Wrong Name Page3

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[81-2 USTC ¶9482]Pioneer National Title Insurance Company, a Corporation authorized to transact business in New Jersey , and Frank Banko, Plaintiffs v. United States of America (Internal Revenue Service); Joseph Caruso and Lauralie Caruso, formerly Lauralie Imbergamo, Defendants

U. S. District Court, Dist. N. J., Civil Action No. 80-1343, 5/18/81

[Code Sec. 6323]

Tax liens: Validity of lien: Filing of notice: Name change.--A federal tax lien was valid against a purchaser of real property where the IRS fully complied with the statutory requirements governing the filing of the notice of lien by filing and indexing the notice under the taxpayer-seller's married name but not also under the name she used at the time she acquired the property. Code Sec. 6323 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. Further, because the deed received by the purchaser and the title insurer identified the taxpayer under both names, the purchaser and title insurer could easily have discovered the lien and thus had constructive notice of the lien's existence.

Sanford E. Chernin, Chernin & Freeman, 1075 Easton Avenue, Somerset, New Jersey 08873, for plaintiffs. Steven R. Toscher, Department of Justice, Washington , D. C. 20530 for defendants. Dennis J. Avigliano, Somerset Sussex Legal Services, 36 Grove Street , Somerville , New Jersey 08876 , for Lauralie Caruso.

Opinion

DEBEVOISE, District Judge:

This action is brought pursuant to 28 U. S. C. §2409a to quiet title to real property in which the United States claims a federal tax lien or, in the alternative, to recover against the sellers of the property for misrepresentation as to the existence of the tax lien. Plaintiffs are Frank Banko, purchaser of the real property in question, and Pioneer National Title Insurance Company, his title insurer. Named as defendant in the quiet title action is the United States of America and as defendants in the misrepresentation action, Lauralie and Joseph Caruso. Jurisdiction to consider the quiet title claim lies under 28 U. S. C. §1346; pendent jurisdiction is presumably invoked with respect to plaintiffs' related state law claims against the Carusos.

The matter is now before the court on plaintiffs' motion and the United States ' cross-motion for summary judgment on the quiet title claim. Plaintiffs also move for summary judgment on their state claims.

In order to prevail on a motion for summary judgment, the moving party must make an affirmative showing based upon the pleadings, depositions, answers to interrogatories, admissions on file, affidavits and uncontested exhibits that "there is no genuine issue of material fact and that he is entitled to judgment as a matter of law." Rule 56, Federal Rules of Civil Procedure. The opposing party "may not rest upon the mere allegations or denials of his pleadings, but his response, by affidavits or as otherwise provided in [Rule 56] must set forth specific facts showing that there is a genuine issue for trial." DeLong Corp. v. Raymond International, Inc., 622 F. 2d 1135 (3d Cir. 1980). Once the party opposing the motion has met this burden, all reasonable inferences of fact must be drawn in his favor. Adickes v. Kress & Co., 398 U. S. 144, 147 (1970); Small v. Seldow's Stationery, 617 F. 2d 992, 994 (3d Cir. 1980).

I. The Action to Quiet Title. The facts pertinent to the quiet title action have been placed before the court in the form of uncontested exhibits and the uncontested affidavit of an official of the Internal Revenue Service. None of the material facts being in dispute, the matter is ripe for summary judgment.

A. Facts: On June 14, 1972 , Lauralie Imbergamo, a single woman, purchased from one Wilson C. Shurts a parcel of land located at 51 Readington Road , Somerville , New Jersey and somewhat less than an acre in size. On August 4, 1973 , Lauralie Imbergamo married Joseph Caruso and assumed his surname. On September 11, 1978 , some five years later, the Carusos conveyed the land to Frank Banko, plaintiff in the present action. The bargain and sale deed identified the sellers as "Lauralie I. Caruso, formerly Lauralie Imbergamo . . . and Joseph Caruso, her husband." When the Carusos and Frank Banko closed on the land on September 20, 1978, Lauralie Caruso signed an "Affidavit of Title" in which she stated that "[s]aid premises are now free and clear of all taxes, incumbrances or liens by mortgage, decree, judgment, statute or otherwise, of every nature and description. . . ."

As it turned out, the premises were not free and clear of all encumbrances. In 1977, the Internal Revenue Service had made assessments against Lauralie and Joseph Caruso for unpaid federal income taxes for the years 1973, 1974 and 1975, together with penalties and interest. When the Carusos failed to pay the amount due on demand, a tax lien arose by statute, in favor of the United States , "upon all their property and rights to property. . . ." See 26 U. S. C. §§ 6321, 6322. To perfect the lien against the taxpayers' property in Somerset County, the Internal Revenue Service filed a "Notice of Federal Tax Lien" in the Somerset County Courthouse, Somerville, New Jersey, covering "all property and rights to property" belonging to Joseph and Lauralie Caruso. Under New Jersey law, the tax lien was required to be indexed under the taxpayers' name, here "Caruso". See N. J. S. A. 46:16-13. The Carusos have yet to pay the federal taxes which they owe and, as of January 16, 1981, the amount due the Internal Revenue Service was $7,521.88. At the time the Carusos' property was purchased by Frank Banko, therefore, it was encumbered to a significant degree, and a cloud now rests upon the title.

Frank Banko's title to the property located at 51 Readington Road is insured by Pioneer National Title Insurance Company, a co-plaintiff in this action. Pioneer alleges in the complaint that it conducted a title search of the property prior to the September 20, 1978 closing. It failed in that search, however, to discover the federal tax lien recorded under the name "Caruso".

B. The Law: It is plaintiffs' contention that the tax lien which attached to the premises located at 51 Readington Road upon the Carusos' failure to pay their back taxes is not valid against the current owner, Frank Banko, because the Internal Revenue Service did not properly file its "Notice of Tax Lien" within the meaning of applicable federal statutes. Specifically, plaintiffs argue that the notice should have been filed under the name "Imbergamo" rather than "Caruso" in order to permit its discovery in a reasonably diligent title search. The United States argues that the lien was properly filed and is enforceable against the current owner.

Under the Internal Revenue Code of 1954, 26 U. S. C. §1 et seq., a lien upon all property owned by an individual automatically comes into existence if the individual neglects or refuses after demand to pay any tax for which he is liable. 26 U. S. C. §6321. The lien arises at the time of assessment and continues "until the liability for the amount so assessed . . . is satisfied or becomes unenforceable by reason of lapse of time." 26 U. S. C. §6322. Despite the fact that a lien is created at the time an assessment is made, however, the Code provides that the lien shall not be valid against a purchaser of the encumbered property until a proper notice is filed. 26 U. S. C. §6323(a). The requirements for proper notice are contained in Section 6323(f) of the Code. The question presented in this case is whether the notice filed by the Internal Revenue Service against the Carusos' property met these requirements so as to become enforceable against a subsequent purchaser of the property.

Section 6323(f)(1) of the Internal Revenue Code provides that, in the case of real property, notice must be filed "in one office within the State (or the county, or other governmental subdivision), as designated by the laws of such State, in which the property subject to the lien is situated." New Jersey law designates as the proper location for filing a tax lien "the office of the county recording officer," here the Somerset County Clerk's Office. N. J. S. A. 46:16-13. There is no dispute that the notice of lien on the Carusos' property was filed in the proper location.

Section 6323(f)(3) of the Code provides that "the form and content of the notice . . . shall be prescribed by the Secretary [of the Treasury]" and that "[s]uch notice shall be valid notwithstanding any other provision of law regarding the form or content of a notice of lien." In accordance with this authority, the Secretary has published regulations which require simply that "[t]he notice . . . shall be filed on Form 668, 'Notice of Federal Tax Lien under Internal Revenue Laws'." It is undisputed as well that the notice of lien on the Carusos' property was filed on Form 668, and pursuant to that form listed the amounts owing under the taxpayers' names.

Section 6323(f)(4) of the Code, as amended on November 6, 1978 , provides for indexing of the tax lien, under certain circumstances, in the local registry of deeds. If 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 filing in such a manner that a reasonable inspection of the index will reveal the existence of the deed" and if the state maintains an adequate federal tax lien index, a tax lien will not be considered properly filed "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." By the terms of the amendment, however, this indexing requirement applies only to interests in real property acquired after November 6, 1978 , and therefore does not cover the property purchased by Frank Banko from the Carusos on September 20, 1978 . At the time of Frank Banko's purchase, Section 6323(f)(4) required simply that the fact of a lien's filing be recorded "in a public index at the district office of the Internal Revenue Service for the district in which the property subject to the lien is situated." It is not disputed that the lien was properly filed in the local IRS office. (See affidavit of D. A. Rosa, ¶9).

Plaintiffs argue that, even though the technical requirements of Section 6323(f) may have been fulfilled, 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 incurred by the seller where the seller has at some point in the past changed his or her name. It is plaintiffs' contention that a reasonable notice scheme would require the filing or indexing of a tax lien not only under the name of the taxpayer but also under the name in which "record title" to the property stands. In this case, they argue, the lien should have been filed under the name in which the property subject to the lien was purchased, "Imbergamo".

In support of their argument, plaintiffs rely upon a number of cases holding that a federal tax lien may be invalidated if the Internal Revenue Service 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 F. P. Baugh, Inc. v. Little Lake Lumber Co. [61-2 USTC ¶9726], 297 F. 2d 692 (9th Cir.), cert. den. 370 U. S. 909 (1962); Richter's Loan Co. v. United States [56-2 USTC ¶9706], 235 F. 2d 753 (5th Cir. 1956); Haye v. United States [79-1 USTC ¶9192], 461 F. Supp. 1168 (C. D. Cal. 1978); United States v. Sirico [66-1 USTC ¶9209], 247 F. Supp. 421 (S. D. N. Y. 1965); United States v. Ruby Luggage, 142 F. Supp. 701 (S. D. N. Y. 1954). These cases, however, stand for a proposition altogether different from that which plaintiffs assert in this action. In each of the cited cases, the Internal Revenue Service failed to correctly identify in its notice the taxpayer against whom its lien was asserted and the question before the court was whether, despite lack of adherence to the exact terms of the statute, there was "substantial compliance" such that the statute's aim of constructive notice to the purchaser was achieved. Under these circumstances, courts have uniformly construed the statute to require identification of the taxpayer with sufficient accuracy to place a reasonably diligent title searcher on notice of the lien's existence.

Here, however, plaintiffs do not argue that the Internal Revenue Service altered or misspelled the taxpayers' name in its notice of lien and thereby failed to substantially comply with the statute. Rather they argue that the statute itself should be broadly construed to require filing and indexing of a federal tax lien not only under the name of the taxpayer but also under any other name in which the taxpayer may at one time have acquired property. Section 6323(f) of the Internal Revenue Code, however, 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. It is a well-established canon of statutory construction that a statute clear on its face will be interpreted in accordance with its plain meaning absent "rare and exceptional circumstances." Rubin v. United States , -- U. S. --, 49 U. S. L. W. 4103, 4104 ( January 21, 1981 ). If Congress had wished to impose upon the Internal Revenue Service the duty to locate a deed for every piece of real property owned by a delinquent taxpayer, determine the name under which it was acquired, and file a separate notice of tax lien for each such name, it would presumably have done so. Since it did not, this court may not impose such a requirement. Cf. Northwest Airlines, Inc. v. Transport Workers Union of America , -- U.S. --, 49 U. S. L. W. 4383, 4388-89 ( April 20, 1981 ).

Even if the statute applicable to plaintiff's purchase provided, as it now provides, that a lien may be invalid unless indexed "in such a manner that a reasonable inspection of the index will reveal the existence of the lien", plaintiffs would still not be entitled to recover on the facts of this case. Plaintiffs Frank Banko and his title insurance company knew perfectly well the name under which the property was held prior to the September 20, 1978 sale because the deed they received identified the sellers as "Lauralie I. Caruso, formerly Lauralie Imbergamo . . . and Joseph Caruso, her husband." Armed with this information, plaintiffs could easily have discovered the federal tax lien. It can be stated as a matter of law that a reasonably diligent title investigation entails searching for tax liens under any name which the searcher knows to have been used by the seller prior to parting with his property. Had such an investigation been undertaken here, it would have turned up the notice of lien filed by the Internal Revenue Service under the name, "Caruso". Even under the statute as amended, therefore, plaintiff would be charged with constructive notice of the federal tax lien outstanding against the Carusos, and the lien would be valid and enforceable against him.

Because the Internal Revenue Service fully complied with the statutory requirements governing the filing of a notice of lien and because plaintiffs in any event had constructive notice of the tax lien's existence, the lien is valid against the purchaser within the meaning of Section 6323(a) of the Internal Revenue Code. On the basis of the undisputed facts, therefore, the United States is entitled to judgment as a matter of law. Plaintiffs' motion for summary judgment will be denied insofar as it seeks to quiet title and the cross-motion of the United States will be granted.

II. The Misrepresentation Action.--As to plaintiffs' alternative state law claim against the Carusos for misrepresentation, it is evident from the complaint that facts do not exist to support diversity jurisdiction. Presumably, therefore, plaintiffs seek to invoke the pendent jurisdiction of this court. Where state and federal claims "derive from a common nucleus of operative fact" and a plaintiff "would ordinarily be expected to try them all in one judicial proceeding, then, assuming substantiality of the federal issues, there is power in federal courts to hear the whole." United Mine Workers v. Gibbs, 383 U. S. 715, 725 (1966) (emphasis in the original); see also Owen Equipment & Erection Co. v. Kroger, 437 U. S. 365 (1978); Tully v. Mott Supermakets, Inc., 540 F. 2d 187 (3d Cir. 1976). Where the federal issues do not appear to be substantial, however, considerations of comity require that the state law questions be left for the state courts to decide. Moreover, "if the federal claims are dismissed before trial, even though not insubstantial in a jurisdictional sense, the state claims should be dismissed as well." United Mine Workers v. Gibbs, supra, at 726.

In light of the foregoing rules, it is clear that this court may not exercise its pendent jurisdiction to consider the state law claims raised by the plaintiffs, having dismissed the only viable federal claim. The remaining count of plaintiffs' complaint will therefore be dismissed for lack of subject matter jurisdiction, pursuant to Rule 12(h)(3) of the Federal Rules of Civil Procedure.

The United States Attorney is requested to submit a form of order in accordance with this opinion.

 

 

[81-1 USTC ¶9406] United States of America , Plaintiff v. Carolyn Sue Clark, Defendant

U. S. District Court, So. Dist. Fla., Case No. 78-8241-CIV-EBD, 3/27/81

[Code Sec. 6323]

Lien for taxes: Validity: Filing of notice: Wrong name.--A tax lien was not valid against a subsequent mortgagee where the government failed to refile its Notice of Tax Lien after notification that the taxpayer-prior owner of the property had changed her name following her remarriage. A reasonable inspection would not reveal the lien.

Ileana M. Romeu, Department of Justice, Washington , D. C. 20530, for plaintiff. Joel M. Aresty, 2400 Amerifirst Building, One S. E. Third Avenue, Miami, Florida 33131, Roger H. Harper, 260 S. E. 5th Avenue, Delray Beach, Florida 33444, O. Edgar Williams, Jr., 2826 East Oakland Park Boulevard, Fort Lauderdale, Florida 33307, for defendant.

Order

DAVIS, District Judge:

This action is before the Court on cross motions for summary judgment between the plaintiff and one defendant, Amerifirst Federal Savings and Loan Association (formerly First Federal Savings and Loan Association of Miami). The plaintiff seeks to satisfy a tax lien by foreclosure on two pieces of property, which for convenience sake will be referred to as Bel Marra and Palm Beach Farms.

I. Background

It is undisputed that Carolyn Sue Clark was assessed $37,848.40 on June 25, 1973, and that a Notice of Tax Lien was filed by the United States on October 26, 1973, listing her by that name and giving as her address the Palm Beach Farms property. On December 12, 1974 , Carolyn (the purpose for not using a surname will quickly become apparent) was divorced, and took full title to Palm Beach Farms exclusively in her name. On February 8, 1975 , Carolyn married Roger Harper, and adopted her new husband's surname.

The government's lien on Palm Beach Farms is not at issue in these summary judgment motions. Regarding Bel Marra, what is important is that Carolyn changed her surname by her marriage to Roger.

The plaintiff received notice of Carolyn's new name as early as May 25, 1975 , when Roger Harper advised the Internal Revenue Service by letter that he wished to transfer the lien on Palm Beach Farms so as to facilitate its sale. Despite this notice, the I. R. S. did not refile the Notice of Tax Lien to reflect that all property owned then or in the future by Carolyn Sue Harper was subject to a federal tax lien.

On June 4, 1975 , Carolyn Harper (using that last name) acquired the Bel Marra property. The ensuing sequence of sales and first, second and third mortgages need not be detailed here except for two events involving the defendant Amerifirst: it took a mortgage on Bel Marra February 6, 1976 , and later foreclosed, purchasing the property for itself at the foreclosure sale, June 16, 1978 . Amerifirst had no actual knowledge of the tax lien against Carolyn at the time the mortgage was issued, and no knowledge then that Carolyn Harper was once Carolyn Clark. ¹

The United States claims it has an interest in Bel Marra superior to that of Amerifirst by virtue of the lien notice filed October 26, 1973. Defendant Amerifirst claims its interest is superior because it had neither actual nor constructive notice of the lien when it issued the mortgage February 6, 1976.

II. Discussion

The question presented is whether the United States could rely on its Notice of Tax Lien when the Notice, because of events known to the government subsequent to the filing, failed to give a diligent defendant actual or constructive notice of the lien. The parties have agreed that this issue is appropriate for summary judgment. The Court concurs, and concludes that the United States may not rely on the Notice.

The filing requirements for a Notice of Tax Lien exist to protect the wary. See I. R. C. §§ 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, but when a party has actual or constructive notice of a previously-filed lien, the government's claim will be superior to interests acquired after the filing. I. R. C. §6323(b); see, e.g., Hannus v. United States, 60-2 U. S. Tax Cas. (CCH) ¶9574 (W. D. Wash. 1958) (divorced woman conveyed encumbered property under her former married name; lien notice filed in that name).

When a party does not have actual notice of a tax lien, as here, the question becomes one of whether the appropriate constructive notice was given. Usually, constructive notice is given when the Notice of Tax Lien is filed in the proper place and under the correct name and address of the liable person. See I. R. C. §6323(f); Treas. Reg. §301.6323(f)-1 (1976). The government can make minor errors in its filings and still give the required notice. E.g., Richter's Loan Co. v. United States [56-2 USTC ¶9706], 235 F. 2d 753 (5th Cir. 1956) ("Friedlander" misspelled "Freidlander"); United States v. Jane B. Corp. [58-2 USTC ¶9924], 167 F. Supp. 352, 355 (D. Mass. 1958) ("Inc." omitted; lien would be discovered by "any prudent person" searching proper record).

Recently, in Haye v. United States [79-1 USTC ¶9192], 461 F. Supp. 1168 (C. D. Cal. 1978), a lien against Manuel Castillo had been filed as being against Manual Castello. The Court held that the misspelling, which resulted in the lien being recorded nine pages from the appropriate place, would not give notice to a reasonable and diligent searcher. Thus, the Court granted the plaintiff purchaser's motion for summary judgment. Id. at 1175; cf. F. P. Baugh, Inc. v. Little Lake Lumber Co. [61-2 USTC ¶9726], 297 F. 2d 692 (9th Cir. 1961), cert. denied, 370 U. S. 909 (1962) (filing insufficient to place reasonably prudent person on inquiry); Holt v. United States, 73-2 U. S. Tax Cas. (CCH) ¶9680 (D. D. C. 1973) (state lost priority to federal government because it filed under corporation's former name).

The question here--whether the government is required to refile a Notice once it becomes aware of a name change--does not fit precisely within the holding of any reported decision. The language of the Internal Revenue Code, however, provides the answer. The government's 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." I. R. C. §6323(f)(4) (emphasis added).

Here, the remarriage of Carolyn Clark (of which the Internal Revenue Service received notice) resulted in a situation where there was no reasonable opportunity for a prudent person dealing with the delinquent taxpayer to ascertain the existence of a federal tax lien. A "reasonable inspection" would not reveal the lien. Thus, the government's lien is of no effect against the subsequent mortgagee because the Notice did not comply with I. R. C. §6323(f)(4). See Haye v. United States, 461 F. Supp. at 1175; Annot., 3 A. L. R. 3d 633, 634 (1965); cf. Adams v. United States , 420 F. Supp. 27, 30 (S. D. N. Y. 1976) (clerk misfiled Notice; government could not reasonably be expected to do anything further). It is therefore

ORDERED AND ADJUDGED that Amerifirst's motion for summary judgment is GRANTED, and the United States ' motion for summary judgment is DENIED. The defendant Amerifirst (formerly First Federal of Miami), is hereby DISMISSED from this action. Greer and the Fordhams (the other Bel Marra defendants) are also DISMISSED from this cause. Amerifirst's counterclaim against the United States , its crossclaims against Carolyn Sue Clark (a/k/a Harper), the Fordhams and Greer, and its third party complaints against Roger Harper and the Lawyers Title Guarantee Fund are DISMISSED as moot and without prejudice. It is further

ORDERED AND ADJUDGED that Lawyers Title's motion to dismiss the third party complaint against it is DENIED, as moot in view of the above dismissal.

¹ By contrast, when Carolyn sold Palm Beach Farms, the deed was from "Sue Harper (formerly Carolyn Sue Clark)" to the grantees. The deed also specified that the Palm Beach property was the same which had been conveyed to Carolyn Clark and her former husband in 1970.

 

 

[66-1 USTC ¶9209] United States of America , Plaintiff v. Assunta Sirico, Joseph Coniglio, Gloria Coniglio, and the Brooklyn Federal Savings & Loan Association, Defendants

U. S. District Court, So. Dist. N. Y., 65 Civil 2643, 247 FSupp 421, 12/7/65

[1954 Code Sec. 6323]

Tax liens: First initial v. first name: Constructive notice to mortgagee.--A tax lien was filed with the proper county officer against George and A. Sirico. A. Sirico's first name was Assunta. The lien notice gave their true address which was the address of the property against which the lien was asserted. The lien was superior to the rights of the subsequent mortgagee. Since the correct surname was listed and her residence address corresponded with the premises subject of the title search, the subsequent mortgagee was charged with constructive notice of the lien because due diligence, i.e., an examination of the records, would have disclosed the existence of the lien.

Rob ert M. Morgenthau, United States Attorney, Edward L. Smith, Assistant United States Attorney, United States Courthouse, Foley Square, New York, N. Y., for plaintiff. Kalman V. Gallop, Morris Permut, 170 Broadway, New York , N. Y., for defendant.

Opinion

EDWARD WEINFELD, District Judge:

The government moves for summary judgment in this action to foreclose a tax lien on the real property at 1005 Swinton Avenue , Bronx County , New York . The motion is opposed by defendant Brooklyn Federal Savings & Loan Association, the first mortgagee of the premises.

The owner of the property was Assunta Sirico. She and her husband, George, were the taxpayers. A notice of tax lien was filed in March 1959 in the office of the Register, Bronx County . The first mortgage, which was executed by the taxpayers' grantees, also defendants herein, was recorded in December 1962. Notwithstanding that the federal tax lien was filed more than three years before the mortgage was recorded, the mortgagee contends its lien is superior. The basis of its contention is an alleged misdescription in the notice of the federal tax lien filed by the District Director of Internal Revenue and in its recordation by the Register of New York City, in that one of the taxpayers, Assunta Sirico, was referred to only by the initial of her first name, that is, as "A. Sirico," rather than by her full name. The notice of lien described the taxpayers, husband and wife, as "George and A. Sirico." The recordation on the official docket of the Register's office is as follows: ¹

Reg's No.              Date         AM           PM         Name of Taxpayer                   Residence

                                                          Sirico, George            1005 Swinton Avenue

    342            Mar. 24                    
1:56
        Sirico, A.                   
Bronx
, N. Y.

 

Apparently, when a title search was made prior to the placement of the first mortgage, the tax lien was overlooked. There is no dispute that the notice of lien was filed in the proper index and that the correct address of the taxpayers, which corresponds to the premises in question, was set forth. Thus the issue is whether an otherwise valid and properly recorded notice of the federal tax lien is subordinated as against a subsequent mortgage solely by reason of the fact that the taxpayer's initial instead of her full first name is set forth.

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. ² The essential purpose of the filing of the lien is to give constructive notice of its existence. ³ The test is not absolute perfection in compliance with the statutory requirement for filing the tax lien, ⁴ but whether there is substantial compliance sufficient to give constructive notice and to alert one of the government's claims. ⁵

Upon the facts here presented, it is difficult to understand how one searching the records of the Register's office could have missed the notice of tax lien. Not only was the correct surname of the taxpayer listed, but her residence address corresponded with the premises which was the subject of the title search. The filing of the lien under the circumstances here presented was adequate to give constructive notice to interested persons.

The motion is granted.

¹ The Lien Law of New York State provides that when a notice of a Federal tax lien is filed with the recording officer, "the entry shall show the name and residence of the taxpayer named in the notice, . . . the date of filing and the total amount of tax, interest and penalty." N. Y. Lien L. §241.

² Richter's Loan Co. v. United States [56-2 USTC ¶9706], 235 F. 2d 753, 755 (5th Cir. 1956); Hannus v. United States [60-2 USTC ¶9574], (W. D. Wash. 1958). But cf. Continental Investments v. United States [53-2 USTC ¶9625], 142 F. Supp. 542 (W. D. Tenn. 1953).

³ Goldstein v. Bankers Commercial Corp. [57-1 USTC ¶9596], 152 F. Supp. 856, 861 (S. D. N. Y. 1957), aff'd on opinion below, [58-2 USTC ¶9662] 257 F. 2d 48 (2d Cir. 1958).

⁴ 26 U. S. C. §6323.

⁵ Goldstein v. Bankers Commercial Corp. [57-1 USTC ¶9596], 152 F. Supp. 856, 861 (S. D. N. Y. 1957), aff'd on opinion below, [58-2 USTC ¶9662] 257 F. 2d 48 (2d Cir. 1958). The sufficiency of the notice is a question of federal law, `notwithstanding any law of the State or Territory regarding the form or content of a notice. . . .'" United States v. Union Cent. Life Ins. Co. [62-1 USTC ¶9103], 368 U. S. 291, 296 (1961). Accord, 26 U. S. C. §6323(b); United States v. Rasmuson [58-1 USTC ¶9399], 253 F. 2d 944, 946-47 (8th Cir. 1958); F. P. Baugh, Inc. v. Little Lake Lumber Co. [60-2 USTC ¶9757], 185 F. Supp. 628, 630 (N. D. Cal. 1960), aff'd in part and rev'd in part on other grounds, [61-2 USTC ¶9726] 297 F. 2d 692 (9th Cir. 1961), cert. denied, 370 U. S. 909 (1962).

 

 

[74-2 USTC ¶9814] United States of America , Plaintiff v. Glen Upton, Inc. et al., Defendants

U. S. District Court, West. Dist. Mo. , West. Div., No. 20717-1, 378 FSupp 1028, 7/17/74

[Code Sec. 6323]

Liens for taxes: Filing notice of tax lien: Wrong name.--Government tax liens for the first three quarters of 1969 did have priority over taxpayer's claim with respect to certain real property belonging to Lane Co. Lane Co. had lost its corporate charter in January 1969 and the government had filed the tax liens in the name of the company's president. There was actual notice of these liens. However, the government filed a tax lien for the fourth quarter in the company's name. There was neither actual nor constructive notice with regard to this lien so the government did not have priority in this instance.

Mary A. Schneider, Thomas H. Stahl, Assistant United States Attorney, Kansas City, Mo., for plaintiff. Jack N. Bohm, 950 Home Savings Bldg., Kansas City , Mo. , Dean Arnold, Bagby, Benjamin & Arnold, 2330 Commerce Towner, Kansas City , Mo. , for defendants.

Memorandum and Order

OLIVER, District Judge:

The present cause is an action brought to foreclose a federal tax lien against a parcel of real property purchased by the defendant from the taxpayer. With regard to the government's claim, which is separately considered pursuant to Rule 42(b) of the Rules of Civil Procedure, the parties have agreed that no oral evidence need be presented and have submitted the case on a stipulated factual record. We have carefully reviewed the Stipulation and the briefs of the parties and make the following findings of fact and state the following conclusions of law:

I. Findings of Fact

The parties' Stipulation established that:

1. On May 12, 1960 , Lane Body and Frame Co. was formed as a corporation under Missouri law.

2. On September 6, 1968 , Lane Body and Frame Co. executed a Deed of Trust concerning the parcel of real property in issue to William Asjes as Trustee for Linwood Mortgage Company in the amount of $25,000.

[Corporate Charter Revoked]

3. On January 15, 1969 , the Missouri Secretary of State declared the corporate records, privileges and franchises of Lane Body and Frame Co. forfeited and cancelled and the corporation dissolved as of January 1, 1969 .

4. On and as of April 24, 1969 , pursuant to an Application for Rescinding Forfeiture submitted by Lane Body and Frame Company's last president, Lee B. Hill, the Missouri Secretary of State rescinded the previously described forfeiture and Lane Body and Frame Co. was restored to good standing on the records of the said Secretary of State.

[Tax Liens Filed]

5. On August 27, 1969 , the Internal Revenue Service received an Employer's Qurarterly Federal Tax Return concerning Lane Body and Frame Co., Inc., from Lee B. Hill who gave his title as "owner;" the return shows a tax due of $2,538.35 for the first quarter of 1969. Also on August 27, 1969 the Internal Revenue Service received as second Employer's Quarterly Federal Tax Return concerning Lane Body and Frame Co., Inc. (on a preaddressed form) from Mary Ann Hill as secretary-treasurer; the return shows a tax due of $3,414.41 for the second quarter of 1969.

6. On September 15, 1969 , the Linwood Mortgage Company foreclosed the lien of a Deed of Trust between Lane Body and Frame Co. and Linwood Mortgage Company and William Asjes, Trustee, upon the parcel of real property in issue and sold same for $25,000 to the Linwood State Bank.

7. On December 26, 1969, the Internal Revenue Service received an Employer's Quarterly Federal Tax Return concerning Lane Body and Frame Co., Inc. (on a pre-addressed form) from Lee B. Hill who gave his title as "Pres.;" the return shows a tax due of $2,442.09 for the third quarter of 1969.

8. On October 3, 1969 and October 17, 1969 and December 26, 1969 the United States made assessments (designated as "23C Date") for unpaid withholding taxes against Lane Body and Frame Co., Inc., for, respectively, the second quarter, the first quarter, and the third quarter of that year; during the period November 4, 1969 and March 17, 1970, payments were received by Internal Revenue concerning the above assessments. There remains due and owing the following amounts (which do not include interest): $800 for the first quarter; $2,800 for the second quarter; $2,547.87 for the third quarter, and $2,249.73 for the fourth quarter.

9. On October 3, 1969 , and October 17, 1969 , and December 26, 1969 , the United States gave notice of the assessments described in the preceding paragraph to Lane Body and Frame Co., Inc., and demanded payment thereof for, respectively, the second quarter, the first quarter, and the third quarter of 1969. As indicated in the preceding paragraph some payments were received by Internal Revenue.

10. On January 15, 1970 , the Missouri Secretary of State declared the corporate rights, privileges and franchises heretofore conferred upon Lane Body and Frame Co. forfeited and cancelled as of January 1, 1970 .

11. On January 19, 1970 , Lane Body and Frame Co. and Harry W. Allen, the latter as surety, filed a bond in the amount of $5,500 in the Circuit Court of Jackson County in order to have an opportunity to redeem the parcel of real property in issue.

12. On March 20, 1970 the Internal Revenue Service received an Employer's Quarterly Federal Tax Return concerning Lane Body and Frame Co., Inc., (on a pre-addressed form) which return is not signed or dated; the return shows a tax due of $2,232.33 for the fourth quarter of 1969.

13. On March 20, 1970, the United States made an assessment for unpaid withholding taxes against Lane Body and Frame Co., Inc., for the fourth quarter of 1969.

14. On March 20, 1970, the United States gave notice of the assessment described in the preceding paragraph to Lane Body and Frame Co., Inc., and made demand for payment thereof. There remains due and owing (without interest) the sum of $2,249.73.

[Lien Filed Under Company's Name]

15. On April 8, 1970, the United States filed a Notice of Federal Tax Lien listing the taxpayer as "Lee B. Hill DBA Lane Body and Frame Co., Inc.," and concerning Federal Withholding (941) taxes for the first three quarters of 1969. This notice was filed with the Jackson County Recorder of Deeds under "Hill."

16. On April 14, 1970, the United States filed a Notice of Federal Tax Lien listing the taxpayer as "Lane Body and Frame Co., Inc.," and concerning Federal withholding taxes for the fourth quarter of 1969. This notice was filed with the Jackson County Recorder of Deeds under "Lane."

17. As of December 9, 1970, McDaniel Title Company, agent for Title Insurance Company of Minnesota, made a title search on the Application of Swope Parkway National Bank for a loan policy as concerns the parcel of real property in issue; as the result of this search, it was aware of the Notice of Federal Tax Lien filed on April 8, 1970 against Lee B. Hill DBA Lane Body and Frame Co., Inc. However, McDaniel Title Company failed to search for and become aware of the Notice of Federal Tax Lien filed on April 14, 1970 against Lane Body and Frame Co., Inc.

[Contract to Purchase Land ]

18. On September 14, 1970, Glen Upton, Inc., by Glen A. Upton, entered into a Real Estate Contract with Lane Body and Frame Co., Inc., by Lee B. Hill to purchase the parcel of real property in issue for $40,000. In order to make this purchase, Glen Upton, Inc., had approached the Swope Parkway National Bank to secure a loan. At no time did Glen Upton, Inc., or any of its officers or employees check with the Jackson County Recorder to determine if any notices of federal tax lien were filed affecting the property.

19. Also, on September 14, 1970, a "trustee's corporation warranty deed" was executed by "L. B. Hill and Mary Ann Hill, Trustees of Lane Body and Frame Co., as the sole surviving officers and members of the last board of directors of Lane Body and Frame Co., a dissolved corporation." This deed was signed in the name of "Lane Body and Frame Company, Inc." by L. B. Hill "Trustee and former president" and Mary Ann Hill, "Trustee and former secretary" of "Lane Body & Frame Co., a dissolved corporation." This deed conveyed whatever right Lane Body and Frame Co., Inc., or Lee B. Hill or Mary Ann Hill had in the parcel of real property in issue to Glen Upton, Inc.

20. Also, on September 14, 1970 , a Deed of Trust was executed by Glen Upton, Inc., in favor of Swope Parkway National Bank to secure the afore-described loan of $40,000.

21. On September 15, 1970 , a Deed of Release was executed by William Asjes, Trustee for Linwood Mortgage Company, concerning the parcel of real property in issue.

22. Also on September 15, 1970, the Swope Parkway National Bank, with regard to the Glen Upton, Inc., loan, wrote checks to the following entities in the following amounts: $9,502.73 to Lane Body and Frame Co., Inc.; $1,228.30 to the County Collector; $351.36 to the City Treasurer; $760.03 to the Swope Parkway National Bank; $349.15 to the City Treasurer and $23,157.58 to Linwood Mortgage Company.

23. On September 16, 1970 Lee B. Hill signed and delivered to McDaniel Title Company for itself and Title Insurance Company of Minnesota a document entitled "Indemnity Agreement" referring to the Notice of Tax Lien filed on April 8, 1970 . In this document Lee B. Hill states that the said lien was filed upon him individually and not against Lane Body and Frame Co., and that "the said claimed lien and amount [are] for a personal obligation of the undersigned and not an obligation of said dissolved corporation * * *." Moreover, the document recites that "Lee B. Hill is presently, and has been in the past, making payments thereon his said individual tax obligation, under his agreement with the Government, lienor, to ultimately discharge the same * * *." The document further refers to the sale of the real estate in issue and states that "Lee B. Hill agrees to indemnify and save harmless McDaniel Title Company and Title Insurance Company of Minnesota from any and all claims * * *."

24. On September 17, 1970 William Asjes, Trustee, delivered a Deed of Redemption from the foreclosure of the Deed of Trust concerning the parcel of real property in issue.

25. Also on September 17, 1970 , "Lane Body and Frame, Inc., by Trustee former Pres. Lee B. Hill" cashed the check received from Swope Parkway National Bank.

II. Conclusions of Law

1. Jurisdiction of this action is conferred upon this Court by Title 28, United States Code, Sections 1340 and 1345, and Title 26, United States Code, Section 7402.

2. The Internal Revenue Service may properly impose a tax lien on the parcel of real property in issue as security for tax liabilities incurred by the statutory trustees of Lane Body & Frame Co., Inc., in operating the business between January 1, 1969 and April 24, 1969 .

3. The Internal Revenue Service may properly impose a tax lien on the parcel of real property in issue as security for tax liabilities incurred by Lane Body & Frame Co., Inc., between April 25, 1969 and December 31, 1969 .

4. The Notice of Federal Tax Lien filed on April 8, 1970, listing the taxpayer as "Lee B. Hill DBA Lane Body & Frame Co., Inc." and covering the first three quarters of 1969, met the statutory requirement of notice set forth in 26 U. S. C. §6323.

5. The Notice of Federal Tax Lien filed on April 14, 1970 listing the taxpayer as "Lane Body & Frame Co., Inc." and covering the fourth quarter of 1969, does not meet the statutory requirement of notice set forth in 26 U. S. C. §6323.

6. The tax lien against the parcel of real property in issue for the first three quarters of 1969 is valid and prior to any rights which subsequently accrued to the defendant.

7. The tax lien against the parcel of real property in issue for the fourth quarter of 1969 is not valid as against the rights of defendant as a purchaser.

8. The United States is entitled to foreclose its lien in the amount of $6,147.87 plus statutory interest thereon upon the parcel of real property in issue.

III. Discussion

The initial question presented is whether in view of the forfeiture by the Missouri Secretary of State of the Lane Body & Frame Co., Inc. corporate charter for the period from January 1 to April 24, 1969, a lien for taxes incurred during that period may be imposed under 26 U. S. C. §6321 upon the parcel of property purchased by defendant.

[State Corporation Law]

V. A. M. S. §351.525 sets forth the procedure to be followed in the forfeiture of corporate charters:

If any corporation:

(1) Fails to comply with the provisions of this chapter with respect to registration, the filing of its antitrust affidavit, the filing of its annual report, or the payment of its annual franchise tax on or before the thirty-first day of December;

(2) Procures its franchise through fraud practiced upon the state;

(3) Has continued to exceed or abuse the authority conferred upon it by law, or has continued to violate any section or sections of the criminal code of the state of Missouri after a written demand to discontinue the same shall have been delivered by the secretary of state to the corporation, either personally or by mail; (If mailed, the notice shall be deemed to be delivered five days after it has been deposited in the United States registered mail in a sealed envelope addressed to such corporation at its registered office in this state.)

(4) After written notice by the secretary of state to the last known address, has failed for sixty days to appoint and maintain a registered agent in this state; or

(5) After written notice by the secretary of state to the last known address, has failed for sixty days after change of registered officer or registered agent to file in the office of the secretary of state a statement of such change;

the corporate rights and privileges of the corporation shall be forfeited, and the secretary of state shall thereupon cancel the certificate, or license, of the corporation by appropriate entry on the margin of the record thereof, whereupon all the powers, privileges and franchises conferred upon the corporation by the certificate, or license, shall [be] subject to rescission as provided in this chapter, cease and determine; and the secretary of state shall notify the corporation by mail, addressed to its registered office, as disclosed by the records of his office, that its corporate existence and rights in this state have been forfeited and canceled, and the corporation dissolved subject to rescission as provided in this chapter; and the directors and officers in office when the forfeiture occurs shall be the trustees of the corporation, who shall have full authority to wind up its business and affairs, sell and liquidate its property and assets, pay its debts and obligations and to distribute the net assets among the shareholders; and the trustees as such shall have power to sue for and recover the debts and property due the corporation, describing it by its corporate name, and may be sued as such; and the trustees shall be jointly and severally responsible to the creditors and shareholders of the corporation to the extent of its property and effects that shall have come into their hands.

Defendants argues that this statute requires that the trustees immediately wind up the corporate affairs, that continuation of the business by the trustees is improper, and that business liabilities incurred by the trustees after forfeiture are their personal liabilities rather than corporate liabilities. This is an unnecessarily narrow reading of the statute.

[Time to Wind Up Affairs]

Forfeiture of a corporation's charter under V. A. M. S. §351.525 does not mean that corporate affairs must immediately cease. Indeed, it is clear that even where the trustees choose to wind up the corporation, the business may have to be carried on for some time in order to protect corporate assets. Cf. Eaton, Yale & Towne, Inc. v. Sherman Industrial Equipment Co., 316 F. Supp. 435 (E. D. Mo. 1970). Liabilities incurred in the normal course of business subsequent to forfeiture should be considered corporate liabilities, especially where, as here, the forfeiture is quickly rescinded, the corporation's actual operations continue unabated, and creditors have no notice of the break in the corporation's legal status. Cf. Schneider v. Best Truck Lines, 472 S. W. 2d 655, 659 ( Mo. 1971); Mo. Atty. Gen. Op. No. 40.

[Validity of Liens]

Given this conclusion, the remaining question is whether the steps taken by the IRS were legally sufficient to protect the government's rights. The validity of the tax lien against the defendant, a subsequent purchaser, is controlled by 26 U. S. C. §6323(a), which states:

The lien imposed by section 6321 shall not be valid as against any purchaser, holder of a security interest, mechanic's lienor, or judgment lien creditor until notice thereof which meets the requirements of subsection (f) has been filed by the Secretary or his delegate.

Subsection 6323(f)(3), referred to above, states:

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

It is clear from these sections that, in order for a valid tax lien to arise, a notice in the form prescribed by the Secretary must be filed. In the present case, the notices filed for each of the four quarters were submitted on Form 668 "Notice of Federal Tax Lien under Internal Revenue Laws," as required by the applicable regulation, 26 C. F. R. §6323-1(a)(3) (1973). On the form filed on April 8, 1970 , for the first three quarters of 1969, in the space provided for "Name of Taxpayer" the IRS inserted "Lee B. Hill dba Lane Body & Frame Co., Inc." On the notice filed on April 14, 1970 , for the fourth quarter of 1969, however, the name of "Lane Body & Frame Co., Inc." was inserted in that space. The question is whether either of these descriptions accurately set forth the name of the "Taxpayer," as required by Form 668 and §6323.

Under 26 U. S. C. §6901(a) transferees of corporate assets, who are liable at law or in equity for the transferor's debts, are similarly liable for taxes due from the transferor. The transferee is therefore the "taxpayer" within the meaning of the Internal Revenue Laws and taxes can be assessed against him as if it were an original liability. Cf. Drew v. United States [66-2 USTC ¶9739], 367 F. 2d 828 (Ct. Cl. 1966). However, the transferee is liable only to the extent that state law imposes liability on him for general corporate debts. See, i. e., Southern Arizona Bank & Trust Co. v. United States [67-2 USTC ¶9722], 386 F. 2d 1002 (Ct. Cl. 1967), cert. den. 391 U. S. 967 (1968).

[Company's Legal Representative]

The liability of statutory trustees in the event of forfeiture is stated in V. A. M. S. §351.525, supra. That section makes clear that upon forfeiture the trustees become the corporation's legal representatives. Watkins v. Mayer, 103 S. W. 2d 566 ( Mo. 1937). As such, they are proper parties against whom legal action for the collection of corporate debts may be brought, though they are liable only to the extent of remaining corporate assets. See, e.g., State of Missouri ex rel. Darr v. A. B. Collins & Co., 34 F. Supp. 550 (W. D. Mo. 1940); State ex rel. McDowell v. Libby, 175 S. W. 2d 171 ( Mo. 1943); Auffenberg v. Hafley, 457 S. W. 2d 223 ( Mo. 1970). A notice of tax lien filed subsequent to forfeiture would therefore properly list the trustees as "taxpayers." The notice filed in the name of "Lee B. Hill dba Lane Body & Frame Co., Inc.," On April 8, 1970 was sufficient to comply with this requirement. See United States v. Siroco [66-1 USTC ¶9209], 247 F. Supp. 421 (S. D. N. Y. 1965).

Not only was this filing legally proper but it was also actually sufficient to notify the parties of the IRS claim. Defendant was well aware at the time of purchase of the property herein involved that Lee B. Hill was the trustee and legal representative of the defunct corporation, as evidenced by the signatures on the warranty deed of "L. B. and Mary Ann Hill, trustees of Lane Body & Frame Co." While the record before us may not establish that defendant had actual knowledge of the tax liens filed on April 8, 1970 , at the time of purchase, they cannot properly claim that any lack of knowledge was caused by the manner in which the notice was filed. Indeed, the fact that McDaniel Title Company ran its title search under the name of "Hill" and actually found the tax lien demonstrates that corporate status and proper filing procedures were readily apparent. For these reasons, we conclude that the notice of tax lien filed on April 8, 1970 for the first three quarters of 1969 is valid against defendant as a subsequent purchaser of the property.

[Notice Not Provided]

It also follows from the above discussion that the lien for the fourth quarter, filed in the name of "Lane Body & Frame Co., Inc." on April 14, 1970 , is not valid. The "taxpayers" on that date were the trustees, and a notice of tax lien would be proper only if drawn in their names. It is irrelevant whether this Court believes it reasonable to have also checked under the corporate name, since the lien imposed by §6323 is valid only if the required notice is filed.

IV. For the reasons stated, it is

ORDERED that within ten (10) days the government shall prepare an appropriate judgment in accordance with this opinion, submit the same to counsel for defendant for approval as to form, and thereafter to the Court for entry.

 

 

[61-2 USTC ¶9726]F. P. Baugh, Inc., a California corporation, Appellant v. Little Lake Lumber Company, aka Little Lake Lumber Co., a partnership; United States of America, et al., Appellees

(CA-9), U. S. Court of Appeals, 9th Circuit, No. 17,230, 297 F2d 692, 10/18/61, Affirming and reversing in part District Court, 60-2 USTC ¶9757, 185 F. Supp. 628

[1954 Code Sec. 6323]

Priority of liens: Mortgagee: Sufficiency of notice.--On the basis of an assessment for withholding and F. I. C. A. taxes made against three partners doing business as Little Lake Lumber Company, the District Director filed a federal tax lien with the county recorder. The lien listed the name of the taxpayer as "Chas. E. McCulloch et al.", and indicated that his address was "Little Lake Lumber Co., Box 271 Willits Calif. ". The lien did not indicate the names of the other two partners. The Court held that the mortgagee had priority over the government in the interests of these partners in the assets. The Court further held that a lien confers priority only on the taxpayers listed on the lien, and refused to apply the doctrine of constructive notice even though there are facts on the lien which warrant its application.

Falk, Johnson & Cleland, Ukiah, Peter L. Townsend, San Francisco , Calif. , for appellant. Louis F. Oberdorfer, Assistant Attorney General, Lee A. Jackson, A. F. Prescott, Fred E. Youngman, Kenneth Levin, Department of Justice, Washington 25, D. C., Laurence E. Dayton, United States Attorney, Charles Elmer Collett, Assistant United States Attorney, San Francisco, Calif., for appellee.

Before CHAMBERS and MERRILL, Circuit Judges, and KILKENNY, District Judge.

Opinion

KILKENNY, District Judge:

Appellant seeks to foreclose a chattel mortgage and deed of trust on certain property in California . The United States of America , respondent here, filed a counterclaim for foreclosure of an alleged tax lien. The lower court [60-2 USTC ¶9757] found for respondent and held that the notice of tax lien was sufficient to place a reasonable prudent person on inquiry and that if inquiry had been made, the person so inquiring would be inevitably led to the conclusion that the Government was claiming a lien on the property of all of the parties doing business as Little Lake Lumber Company and on the property of the partnership itself.

On the 23rd day of November, 1955, an assessment for Withholding ¹ and F. I. C. A. ² taxes was made by the respondent against C. E. McCulloch, Jr., H. W. Bryan and M. L. Kramer, dba Little Lake Lumber Company.

On January 13, 1956 , the District Director of Internal Revenue caused a form designated "NOTICE OF FEDERAL TAX LIEN UNDER INTERNAL REVENUE LAWS" to be filed with the County Recorder of Mendocino County , California . On said date this instrument was indexd in the general index--grantors, defendants, etc., to Charles E. McCulloch and on another page of the index to Little Lake Lumber Company. Said notice read, in part, as follows:

"Pursuant to the provisions of Sections 6321, 6322, and 6323 of the Internal Revenue Code of 1954, notice is hereby given that there have been assessed under the Internal Revenue laws of the United States against the following-named taxpayer, taxes (including interest and penalties) which after demand for payment thereof remain unpaid, and that by virtue of the above-mentioned statutes the amount of said taxes, together with penalties, interest, and costs that may accrue in addition thereto, is a lien in favor of the United States upon all property and rights to property belonging to said taxpayer, to-wit:

NAME OF TAXPAYER

Chas. E. McCulloch et al.

RESIDENCE OR PLACE OF BUSINESS

Little Lake Lumber Co. Box 271 Willits Calif.

* * *"

(Italics added)

Little Lake Lumber Company is a partnership organized under the laws of the state of California . The title to the property was in the name of said partnership. After said filing and on April 25, 1956, the partnership, for a valuable consideration, made, executed and delivered to appellant a chattel mortgage and deed of trust, which instruments secured the payment of certain promissory notes. These instruments are the basis of the foreclosure proceedings.

After proper assessment the United States has a lien upon all property and rights to property, whether real or personal, belonging to any person liable to pay the tax. ³ However, with certain exceptions not here applicable, this lien has no validity against a mortgagee until a proper notice has been filed. ⁴

[Sufficiency of Notice]

It is conceded that the California Recording Statutes ⁵ meet the requirements of the Federal legislation. For that matter, the filing of the alleged notice by the District Director recognizes the conformity of the California legislation on the subject. Therefore the only matter we have for determination is the sufficiency of the notice of lien and the effect, if any, of the alleged constructive notice of the lien. Federal law determines the priority of competing liens asserted against the taxpayer's "property" or "rights of property." United States v. Vorreiter [57-2 USTC ¶9956], 355 U. S. 15; United States v. White Bear Brewing Co. [56-1 USTC ¶9440], 350 U. S. 1010; Aquilino v. United States [60-2 USTC ¶9538], 363 U. S. 509.

Acting under the authority granted by Congress ⁶ the Commissioner of Internal Revenue promulgated a regulation, effective December 30, 1954, which included a form of notice of lien as follows:

§301.6323-1

* * *

"(3) Form of notice. The form to be used for filing the notice of lien shall be Form 668, 'Notice of Federal Tax Lien Under Internal Revenue Laws.' Such notice, filed in the office designated by the law of a State or Territory, shall be valid notwithstanding any law of the State or Territory regarding the form or content of a notice of lien. For example, the omission from the notice of lien of a description of the property subject to the lien will not affect the validity thereof, even though the law of the State or Territory requires that the notice of lien contain a description of the property subject to the lien.

* * *

The form of notice used in this case was printed by the Government Printing Office in January, 1955, is designated Form No. 668, and is obviously the form referred to by the Commissioner in the above regulation.

[Lien Must Disclose Name of Taxpayer]

It is clear that the Commissioner interpreted the legislation as requiring him to provide a form which would disclose the names of the taxpayers with reasonable preciseness. The contemporaneous construction of a statute by those charged with its admin istration is entitled to great weight. C. I. R. v. South Texas Lumber Company [48-1 USTC ¶5922], 333 U. S. 496; United States v. Leslie Salt Co., [56-1 USTC ¶9319], 350 U. S. 383; Gray Line Co. v. Granquist, 9 Cir., 1956 [56-2 USTC ¶9973], 237 F. 2d 390, cert. den. 353 U. S. 911.

We feel that the requirement of the Commissioner, under the approved form, that the taxpayers should be named is wholesome and salutary and fully within the spirit of the legislation which requires the filing of a notice of the lien. The Commissioner, having drafted the form which required the naming of the taxpayer against whom the lien is claimed, should not ask the Court to place in the notice the names of persons whom his draftsman attempted to include by the insertion of the abbreviation of the Latin "et alius" or "et alii." The abbreviation "et al" encompasses both singular and plural and commonly means "and another" or "and others." Black's Law Dictionary, p. 652; Crittendon v. Rogers, 278 Ky. 481, 128 S. W. 2d 942, 943; LeBlanc v. Babin, 197 La. 825, 2 So. 2d 225, 229.

Prior to 1913, Federal tax liens were valid against bona fide purchasers and mortgagees for value without notice. United States v. Snyder, 149 U. S. 210. In 1913 ⁷ Congress enacted what might be termed the parent of 26 U. S. C. 6323, "to meet the harsh condition created" by the holding in the Snyder case. United States v. Gilbert Associates, Inc. [53-1 USTC ¶9291], 345 U. S. 361.

The Congress gave full and complete power to the Commissioner to make and enforce the rules and regulations under which the United States may assert its tax liens against those who may be financing the commercial enterprises which are the life blood of the nation's economic strength. To require the Commissioner to abide by the rules which he obviously felt were required to protect such strength is nothing more than good common sense.

[Notice Insufficient]

The statute directs that the lien shall not be valid unless a notice is filed pursuant to the statute. "Valid" has a well understood technical meaning, as well as a popular acceptation, and must receive such meaning in the Courts if its use in the statute does not suggest a different one. The word means good or sufficient in point of law; sustainable and effective in law. United States v. McCutchen, 234 F. 702, 709; Sharpleigh v. Surdam, 21 Fed. Cas. 1173, 1178. The character, operation and extent of the lien must be ascertained by the terms of the statute which creates and defines it. The lien should only extend to persons or conditions provided for by the statute and the regulations, and then only where there has been a substantial compliance with all such requirements. United States v. Beaver Run Coal Co., 3 Cir., 1938, [38-2 USTC ¶9540] 99 F. 2d 610. We hold that the notice was insufficient to perfect the lien against the appellant as to the interests of the partners H. W. Ryan and M. L. Kramer in the partnership property.

The decision of the lower court upholding the validity of the lien was based on the lower court's finding that the notice was sufficient to place the appellant on inquiry and that an inquiry would have disclosed that "et al" was intended to cover the remaining partners, doing business as Little Lake Lumber Company. There is no claim that appellant had actual notice of the alleged lien.

[Constructive Notice]

A large segment of the brief of each party is devoted to constructive notice, implied actual notice and inquiry notice. We believe constructive notice includes the other two, and that the factual background in the present case does not suggest an application of the rule. The fact that Little Lake Lumber Company may have been mentioned as part of the address of the taxpayer is of no significance, nor is the fact that the County Recorder concluded it was proper to index the address, as well as the name, of the taxpayer.

In any event, the notice does not give rise to a valid lien against the interests of the unnamed partners, even though the evidence disclosed actual knowledge on the part of the mortgagee. We must keep in mind that we are dealing with the validity or invalidity of the lien insofar as the unnamed taxpayers are concerned. It requires no citation of authority to state that statutes in pari materia must be construed together. 26 U. S. C. 6321 and 6323 concern themselves with the same subject matter, i. e., the lien of federal taxes and when such lien is valid against a mortgagee and others. We are passing on the validity of the lien, rather than notice of the tax assessments, either actual or constructive. This view finds wholehearted support in United States v. Beaver Run Coal Co., supra. In that case the United States contended that its lien was entitled to priority over the mortgage on the ground that at the time the loan was negotiated and the mortgage executed the mortgagee knew that the Coal Company owed the taxes in question. That case arose at a time when the lien statute required the filing of the notice with the Clerk of the District Court. A proper notice was filed, but was filed in the wrong district. The mortgagee knew of the existence of the tax assessment.

In answer to the contention that the Court should breathe life into the alleged lien by reason of the fact that the mortgagee had actual notice of the tax, the Court said that the statute dealing with the validity of the lien as against a morgagee was clear and that the Court should not rewrite the statute and read into it restrictions and limitations which were not there. We observe that the Beaver Run case was decided in 1938 and that no Congressional action has ever been taken to modify or change the effect of such decision.

At the time of the arguments, counsel for appellants conceded that the notice was probably good as to the taxpayer C. E. McCulloch, Jr. and that the slight difference between "C. E. McCulloch, Jr." in the assessment and "Chas. E. McCulloch" in the notice was of no consequence. The taxes in question, Withholding and F. I. C. A., were statutory obligations of the partnership and the partners. 26 U. S. C. 3403; 26 U. S. C. 3201(a), (c). This distinguishes our problem from United States v. Worley, 6 Cir., 1954, [54-1 USTC ¶9427] 213 F. 2d 509, in which the basis of the tax lien was personal income taxes. The statute ⁸ is very specific, as applied to McCulloch. It creates a lien upon all his property and all his rights to property. These being partnership debts and the debts of the individual partners, a valid lien was created against the interest of McCulloch in the partnership on January 13, 1956, the date of the filing of the notice, and such lien against such interest is prior in time and superior in right to appellant's mortgage lien. The United States has no lien, under the notice in question, against the interests of the remaining partners. Holding that the lien is valid on the partnership interest of McCulloch may not be in accordance with usual concepts of partnership law. However, we are not concerned with those concepts. Rather, we are construing federal statutes confined to the unusual and highly technical field of tax law. We cannot, under the clear language of the statutes, permit the interest of McCulloch to escape.

The decree of the lower court is vacated and the cause remanded to the District Court to determine the interest of McCulloch in the partnership property and then enter a decree of foreclosure in accordance with the views herein recorded.

AFFIRMED IN PART. REVERSED IN PART.

¹ 26 U. S. C. 3401, et seq.

² 26 U. S. C. 3101, et seq. Federal Insurance Contributions Act.

³ 26 U. S. C. 6321. Lien for taxes

"If any person liable to pay any tax neglects or refuses to pay the same after demand, the amount (including any interest, additional amount, addition to tax, or assessable penalty, together with any costs that may accrue in addition thereto) shall be a lien in favor of the United States upon all property and rights to property, whether real or personal, belonging to such person."

⁴ 26 U. S. C. 6323. Validity against mortgagees, pledgees, purchasers, and judgment creditors

"(a) Invalidity of lien without notice.--Except as otherwise provided in subsection (c), the lien imposed by section 6321 shall not be valid as against any mortgagee, pledgee, purchaser, or judgment creditor until notice thereof has been filed by the Secretary or his delegate--

(1) Under state or territorial laws.--In the office designated by the law of the State or Territory in which the property subject to the lien is situated, whenever the State or Territory has by law designated an office within the State or Territory for the filing of such notice; or

(2) With clerk of district court.--In the office of the clerk of the United States district court for the judicial district in which the property subject to the lien is situated, whenever the State or Territory has not by law designated an office within the State or Territory for the filing of such notice; or

(3) With clerk of district court for District of Columbia.--In the office of the clerk of the United States District Court for the District of Columbia, if the property subject to the lien is situated in the District of Columbia.

(b) Form of notice.--If the notice filed pursuant to subsection (a)(1) is in such form as would be valid if filed with the clerk of the United States district court pursuant to subsection (a)(2), such notice shall be valid notwithstanding any law of the State or Territory regarding the form or content of a notice of lien.

⁵ California Government Code:

Sec. 27330. Liens for Federal Taxes.

"Notices of liens for internal revenue taxes payable to the United States and certificates discharging such liens may be filed in the office of the county recorder of the county within which the property subject to the lien is situated."

Sec. 27331. Federal Tax Liens; Manner of Indexing.

"When a notice of the tax lien is filed, the recorder shall forthwith enter it in an alphabetical federal lien tax index provided by the board of supervisors, showing on one line the name and residence of the taxpayer named in the notice, the collector's serial number of the notice, the date and hour of filing, and the amount of tax and penalty assessed. He shall file and keep all original notices so filed in numerical order and in a file provided by the board of supervisors and designated federal tax lien notices."

⁶ 26 U. S. C. 7805(a), (c).

⁷ 37 Statutes at Large 1016.

⁸ 26 U. S. C. 6321

 

 

[60-2 USTC ¶9574]Eskil Hannus and Verna Hannus, his wife, Plaintiffs v. United States of America, Defendant

U. S. District Court, West. Dist. Wash. , No. Div., No. 4495, 7/24/58

[1954 Code Sec. 6323]

Tax lien: Common name v. correct name: Constructive notice to purchaser.--A tax lien was filed with the proper county officer against Andy Johnston, whose correct name was Andrew Johnston. The lien notice gave his true address which was the address of the property against which the lien was asserted. The lien was superior to the rights of the subsequent purchaser without knowledge. Since Andy was commonly applied to persons named Andrew, the purchaser was charged with constructive notice of the tax lien because due diligence would have disclosed the existence of the lien by an examination of the records.

James F. Loveridge, Jr., 900 United Pacific Bldg., Seattle , Washington , for plaintiffs. Charles P. Moriarty, United States Attorney, Richard F. Broz, Assistant United States Attorney, and James D. Webb, III, Office of Regional Counsel, Internal Revenue Service, 1012 U. S. Courthouse, 5th and Madison, Seattle, Washington, for defendant.

Findings of Fact and Conclusions of Law

BOWEN, District Judge:

This matter having come on the 21st day of July, 1958, for hearing before the undersigned Judge of the above-entitled Court, plaintiffs having appeared by their attorney, James F. Loveridge, Jr., of Croson, Johnson & Wheelon, and the defendant appearing by Charles P. Moriarty, United States Attorney for the Western District of Washington, Richard F. Broz, Assistant United States Attorney for the said district, and James D. Webb, III, Attorney, Office of the Regional Counsel, Internal Revenue Service, its attorneys of record, and witnesses having been sworn and evidence introduced, and the Court having been fully advised in the premises and having orally announced its decision, does make the following

Findings of Fact

I. That the plaintiffs, Eskil Hannus and Verna Hannus, are residents of Seattle , King County , Washington .

II. That the defendant, United States of America , is a sovereign and corporate body politic.

III. That there were duly assessed by William E. Frank, District Director of Internal Revenue for the Seattle District, the following taxes, penalties, and interest, against the Andy Johnston Construction Company--Andy Johnston, Owner:

                                                                                       Date Notice

                                                     Amount         Assessment              of Tax

Lien No.               Tax          Period          of Lien               Date          Lien Filed

SE-679-56           Withh.         
3-31-55
         $ 476.05            
5-23-56
             
6-25-56

SE-679-56           Withh.         
6-30-55
           693.35            
5-23-56
             
6-25-56

SE-679-56           Withh.         
9-30-55
           452.99            
5-23-56
             
6-25-56

 

IV. That after the said assessments, as indicated above, the District Director of Internal Revenue for the District of Seattle duly demanded payment of said taxes, but the said Andy Johnston Construction Company--Andy Johnston, Owner, neglected and refused to pay the same, but did make a partial payment of $25.81 on November 8, 1957, to apply on the withholding tax assessed for the taxable period 3-31-55, leaving a principal balance due on this item of tax of $450.24, which balance, together with all other taxes as set forth above, interest as provided by law, and a filing fee in the sum of $1.50, is still due, outstanding and unpaid.

V. That on the date set forth above, pursuant to the provisions of Sections 6321, 6322 and 6323 of the Internal Revenue Code of 1954, the District Director of Internal Revenue for the District of Seattle caused to be filed with the Auditor of King County, Washington, a notice of Federal tax lien against the said Andy Johnston Construction Company--Andy Johnston, Owner, No. SE-679-56, Auditor's File No. 3299255, covering the taxes assessed not outstanding as hereinbefore set forth.

VI. That the Auditor of King County, Washington, in accordance with Section 60.68.020, R. C. W., recorded the said notice of Federal tax lien in the index of Federal tax liens under the name Andy Johnston Construction Company, 8829--41st Avenue, South, Seattle, Washington, and under the name Andy Johnston, 8829--41st Avenue, South, Seattle, Washington.

VII. That at the time the said tax liability was incurred, assessed, and notice of Federal tax lien filed, Andrew Johnston had legal title to the following-described real property in the City of Seattle , County of King , State of Washington :

"Lot 30, Block 16, Beacon Hill View Addition to the City of Seattle , according to plat recorded in Volume 18 of Plats, Page 93, records of said County."

VIII. That at the time the said tax liability was incurred, assessed, and notice of Federal tax lien filed, the said Andrew Johnston was known in the community as Andy Johnston and did business as the Andy Johnston Construction Company, as a sole proprietorship, under the laws of the State of Washington .

IX. That the said Andrew Johnston filed his Federal tax returns under the name of Andy Johnston and the Andy Johnston Construction Company.

X. That Leona E. Johnston, also known as Leona Reynolds Johnston, was the wife of the said Andrew Johnston and received the said property from the said Andrew Johnston by decree of divorce entered by the Superior Court of the State of Washington for King County on or about the 8th day of February, 1957.

XI. That the plaintiffs, Eskil Hannus and Verna Hannus, his wife, on May 9, 1957, purchased by statutory warranty deed the said real property which is the subject of this action from the said Leona E. Johnston for a valuable consideration and without actual knowledge of the aforesaid Federal tax liens.

XII. That the name "Andy" in commonly applied in this jurisdiction to persons with the true and correct name of Andrew, and that the name Andy Johnston was the working and occupational name of the said Andrew Johnston appearing in the chain of title.

XIII. That the index to Federal tax liens as recorded by the Auditor of King County, Washington, shows opposite the name of the Andy Johnston Construction Company and the name Andy Johnston, Owner, the true and correct address of th taxpayer, and is the address of the real property which is the subject of this litigation.

XIV. That a person of ordinary intelligence and experience, including a person purchasing property, would have gotten notice of the said Federal tax liens by a search of the records of the County Auditor.

From the foregoing Findings of Fact, the Court does make the following

Conclusions of Law

I. The Court has jurisdiction of the subject matter and the parties to this law suit.

II. A Federal tax lien, under Sections 6321 and 6323 of the Internal Revenue Code of 1954, is valid against a purchaser if at the time of the purchase a notice has been filed in the office designated by the law of the state in which the property subject to the lien is situated.

III. The law of the State of Washington designates by Section 60.68.010, R. C. W., the office of the county auditor of the county in which the property subject to the lien is situated.

IV. The purpose of the filing of a notice of Federal lien is to give constructive notice.

V. A purchaser is charged with constructive notice of all a person of ordinary intelligence and diligence would have discovered by an examination of the index to Federal tax liens in the office of the County Auditor .

VI. The filing of a notice of Federal tax liens in the name of Andy Johnston, giving his true address, which address is the address of the property which is the subject of this proceeding, is constructive notice to a subsequent purchaser of the property of Andrew Johnston, as the name "Andy" is derived from the name Andrew and both are in common use and are applied in this particular jurisdiction to refer to persons with the true and correct name of Andrew; the use of the name Andy Johnston is not a misnomer, and the filing of the notice was adequate and constructive notice to the plaintiffs, Eskil Hannus and Verna Hannus, his wife.

VII. The defendant, United States of America, is entitled to a decree adjudging that the hereinbefore-described Federal tax liens be valid and prior, superior, and paramount on the above-described real property to any right, title or claim of the plaintiffs, Eakil Hannus and Verna Hannus, or any person or persons claiming by, through, or under them.

Decree and Judgment

The above-entitled action having come on regularly for hearing on the 21st day of July, 1958, the plaintiffs appearing in person and by James F. Loveridge, Jr., of Croson, Johnson & Wheelon, their attorneys, and the defendant appearing by Charles P. Moriarty, United States Attorney for the Western District of Washington, Richard F. Broz, Assistant United States Attorney for the said district, and James B. Webb, III, Attorney, Office of the Regional Counsel, Internal Revenue Service, its attorneys of record, witnesses were sworn and evidence introduced, and the Court having been fully advised in the premises, and on the 24th day of July, 1958, made and filed its Findings of Fact and Conclusions of Law, now, therefore,

IT IS HEREBY ORDERED, ADJUDGED, AND DECREED that the defendant, United States of America, has valid and prior Federal tax liens as described in the defendant's Answer and the Pretrial Order on the following-described real property situated in the City of Seattle, County of King, State of Washington, to wit:

"Lot 30, Block 16, Beacon Hill View Addition to the City of Seattle , according to plat recorded in Volume 18 of Plats, Page 93, records of said County."

IT IS FURTHER ORDERED, ADJUDGED, AND DECREED that the plaintiffs and all persons claiming by, through, or under them, are to recover nothing by this action, and the said action is hereby dismissed with prejudice.

 

 

[79-1 USTC ¶9192]Henry T. Haye, Jane S. Haye, et al., Plaintiffs v. United States of America , Defendant

U. S. District Court, Cen. Dist. Cal., No. CV 78-2423-RJK, 461 FSupp 1168, 12/13/78

[Code Sec. 6323]

Lien for taxes: Notice: Wrong name.--Purchasers of land subject to a federal tax lien were granted an injunction against the enforcement of the lien. The Court found that the IRS did not file proper notice of the lien because both the first and last names of the delinquent taxpayer were misspelled. The defective notice prevented the purchasers from determining the existence of the lien because the filing system in the state was indexed by name only. Since a reasonable and diligent search would not have revealed the existence of the lien to subsequent purchasers, the lien was invalid against the purchasers.

Francis J. Cunningham III, Mazirow, Schneider, Forer & Lawrence, Inc., One Century Plaza , Los Angeles , California 90067 , for plaintiffs. William J. James, Assistant U. S. Attorney, Andrea S. Ordin, United States Attorney, Los Angeles California 90012, for defendant.

Memorandum of Decision and Order

KELLEHER, District Judge:

Simply put, the genesis of this litigation lies in the complete and utter inability of several parties to correctly spell the name "Castillo." As will develop, one Manuel de J. Castillo took title to a parcel of real property in 1971. The deed, duly recorded, referred to him as "Cattillo." Years later, Dr. Castillo fell into tax trouble with the federal government. The IRS duly filed its Notice of Tax Lien (Form 688) with the Los Angeles County Recorder's office. The Notice, however, referred to Dr. Castillo as "Manual de J. Castello," misspelling both his first and last names. Castillo subsequently transferred the property to a "friend," who thereupon--without Castillo's knowledge--transferred the parcel to plaintiffs. All the transactions were duly recorded. The government, on the basis of its tax lien, now wishes to sell the parcel. The plaintiffs, understandably attached to their homestead, resist this effort.

The plaintiffs filed this complaint to quiet title to real property, to cancel a federal tax lien, and to seek injunctive relief on June 22, 1978 . The United States had seized the property on June 8, 1978 , pursuant to its levy, and was planning to conduct a sale of the same property on June 27, 1978 . On June 26, 1978 , the Court granted plaintiffs' request for a preliminary injunction by minute order. A formal order to that effect was lodged and signed on June 28, 1978 . The preliminary injunction required the defendant, the United States of America , to refrain from selling the plaintiffs' property pursuant to a tax lien during the pendency of this action. Plaintiffs filed their request for judicial notice and motion for summary judgment on October 27, 1978 . The government's opposition was filed November 8, 1978 , contesting only plaintiffs' motion for summary judgment. No opposition was filed with respect to plaintiffs' request for judicial notice.

Briefly, the plaintiffs contend that the United States District Court has jurisdiction to quiet title to the real property and to grant the requested permanent injunction. They further argue that (a) a title insurance company is not an agent of the insured (i. e the plaintiffs) for purposes of imputing knowledge of the existence of federal tax liens, and (b) the lien recorded pursuant to 26 U. S. C. §6321 was and is invalid in that it failed to give actual or constructive notice of its existence to a person of ordinary intelligence and diligence. They concluded that the Court should enter a judgment quieting title to the real property in plaintiffs' name and permanently enjoining the government from selling or attempting to sell all or any portion of that real property pursuant to its invalid tax lien.

Defendant agrees that the Court has jurisdiction over wrongful levy actions (see 28 U. S. C. §3146(e)) and over quiet title actions which do not challenge the merits of the underlying tax assessment. ¹ It argues, however, that the Court has no jurisdiction to cancel a federal tax lien, and further argues that a complete cancellation would be inappropriate, as "the federal tax lien attached to all property and rights to property of the delinquent taxpayer [in this case, someone other than the plaintiffs] and affects both individuals and property not before this Court." ² The government further argues that the plaintiffs were not "purchasers" within the ambit of 26 U. S. C. §6323(a) as that term is defined in 26 U. S. C. §6323(h)(6), because their title was not valid under local law as against subsequent purchasers without actual notice. The government alleges plaintiffs' title was unmarketable because of variations in the spelling of the name of a prior grantor within the plaintiffs' chain of title, and this, it is claimed, is fatal under §6323(h)(6). Finally, the government contends its tax lien, as filed, was sufficient to give notice to the plaintiffs of the federal tax lien on their property.

A. Jurisdiction. The Court has jurisdiction over the instant matter by virtue of 28 U. S. C. §1346(e), which states that

[t]he district courts shall have original jurisdiction of any civil action against the United States provided in Section 7426 of the Internal Revenue Code of 1954.

26 U. S. C. §7426(a)(1) provides, in pertinent part, that

[i]f a levy has been made on property . . . any person (other than the person against whom is assessed the tax out of which such levy arose) who claims an interest in . . . such property . . . may bring a civil action against the United States in a district court of the United States.

Subsection (b)(1) limits the form of relief a district court may grant in such a situation:

The district court shall have jurisdiction to grant only such of the following forms of relief as may be appropriate in the circumstances:

(1) Injunction.--If a levy or sale would irreparably injure rights in property which the court determines to be superior to rights of the United States in such property, the court may grant an injunction to prohibit the enforcement of such levy or to prohibit such sale.

Thus, the Court has jurisdiction. And if the Court finds the rights of Haye superior to those of the United States in the property, it may issue an injunction prohibiting the United States from enforcing its levy if the Court further finds that such enforcement would, in absence of the decree, cause irreparable harm.

B. Propriety of Summary Judgment. Fed. R. Civ. P. 56(a) states that "[a] party seeking to recover upon a claim . . . may, at any time after the expiration of 20 days from the commencement of the action . . . move, with or without supporting affidavits, for a summary judgment in his favor upon all or any part thereof." Summary judgment is appropriate under 26 U. S. C. §6323 if there are no "material, but undetermined question[s] of fact" outstanding. See Corwin Consultants, Inc. v. Interpublic Group of Companies, Inc. [75-1 USTC ¶9299], 512 F. 2d 605 (2d Cir. 1975) (summary judgment improper where taxpayer's domicile is unclear).

A review of the complaint, the government's answer thereto (as supplemented by certain admissions contained in its opposition to summary judgment), reveals the following uncontested facts:

The plaintiffs are residents of the County of Los Angeles , State of California . The plaintiff, Glendale Federal Savings and Loan Association, was and is now a corporation duly organized and existing under the laws of the United States , and doing business in the County of Los Angeles . That on or about May 17, 1977 , plaintiffs Haye bought the property in question from Isidore Schuman. Schuman, in turn, had received the property from the delinquent taxpayer, Manuel de Castillo on May 5, 1975 , after the government had filed a Notice of Federal Tax Lien on February 26, 1974 . The plaintiff Glendale Federal is a beneficiary of a Deed of Trust executed by plaintiffs Haye. The tax lien named as the taxpayer Manual De. J. Castello. Defendant seized the real property in question on June 8, 1978 , and the plaintiffs were unaware of the existence of the government's lien until that time.

The parties agree that the taxpayer's correct name is Manuel de J. Castillo. The parties agree that the Notice of Tax Lien was filed under the incorrect name of Manual de J. Castello. The parties further agree that Notice of Federal Tax Liens are recorded in Los Angeles County only by the name of the delinquent taxpayer.

Although the parties dispute certain "ultimate" factual issues, the Court concludes that the only issues remaining for determination are legal in nature, requiring the Court to interpret existing law and apply it to the uncontested factual recitals.

C. Summary Judgment Should Be Given to Plaintiffs. 26 U. S. C. §6321 provides that if a person fails to pay any tax, a lien shall arise in favor of the United States with respect to all property owned by the taxpayer. Manuel de J. Castillo was such a taxpayer, and the government duly assessed a deficiency on February 25, 1974 . On February 26, 1974 , a Notice of Federal Tax Lien (form 688) was filed with the Los Angeles County Recorder's Office, naming the delinquent taxpayer as "Manual de J. Castello." 26 U. S. C. §6323(a) provides that the "lien imposed by section 6321 shall not be valid as against any purchaser . . . until notice thereof which meets the requirements of subsection (f) has been filed . . .". 26 U. S. C. §6323(f)(3) provides that the "form and content of the notice referred to in subsection (a) shall be prescribed by the Secretary or his delegate. Such notice shall be valid notwithstanding any other provision of law regarding the form or content of a notice of lien." There are two threshold issues. First, are the plaintiffs "purchasers" within the ambit of section 6323(a)? If so, did the IRS satisfy the requirements of section 6323(f)(3)?

1. Plaintiffs Are Purchasers. The government asserts that the plaintiffs are not "purchasers" as that term is used in 26 U. S. C. §6323(a). The government maintains that because the title the plaintiffs acquired was clouded (i.e. Castillo's name was spelled "Cattillo" in the 1971 conveyance to him) the plaintiffs' title is "unmarketable." The inference made by the government is that an "unmarketable" title is not "valid under local law as against subsequent purchasers without actual notice." Id. Thus, the government, argues, if the plaintiffs did not acquire a title valid as against subsequent purchasers without actual notice, they cannot be purchasers under §6323(h)(6). This is a novel argument. It is also an incorrect argument, as will be presently demonstrated.

First, that a title is "unmarketable" has nothing whatsoever to do with its validity as against subsequent purchasers without actual notice. "Recordation is a device to establish priority, but has nothing to do with conveying title." Lawler v. Gleason, 130 Cal. App. 2d 390, 395-6, 279 P. 2d 70, 74 (1955). Thus, a marketable title is defined as one that is free from reasonable doubt in law or in fact; one that may be readily sold to a reasonably prudent purchaser, or mortgaged to a person of reasonable prudence as security for the loan of money. See Peckham v. Stewart, 97 Cal. 147, 31 P. 928 (1893); 92 C. J. S. Vendor v. Purchaser, §191(a). Marketable title is, in that respect, an extremely artificial concept. For instance, property encumbered with a restrictive covenant is generally thought to be "unmarketable," regardless of whether or not the restrictions are seen as being beneficial. 92 C. J. S. Vendor v. Purchaser, §191(a). However, a title encumbered with a restrictive covenant is nonetheless recordable and protected against subsequent purchasers without actual notice. Therefore, the mere assertion of "unmarketability" does not exclude plaintiffs from the class of purchasers within the purview of 26 U. S. C. §6323(a), as that term is defined in §6323(h)(6).

Second, even if it is the law that an unmarketable title, duly recorded, provides no protection against subsequent purchasers for value without actual notice, it is not entirely obvious that the plaintiffs' title is unmarketable. Although

a title may be rendered unmarketable by a materially wrong [sic] designation of the grantor or grantee in a deed in the chain of title, unless the variance is immaterial and the objection frivolous or it is cured by competent evidence . . . a discrepancy between the name of a grantee in a deed and that of a grantor in a subsequent deed, both of which deeds have been of record of adverse title for a number of years, with no assertion based on the discrepancy, is insufficient to avoid a contract which provides for an abstract showing good title.

92 C. J. S. Vendor v. Purchaser, §195(c). See also Levitt v. 1317 Wilkins Corp., 58 N. Y. S. 2d 507 (Sup. Ct. 1945); Trinity Cathedral v. ETZ, 137 N. J. Eq. 261, 44 A. 2d 397 (1945).

Here the government neither makes an assertion of adverse title based on the 1971 misspelling, nor does it appear that Castillo's title wasn't "recorded for a number of years." On this evidence, most courts would not declare the plaintiffs' title unmarketable.

Finally, a generous reading of the government's allegations would find it asserting that the misspelling of Castillo's name in 1971 somehow rendered the Haye deed of no force and effect against subsequent purchasers for value without notice. Presumably, a subsequent purchaser could take title from "Cattillo" although the Haye family has taken title from "Castillo." The California law is directly to the contrary.

Thus, in Fallon v. Keough, 38 Cal. 44, 99 Am. Dec. 347 (1869), the Alcalde of San Jose granted a lot to one "Darby O'Fallon," the nickname of Jeremiah Fallon. Fallon subsequently conveyed the lot twice, once under the nickname (i. e. Darby O'Fallon) and once under his Christian name (i. e. Jeremiah Fallon). The issue before the Court, of course, concerned which purchaser had the valid title. The Court noted that the first purchaser (who took under Fallon's Christian name) had duly recorded the conveyance, and was entitled to a protected title, notwithstanding the fact that the conveyance was made in a name other than that under which the vendor originally acquired title. The Court there recommended that the Recording Statute include a provision whereby a conveyance in a name other than the name of the grantee should be noted in the recording for the protection of subsequent purchasers. The California legislature indeed added such a provision. See California Civil Code §1096; Puccetti v. Girola, 20 C. 2d 574, 576-9 (1942) (per Traynor, J.). However, as Judge Traynor indicated in his opinion, the purpose of the statute was to avoid the spectre of an intentional "wild title" stalking the recorded property by virtue of a person's name change or use of a false name to take title. Here, there is no allegation that the misspelling was anything other than a mistake. As a mistake, the provisions of §1096 are inapplicable, and plaintiff's title remains valid as against subsequent purchasers without actual notice under the doctrine set forth in Fallon, supra.

Finally, the Glendale Federal Savings and Loan Association is also a "purchaser," as that term is defined in 26 U. S. C. §6323(h)(6), by reason of the fact that it is a holder of a security interest in the property.

2. The Government Failed the Test of Section 6323(f)(3). Section 6323(f)(3) authorizes the Secretary or his delegate to prescribe the correct form of notice. The proper form so prescribed is denominated "Form 688":

The notice referred to . . . shall be filed on Form 688, "Notice of Federal Tax Lien under Internal Revenue Laws". Such notice is valid notwithstanding any other provision regarding the form or content of a notice of lien. For example, omission from the notice of lien of a description of the property subject to the lien does not affect the validity thereof even though State law may require that the notice contain a description of the property subject to the lien.

26 C. F. R. §301.6323(f)-1(c).

The form sets forth (a) the name of the taxpayer, and (b) his residence. Because the residence of Manuel de J. Castillo was not the subject property, the plaintiffs could not have obtained notice of the lien by screening the records in that fashion. Further, the uncontroverted facts show that the government incorrectly spelled the name of the taxpayer on Form 688. The misspelling of Castillo's first and last names caused the Notice to be indexed approximately nine pages and one thousand names prior to its proper location in the Los Angeles County Recorder's General Index. A review of the case law indicates that a misspelling does not automatically render the tax lien invalid under §6323(a). However, where the indexing system is only by the taxpayer's name (compare: Richter's Loan Co. v. United States [56-2 USTC ¶9706], 235 F. 2d 753 (5th Cir. 1956) (Florida System gave purchasers a number of methods for checking for Federal Tax liens)) the issue is whether the lien would be disclosed by a reasonable and diligent search of the General Index. United States v. Sirica [66-1 USTC ¶9209], 247 F. Supp. 421, 422 (S. D. N. Y. 1965). However, it should be kept in mind that

[t]he Commissioner, having drafted the form which required the naming of the taxpayer against whom the lien is claimed, should not ask the Court to place in the notice the names of persons whom his draftsman attempted to include by the insertion of the abbreviation . . . "et alii." . . . To require the Commissioner to abide by the rules which he obviously felt were required . . . is nothing more than good common sense.

F. P. Baugh, Inc. v. Little Lake Lumber Co. [61-2 USTC ¶9726], 297 F. 2d 692 (9th Cir. 1961, cert. denied, 370 U. S. 909 (1962).

Here, the IRS drafted Form 688. Because the name of the taxpayer is crucial under the California Indexing System, the IRS should be required to hold fairly strict standards as to the correctness of the name used on the form. Here, reasonable and diligent search probably does not encompass a search of over 1,000 names and nine pages of the General Index, especially where the name is a common Hispanic name like Castillo. Even if such is reasonable, the plaintiffs would have had the further problem that the taxpayer's first name was incorrectly spelled. Taken together, no reasonable and diligent search would have revealed the Federal Tax Lien.

Thus, the form of notice does not comport with the requirement of section 6323(f)(3), as that is interpreted in the IRS' own regulations. Because the notice failed to so comply, plaintiffs Haye and plaintiff Glendale Federal fit within the purview of section 6323(a), and the lien against the property in question is invalid as against them.

Finally, the government argues that a correct title search would not have begun with "Castillo" but rather with "de Castillo" or "Cattillo." They suggest that a reasonable person would have, at the very least, conducted a more thorough search. Furthermore, the government argues, the plaintiffs would have discovered the Federal Tax Lien. However, "Cattillo" is further away in the General Index from the Federal Tax Lien than "Castillo." For this reason, the Court believes the government's argument is to no avail, and the plaintiffs' motion for summary judgment is granted.

D. Judicial Notice. The plaintiffs request the Court to take judicial notice of the following documents:

(a) Deed to Cattillo, recorded July 15, 1971 ;

(b) Deed of Trust, trustor Castillo, recorded July 15, 1971 ;

(c) Notice of Federal Tax Lien, recorded February 26, 1974 ;

(d) Deed to Isidore Schuman, recorded September 23, 1975 ;

(e) Deed to plaintiffs Haye, recorded May 17, 1977 ;

(f) Deed of Trust, trustor plaintiffs Haye, recorded May 17, 1977 ; and

(g) Los Angeles County General Index (partial) for the years 1967 through 1977, inclusive.

The request for judicial notice arises under Fed. R. Ev. 201, which states, in pertinent part:

A judicially noticed fact must be one not subject to reasonable dispute in that it is either . . . (2) capable of accurate and ready determination by resort to sources whose accuracy cannot be questioned.

Fed. R. Ev. 201(b)(2).

Subsection (d) makes the taking of judicial notice mandatory if the Court is so requested and supplied with the necessary information Here, because all the deeds are recorded with the Los Angeles County Index, they are not subject to reasonable dispute. Further, they are capable of accurate and ready determination. The same is true for the General Index itself. The Court hereby takes judicial notice thereof, and orders as follows:

1. Plaintiffs Henry T. Haye and Jane S. Haye are purchasers, within the meaning of 26 U. S. C. §6323(a) and as defined in 26 U. S. C. §6323(h)(6), of the real property legally described as:

Lots 3 and 4 in Block 10 of Tract No. 10731, in the City of Los Angeles , as per map recorded in Book 202 Pages 20 and 23 inclusive of Maps, in the office of the County Recorder of said County. EXCEPT from said Lots, that portion thereof described as follows:

Beginning at the Northwesterly corner of said Lot 3; thence along the Westerly line of said Lot 3, South 12 degrees 33'20" West 204.35 feet; thence South 80 degrees 12"34" East 133.52 feet to a point in the Easterly line of said Lot 3, that distance thereon South 23 degrees 36"41" West 137.39 feet from the Northerly corner of said Lot 3; thence South 61 degrees 12"34" East 131.70 feet; thence North 40 degrees 34"50" East 124.49 feet to the Northerly line of said Lot 4; thence in a general Westerly direction along the Northerly lines of said Lots 4 and 3 to the point of beginning. [Hereinafter referred to as "said real property"].

2. Plaintiff, Glendale Federal Savings and Loan Association, is a holder of a security interest in said real property, within the meaning of 26 U. S. C. §6323(a) and as defined in 26 U. S. C. §6323(h)(1).

3. The lien referred to in the Notice of Federal Tax Lien recorded as document number 2304 at Book M4614, Page 216 of the official records of the County Recorder of Los Angeles County, State of California, is not valid as against plaintiffs, and each of them, on the grounds that said Notice does not comply with the requirements of 26 U. S. C. §6323(f)(3).

4. Said Notice of Federal Tax Lien does not impart constructive notice of its existence or contents, or of the lien referred to therein, to anyone due to the misspelling of the taxpayer's name therein.

Based upon the foregoing, the Court finds that there is no genuine issue as to any material fact, that plaintiffs herein are entitled to judgment as a matter of law, and therefore orders that judgment be entered accordingly.

The Clerk shall send, by United States mail, a copy of this Memorandum of Decision and Order to counsel for all parties.

¹ The government initially denied that the Court had such jurisdiction.

² The Court does not, however, understand the plaintiffs to ask that the entire lien be cancelled. Rather, they ask that the lien be cancelled as to the subject property only.

 

 

[56-2 USTC ¶9706]Richter's Loan Company, Appellant v. United States of America , Appellee

(CA-5), U. S. Court of Appeals, 5th Circuit, No. 15971, 235 F2d 753, 6/22/56, Affirming District Court, 56-1 USTC ¶9173

[1939 Code Secs. 3670 and 3672--substantially similar in 1954 Code Secs. 6321 and 6323, respectively]

Tax liens: Priority over pledgee's lien: Notice sufficient.--A Federal tax lien for taxes assessed was prior in time to the lien of a loan company which had received a pledge of personal jewelry from the taxpayers. The notice of tax lien was adequate, since a slight difference in spelling the taxpayers' name "Freidlander" instead of "Friedlander" could not mislead searchers of the record who were contemplating doing business with taxpayers.

Ely R. Katz, Miami , Fla. , for appellant. Karl Schmeidler, Lee A. Jackson, Acting Chief, Appellate Section, Rob ert N. Anderson, George F. Lynch, Department of Justice, Charles K. Rice, Acting Assistant Attorney General, Washington, D. C., E. David Rosen, Assistant United States Attorney, Miami, Fla., for appellee.

Before HUTCHESON, Chief Judge, and RIVES and BROWN, Circuit Judges.

[Issue]

HUTCHESON, Chief Judge:

Submitted here upon an agreed statement of record on appeal, pursuant to Rule 76 of the Federal Rules of Civil Procedure, this appeal involves federal income taxes assessed for the years 1947 and 1950. The question it presents is whether the notice of tax lien filed in the Federal Tax Lien Book 26, at page 195, and indexed on page 45 of the Federal Tax Lien Index Record in the office of the Clerk of the Circuit Court in and for Dade County, Florida, constitutes constructive notice to the defendant, Richter's Loan Company, so as to render the lien of the pledge of certain items of jewelry pledged to it by Joseph Friedlander inferior to the government's prior tax lien against the Friedlanders.

[Contention of Pledgee]

The claim of defendant below was, and here is, that the notice was insufficient for the reason that in it, instead of taxpayers' name being properly spelled "Friedlander", it was misspelled "Freidlander", and, furthermore, the correct address of the taxpayers, 4444 Pinetree Drive, was incorrectly placed above their names, and in the index an erroneous address, 1610 Alton Road, appeared below the names of the taxpayers.

Basing them upon the stipulation of counsel in open court, the district judge made findings of fact ¹ and conclusions of law. ²

Appellant urging upon us that since the prime purpose of Sec. 3672, 26 U. S. C. A. ³ is to mitigate the rigors of Sec. 3670 by protecting from secret liens the persons described in Subd. (a) of that section, it is essential to the effectiveness of the filed notice that the name of the tax debtor against whom the lien is filed be clearly and accurately shown, cites in support: Continental Investments v. United States (W. Dist. Tenn.), decided 10-30-53 [53-2 USTC ¶9625], holding that a notice of tax lien filed in the name of "W. B. Clark, Sr." was not sufficient to give notice of a lien against "W. R. Clark, Sr."; and United States v. Ruby Luggage Corp. (S. D. N. Y.) [54-2 USTC ¶9512], decided June 21, 1954, holding that notice of a prior lien, filed against "Ruby Luggage Corporation", did not give notice of a lien against "S. Ruby Luggage Corporation". So urging, it insists that notice here that a tax lien has been filed against "Joseph Friedlander" is not sufficient to put persons dealing with "Joseph Friedlander" on notice that a lien exists against him.

[Contention of Government]

The United States quotes from Sapp v. Warner, 105 Fla. 245, 141 So. 124:

"The rule supported by the best authority is that the record is constructive notice to creditors and subsequent purchasers not only of its own existence and contents, but of such other facts as those concerned with it would have learned from the record, if it had been examined, and inquiries suggested by it, duly prosecuted, would have disclosed.

* * *

"If, in the investigation of a title, a purchaser, with common prudence, must have been apprised of another right, notice of that right is presumed as a matter of implied actual notice. * * * Means of knowledge with the duty of using them, are in equity equivalent to knowledge itself."

and cites Zaucha v. Town of Medley, ( Fla. ) 66 So. (2d) 238, and cases from other jurisdictions pronouncing the same rule. ⁴ Urging upon us that appellant's contention, under the facts in this case, tithes mint, anise, and cummin, exalts form over substance, it insists that it is a sticking in the bark to say that, under the findings of the court, the filing in this case was not in law and in fact constructive notice to the defendant of the tax claim and lien against the taxpayer Friedlander.

[Conclusions]

Without engaging in a discussion of the application in situations of this kind of the doctrine of idem sonans, ⁵ frequently resorted to in determining the effect of mistakes in the names of parties in the entering, docketing and indexing of judgments, deeds, liens, etc., or attempting to generalize upon the effect of the addition, omission, or substitution of letters in names in such situations, ⁶ we think it sufficient to say: that, whether the Florida rule invoked by appellee or the stricter rule on which appellant relies be applied, the slight difference in spelling the name "Freidlander" instead of "Friedlander" could not mislead searchers of the record, who were contemplating doing business with Friedlander; that the notice of the lien was adequate; and that the judgment [56-1 USTC ¶9173] giving priority to the lien of the United States should be affirmed.

¹ As pertinent here, they are:

On July 14, 1952, said Collector of Internal Revenue caused to be filed in the office of the Clerk of the Circuit Court of Dade County, Florida, a notice of tax lien against all property and rights to property belonging to Joseph Friedlander in the amount of $57,007.93. Said notice was recorded in Federal Tax Lien Book No. 29, at page 542.

On April 16, 1951, the Commissioner of Internal Revenue assessed on his 1951 List income tax for the calendar year 1950 against defendants Joseph Friedlander and Sally Friedlander, in the amount of $14,623.70, together with interest in the amount of $73.12, making a total assessment of $14,696.82. The Collector of Internal Revenue for the District of Florida received said assessment list on April 18, 1951, and gave notice and made demand for payment thereof upon defendants Joseph Friedlander and Sally Friedlander on or about that time. Except for a credit in the amount of $126.53 made against said assessment on Sept. 10, 1954, no part of said assessment has been paid, abated or credited.

On June 28, 1951, said Collector of Internal Revenue caused to be filed in the office of the Clerk of the Circuit Court, of Dade County, Florida, a notice of tax lien for taxes and interest assessed as set forth above against all the property and rights to property belonging to Joseph and Sally Friedlander in the amount of $14,696.82, which said notice of tax lien was recorded on said date in Federal Tax Lien Book No. 26, at page 195, in the following manner:

Name of taxpayer--Joseph & Sally Friedlander

Residence or place of business-- 4444 Pinetree Drive . Miami Beach , Florida .

Nature of tax--Income

Year or taxable period ended--1950.

Date assessment list received--4-18-51

Amount of Assessment--$14,696.82

Signed John L. Fahs, Collector.

that on the date aforesaid, to wit, June 28, 1951, a reference to said Notice of Tax Lien was entered on page 45 of the Federal Tax Lien Index Record in said office of the Clerk of the Circuit Court of Dade County, Florida, in the following words and figures:

"Book and page 26195

Date 6-22-51

Name--Freidlander, Joseph & Sally

Address-- 4444 Pinetree Dr. , Miami Beach

Date of Filing-- 6-28-51 . Hour of filing 9:15 A. M.

Total tax, interest and pen.--$14,696.82."

On August 1, 1951 , Joseph Friedlander borrowed $4500 from Richter's Loan Company and placed certain jewelry as security, warranting that it was free and clear of encumbrances, and defendant loaned the money in reliance upon the belief that it was free and clear and without actual notice of the filing of the tax lien.

² As pertinent here, they are:

That the names of the defendants Friedlanders as they appeared in the Federal Tax Lien Index Record in the Office of the Clerk of the Circuit Court in and for Dade County , Florida , were sufficient constructive notice to defendant Richter's Loan Company and adequate to alert said defendant of the existence of the plaintiff's lien.

That the lien of the plaintiff is prior, superior and paramount to Richter's claim.

³ "Sec. 3672. Validity Against Mortgagees, Pledgees, Purchasers, and Judgment Creditors.

"(a) Invalidity of Lien Without Notice.--Such lien shall not be valid as against any mortgagee, pledgee, purchaser, or judgment creditor until notice thereof has been filed by the collector--

"(1) Under state or territorial laws--In the office in which the filing of such notice is authorized by the law of the State or Territory in which the property subject to the lien is situated, whenever the State or Territory has by law authorized the filing of such notice in an office within the State or Territory; or

* * *"

26 U. S. C. 1952 ed. Sec. 3672.

⁴ Butts v. Cruttenden, 14 P. A. Super. 449; Henry V. Sanders, 212 N. C. 239, 193 S. E. 15; Gilbert v. Berry, 190 Iowa, 170, 180 N. W. 148; Coral Gables, Inc. v. Kerl, 334 Pa. 441, 6 A. 275; Department of Public Assist. v. Reustle, 358 Pa. 111, 56 A. (2d) 221; Sligo Furnace Co. v. Coombs, 239 S. W. 816; 30 Am. Jur. "Judgments" 86, p. 863; Bergman's Appeal, 88 Pa. 120; Myer v. Fegaly, 39 Pa. 429.

⁵ 30 Am. Jur. "Judgments", Secs. 86-87, page 863.

⁶ 30 Am. Jur. "Judgments" Secs. 89-92, pp. 863-865.

 

 

[95-1 USTC ¶50,221] In re Cary A. Reid, Jr., Debtor. Cary A. Reid, Jr., Plaintiff v. Internal Revenue Service, Defendant

U.S. Bankruptcy Court, East. Dist. Va., Alexandria Div., 94-13218-A, 3/3/95, 812 BR 443

[Code Sec. 6323 ]

Validity of lien: Bankruptcy: Notice: Filing requirements: Wrong name.--

A debtor in possession in a bankruptcy proceeding was able to avoid a federal tax lien because the recording of the lien under an incorrect name did not provide constructive notice of the government's lien. The lien was recorded using the first name Gary instead of the debtor's true name Cary . Although there were very few entries in the judgment lien index separating the incorrect and correct spellings, the address listed under the incorrect spelling was different from any of the addresses listed under the correct spelling. In addition, two experienced local examiners who had performed title examinations on the debtor's property had failed to discover the liens recorded under the incorrect spelling. Therefore, a reasonable inspection of the judgment lien index would not have revealed the government's lien against the debtor.

Ann M. Callaway, Ann M. Callaway, P.C., Warrenton , Va. , for plaintiff. Margaret M. Earnest, Department of Justice, Washington , D.C. , for defendant.

Memorandum Opinion

 

MITCHELL, Bankruptcy Judge:

This adversary proceeding to determine the validity of a lien requires the Court to determine whether a notice of Federal tax lien recorded in the name of Gary A. Reid, Jr. is sufficient to create a lien against the property of Cary A. Reid, Jr., the debtor in this case. A trial of the issues raised by the complaint was held on February 28, 1995 , at the conclusion of which, the court took the matter under advisement. This memorandum opinion constitutes the Court's findings of fact and conclusions of law as required by Fed.R.Bankr.P. 7052 and Fed.R.Civ.P. 52(a).

Findings of Fact

 

The debtor, Cary A. Reid, Jr., filed a voluntary petition under chapter 11 of the Bankruptcy Code in this court on August 19, 1994 . He remains in possession of his estate as debtor in possession. At the time he filed his petition, a "miscellaneous penalty" (apparently the result of a responsible officer assessment) in the amount of $32,933.33 had previously been assessed against him by the Internal Revenue Service for the tax year ending December 1991. On May 20, 1993 , a Notice of Federal Tax Lien under Internal Revenue Laws in that amount was issued at Richmond , Virginia and was docketed on May 26, 1993 in the judgment lien docket maintained by the Clerk of Court, Fauquier County Circuit Court. For reasons that are unexplained, the Notice of Federal Tax Lien was prepared in the name of Gary A. Reid, Jr. rather than Cary A. Reid, Jr. ¹ At the time the Notice of Federal Tax Lien was docketed, the debtor resided and owned real property in Fauquier County, Virginia.

The Internal Revenue Service filed a timely proof of claim on October 27, 1994 asserting a secured claim in the amount of $33,480.53 and an unsecured priority claim of $1,636.09. The debtor filed an objection to the proof of claim directed, not to the amount due, but rather to its secured status. At the hearing on the objection, the court ruled that an objection directed to the validity of a claimed lien should properly be brought as an adversary proceeding rather than as an objection to claim, and the debtor subsequently commenced the present adversary proceeding.

At the trial, the debtor presented the testimony of two experienced title examiners, Dale W. Rankin and Horace Eugene ("Jay") Herndon, who had, subsequent to the filing of the I.R.S. lien, performed separate title examinations of the debtor's property at the request of debtor's counsel. ² Both examiners had many years of experience in examining titles and were familiar with the way judgments were indexed in the Clerk's office of the Fauquier County Circuit Court. Neither examiner found nor reported the I.R.S. lien as a lien against the debtor's real estate. The examiners testified that, for judgments subsequent to July 1, 1991, the judgment lien index in the Fauquier County Circuit Court Clerk's office is maintained both on a computer system accessible by terminals in the record room and on bound hard-copy print-outs; the print-outs apparently being updated several times a week. Both examiners normally used the computer terminals, although in unusual situations they would also check the book index. Both examiners searched the judgment lien index by entering "Reid" on the computer terminal, which then displayed all the entries beginning with "Reid" in alphabetical order using a last-name-first format. At the time Mr. Rankin did his search there were approximately 20 or 30 entries under the name "Reid." If the cursor is positioned next to a displayed name and a key pressed, additional information can be called up, including the judgment debtor's address and social security number, if available. Each examiner also explored the common spelling variants of "Reid," namely "Reed" and "Read." One also checked "Ried." Each testified that he would have checked any obvious spelling variants of " Cary ," such as "Carey," or "Kary." Neither examiner flagged Gary A. Reid, Jr. as a possible variant of Cary A. Reid, Jr., although both entries appeared on the same computer screen and were separated by only a few entries (2 or 3 according to one examiner and 4 according to the other). Both examiners testified that they did not consider the entry for Gary A. Reid, Jr. as representing a possible lien because it was not "close enough" to Cary A. Reid, Jr. In the print-out as it then existed, the entries for Cary A. Reid, Jr. and Gary A. Reid, Jr. were on different pages.

The Government called a revenue officer, G. T. Wert, to testify that he had, in preparation for the original hearing on objection to the proof of claim, gone out to the Fauquier County Circuit Court to check how the lien was recorded. He had no prior familiarity with that particular court house but had performed record room searches for a number of years in various Virginia court houses looking for assets belonging to delinquent taxpayers and determining whether the taxpayer had sufficient equity to justify selling the property. He checked the book index rather than the computer screen and was able to find the I.R.S. lien recorded under the name Gary A. Reid, Jr. He had, however, been told prior to the search to look under both names. The judgment lien index entry for the IRS lien showed an address for Gary A. Reid, Jr. of 209 Dover Road, Warrenton, Virginia 22186. The revenue officer testified that this address had been supplied by the debtor himself in March 1992 as his address, and that in February 1995 the U.S. Postal Service verified that mail for the debtor was currently being delivered to that address. ³ None of the seven judgments the revenue officer had found docketed against "Reid, Cary ," "Reid, Cary A" and "Reid, Cary A-Jr" showed a Dover Road address. In particular, a state tax lien in favor of the Commonwealth of Virginia against "Reid, Cary" docketed the same month as the I.R.S. lien against "Reid, Gary A-Jr" showed an address for the judgment debtor of Route 50, P.O. Box 286, Upperville, Virginia. At the time he checked the book index, there were five entries separating "Reid, Cary A-Jr" and "Reid, Gary A-Jr" and the entry for Gary Reid appeared on the same page as the entry for Cary Reid. He verified that the entries for Cary Reid and Gary Reid related to the same person by pulling up the social security numbers for the two entries.

Conclusions of Law

 

This court has jurisdiction over this controversy under 28 U.S.C. §§1334 and 157(a). This is a core proceeding under 28 U.S.C. §157(b)(2)(K).

Under 26 U.S.C. §6321 the failure, after demand, to pay any tax due the United States creates a lien in favor of the United States for the amount of the unpaid tax "upon all property and rights to property, whether real or personal, belonging to [the taxpayer]." Such lien is not effective, however, against any purchaser, holder of a security interest, mechanic's lienor, or judgment lien creditor until public notice of the lien has been filed. 26 U.S.C. §6323(a) and (f) . The latter subsection requires that notice of the lien be filed in "one office within the State (or the county or other governmental subdivision), as designated by the laws of such State in which the property subject to the lien is situated" ⁴ and that, in the case of real estate, if under state law a deed would not be valid against a purchaser without actual notice unless indexed, and if the office where the notice of lien is filed maintains "an adequate system for the public indexing of Federal tax liens," then the notice of 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)(4) (emphasis added).

Under §1107(a) of the Bankruptcy Code, a debtor in possession in a case under chapter 11 had the powers of a trustee. These include the power to avoid the fixing of statutory liens "to the extent that such lien . . . is not perfected or enforceable at the time of the commencement of the case against a bona fide purchaser that purchases such property at the time of the commencement of the case, whether or not such a purchaser exists." Section 545(2) , Bankruptcy Code. The issue, then, is whether the notice and indexing of the Federal tax lien in the name of "Gary A. Reid, Jr." would, on "reasonable inspection" of the judgment lien index, "reveal" the lien so as to be effective against a hypothetical bona fide purchaser.

In Hudgins v. Internal Revenue Service (In re: Hudgins) [92-2 USTC ¶50,341 ], 967 F.2d 973 (4th Cir. 1992), the Court of Appeals rejected a "bright line" test, under which an I.R.S. lien would have been perfected only if recorded in the exact name of the taxpayer, in favor of a "constructive notice" approach:

It is hornbook law that every purchaser is expected to search for recorded encumbrances on the property; that is, he is held to have constructive knowledge of recorded liens. Thus, the validity of a tax lien in bankruptcy must depend on the constructive notice that the lien would give the purchaser. It reasonably follows that when there is a mistake in the indexing of a tax lien, as here, the validity of the lien in bankruptcy depends on whether it would nevertheless give a purchaser constructive notice.

Id. at 976. In Hudgins the Court of Appeals held that a Federal tax lien recorded against "Hudgins Masonry, Inc."--a corporation whose existence had been terminated for failure to pay certain fees--constituted constructive notice as to the business assets of Michael Hudgins, who continued to do business (and to file Federal tax returns) under the name of "Hudgins Masonry, Inc.," but not as to his non-business assets. As the Court of Appeals observed:

A purchaser of Hudgins' business assets would certainly have known that Hudgin traded as "Hudgins Masonry, Inc.," and, finding a lien against "Hudgins Masonry, Inc.," would have taken further steps to determine if the assets were encumbered.

Id. at 977. With respect to the non-business assets, however, the Court of Appeals reasoned that "individuals are shielded from corporate liability" and that, therefore,

even if a purchaser knew that Michael Hudgins the individual owned Hudgins Masonry, Inc., that purchaser would reasonably believe that any liens against the corporation would not be valid as against Hudgins' nonbusiness assets.

Id. See, Ducote v. United States (In re: de la Vergne), 156 B.R. 773 (Bankr.E.D.La. 1993) (Notice of Federal tax lien recorded in name of "Hughes J. de la Verone II Payroll Account" not sufficient to perfect lien against "Hugues J. de la Vergne II"). Just how far the name under which the lien is recorded can vary from the taxpayer's true name before the notice of lien is ineffective depends on all the circumstances, but it is clear than even fairly significant misspellings may nevertheless be close enough "to alert one of the government's claim." Hudgins, supra, at 976. See, e.g., United States v. Feinstein [89-2 USTC ¶9547 ], 717 F.Supp 1552 (S.D.Fla. 1989) (misspelling of "Tarragon" as "Taragon"); Richter's Loan Co. v. United States [56-2 USTC ¶9706 ], 235 F.2d 753 (5th Cir. 1956) ("Freidlander" instead of "Friedlander"). But see Continental Investments v. United States [53-2 USTC ¶9625 ], 142 F.Supp 542 (W.D.Tenn. 1953) (tax lien in the name of "W.B. Clark, Sr." not constructive notice of lien against "W.R. Clark, Sr.").

In the case before the court, the number of entries indexed under the debtor's last name are relatively few, and no more than five entries separate the correct spelling and the incorrect spelling. On the computer terminal, both the correct and incorrect forms of the name appear on the same screen. The difference between the two spellings involves only one letter in the first name; otherwise the two forms are identical, including the middle initial and the generation suffix. On the other hand, " Gary " is not only spelled differently from " Cary ," it is pronounced differently as well. While the address shown for " Gary " is (presumably) an actual address of the debtor, it is distinctly different from any of the addresses shown on the judgment lien index for "Cary Reid," "Cary A. Reid" and " Cary A. Reid, Jr." Moreover, two experienced title examiners who routinely search titles in the jurisdiction involved did not report the lien recorded against "Gary A. Reid, Jr." as a title objection with respect to the property of "Cary A. Reid, Jr." Although it is true that "what title companies in fact do is not itself decisive of the question of reasonableness" and that the issue of what is a "reasonable inspection" is a mixed question of fact and law to be decided by the court, de la Vergne, supra, at 776, nevertheless the result of actual title searches by experienced local examiners is powerful evidence on the issue of what a reasonable inspection would disclose. Finally, this is not a case, as in Hudgins, where the notice of lien was not filed under the debtor's name because the debtor himself continued to file his business tax returns using a corporate name he was no longer entitled to use and, in effect, misled the Government. Here, there is no evidence that the debtor ever used or filed tax returns in the name of "Gary A. Reid, Jr."

In short, the issue is a close one, but on balance I find that the indexing of the lien in the name of Gary A. Reid, Jr. would not, on reasonable inspection of the judgment lien index, provide constructive notice of a tax lien against the debtor in this case, Cary A. Reid. Accordingly, an order will be entered avoiding the claimed lien.

¹ There was no evidence, and no assertion, that the debtor ever used Gary as his first name.

² Mr. Rankin's search was performed September 28, 1994 and involved a 6.0379-acre parcel vested of record in the name of Cary A. Reid, Jr. He reported only one unsatisfied judgment, which was in favor of James H. Harris & Associates. Mr. Herndon's search was performed April 6, 1994 and involved a 13.4400-acre parcel vested of record in the name of Cary A. Reid, Jr. and Lisa Reid, husband and wife. He likewise reported only a single unsatisfied judgment, which was a tax lien in favor of the Commonwealth of Virginia .

³ The debtor's chapter 11 petition shows his address as P.O. Box 129 , Marshall , Virginia . The discrepancy between that address and the one he supplied the I.R.S. is unexplained. In any event, no evidence was presented to rebut the Government's showing that 209 Dover Road, Warrenton, Virginia, was the debtor's address and the Court can only assume the debtor has used, and continues to use, more than one address.

⁴ Under §55 -1421, Code of Va. (1950), the Clerk's office of the circuit court for the city or county where the real estate is located or where the taxpayer resides is the designated office for filing notices of Federal tax liens.

 

 

[53-2 USTC ¶9625]Continental Investments, a partnership composed of H. H. Hull, J. K. Dobbs, Mrs. H. H. Hull, Mrs. J. K. Dobbs, Emily Hull Keesee, Helen Hull Freeburg and John Hull Dobbs, Plaintiffs v. United States of America, Defendant

In the District Court of the United States for the Western District of Tennessee, Western Division, No. 2261--Civil, October 30, 1953

Liens for taxes: Insufficient notice to mortgagee.--A prior tax lien in the name of W. B. Clark, Sr., was not constructive or actual notice to chattel mortgagees where the owner of the property in litigation was W. R. Clark, Sr. The United States had contended that such mistake was immaterial and that the lien was sufficient to give constructive notice of the existing tax lien on the properties of W. R. Clark, Sr. The mortgagees, consequently, were entitled to recover.

Paul W. Denton for plaintiffs. Edward N. Vaden, Assistant United States Attorney, for defendant.

Findings of Fact, Conclusions of Law and Order For Judgment

BOYD, District Judge:

Plaintiffs, in this action, seek a judgment against the defendant, United States of America , in the sum of $405.08, alleging that said defendant wrongfully converted an automobile owned by one "W. R. Clark, Sr.", upon which the plaintiffs had a valid mortgage. The plaintiffs allege that the prior income tax lien, asserted by the defendant, ran against the property of one "W. B. Clark, Sr.", instead of "W. R. Clark, Sr.", the true owner of the automobile. They contend, therefore, that said prior tax lien, although duly recorded in the Register's Office of Shelby County, Tennessee, was invalid as against the rights of these plaintiffs as mortgagees, inasmuch as they had no actual or constructive notice of defendant's tax lien.

The defendant, for answer to the complaint, denies that it wrongfully converted said automobile when it seized and sold same under its tax lien; it contends that the plaintiffs had constructive notice of its lien on said automobile because said lien notice was duly recorded in the Register's Office of Shelby County, Tennessee, prior to the time the plaintiffs took the mortgage on taxpayer's automobile. It further contends that though through inadvertance, or mistake, it inserted in its lien notice as the middle initial of taxpayer's name, the letter "B" instead of the letter "R", which was the correct initial, such mistake was immaterial and was sufficient to give constructive notice to plaintiffs of defendant's prior existing lien on the properties of W. R. Clark, Sr.

The Court, upon the pleadings, stipulation of facts, briefs and arguments of counsel, makes the following:

Findings of Fact

I. Previous to May 22, 1950, W. R. Clark, Sr., was indebted to the defendant, United States of America, for taxes in the sum of Six Hundred and Six and 80/100 ($606.80) Dollars, and on May 22, 1950, the Collector of Internal Revenue for the District of Tennessee, caused to be recorded in the Register's Office of Shelby County, Tennessee, a Federal tax lien in the name of W. B. Clark, Sr., 2654 Burns Street, Memphis, Tennessee. This lien was recorded in a book kept and provided for that purpose by the Register of Deeds pursuant to a statute of the State of Tennessee . Thereafter, on September 8, 1951, plaintiff, Continental Investments, made a loan to W. R. Clark, Sr., 2654 Burns Street, Memphis, Tennessee, and took as security, a 1949 Ford Automobile, forwarding the chattel mortgage to the proper department of the State of Tennessee, in Nashville, Tennessee, so that a record on the title certificate of W. R. Clark., Sr., could be made, as provided by State Statute. Continental Investments did not record its mortgage in Shelby County, Tennessee, nor did it search the tax lien records of the Shelby County Register's Office for any outstanding liens against W. R. Clark, Sr. Plaintiffs, at no time, had actual knowledge of a pre-existing lien on the properties of W. R. Clark, Sr.

About June 30, 1952, the United States of America, acting through an agent of its Collector of Internal Revenue in Memphis, seized the Ford Automobile above referred to, and after the required notice, proceeded to sell the same under its registered tax lien stated above, and, upon the sale, the automobile was bid in by some third person for Five Hundred and Ten and no/100 ($510.00) Dollars.

At the time of the seizure and sale aforesaid the balance due plaintiffs by W. R. Clark, Sr., on the indebtedness secured by a mortgage on the automobile herein, was Four Hundred and Five and 08/100 ($405.08) Dollars.

The controversy between the parties from the above facts revolves around the issue of whether or not the use of the middle initial "B" in the recorded tax lien instead of the correct initial "R" operated as notice or constructive notice to the plaintiffs Continental Investments.

Conclusions of Law

I. The Court has jurisdiction of the subject matter and the parties to this law suit.

II. A tax lien, under the law, is not valid as against a mortgagee, if, at the time of the mortgage, such mortgagee is without notice, either actual or constructive, of the existence of such lien.

III. Registration of a tax lien is constructive notice only of what appears on the face of the official records. The object of registration is to give constructive notice to mortgagees, pledgees, purchasers or judgment creditors. The official registration records are presumed to speak the truth. They are what they purport to be upon their face and a mortgagee is not charged with notice of anything beyond.

IV. Where the initials only of the party against whom a tax lien is filed are used, they take the place of the Christian name, and, in such case, it is necessary that the correct initials be inserted in the official lien records, in order to impute constructive notice of a claimed lien to a subsequent mortgagee.

V. The tax lien herein mentioned in the name of "W. B. Clark, Sr.", was not constructive notice to the plaintiffs in this case that the defendant, United States of America, held a prior tax lien on the properties of "W. R. Clark, Sr.", and, in particular, the Ford Automobile in question.

VI. The plaintiffs are entitled to recover of the defendant judgment in the sum of $405.08. (Lally v. Holland, 31 Tenn., 396; First National Bank of Opp v. Hacoda Mercantile Co., 53 So., 802; Garner v. Cluck, 193 S. W. (2d) 661.)

Order of Judgment

Judgment in accordance with the foregoing Findings of Fact and Conclusions of Law will be entered within three days.