6337 Annotations: Fraud--Right of Redemption- Levy

Redemption of Properly: Fraud--Right of Redemption

[94-2 USTC ¶50,378] United States of America , Plaintiff v. Kim T. Kilgore and Shirley M. Garrity, et al., Defendants

U.S. District Court, Dist. Kan., 93-1094-PFK, 7/5/94

[Code Secs. 6337 and 7403 ]

Action to enforce lien: Foreclosure: Redemption rights.--Two individuals were not entitled to either a statutory or an equitable period of redemption following the government's foreclosure of its tax liens on property fraudulently transferred from one individual to the other. Because the government brought a judicial foreclosure action, no statutory right of redemption existed. Since the property had been transferred with the intent to delay, hinder, or defraud the United States and the transferor had failed to pay federal income taxes, equitable relief was also barred by the clean hands doctrine.

MEMORANDUM AND ORDER

KELLY, Chief Judge:

This matter comes before the court on defendants Kim T. Kilgore and Shirley M. Garrity's motion to establish redemption rights. Plaintiff United States brought this action, on behalf of the Internal Revenue Service, against Kilgore and Garrity in an effort to collect Kilgore's unpaid federal income taxes by asking the court to allow the United States to foreclose its tax liens against Kilgore's real property and to order the sale of the property pursuant to 26 U.S.C. §7403 . On June 27, 1994 , the court heard the parties' oral arguments and announced its decision to deny the motion for redemption rights. The court enters this memorandum and order in accordance with that decision.

The legal description of the property at issue is:

Lot 4, Except the North Half Thereof, The Oaks, Replat of Reserve A, Block A, The First Addition to The Village, Wichita , Sedgwick County , Kansas .

Kilgore and Garrity began residing on the property in January 1984. By deed dated October 2, 1985 , the property was transferred to Kilgore and duly filed in the office of the Register of Deeds of Sedgwick County, Kansas.

On November 21, 1990 , Kilgore pleaded guilty to travel in interstate commerce with intent to distribute marijuana, a violation of 18 U.S.C. §1952. By deed dated January 30, 1991 , Kilgore deeded his interest in the property to Garrity, upon her agreement to maintain the property and make the monthly mortgage installment payments while Garrity was incarcerated. He began his incarceration in September 1991 and was released to his home in September 1993.

On March 8, 1993 , the United States filed this action to reduce to judgment certain income tax assessments against Kilgore. The government further sought to have the transfer of the property from Kilgore to Garrity declared fraudulent and set aside. Finally, the government asked the court to determine that Garrity holds the title to the property as the nominee to Kilgore and that Kilgore is the true owner of the property.

On September 22, 1993 , the parties filed a joint stipulation that states in part:

1. Judgment may be entered in favor of the United States , and against defendant Kim T. Kilgore, in the amount of $341,652.00, plus statutory additions accruing after the respective dates of assessment.

2. The transfer of real property from defendant Kim T. Kilgore to defendant Shirley M. Garrity . . . was fraudulently made with knowledge of the federal tax liabilities referred to above, and was made for insufficient consideration, with the intent to delay, hinder or defraud the United States of payment of those liabilities pursuant to K.S.A. Section 33 -102.

3. Defendant Shirley M. Garrity holds title to the real property . . . as the nominee of Kim T. Kilgore, who is the true owner of this real property.

4. Defendant Shirley M. Garrity has no legal, or equitable right, title or interest in the real property . . . and that title to this property rightfully belongs in the name of defendant Kim T. Kilgore.

5. The United States has valid federal tax liens against the real property . . . .

6. Defendants have no objection to allowing the United States to foreclose its federal tax liens against the real property . . . subject to the defendants' rights to redemption, if any.

(Pltf. Opp. to Motion, Ex. A.)

Defendants first claim they have a statutory right of redemption pursuant to 26 U.C.S. §6337(b) . Section 6337(b)(1) provides that any person having any interest in real property sold in accordance with 26 U.S.C. §6335 "shall be permitted to redeem the property sold, or any particular tract of such property, at any time within 180 days after the sale thereof." Section 6335 pertains to the sale of property seized by the Secretary of the Internal Revenue Department. Statutes that provide redemption rights should be liberally construed in favor of the property owner-debtor. United States v. Lowe [67-2 USTC ¶9650 ], 268 F.Supp. 190, 192 (N.D. Ga. 1966), affd, Lowe v. Monk [67-2 USTC ¶9654 ], 379 F.2d 555 (5th Cir. 1967), cert. denied, 389 U.S. 1039 (1968).

The government responds by arguing no right of redemption exists in a foreclosure action brought under 26 U.S.C. §7403 . In United States v. Heasley [60-2 USTC ¶9744 ], 283 F.2d 422 (8th Cir. 1960), the court stated:

Unlike the sale of property under levy and distraint proceeding, where by statute there is a specific provision for redemption of the property, §6337(b) of the 1954 Internal Revenue Code, 26 U.S.C.A. §6337(b) , Congress has not seen fit to provide that the right to redeem shall exist where property is sold pursuant to a judicial decree. See §2001 , Title 28, . . .

283 F.2d at 427; see also United States v. Jones [89-2 USTC ¶9411 ], 699 F.Supp. 248, 251 (D. Kan. 1988) ("no right of redemption exists in a foreclosure action to satisfy a judgment for tax liability").

In United States v. Curry, 561 F.Supp. 429 (D. Kan. 1983), the government brought a foreclosure action on behalf of the Farmers Home Administration. The defendants argued they had up to 12 months to redeem the property pursuant to K.S.A. §60-2414. This court found state redemption rights do not apply in foreclosures by federal mortgagees. Furthermore, no statutory rights of redemption under federal law applied to Farmers Home Administration loans. This court, however, granted the defendants an equitable period of redemption not to exceed 180 days. 561 F.Supp. at 431 (citing United States v. Montgomery, 268 F.Supp. 787 (D. Kan. 1967).

Based on the foregoing, Kansas redemption statutes do not apply here. Section 6337 of Title 26 does not apply because this is not a seizure pursuant to 26 U.S.C. §6335 , but instead is a judicial foreclosure brought under §7403 . Section 7403 sales are governed by 28 U.S.C. §§2001 et seq., which do not contain a redemption provision. Thus, Kilgore and Garrity do not have a statutory right of redemption.

Defendants contend that even if they do not have a period of redemption pursuant to any applicable statute, they should be granted an equitable redemption by the court. In United States v. Montgomery , 268 F.Supp. 787 (D. Kan. 1967), the United States brought a foreclosure action on behalf of the Small Business Administration. As discussed above, Judge Brown found "state redemption rights do not apply to judicial foreclosures in federal courts of mortgages held by federal agencies." 268 F.Supp. at 788. The court, however, went on to state:

28 U.S.C. §2001 , which authorizes judicial sales of realty, provides in subsection (a) that "Such sale shall be upon such terms and conditions as the court directs." We think it unnecessarily harsh and inflexible to hold that such language, of itself, precludes any redemption rights in defaulting mortgagors. We conclude that, although defendants are not entitled to the Kansas statutory eighteen month period of redemption, they are entitled to an equitable period of time in which to redeem, which we deem to be sixty days, from the date of sale.

268 F.Supp. at 790.

The government responds by arguing the clean hands doctrine bars the equitable relief Kilgore and Garrity seek. Plaintiff contends a taxpayer who fails to pay federal income taxes and has fraudulently transferred real property with the intent to delay, hinder, or defraud the United States is barred from equitable relief. The clean hands doctrine provides:

"[H]e who comes into equity must come with clean hands." This maxim is far more than a mere banality. It is a self-imposed ordinance that closes the doors of a court of equity to one tainted with inequitableness or bad faith relative to the matter in which he seeks relief, however improper may have been the behavior of the defendants. That doctrine is rooted in the historical concept of count of equity as a vehicle for affirmatively enforcing the requirements of conscience and good faith. This presupposes a refusal on its part to be "the abettor of iniquity." Thus while "equity does not demand that its suitors shall have led blameless lives," as to other matters, it does require that they shall have acted fairly and without fraud or deceit as to the controversy in issue.

This maxim necessarily gives wide range to the equity court's use of discretion in refusing to aid the unclean litigant. It is "not bound by formula or restrained by any limitation that tends to trammel the free and just exercise of discretion." Accordingly one's misconduct need not necessarily have been of such a nature as to be punishable as a crime or as to justify legal proceedings of any character. Any willful act concerning the cause of action which rightfully can be said to transgress equitable standards of conduct is sufficient cause for the invocation of the maxim by the chancellor.

Precision Instrument Mfg. Co. v. Automotive Maintenance Machinery Co., 324 U.S. 806, 814-15 (1945) (citations omitted).

The United States cites several taxpayer cases in which the clean hands doctrine was applied. See, e.g, Irving v. Gray [73-2 USTC ¶9581 ], 479 F.2d 20, 22 (2d Cir. 1973) (persons involved in the "Hughes hoax" biography embezzled money from publisher and failed to pay over $500,000.00 in income tax); Findley v. Odland, 127 F.2d 948, 952 (6th Cir. 1942) (bank failed to perform statutory duty of collecting taxes, and therefore was not entitled to enjoin enforcement of their tax collection obligation); Blum v. Internal Revenue Service, 91-1 USTC (CCH) ¶50,140 (W.D. Mo. 1991) ("A party who has violated the law by not paying taxes is doubtless subject to an 'unclean hands' bar to equitable relief"); Lampenfield v. Internal Revenue Service, 91-1 USTC (CCH) ¶50,038 (W.D. Pa. 1991) (taxpayer not entitled to equitable relief because of his "failure to file a tax return for the time period in question--an omission which precluded his filing a suit for refund"); Williamson v. United States, 79-2 USTC (CCH) ¶9640 (D. N.J. 1979) (taxpayer received a check that he did not deserve, cashed it, and then retained the proceeds without a colorable claim that the money belonged to him).

The government points out that Kilgore and Garrity have stipulated to the following facts: (1) Kilgore owes the United States $341,652.00 in unpaid income taxes, plus statutory additions; (2) the transfer of real property from Kilgore to Garrity was fraudulent; and (3) Garrity has no legal or equitable right, title or interest in the real property at issue. Applying the principles discussed in the cases cited by the government to these facts, the United States argues Kilgore and Garrity are not entitled to an equitable right of redemption. Moreover, plaintiff contends United States v. Curry, supra, and United States v. Montgomery , supra, can be distinguished because they addressed consensual debtor-creditor relationships in which federal agencies sought to foreclose mortgages.

The court agrees with the government. Kilgore and Garrity do not have the requisite clean hands and therefore are not entitled to an equitable period of redemption.

On June 13, 1994 , defendants Kilgore and Garrity filed a motion for summary judgment on plaintiff's prayer for foreclosure and judicial sale of real property. Plaintiff shall have 10 days from the date of this memorandum and order to file a response to that motion.

IT IS ACCORDINGLY ORDERED this 5 day of July, 1994, that defendants' motion to establish redemption rights (Dkt. No. 28) is denied.