 23, 1987 , and filed in the above-entitled case, it is

ORDERED and ADJUDGED:

That judgment is hereby entered for the defendants and against the plaintiffs.

 

 

[87-2 USTC ¶9432] United States of America, Plaintiff/Counter-Defendant/Appellee v. Roy Bruce Polk, Darlene Polk, First Federal Savings and Loan, Richard L. Anderson, L.J. Rob erts, d/b/a The L.J. Rob erts Maricopa Turf, Inc., and State of Arizona, Defendants, and Richard L. Anderson, Defendant/Counter-Claimant/Appellant

(CA-9), U.S. Court of Appeals, 9th Circuit, 86-2918, 7/20/87, 822 F2d 871, Affirming unreported District Court decision

[Code Secs. 6323 and 7403 --Result unchanged by the Tax Reform Act of 1986 ]

Liens: Validity: Wrong name: Notice: Acquisition through foreclosure: Action to quiet title: Summary judgment.--A tax lien on real property filed by the IRS in the full legal name of the owner was valid even though it did not appear on title searches by a third-party mortgagor because the owner-mortgagee had used a shortened name on his deeds and mortgages. After the third-party mortgagor brought a foreclosure action against the mortgagee in which the IRS was neither notified nor made a party and the mortgagor purchased such property at the sheriff's sale, the IRS brought a foreclosure action against the third-party mortgagor in which the lower court properly granted the IRS summary judgment.

Deborah Swann Mbye, Department of Justice, Washington , D.C. 20530 , for plaintiff/counter-defendant/appellee. David A. Griffiths, Lindtelgen & Griffiths, 304 N. Rob son, Mesa , Ariz. 85201 , for defendant/counter-claimant/appellant.

Before GOODWIN, BEEZER and THOMPSON, Circuit Judges.

OPINION

 

BEEZER, Circuit Judge:

Richard L. Anderson appeals from the district court's grant of summary judgment for the United States . The district court held that the IRS had a tax lien enforceable against Anderson 's property. Anderson argues that the lien was improperly recorded, that it should have been discharged, and that it was wrongly given priority over his own interests. We affirm.

FACTS

The facts were stipulated by the parties before the district court and are briefly as follows. In April 1975, appellant Richard Anderson lent $20,000.00 to Roy Bruce Polk, taking in exchange a note and a third mortgage on Polk's residential real property in Maricopa County , Arizona . Unknown to Anderson, the IRS had previously assessed a penalty of over $18,000.00 against Polk. ¹ When Polk failed to pay, the IRS took action to create a tax lien against his property by filing a notice of tax lien with the Maricopa County Recorder in May, 1975.

In late 1975 or early 1976, Anderson and the two other mortgagees commenced actions to foreclose their mortgages against the Polk property. All three ordered title searches for "Bruce Polk," the name by which Polk was generally known and the name appearing on all of Polk's deeds and mortgages connected with his residence. None of the title searches revealed the IRS tax lien, which was filed under Polk's full legal name of "Roy Bruce Polk." Accordingly, the IRS was neither notified of nor made a party to the combined foreclosure proceedings, which were reduced to judgment in 1976. Following foreclosure, Anderson bought the Polk property at the sheriff's sale.

In 1979, the IRS wrote to Anderson informing him of the tax lien and threatening to foreclose if he did not pay Polk's debt. Anderson did not pay, so in 1983 the IRS commenced foreclosure proceedings in the district court pursuant to 26 U.S.C. §7403 . Anderson filed a counterclaim requesting that the court quiet title in his favor. Both parties moved for summary judgment. The district court granted summary judgment for the IRS in October, 1986, and certified it as final under Fed. R. Civ. P. 54(b). Anderson timely appealed.

ANALYSIS

"[W]hen reviewing a grant of summary judgment, this court sits in the same position as the district court and applies the same summary judgment test that governs the district court's decision." T.W. Elec. Serv., Inc. v. Pacific Elec. Contractors Ass'n, 809 F.2d 626, 630 (9th Cir. 1987).

A. Validity of the Tax Lien

It is Anderson 's contention that the tax lien which attached to Polk's property in 1975 is not valid against Anderson because the IRS did not properly file its notice of lien within the meaning of applicable federal statutes. Specifically, Anderson argues that for three reasons the notice should have been filed under the name "Bruce Polk." First, all the mortgages and deeds relating to Polk's property, all the logical starting points for a title search, listed the owner as "Bruce Polk." Second, the Maricopa County records had so many entries under the name of Polk that someone searching diligently under "Bruce Polk" would be unlikely to notice entries under "Roy Bruce Polk." Third, the IRS revenue officer assigned to collect Polk's tax assessment knew that Polk was commonly known as "Bruce" rather than "Roy." The IRS argues in response that the lien was properly filed and is enforceable against the property now owned by Anderson .

Since the federal tax lien is wholly a creature of federal statute, federal law establishes the content of a sufficient filing. United States v. Brosnan [60-2 USTC ¶9516 ], 363 U.S. 237, 240 (1960). Questions of law are reviewed de novo. United States v. McConney, 728 F.2d 1195, 1201 (9th Cir.) (en banc), cert. denied, 469 U.S. 824 (1984).

The proper form of filing for a tax lien is left up to the Secretary of the Treasury by 26 U.S.C. §6323(f)(3) ; it is defined in the regulations as Form 668, "Notice of Federal Tax Lien under Internal Revenue Laws." 26 C.F.R. §301.6323(f)-1(c) . Such a form, if properly filled out and filed in the correct location, is "valid notwithstanding any other provision of law regarding the form or content of a notice of lien." 26 U.S.C. §6323(f)(3) . There is no dispute in this case that the notice of lien against Polk's property was filed in the correct location. There is also no dispute that the notice of lien was filed on Form 668 and pursuant to that form listed the amount owing under Polk's full legal name.

Anderson argues that, even though the technical requirements of section 6323(f) may have been met, the lien should nevertheless be invalidated because the federal statutory scheme itself is inadequate to put a real estate purchaser on notice of a tax lien where the seller does not commonly use his full legal name. According to Anderson , a reasonable notice scheme would require the filing of a tax lien not only under the taxpayer's legal name, but also under every name in which the IRS knows the taxpayer has recorded title to property.

Anderson relies on a number of cases holding that a federal tax lien may be invalidated if the IRS misspells or otherwise materially alters a taxpayer's name in its notice of lien such that a reasonable and diligent search by the purchaser would not reveal the existence of the lien. See Haye v. United States [79-1 USTC ¶9192 ], 461 F.Supp. 1168 (C.D. Cal. 1978) ("Castello" instead of "Castillo");Continental Investments v. United States [53-2 USTC¶9625 ], 142 F.Supp. 542 (W.D. Tenn. 1953) ("W.R. Clark, Sr." instead of "W.B. Clark, Sr."); cf. United States v. Sirico [66-1 USTC ¶9209 ], 247 F.Supp. 421 (S.D.N.Y. 1965) (lien filing gave constructive notice, even though taxpayer's first name was shortened to an initial.). In each of these cases, the IRS failed to file its notice of lien under the taxpayer's full legal name. Here, by contrast, Anderson does not argue that the IRS altered or misspelled Polk's name and thereby failed to comply with the filing statute.

We have found only two cases where a tax lien correctly filed under the taxpayer's full legal name was called in question. In United States v. Clark, 81-1 USTC¶9406 (S.D. Fla. 1981), the delinquent taxpayer was a married woman. After the IRS filed a notice of tax lien under her correct married name, she divorced and remarried. Although the IRS knew that the taxpayer changed her legal name upon remarriage, it did not file a new notice of lien under the new name. When the taxpayer sold certain real property, the purchaser searched the title only under the taxpayer's current name and so did not find the notice of tax lien. The district court, citing 26 U.S.C. §6323(f)(4) (which was added in 1978), held that the government's failure to refile its notice made it impossible for a "reasonable inspection" of the land records to reveal the lien. Accordingly, the court held the lien invalid as against the purchaser.

Clark is distinguishable from the present case on two sufficient grounds. First, it relies on statutory language in 26 U.S.C. §6323(f)(4) which was not yet enacted when the IRS filed its notice of lien on Polk's property. Second, inClark the real estate purchaser failed to discover the notice of lien even though he searched the land records under the seller's correct legal name. Such was not the case here.

In Pioneer National Title Ins. Co. v. United States , 81-2 USTC ¶9482 (D.N.J. 1981), a single woman purchased real property under her maiden name. Later she married and was assessed for unpaid taxes under her married name. She subsequently sold her property to a purchaser who searched the title under her maiden name only. When the purchaser later discovered that the IRS had filed a notice of lien under the taxpayer's married name, he sued to quiet title. The court, in a well-reasoned opinion held in favor of the IRS:

Section 6323(f) . . . clearly provides that a notice of tax lien properly filed under the name of the taxpayer is sufficient to validate the lien against all property owned by the taxpayer, under whatever name acquired.

Id. at p. 87,515.

We agree with the New Jersey district court. If Congress had intended to impose upon the IRS the duty to investigate what property is owned by a delinquent taxpayer, record the name under which it was acquired, and file a separate notice of tax lien for each such name, it could have done so. Cf. United States v. Union Central Life Ins. Co. [62-1 USTC¶9103 ], 368 U.S. 291, 294 (1961) (IRS has no duty to keep aware of property owned by tax delinquents). We hold that the tax lien is valid against Anderson .

B. Discharge of the Tax Lien

Anderson argues that, even if the tax lien was once valid against him, it should have been discharged in 1976 or 1979. Section 6325(b) of 26 U.S.C. permits the IRS to issue a certificate of discharge concerning property subject to a tax lien if it determines that the lien is valueless. The parties stipulated that, in 1975-76 after the tax lien had been filed, the IRS

did not consider that there was any equity in the house out of which to satisfy the federal tax lien. Accordingly, [the IRS] did not seize the house at that time, but scheduled the file for review in 1982 in accordance with normal . . . procedures.

Apparently, the IRS was waiting to see whether the property would appreciate. This lawsuit is evidence that it did.

Anderson does not explain how the IRS abused the discretion granted by the statute. We find that the IRS acted within its statutory authority when it refused to discharge the tax lien. ²

C. Priority of the Federal Lien

The district court ordered that the Polk property be sold and the proceeds applied to the costs of the sale, the outstanding first mortgage, the federal tax lien (up to one-half of the remaining proceeds), and Anderson , in that order. Anderson contends that, even if the federal lien survived the foreclosure judgment, it should be subordinated to his interests for two reasons: first, because Anderson once held two mortgages, both senior to the tax lien; second, because Anderson has expended substantial sums to maintain and improve the Polk property since he bought it.

Whether or not Anderson retains any legal interest in the Polk property corresponding to the two former mortgages is a matter of Arizona law. See Magneson v. C.I.R. [85-1USTC ¶9205], 753 F.2d 1490, 1495 (9th Cir. 1985), citingAquilino v. United States [60-2 USTC ¶9538 ], 363 U.S. 509, 512-13 (1960). According to Arizona law, a mortgagee's interest does not survive the discharge or satisfaction of the underlying debt, regardless of the mortgagee's intent. Best Fertilizers of Arizona, Inc. v. Burns, 116 Ariz. 492, 493, 570 P.2d 179, 180 (1977) (en banc). It follows that Anderson , now that his mortgage has been discharged, has no mortgagee's interest entitled to priority over the federal lien in a judicial sale.

Anderson argues that principles of equity entitle him to priority over the tax lien. Specifically, he wishes to be subrogated to the rights of the (former) mortgagees (one of which was himself) as against the government. Whether or not Anderson is entitled to subrogation is a matter of Arizona law. See Simon v. United States [85-1 USTC ¶9371 ], 756 F.2d 696, 698 (9th Cir. 1985), citing 26 U.S.C. §6323(i)(2) . In Arizona ,

Subrogation is the substitution of another person in the place of a creditor, so that the person in whose favor it is exercised succeeds to the rights of the creditor in relation to the debt.

* * *

So when one, being himself a creditor, pays another creditor, whose claim is preferable to his, it is held that the person so paying is subrogated to the rights of the other creditor.

Mosher v. Conway, 45 Ariz. 463, 469, 46 P.2d 110, 112 (1935).

The doctrine of subrogation does not apply to Anderson 's purchase of the property in satisfaction of his own third mortgage. "[T]here can be no right of subrogation when one pays a debt which he is obligated to pay." Del E. Webb Hotel Co. v. Bentley, 8 Ariz. App. 408, 412, 446 P.2d 687, 691 (1968). Nor should the doctrine be applied to preserve the priority of the second mortgage. The purpose of the doctrine is manifestly to protect a creditor's rights against the property when the creditor is forced to pay off competing creditors. The doctrine operates "in relation to the debt" which he pays off. In this case, Anderson no longer has a creditor's interest to protect; he now owns the fee interest. By the same token, he needs no subrogation to give him leverage against the debtor; the debtor (Polk) is out of the picture. Moreover, "subrogation can only be granted when an equitable result will be reached." Mosher, 45 Ariz. at 468, 46 P.2d at 112. But in this case the equities do not decisively favor Anderson, who failed to notify the United States of his foreclosure.

Anderson relies onPipola v. Chicco, [60-1 USTC ¶15,276 ], 274 F.2d 909 (2d Cir. 1960). In Pipola, a senior mortgage (A) on real property was paid off by the purchaser with borrowed funds secured by a new mortgage (B). In the meantime, a tax lien had been filed on the property, junior to A but senior to B. When the government sued to enforce the tax lien, the parties agreed that the new mortgagee should be paid ahead of the government.

It is unlikely that a similar result would be reached today without agreement of the parties. In 1966, Congress added section 7425 to the tax code, describing in narrow terms the circumstances in which a federal tax lien can be extinguished without the government's consent. The effect of this provision was considered in Southern Bank v. IRS [85-2 USTC¶9670 ], 770 F.2d 1001 (11th Cir. 1985), cert. denied sub nom. Mid-State Homes, Inc. v. United States , 106 S. Ct. 2890 (1986), a case factually similar to this one. The court concluded that:

the failure of the mortgagees to comply with the notice provisions of 26 U.S.C. §7425 before they conducted the foreclosure sales and purchased the property, caused their mortgage liens to be extinguished and the federal liens to be elevated from their junior status.

Id. at 1009. The court added, "Equitable principles do not persuade us to reach a contrary conclusion for the harsh results now imposed could have easily been avoided by [the foreclosing mortgagees]." Id. We agree with the reasoning of the Eleventh Circuit.

Finally, Anderson claims reimbursement for his "maintenance" and "improvement" expenses before the government takes anything. The IRS disputes whether all of the claimed expenses were really for maintenance. This court has indicated that maintenance expenses incurred by a senior lienholder can be given priority over a tax lien. See Little v. United States [83-1 USTC ¶9343 ], 704 F.2d 1100, 1108 (9th Cir. 1983) ("Little I"); cf. Little v. United States [86-2 USTC ¶9558 ], 794 F.2d 484 (9th Cir. 1986) ("Little II"). Both Little I andLittle II involved a government redemption of property after a non-judicial foreclosure sale. Accordingly, 26 U.S.C. §7425(d) applied to that case, while it does not apply to the present case. Section 7425(d) incorporates by reference 28 U.S.C. §2410(d), which provides explicitly for payment by the government (as redemptioner) for maintenance and improvements. Again, that statute is not applicable in the present case, nor has Anderson suggested another basis for his claims to compensation, other than general principles of equity. We reject this claim.

AFFIRMED.

¹ The parties agree, for purposes of this litigation, that the IRS has a valid assessment against Polk. Indeed, Anderson cannot challenge the assessment in a quiet title action. See Zimmer v. Connett [81-1 USTC ¶9223 ], 640 F.2d 208, 210 (9th Cir. 1981) (citing with approval Falik v. United States [65-1 USTC ¶9295 ], 343 F.2d 38 (2d Cir. 1965)).

² When Congress wishes to impose a duty on the IRS to discharge a lien, it knows how to do so. See 26 U.S.C. §6325(a) (1982).