United States of America
, Plaintiff v. Jack Jepsen, Kris Jepsen, Karen Jepsen Makutenas,
Court of Appeals, 8th Circuit, 00-2812,
App. LEXIS 21628. Affirming a District Court decision, 2000-2
Tax liens: Real property: Conveyance to related parties: Sale v.
gift: State law: Arkansas.--A delinquent individual's conveyance of
property to his children did not constitute a valid inter vivos
gift under state (Arkansas) law and, thus, the government's tax lien
against the property. The transaction was a sale, not a gift, due to the
existence of down payment checks, a promissory note and a mortgage. His
subsequent return of down payment checks to his children did not prove
that the conveyance was a gift; a letter accompanying the returned
checks indicated only that the return of the down payments was a gift.
Additionally, his arguments that his release of the mortgage
extinguished the government's right to foreclose its lien, and that
law required production of the original promissory note by the creditor,
Tax liens: Real property: Conveyance to related parties: State law:
: Statute of limitations.--The government's tax lien against a
delinquent individual's real property that he had transferred to his
children was valid. The government's right to enforce the promissory
note and the mortgage had not expired under state (
) law. The applicable statute of limitations arose under the law of
another state (
) because the promissory note was executed in that state and the
transferees resided there.
law provided for a 10-year limitations period within which the taxpayer
could enforce the promissory note and the mortgage when the government
sued to enforce its tax lien on the property.
Court of appeals: Appealable order: Tax liens.--A delinquent
individual's contention that the district court's judgment that his
transfer of real property subject to a tax lien to his children made
them liable for the full amount of the judgment, rather than the amount
due under a promissory note, was deemed speculative. It was unknown
whether the sale of the real property would produce sufficient proceeds
to satisfy the judgment. The district court did not enter a final order
setting the terms for any sale of the promissory note.
Holmes III, Warner & Smith, Fort Smith, Ariz. Thomas J. Clark,
Anthony T. Sheehan, Thomas J. Sawyer, Department of Justice, Washington
D.C. 20530, Andrew T. Pribe, Department of Justice, Ben Franklin
Station, Washington, D.C., for plaintiff-appellee. David Grant Bercaw,
Ball & Mourton,
, for defendants-appellants.
WOLLMAN, Chief Judge, LOKEN, Circuit Judge, and BOGUE, *
resident Jack Jepsen conveyed the family's
vacation home to his children, Kris and Karen. In exchange, Jepsen
received a $10,000 down-payment check from each child and an
interest-bearing promissory note in the amount of $95,000 secured by a
mortgage on the property. In April 1994, the
assessed a $214,263 tax penalty against Jepsen for failure to pay
employment taxes owed by his company, Jepsen of Illinois, Inc. The
assessment created a lien in favor of the
on all of Jepsen's "property and rights to property." 26
U.S.C. §§6321, 6322. After reducing the assessment to judgment, the
commenced this action in August 1998 to foreclose its tax lien against
the promissory note and mortgage on the
property. Following a bench trial, the district court 1
entered a final judgment in favor of the government and ordered a
foreclosure sale of the real property. Jepsen appeals, arguing in the
alternative that he gave the property to his children in 1989, and that
the applicable statute of limitations bars any claim on the promissory
note and mortgage. He also objects to the conditional foreclosure remedy
granted against the promissory note. We affirm.
Did Jepsen Give the Property to His Children?
defining the federal tax lien in 26 U.S.C. §6321, "Congress meant
to reach every interest in property that a taxpayer might have." United
States v. Nat'l Bank of Commerce [85-2 USTC ¶9482], 472 U.S. 713,
719-20, 86 L.Ed.2d 565, 105 S.Ct. 2919 (1985). In applying that statute,
"we look initially to state law to determine what rights the
taxpayer has in the property the Government seeks to reach, then to
federal law to determine whether the taxpayer's state-delineated rights
qualify as 'property' or 'rights to property' within the compass of the
federal tax lien legislation." Drye v. United States [99-2
USTC ¶51,006], 528 U.S. 49, 58, 145 L.Ed.2d 466, 120 S.Ct. 474 (1999).
Here, Jepsen argues he gave the vacation home to his children in August
1989 and therefore had no interest in that property when the tax lien
came into existence in 1994. He concedes that the note and mortgage
would be "property" for purposes of §6321 if the transaction
was a sale. Whether the transaction was a gift or a sale is an issue of
law, proof of a gift requires clear and convincing evidence that the
donor delivered the property] intending to make an immediate and final
gift and to release unconditionally all future dominion and control over
the property. See O'Fallon v. O'Fallon ex rel. Ngar, 341
138, 14 S.W. 3d 506, 508 (
law "presumes a gift when the donor registers legal title in a
family member's name." Perrin v. Perrin, 9
App. 170, 656 S.W.2d 245, 248 (Ark. App. 1983); see Festinger v.
411, 616 S.W.2d 455, 463-64 (
1981). The district court nonetheless concluded that the August 1989
transfer was a sale, and that no gift of Jack's property interest in the
resulting note and mortgage occurred before the April 1994 tax
assessment. We review these findings for clear error. See Bishop v.
App. 164, 961 S.W.2d 770, 773 (
App. 1998). The following is a summary of the relevant underlying
conveyed the property to Kris and Karen by a warranty deed dated
August 15, 1989
. Jepsen's lawyer, George Carberry, prepared the transaction documents.
Carberry filed the deed and mortgage in
in October 1989. He then sent the document originals to
ert Bailie, vice president of finance of Jepsen of Illinois, with a
the original, recorded warranty deed and real estate mortgage relative
to Jack's sale of the
real estate to Kris and Karen. These documents should be kept along with
Jack's other real estate documents.
I am also
returning the original promissory note which Jack should keep.
l In August,
Kris and Karen each gave Jepsen a check in the amount of $10,000 as a
down payment on the property. The parties knew, however, that the
children had insufficient funds to cover the checks, and Jepsen never
presented them for payment. In December, Jepsen returned the $10,000
down payment checks to the children with a letter stating, "I have
decided to give you the down payment required on the purchase of the
promissory note bore interest at nine-and-a-half percent, payable
annually, with the entire principal due on
August 15, 1992
. Neither Kris nor Karen made any interest or principal payments on the
note, nor did Jepsen ever demand any payment. The original of the note
cannot be found; Jack assumes he destroyed it. During discovery, Bailie
produced a copy of the note and the other documents Carberry had sent
l In April
1995, Kris applied for a bank loan secured in part by the
property. The bank did a title search and discovered the 1989 mortgage
to Jepsen. Kris brought the mortgage to Jepsen's attention, and he
released it for no consideration. At about this time, Karen executed a
quit claim deed conveying her interest in the property to Kris. Jepsen's
release and Karen's quit claim deed were recorded in
in April 1995.
l At trial,
Jepsen testified that he intended the August 1989 transfer to be a gift
but left the documentation to Carberry and Bailie. His memory of the
details was hazy eleven years later. Kris testified:
In August of
1989 I wanted to purchase the property from my father. At that time I
could not afford to. . . .
time [Jepsen] returned the [$10,000] check to me, he discussed that he
was just going to, you know, give me and Karen the property. I think he
realized we couldn't afford to buy the property so he decided to give it
and Carberry had no recollection of the 1989 transaction. Bailie
testified that he would only have acted at the direction of Jepsen.
record, the district court's finding that the August 1989 transaction
was not a gift is not clearly erroneous. To prove the conveyance was a
gift, Jepsen needed clear and convincing evidence that he intended to
make an immediate and final gift at that time. Clear and
convincing evidence is "evidence by a credible witness whose memory
of the facts about which he testifies is distinct, whose narration of
the details is exact . . . and whose testimony is so . . . convincing as
to enable the fact-finder to come to a clear conviction . . . of the
truth of the facts related." Bishop, 961 S.W.2d at 773. Jepsen's
memory of the August 1989 transaction was indistinct and inexact, the
contemporary documents were all consistent with a sale, and even Kris
testified that he intended to purchase the property in August 1989.
attempts to rescue his position by arguing that even if the August 15
transaction were a sale, he later changed his mind and gave the property
to his children when he returned their down payment checks in December
1989. But as the district court noted, the letter accompanying the
returned checks states that Jepsen was giving each child the $10,000
check, not his entire property interest in the note and mortgage. The
trial testimony did not provide clear and convincing evidence to the
Jepsen argues in his reply brief that the promissory note was discharged
and his interest in the mortgage extinguished when he destroyed the
note. He relies on §3-604 of the Uniform Commercial Code as adopted in
which would govern this issue under Arkansas choice-of-law principles.
But Jepsen did not argue this theory to the district court, nor did he
present clear and convincing evidence that he destroyed the note with
the requisite intent to discharge his children's obligation to pay the
instrument. In these circumstances, we decline to depart from our normal
rule that we do not consider issues first raised in a reply brief. See,
e. g., United States v. Darden, 70 F.3d 1507, 1549 n. 18 (8th Cir.
1995), cert. denied, 517
1149, 134 L.Ed.2d 569, 116 S.Ct. 1449 (1996).
argues that his release of the mortgage in April 1995 extinguished the
government's right to foreclose its tax lien on this property. The
district court concluded that release of the mortgage did not affect the
government's pre-existing tax lien, citing cases holding that "once
a lien has attached to an interest in property, the lien cannot be
extinguished . . . simply by a transfer or conveyance of the
interest." United States v. Rodgers [83-1 USTC ¶9374], 461
U.S. 677, 691 n. 16, 76 L.Ed.2d 236, 103 S.Ct. 2132 (1983). On appeal,
Jepsen argues that the government merely acquired Jepsen's right to
reinstate the released mortgage under
law. But the survival of a federal tax lien is a question of federal
law, and Jepsen cites no authority for the proposition that a taxpayer
may defeat an existing lien by releasing a mortgage. In general,
"Congress did not intend that taxpayers have the prerogative to
relinquish rights in property in favor of avoiding tax liability." Drye
Family 1995 Trust v. United States [98-2 USTC ¶50,651], 152 F.3d
892, 899 (8th Cir. 1998), aff'd [99-2 USTC ¶51,006], 528 U.S. 49
McKay v. Capital Resources Co., 327 Ark. 737, 940 S.W.2d 869 (Ark.
1997), Jepsen argues that the United States may not foreclose on the
note and mortgage because Arkansas law requires a creditor either to
produce the original promissory note or to comply with the requirements
of the Uniform Commercial Code relating to lost, stolen, or destroyed
negotiable instruments. See ARK. STAT. ANN. §4-3-309. But these
authorities deal with a creditor suing as holder of the note, not with
the enforcement of a federal tax lien. The
presented convincing evidence as to the terms of the note and the fact
that Jepsen was the holder of the note when it was lost or destroyed.
Jepsen cites no authority suggesting that this evidence was insufficient
to establish a property interest against which the tax lien may be
The Statute of Limitations Issue.
"acquires by its lien and levy no greater right to the property
than the taxpayer himself has at the time the tax lien arises." St.
Louis Union Trust Co. v. United States [80-1 USTC ¶9282], 617 F.2d
1293, 1301 (8th Cir. 1980). Jepsen argues that the government's claim to
enforce the promissory note and mortgage is time-barred because the
statute of limitations on claims for payment of the note expired before
the government filed this action in August 1998. Applying
conflict of law principles, the district court determined that
law governs this issue because the note was made in
. See Cooper v. Cherokee Vill. Dev. Co., 236
37, 364 S.W.2d 158, 161-62 (
1963). The parties agree that
In 1989, when
the promissory note was executed,
law provided that "actions on . . . promissory notes . . . shall be
commenced within 10 years next after the cause of action accrued."
735 ILL. COMP. STAT. §5/13-206 (1989). Applying this statute, the
district court concluded that Jepsen had the right to enforce the note
for the ten years following
August 15, 1992
, its maturity date. Jepsen argues that the Illinois Uniform Commercial
Code was amended on
January 1, 1992
, to provide a six-year statute of limitations on suits to enforce
negotiable instruments such as the promissory note here at issue. See
810 ILL. COMP. STAT. §5/3-118(a) (1992); Krajcir v. Egidi, 305
App. 3d 613, 712 N.E.2d 917, 922, 238
Dec. 813 (
App. 1999). But the six-year statute was repealed on
January 1, 1998
, before this action was commenced. See
Pub. Act 90-451, §10 (1997).
statute also amended §5/13-206 to add rules regarding the accrual of
causes of action on promissory notes dated after January 1, 1998, rules
taken from the six-year statute being repealed. See
Pub. Act 90-451, §5. Jepsen argues that these amendments confirm that
§5/13-206 does not apply to the note in this case. We disagree. In our
view, the amendments resolved accrual issues for promissory notes dated
after January 1, 1998, while leaving existing promissory notes subject
to the earlier version of §5/13-206, which was carried forward
unaltered in the amended law. Thus, the district court properly applied
the ten-year statute of limitations in concluding that Jepsen had a
right to enforce the promissory note and mortgage when the
commenced this action to enforce its tax lien on his property.
The Remedy Issue.
court entered final judgment for the
in the amount of $361,908.02, consisting of the amount of the April 1994
assessment, a small lien fee, and interest through
June 15, 2000
. The judgment further recited that the outstanding balance of the
interest-bearing promissory note, and therefore Jepsen's interest as
mortgagee in the
real property, was $252,650.40 as of
May 22, 2000
. The court ordered the real property sold, with the proceeds to be
applied to the costs of sale, any delinquent property taxes, and then
the judgment in favor of the
(the sale has been stayed pending this appeal). The court's judgment
then addressed the issue of the promissory note:
6. If the
proceeds from the sale [of the real property] are insufficient to pay
the amount due to the United States herein, then the United States may,
in its discretion, request this Court to order the sale of Defendant
Jack Jepsen's rights to payment under the promissory note in accord with
28 U.S.C. §2004.
appeal, Jepsen challenges paragraph 6 of the final judgment, arguing
that it potentially makes Kris and Karen liable for the full amount of
the judgment in favor of the
, rather than the amount due under the promissory note. This issue is
speculative, because we do not know if the sale of the real property
will leave a deficiency, and it is premature, because the district court
has not entered a final order setting the terms for any sale of the
promissory note. Appeal of this post-judgment collection issue must
therefore await a final or otherwise appealable order concluding the
relevant portion of the collection proceedings. See In re Joint
E.&S. Dists. Asbestos Litig., 22 F.3d 755, 760 (7th Cir. 1994).
Jepsen's further contention that Karen should not be liable on the
promissory note because she quit-claimed her interest in the real
property to Kris is without merit.
foregoing reasons, the judgment of the district court is affirmed.
The Honorable Andrew W. Bogue, United States District Judge for the
District of South Dakota, sitting by designation.
The Honorable H. Franklin Waters, United States District Judge for the
Western District of Arkansas.
"A person entitled to enforce an instrument, with or without
consideration, may discharge the obligation of a party to pay the
instrument (i) by an intentional voluntary act, such as . . .
destruction, mutilation, or cancellation of the instrument." 810
ILL. COMP. STAT. Ch. §5/3-604 (Smith-Hurd 2000).
¶9170]The Caraway Bank v.
United States of America
Court, Ark., No. 75-127, 11/10/75
[Code Secs. 6321 and 6323]
Lien for taxes: Mortgage: Priority: Perfection of security interest:
State law: Defective description of property.--Although a
description in a mortgage inaccurately located the mortgaged realty as
to township, the metes and bounds statement and a plat of the property
pointed up the error and furnished keys to the true township number.
Therefore, the mortgage was not void for uncertainty, but represented,
under state law, a perfected security interest taking priority over a
federal tax lien.
Bradley, Jon R. Coldman, for appellant. Fletcher Jackson, United States
Attorney, for appellee.
At issue here
is the sufficiency of the description of real estate in a mortgage to
have priority over a federal tax lien. Federal Law, 26
C. §6323, recognizes that a federal tax lien is not superior to
perfected security interests. The decisions interpreting the federal law
point out that a competing non-federal lien is not perfected and choate
until it is definite as to (1) the identity of the lienor, (2) the
property subject to the lien, and (3) the amount of the lien, 94 ALR 2d
748, 755 §3.
law with respect to the sufficiency of description is stated by Judge
Lemley in United States v. Westmoreland Manganese Corp., 134 F.
Supp. 898 (E. D.
is a well settled principle of
is a well settled principal of Arkansas law that a mortgage will not be
held void for uncertainty, even as to third persons, whereby any
reasonable construction it can be sustained; and where the description
used furnishes a key whereby a person, aided by extrinsic evidence, can
ascertain what property is covered, such description is sufficient. . .
bearing upon the issues here are Ark. Stat. Ann. §17-1201 (Repl. 1968),
which authorizes the subdivision of lands and the recordation of the
plats thereof, and Ark. Stat. Ann. §17-1203 (Repl. 1968), which
provides that conveyances made according to the descriptions platted and
recorded will be sufficient.
It is admitted
that the federal tax lien was filed and a levy made upon the property
subsequent to the mortgage to The Caraway Bank. That mortgage described
the property as follows:
part of the SE1/4 of SW1/4 of Sec. 21, a part of the NE1/4 of NW1/4 of
Sec. 28 all in Township 18 N., Range 5 W., all in Hidden Valley, more
properly defined as follows:
the Northeast Corner of Lot 21, Block 1 West Lake Shore Addition, thence
North 84 degrees, 32 minutes West, 201 feet, thence North 80 degrees, 21
minutes West, 173 feet to the Southeast Corner of Lot 25, Block 3 of
Ridgecrest Addition, thence North 10 degrees, 48 minutes West, 312 feet
to the Northeast Corner of Lot 28, Block 3, of Ridgecrest Addition,
thence South 79 degrees, 12 minutes West, 150 feet to the Northwest
Corner of Lot 28, Block 3 Ridgecrest Addition, thence North 88 degrees,
32 minutes and 30 seconds West, 30.40 feet, thence North 7 degrees, 53
minutes East, 187.60 feet, thence North 34 degrees, 33 minutes East, 433
feet, thence North 5 degrees, 55 minutes East, 44.96 feet, thence South
85 degrees, 42 minutes East, 40 feet to the Northwest corner of Lot 8,
Block 1 of Ridgecrest Addition, thence South 26 degrees, 47 minutes
East, 476 feet to the Southwest Corner of Lot 14, Block 1, of Ridgecrest
Addition, thence South 19 degrees, 32 minutes and 30 seconds East 95.51
feet, thence South 8 degrees, 46 minutes East, 258.95 feet, thence South
2 degrees, 05 minutes East, 140.70 feet to the point of beginning.
Contains 7 acres more or less (one acre of this is in roads)."
description is deficient in that
is not in Township 18 North. However, the recorded plat of
correctly shows that
is in Township 19 North. Thus, we see that the mortgage contains two
general descriptions, one which erroneously describes the property as
being in Township 18 North and the other which correctly describes the
property as being "all in
." Furthermore, the metes and bounds description, without the
necessity of extrinsic evidence, furnishes the key to show the error in
the stated township description in the deed. The actual metes and bounds
description of the property involved is shown on plaintiff's Exhibit 8
Since it is
shown that Hidden Valley was a properly recorded subdivision and that
the mortgage itself furnished a key not only for correctly describing
the property but also showed the error in the reference to
"Twp.-18-N.", it follows that the mortgage description is good
as against a claim of a bona fide purchaser without notice. If the
description is good as recorded against a bona fide purchaser, we can
see no reason why it should not be good as against the federal tax lien
pursuant to 26 U. S. C. §6323.
United States of America
, relies upon McLain v. Jordan, 174
738, 298 S. W. 10 (1927), to support the trial court's ruling in its
's mortgage described the property as being in Section 15 rather than in
the correct Section 16. We held a recorded and subsequent mortgage
containing a correct description to be superior to
's. However, unlike The Caraway Bank's mortgage, the
mortgage did not furnish a key to show both the error and the correct
foregoing reasons, we hold that the trial court erred in holding that
appellee's tax lien was superior to the mortgage.
HARRIS, C. J.,