[85-2 USTC ¶9670]Southern Bank of Lauderdale County,
Plaintiff-Appellee v. Internal Revenue Service, United States of
America, Defendants-Appellants Mid-State Homes, Inc., Plaintiff-Appellee
v. United States of America, Defendant-Appellant
(CA-11), U. S. Court of Appeals, 11th Circuit,
Nos. 84-7280, 84-7501, 770 F2d 1001,
, Reversing and remanding District Court opinions, 84-1 USTC ¶9245,
586 F. Supp. 12, and 84-1 USTC ¶9533
[Code Secs. 6321, 6323, and 7425]
Lien for taxes: Nonjudicial foreclosure sales: Equitable
principles v. legal principles: Property subject to tax liens:
Mortgaged property.--Certain actions by two mortgagees in a
"title" State, whereby they conducted nonjudicial sales
of the mortgaged properties without giving notice to the
, elevated two junior tax liens on the taxpayer-mortgagors'
equitable rights of redemption to first liens on the realty. When
the mortgagees purchased the properties at the foreclosure sales,
the doctrine of merger operated to extinguish the mortgage
indebtedness and the related liens. No equitable considerations
precluded the harsh result because the result could have been
easily avoided by the mortgagee-purchasers and it was consistent
with the plain language of Code Sec. 7425, its legislative
history, and the overall purpose of the tax collection system. In
addition, State law was inapplicable and, therefore, the
mortgagee-purchasers' contention that the government only held a
statutory right of redemption after the sales was meritless. BACK
¶5362.225, and 85
John E. Higginbotham, 206 S. Pine St., Florence, Ala. 35630,
William B. Tatum, Ford, Caldwell, Ford & Payne, 218 Randolph
Ave., Huntsville, Ala. 35804, James M. Edwards, Copeland, Franco,
Screws & Gill, P. O. Box 347, Montgomery, Ala. 36101, for
W. Donaldson, United States Attorney, Caryl P. Privett, Assistant
United States Attorney, Birmingham, Ala. 35203, Glenn L. Archer,
Jr., Assistant Attorney General, Curtis L. Muncy, Michael L. Paup,
Wynette J. Hewett, Steven I. Frahm, Department of Justice,
Washington, D. C. 20530, for defendants-appellants.
Before KRAVITCH and CLARK, Circuit Judges, and WRIGHT *,
Senior Circuit Judge.
CLARK, Circuit Judge:
These two cases, which were consolidated for oral argument
purposes, present questions about the federal tax lien and the
notice provisions of 26 U. S. C. §7425(b). In both cases the
district court granted summary judgment in favor of the appellees
Southern Bank of Lauderdale County (Southern Bank) and Mid-State
Homes, Inc. (Mid-State). For the reasons discussed below, we
The facts in both cases are undisputed. The appellees, Southern
Bank and Mid-State, obtained their respective interests in the
property by either the assignment or execution of mortgages upon
which the taxpayers were obligated. 1
These mortgagees were properly recorded. Thereafter, the Internal
Revenue Service (
) made assessments against the taxpayers for unpaid taxes and
properly filed notices of the federal tax liens pursuant to 26 U.
S. C. §6323. 2
The taxpayers defaulted on their mortgages. Thereafter, Southern
Bank and Mid-State conducted nonjudicial foreclosure sales in
accordance with the power of sale contained in the mortgages. Both
Southern Bank and Mid-State admit that they did not provide the
United States with notice of the sales as set forth under 26 U. S.
C. §7425. Nor did the
consent to the sales. 3
Southern Bank and Mid-State were the purchasers of the property at
the nonjudicial sales. 4
Recognizing that its initial foreclosure was ineffectual against
because of its failure to give notice, Mid-State foreclosed on the
property approximately eleven months after the first foreclosure
On this second occasion, however, Mid-State gave proper notice of
the foreclosure sale to the
pursuant to 26 U. .S. C. §7425. Mid-State was the purchaser of
the property at this second sale and thereafter recorded its
II. Proceedings in the District Court and
Arguments on Appeal
A. Southern Bank. Southern Bank filed its complaint seeking:
(1) to quiet title to the property; (2) an injunction prohibiting
from selling the property under its notice of levy; (3) a
discharge of the tax lien; and (4) a determination that Southern
Bank was the owner of the property with the rights of the
or any other interested party to be governed by the redemption
provisions of the Code of Alabama. 6
Record, No. 84-7280 at 3, 6.
Southern Bank argues that under 26 U. S. C. §6321 the tax lien
only applied to the interest the taxpayer held in the property
prior to the foreclosure sale, that state law controlled the legal
interest the taxpayers held in the property, and that federal law
limited the tax lien to only that property interest. Because
is a "title" state, which means that legal title passes
to the mortgagee upon execution of the mortgage, Southern Bank
argues that the only interest retained by the taxpayer prior to
foreclosure was its equitable right of redemption. Thus, the tax
lien only attached to this equitable right of the taxpayer, which
was a right the taxpayer had to gain legal title by paying off the
note secured by the mortgage. According to Southern Bank, the
government's interest in the property, subsequent to the
foreclosure sale, was only a statutory right of redemption. 7
Southern Bank concedes that because notice of the sale was not
given to the
, the tax lien remained in effect to that extent.
maintains that due to its lack of notice of the sale, its lien was
undisturbed by the foreclosure. Because the sale extinguished
Southern Bank's mortgage, the
contends that its junior lien was automatically elevated to a
first lien against the real estate acquired by the purchaser at
The district court concluded that Southern Bank had a better
equitable and legal argument. The court observed:
lien could only attach to what the mortgagor had and could not
leap ahead of Bank simply because Bank purchased at foreclosure.
It would be unfair in the extreme to make a distinction here
between foreclosure sales where a third party purchases and where
the mortgagee purchases. The court must therefore conclude that, as
, the nonjudicial foreclosure sale conducted by Bank on March
30, 1982 is a nullity. Legal title to the property in issue under
the law of
was held by Bank prior to the sale and continues to be held by the
Bank. The effect of this court's ruling is to place the parties in
the same position vis-a-vis each other as they were in just prior
to Bank's nonjudicial foreclosure sale. This means, of course,
that the court disagrees with the Bank's contention that
only has a statutory right to redeem.
Southern Bank, 586 F. Supp. at 14 emphasis in original).
B. Mid-State. Because the
levied and seized possession of the subject property, Mid-State
filed its complaint alleging that the
wrongfully levied upon the property. Mid-State argues that 26
C. §7425 was unconstitutional as written or applied and that the
procedures required under the statute had not been followed.
Mid-State sought to enjoin the
from enforcing its lien and sought to have the subject property
returned. Record, No. 84-7501 at 32.
In finding in favor of Mid-State the court stated:
This Court has not changed its mind since it
wrote Southern Bank, and therefore believes that
Mid-State's second foreclosure was successful in cutting off
U. S. A.
's tax lien, leaving
U. S. A.
with no more than a lien creditor's statutory right to redeem.
* * *
Based on the conclusions which this Court has
reached there is no necessity for expressing an opinion on the
question of the constitutionality of 26
C. §7425 or an opinion on the alleged failure of
U. S. A.
to comply with 26
C. §6331(a). These issues are mooted by the rationale of this
Record, No. 84-7501 at 113, 114.
C. Arguments on Appeal. The parties raise similar arguments
on appeal. The
essentially argues that the district court erred when it concluded
that "where a nonjudicial foreclosure sale was held without
notice to the
, the sale was a nullity insofar as the Government was concerned
and the foreclosing mortgagee consequently retained a lien against
the property that was superior to the federal tax liens." Appellant's
Brief, No. 84-7501 at 8. It further contends that in Mid-State
the district court erred when it treated the second sale as
effective to extinguish the federal tax lien on the basis of its
holding in Southern Bank. The
takes the position that the court's holdings are contrary to the
plain language of the statute, its interpretation by the courts,
and its legislative history.
Southern Bank admits in its brief:
A federal tax lien attaches to the taxpayer's interest in property
and becomes enforceable against the property whether his interests
are extensive or limited.
also correctly asserts that state law controls in determining what
interest the taxpayer has in the property, and that federal law
determines whether a lien attached to the property and the
priority of competing liens. Aquilino v. United States
[60-2 USTC ¶9538], 363 U. S. 509, 80 S. Ct. 1277, 4 L. Ed. 2d
1365 (1960); United States v. Brosnan [60-2 USTC ¶9516],
363 U. S. 237, 80 S. Ct. 1108, 4 L. Ed. 2d 1192 (1960); United
States v. Bess [58-2 USTC ¶9595], 357 U. S. 51, 78 S. Ct.
1054, 2 L. Ed. 2d 1135 (1958). There is no controversy as to these
statements of law.
No. 84-7280 at 5.
The appellees argue that 26 U. S. C. §7425 was only designed to
protect the government's interest in property prior to a
nonjudicial foreclosure if the I. R. S. was not given notice of
the sale and that the protection continued because the I. R. S.
lien remained after the sale as a lien junior to that of each
appellee's lien. They urge that a failure to give notice should
not create a "wind fall" or greater interest in the
property than the
held prior to closeclosure. Mid-State points out that "[t]here
is nothing in the language of the statute or the legislative
history [sic] to suggest that Congress intended to leapfrog
priorities. Instead, the clear directive of the satute is simply
that the tax lien continues if notice of foreclosure is not
given." Appellee's Brief, No. 84-7501 at 5. Both
Mid-State and Southern Bank claim that under
law the taxpayers only held an equitable right of redemption, and
that this was the only interest to which the tax lien could
attach. Thus, it is argued that to obtain title to the property
must first make payment in full of the prior mortgage
indebtedness. The appellees contend that if the government had
been given notice before the foreclosure sales, it would have had
to purchase the property at foreclosure for the full amount owed
to each mortgagee in order to protect the tax lien and obtain any
revenue for the government. To change the priorities because of
lack of notice, it is urged, would be against the principles of
equity and fairness. It is apparent the district court was
persuaded by these arguments. We now address the issues raised by
A. Failure of a Mortgagee to Provide Notice of a Nonjudicial
Pursuant to 26 U. S. C. §7425. When a taxpayer, who is liable
to pay any tax, neglects or refuses to pay the tax after demand,
the amount becomes "a lien in favor of the United States upon
all property and rights to property, whether real or personal,
belonging to such person." 26 U. S. C. §6321. 8
"The overriding purpose of the tax lien statute obviously is
to ensure prompt revenue collection."
v. Kimbell Foods, Inc., 440
715, 734-35, 99
1448, 1462, 59 L. Ed. 2d 711 (1979). As we observed in
v. Second National Bank of North Miami [74-2 USTC ¶9739],
502 F. 2d 535 (5th Cir. 1974), cert. denied, 421
1567, 43 L. Ed. 2d 777 (1975), "[i]t has long been recognized
that liens to guarantee payment of taxes are an important element
of the sovereign's taxing power."
at 545. With these objectives in mind, we must rule on the
questions presented in this appeal. We initially determine the
consequences that arise when a mortgagee fails to provide notice
to the government of a forclosure sale and subsequently purchases
property this is subject to a valid federal tax lien.
Under 26 U. S. C. §7425(b) "a sale of property on which the
United States has or claims a lien . . . shall . . . be made
subject to and without disturbing such lien or title, if notice of
such lien was filed or such title recorded in the place provided
by law for such filing or recording more than 30 days before such
sale and the United States is not given notice of such sale in the
manner prescribed in subsection (c). . . ."
The statute sets forth two requirements that must exist before a
sale of property, upon which the
has a tax lien, can be made subject to the lien. First, the
must file its notice of lien 30 days prior to the sale. Second,
must not be furnished with notice of the sale in the time and
manner prescribed by 26
C. §7425(c)(1). One commentator, in discussing these notice
provisions, made the following observation:
The judicial or nonjudicial procedures provided
under local law by which the holder of a senior mortgage or other
lien may foreclose the interests of the debtor and of junior
lienors may not suffice to extinguish a junior federal
lien, unless the senior lienor complies with the further
requirements prescribed by Congress for the protection of the
Plumb, Federal Liens and Priorities--Agenda
for the Next Decade
, 77 Yale L. J. 1104, 1168 (1968) (emphasis in original).
We have determined that the liens attached to the property in
It is undisputed that the government filed notice of the tax liens
at least 30 days prior to the foreclosure sale. It is also
undisputed that the mortgagees, Southern Bank and Mid-State, did
not provide the government with notice of the sales pursuant to 26
C. §7425(c). Since both of the requirements for a sale to be made
subject to the tax lien have occurred in these cases, we hold that
the sales of the property subject to the tax liens were made subject
to and without disturbing the federal tax liens. 10
Our conclusion is supported by Myers v. United States [81-2
USTC ¶9490], 647 F. 2d 591 (5th Cir. Unit A 1981). 11
In Myers, the mortgagee held the senior encumbrance on the
property. The tax lien, which was duly recorded, was junior to the
mortgage. After the tax lien was filed a sheriff's sale was held
pursuant to a nonjudicial foreclosure proceeding initiated by the
mortgagee and the mortgagee purchased the property. The mortgagee
subsequently sold the property to Myers, a third party. At no time
during the foreclosure proceedings was the
joined as a party or served with notice of the sale. The
government levied on the property and served Myers with a notice
of the seizure. Myers brought an action for wrongful levy.
In deciding that the tax lien was not discharged by the nonjudicial
foreclosure sale because of the mortgagee's failure to give
notice, we observed that 26 U. S. C. §7425 "was intended to
protect the United States, where its tax lien is junior, from its
discharge under state law without prior notice to the United
States of proceedings by which the property is sold."
at 596. We concluded that:
Section 7425(b) provides that where notice of a federal tax lien is
duly filed more than thirty days prior to the date of the
foreclosure sale, the sale will be made subject to the federal
lien unless written notice of the sale is served upon the
at least twenty-five days before the sale is held. It is
undisputed that such notice was not given in the present case. It
therefore follows that the second federal lien was not discharged
by the foreclosure sale.
In Little v. United States [83-1 USTC ¶9343], 704 F. 2d
1100 (9th Cir. 1983), the Ninth Circuit reached a similar
conclusion. The court observed that "[s]ection 7425(b)
expressly provides that a nonjudicial sale of property on which
the United States has a lien . . . shall be made 'subject to and
without disturbing such lien or title' if the United States
is not given notice of such sale in the manner prescribed in
at 1107 (emphasis in original) (footnote omitted). 12
And, in United States v. Rodgers, 461
2132, 76 L. Ed. 2d 236 (1983), the Court noted that "[o]nce a
lien has attached to an interest in property, the lien cannot be
extinguished (assuming proper filing and the like) simply by
transfer or conveyance of the interest."
at 2141 n. 16.
B. Elevation of the Federal Tax Lien From its Junior Status.
Southern Bank and Mid-State argue that to allow the government to
summarily levy on the property would allow it to "leapfrog
priorities." Their contention is that this would cause an
inequitable result for it would put the government in a better
position than prior to the foreclosures.
These arguments relate to the priority and overall operation of the
federal tax lien law. It is established that matters directly
affecting the nature and operation of the federal tax lien and its
relative priority present federal questions. See United States
v. Brosnan [60-2 USTC ¶9516], 363 U. S. 237, 240, 80 S. Ct.
1108, 1110, 4 L. Ed. 2d 1192 (1960) ("[M]atters directly
affecting the nature or operation [of federal tax liens] are
federal questions, regardless of whether the federal statutory
scheme specifically deals with them or not."); Aquilino v.
United States [60-2 USTC ¶9538], 363 U. S. 509, 513-14, 80 S.
Ct. 1277, 1280, 4 L. Ed. 2d 1365 (1960) ("[O]nce the tax lien
has attached to the taxpayer's state-created interests, we enter
the province of federal law, which we have consistently held
determines the priority of competing liens asserted against the
taxpayer's 'property' or 'rights to property.'").
[Doctrine of Merger]
With this principle in mind, we address the appellees' arguments.
The federal tax lien has been elevated to its current status
because of the principles regarding merger and foreclosure sales
and due to the operation of 26 U. S. C. §7425. When a mortgagee
forecloses on property, the doctrine of merger generally operates
to extinguish the mortgage indebtedness and the lien held by the
mortgagee. "In other words, the mortgage is no longer in
existence, and thus the original holder of the mortgage no longer
has a mortgage lien which can be foreclosed a second time, even if
the original indebtedness is not satisfied from the sales
proceeds." Baldwin County Savings & Loan Assoc. v.
United States, 81-2 USTC ¶9619 at 88,065 (S. D.
1981). "The equity of redemption in either case, however, is
extinguished by a valid foreclosure sale. . . ." Trauner
v. Lowrey, 369 So. 2d 531, 534 (
Because Southern Bank and Mid-State conducted the foreclosure sales
and purchased the subject property it is reasonable for us to
conclude that a complete merger of title resulted, vesting the fee
simple title to the property in the mortgagees. This title is
superior to all liens except those not extinguished, such as
state, county and city taxes, a federal tax lien properly
perfected as in this case, and such other liens as federal and
local governments may determine are not extinguishable by a
nonjudicial foreclosure sale. 13
For this reason, it was impossible for Mid-State to conduct a
second correcting foreclosure sale. It follows that when Southern
Bank's and Mid-State's liens were extinguished, the tax liens,
were naturally elevated from their junior status.
In our view, the appellees' failure to provide notice to the
government of the sale and their subsequent purchase of the
property has placed the government in a position to exercise any
of its collection remedies including levy and seizure of the
property. The appellees argue that this result is harsh and that
it violates principles of equity.
Before we rule on their equitable arguments, we examine the
legislative history of 26
C. §7425. It illustrates that the statute was designed to make a
"provision for a timely notice to the Government where it has
the status of a junior lienor and there is no plenary
proceeding." Federal Tax Lien Act of 1966, S. Rep. No. 1708,
89th Cong., 2d Sess., reprinted in 1966 U. S. Code Cong.
& Ad. News 3722, 3748. The Committee on Finance indicated that
"[t]here [did] not appear to be any reason why in these cases
there should not be a timely notice of the proceedings to the
Government where notice of its tax lien is on file. The
requirement of notice gives the Government an opportunity to
review its position and determine the appropriate action without
placing an undue burden on the foreclosing creditor."
(emphasis added). In specifically discussing 26
C. §7425(b) it was observed:
The bill provides that, in the case of all other
foreclosure proceedings, where timely notice of the proceedings is
given to the Government, the Government's claim to property under
a tax lien is to be discharged in the manner provided by local
Where foreclosures covered by this provision are
made without proper notice to the Government, the bill provides
that this does not affect the Government's claim under a tax lien
(as where the Government is not joined in a judicial foreclosure).
In these cases, the Government's claim continues against the
property into the hands of a third party.
One legal commentator, in seeking reform of the notice provisions,
made the following observations:
Notice of a sale enables the tax collector to drum up interest
among potential bidders, to observe the fairness of the sale, and
to reach the surplus proceeds, if any. Notice well in advance of
the sale seems necessary only for the first of those purposes; but
the tax collector is likely to utilize the opportunity to drum up
bids only in the case of real property . . . and in these cases 25
days may be too short to be meaningful.
. . . .
[I]t seems desirable also to provide that the
Government's remedy for inadequacy of the notice shall be only
against the selling creditor, and that the innocent purchaser's
title shall not be impaired if he behaved reasonably. Plumb, Federal
Liens and Priorities--Agenda for the Next Decade
, 77 Yale L. J. 1104, 1171-72 (1968) (emphasis added)
Even if this commentator's suggestions for reform were adopted,
Mid-State and Southern Bank would not prevail. The commentator
advocates that the remedy for inadequate notice should be against
the selling creditor rather than an innocent purchaser who
behaved reasonably. E.g., as in Myers, supra. Mid-State
and Southern Bank were neither innocent purchasers nor did they
behave reasonably under the circumstances.
Although appellees contend that our interpretation of the statute
produces a harsh result, we think it is consistent with the plain
language of the statute, the legislative history, and the overall
purpose of our tax collection system. The appellees claim in each
case the value of the property was much less than the amount of
the debt, that I. R. S. in neither case would have paid off the
debt if notice had been properly given, and that the government is
unjustly enriched if it now has a first lien against the property.
To accept appellees' argument would result in a disparate, unequal
and impossible application of the federal notice statute.
Appellees would have the notice statute apply only when the value
of the land exceeded the mortgagor's debt to the mortgagee. This
would require litigation by the government of every non-notice
case so that it would be able to conduct a comparison of the value
of the security to the amount of the indebtedness. Congress
required the simple expediency of notice by the mortgagee to the
government prior to foreclosure in every case. We cannot and do
not wish to rewrite the statute. Equitable principles do not
persuade us to reach a contrary conclusion for the harsh results
now imposed could have easily been avoided by Mid-State and
Mid-State and Southern Bank, as mortgagees, were in the best
position to provide notice to the government and extinguish the
liens. If as in Myers, an innocent third party purchaser
takes the property subject to the lien, these experienced
mortgagees certainly should not receive different treatment.
Our conclusion is bolstered by the supremacy clause of the United
States Constitution which provides that:
This Constitution, and the Laws of the United
States which shall be made in Pursuance thereof; and all Treaties
made, or which shall be made, under the Authority of the United
States, shall be the supreme Law of the Land; and the Judges in
every State shall be bound thereby, and Thing in the Constitution
or Laws of any State to the Contrary notwithstanding.
U. S. Const. Art. VI, cl. 2.
As the Supreme Court stated in Commonwealth Edison Company v.
Montana, 453 U. S. 609, 634, 101 S. Ct. 2946, 2962, 69 L. Ed.
2d 884 (1981) `[p]re-emption of state law by federal statute or
regulation is not favored' in the absence of persuasive
reasons--either that the nature of the regulated subject matter
permits no other conclusion, or that the Congress has unmistakably
The collection of taxes serves a vital national interest. The
federal tax lien is one of the tools utilized by the government to
achieve this objective. Because of this important interest, we
cannot permit states to nullify the effectiveness of the federal
tax lien by enacting nonjudicial foreclosure laws or by applying
various equitable principles recognized by the state. The
legislative history of 26
C. §7425 makes clear that Congress did not intend such a result.
We therefore hold that the failure of the mortgagees to comply with
the notice provisions of 26
C. §7425 before they conducted the foreclosure sales and
purchased the property, caused their mortgage liens to be
extinguished and the federal liens to be elevated from their
C. Property Interest to which the Tax Lien Attached. One
issue we must decide is whether each taxpayer had a sufficient
property interest for the federal tax liens to attach to the
The appellees argue that
classifies itself as a "title" state with regard to
mortgages. Thus, "[e]xecution of a mortgage passes legal
title to the mortgagee. The mortgagor is left with an equity of
redemption, but upon payment of the debt, legal title revests in
the mortgagor." Trauner v. Lowrey, 369 So. 2d 531, 534
1979) (citations omitted). The equity of redemption is
extinguished by a valid foreclosure sale. Thus, a "mortgagor
or his vendee is left only with the statutory right of
follows the title theory, the appellees contend that the only
interest to which the liens could attach was each taxpayer's
equity of redemption. When foreclosure occurred, each taxpayer was
left with a statutory right of redemption. Thus, the appellees
contend that the
holds only a statutory right of redemption in the property.
According to the appellees, the
, as a holder of a statutory right of redemption, could not claim
legal title to the property prior to the foreclosure sale unless
it paid the mortgage in full and cannot now seek to recover the
property until it has paid the mortgage in full.
We agree with the appellees that under
law the property interest held by each taxpayer was an equitable
right of redemption. In
, this is a valuable property interest for it may be conveyed by
the mortgagor and it allows a mortgagor, who has retained
possession of the subject property, to be possessed of legal title
against all of the world except the mortgagee or its assignee. See
Trauner v. Lowrey, 369 So. 2d 531, 534 (
1979); Jones v.
, 237 So. 2d 460, 462 (
1970). We therefore conclude that each taxpayer had
"property" and "rights to property" under U.
S. C. §6321 to which the tax lien could attach. See Little v.
United States [83-1 USTC ¶9343], 704 F. 2d 1100, 1105 (9th
Cir. 1983) for a discussion of a right of redemption being a
"right to property" since such a right is an economic
asset, has a pecuniary worth, and is transferable.
In its brief, Mid-States relies upon Gilliland v. United States,
47 A. F. T. R. 2d 1364, 81-1 USTC ¶9322 at 86,837 (M. D. Tenn.
1981), arguing the following:
In a dispute involving similar facts, the courts in Gilliland
noted that since the taxpayer held only equitable rights to the
' lien could attach solely to these rights. The courts also noted
that a foreclosure sale without notice to the
did not discharge the
' lien, which continued on after the sale.
No. 84-7501, at 8. The court in that opinion held the following:
However, it is clear that the lien did in fact attach to Webb's
interests in the realty, even though those interests were
equitable in nature. See Howard v. United States, 566 S. W.
2d 521 (
1978) (federal tax lien attached to the equitable interest of
income beneficiary in a spendthrift trust). And, since Webb's
equitable interests in the property continued to exist until
terminated by the foreclosure sale, the issue now before the court
is whether that sale was also effective to extinguish the
government's rights under the tax lien.
* * *
The foreclosure sale was precisely the kind of non-judicial sale
contemplated by 26
C. §7425(b), and in the absence of the notice required by the
statute, the sale could not operate to discharge the government's
tax lien. That tax lien, having previously attached to Webb's
equitable interests in the subject property, clearly survived the
trustee's foreclosure sale.
Gilliland, ¶9322 at 86,840.
The contention by the appellees that the government had only a
statutory right of redemption inferior to their title is meritless.
The interest of the government after the foreclosure sale was that
of an enforceable lien against the realty in each instance and
's statutory redemption provisions have no application to this
The judgment of the district court in each case is reversed. In
reversing, we do not divest the district court of any jurisdiction
it needs with respect to the enforcement of the government's tax
REVERSED and REMANDED.
Honorable Eugene A. Wright, U. S. Circuit Judge for the Ninth
Circuit, sitting by designation.
In Southern Bank of Lauderdale County v. Internal Revenue
Services, United States of America [84-1 USTC ¶9245], 586 F.
Supp. 12 (N. D. Ala. 1984) [hereinafter cited as Southern Bank],
the taxpayer, Florence Reinforced Plastics, Inc., an Alabama
Corporation, executed two mortgages to Southern Bank on a parcel
of real property located in Lauderdale County, Alabama.
In Mid-State Homes, Inc. v. United States [84-1 USTC ¶9533],
No. 83-AR-1072-S, slip op. (N. D. Ala.
May 22, 1984
) [hereinafter cited as Mid-State], the taxpayers, the
Fergusons, executed a first mortgage to Jim Walters Homes, Inc.
who later assigned the mortgage to Mid-State.
In Southern Bank, the taxpayer was assessed $19,025.61. In Mid-State,
the taxpayers were assessed $8,580.18.
Under 26 U. S. C. §7525(c)(1), notice of a nonjudicial or other
sale of property "shall be given . . . in writing, by
registered or certified mail or by personal service, not less than
25 days prior to such sale, to the Secretary." The statute
further provides that a nonjudicial or other sale of property
"shall discharge or divest such property of the lien or title
consents to the sale of such property free of such lien or
title." 26 U. S. C. §7425(c)(2).
Southern Bank purchased the property at the nonjudicial
foreclosure sale for $37,714.18. Southern Bank, 586 F.
Supp. at 13. Mid-State purchased the property at the nonjudicial
sale for $12,542.74. Record, No. 84-7501 at 109.
The first sale was held on
December 30, 1981
. The second sale was held
November 30, 1982
Code §6-5-230 to
Southern Bank reaches this conclusion because it held legal title
before and after the foreclsoure sale and the foreclosure
eliminated the mortgagor's right of equitable redemption. The
mortgagor then only had a statutory right of redemption. Southern
Bank, 586 F. Supp. at 13. See Infra at §
C for a discussion of this issue.
The statute provides:
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.
C. §6321 (emphasis added).
See infra at §
Mid-State agrees that the property is "subject to" the
federal tax lien. However, it argues that it has legal title
to the property "subject to" the government's statutory
right of redemption. As we shall demonstrate in the following
sections of this opinion, this argument is without merit.
In Bonner v. City of Prichard, 661 F. 2d 1206 (11th Cir.
1981) (en banc), this court adopted as binding precedent all of
the decisions of the former Fifth Circuit handed down prior to the
close of business on
September 30, 1981
Another case that is consistent with our position is Baldwin
County Savings & Loan Association v. United States, 81-2
Tax Ct. Rep. (
) ¶9619 (S. D. Ala. 1981). In
, the taxpayer executed a mortgage in favor of the
plaintiff/mortgagee. The mortgage was duly recorded. The
subsequently filed a notice of federal tax liens against the
taxpayer. The mortgagee, without providing notice pursuant to 26
C. §7425, conducted a nonjudicial foreclosure sale. The mortgagee
purchased the property at the sale.
The district court found that the tax liens attached to the real
property in issue. It concluded that because the
was not given notice of the sale, the federal tax liens were not
discharged. Thus, the court held that "by purchasing the
property for an amount equal to the unpaid balance of the
promissory note, not only was the mortgage extinguished, but also
the debt was paid. Accordingly, the tax liens on the subject real
property were promoted to a senior lien status, and that is the
position they enjoy today."
Neither appellee attempts to distinguish Myers, by which we
are bound, nor Little, by which we are not bound, but which
we find persuasive.
To this statement about extinguishment of junior liens in a
nonjudicial foreclosure, we must attach a caveat. This holding is
limited to this case and these facts. Because of our decision in
this case, it is not necessary for us to discuss the
constitutional implications inherent in
's nonjudicial mortgage foreclosure statute which on its face
permits extinguishment by a mortgagee of subordinate liens without
any notice to those lienors except by publication in the
newspaper. At this point in time, to the knowledge of this court,
no court has held such a foreclosure statute unconstitutional.
However, for a discussion of such a constitutional problem, see Federal
Deposit Insurance Corporation v. Morrison, 747 F. 2d 610 (11th
Cir. 1985), reh'g denied, 763 F. 2d 419 (1985) (Clark, J.,
dissenting with opinion); Note, Mortgages--Does Foreclosure
Under Power of
Violate Due Process Right?, 4 Cum.-Sam. L. Rev. 507 (1974);
(G. Osborne, G. Nelson and D. Whitman, Real Estate Finance Law §7.23
at 497 (1979).