Derrington, et al., Plaintiffs v.
United States of America
District Court, West.
September 12, 2003
Secs. 6323 and 6871]
Collection: Tax liens: Validity and priority against third parties:
Constructive trust. --
The IRS was
entitled to levy upon funds held by a bankruptcy estate to satisfy a
debtor's delinquent tax obligations. Because funds transferred into the
bankruptcy estate by a third party as part of an investment plan were
determined to be a loan, the debtor was deemed the owner of the
transferred funds at the time of the levy. The third party's prior
testimony and an examination of the agreement between the third party
and the debtor indicated that the transaction constituted a loan. As
such, the transferred funds were appropriately subject to an IRS levy.
Moreover, the court rejected the third party's argument that a
constructive trust arose on its behalf to protect the transferred funds
from IRS levy. The court noted that the IRS levy preceded the event
giving rise to the possible establishment of a constructive trust.
GRANTING MOTION FOR SUMMARY JUDGMENT
LASNIK, District Judge: This matter comes before the Court on a motion
for summary judgment (Dkt. # 15) filed by defendant United States of
America ("the IRS"). The IRS seeks dismissal of claims for a
refund filed by plaintiffs Donald Derrington, et al.
(collectively, "Plaintiffs"). The Court grants the IRS's
motion for the reasons set forth in this Order.
This suit centers upon the ownership of approximately $235,000 seized in
2000 by the IRS to collect income taxes, interest and penalties owed by
G. Sloan Smith ("Smith"). The funds levied by the IRS were
payable to Smith or his nominee, Plains Group Ltd. ("Plains
Group"), due to claims Smith obtained against a bankruptcy estate
with funds supplied by Plaintiffs. Plaintiffs argue that they owned the
claims from which the funds were derived. The IRS contends that Smith
acquired the claims with money loaned to him by Plaintiffs and therefore
the IRS's liens against the claims trumps any interest Plaintiffs may
have had in the claims. Discussion of a fairly complex set of
transactions is necessary for resolution of this issue.
In the early 1990s, the IRS assessed Smith with federal income tax
liabilities arising from his failure to pay taxes owed for several
years. (Bedford Decl. ¶3). Pursuant to 26 U.S.C. §6321,
statutory liens arose against Smith's property and rights to property
for the tax liabilities.
¶4. In November of 1993, the IRS recorded nominee liens against Plains
¶5; see also Bedford Decl. Exs. A-B (notices of federal tax
In 1991, Wallace and Clarice Hall ("the Halls") and their
entities entered bankruptcy proceedings in In re Wallace and Clarice
Hall, Bankr. No. 91-09143,
Bankruptcy Court, Western District of
. (Hankla Decl. Ex. A (Derrington Decl.) ¶2). The Halls held a fifty
percent interest in the Mariner Village Mobile Home Park in
Plaintiffs learned of an investment opportunity involving the Halls'
bankruptcy through John Widmer, a mutual friend of Plaintiffs and the
¶7. The plan called for Plaintiffs, along with other investors, to
purchase the unsecured claims against the Halls' estate, seek to have
the bankruptcy case dismissed, and then recoup the principal investment
plus points and interest with income generated by the Halls' interest in
¶ ¶5, 12. Plaintiffs initially planned to use an individual named Tim
Golden ("Golden") to raise the funds and implement the
¶5. Golden gave a presentation to Plaintiffs in which he used a term
sheet that described a one-year loan to an unspecified borrower.
Ex. 2. The plan called for Plaintiffs to earn a thirty-three percent
return on their investment: a fifteen percentage point origination fee
and eighteen percent interest.
Golden was unable to complete the deal.
¶2. However, in April of 1994, the Plaintiffs met with Smith and the
parties finalized a deal that was similar to that proposed by Golden.
¶12. Plaintiff Donald Derrington described the plan as follows:
The deal with
Plains Group was to be the same as the deal with Golden, that is, we
were putting up half the money, that Sloan Smith or some other investor
would be going in on the rest of the transaction, and that our
investment was to be secured by Hall's 50% ownership in the
manufactured home park. The thrust was also to get the bankruptcy
dismissed, but that our investment was to be secured by Hall's 50%
ownership of the
manufactured home park. We were also going to receive a 15% loan fee and
18% interest. If the Halls ended up with
, we were going to be paid out over time. If the Halls did not end up
, we would have the security of the funds to be paid out on the
bankruptcy claims from the funds in the hands of the Hall bankruptcy
The net result
was that among the investors we put $325,000, which we paid to Sloan
Smith or Plains Group Ltd. about
April 21, 1994
Plaintiffs and Smith signed a document entitled "Agreement to
Consolidate Loans and Negotiate Settlement" (the
Ex. 3. The Agreement appears to have contemplated that the investors
would loan funds directly to the Halls and that the Halls would use the
proceeds to settle the claims against them. 1
See id. at ¶4 ("All funds loaned to the Halls by the undersigned
lenders shall be subject to the terms of a loan agreement between the
Halls and the undersigned lenders and shall be secured by the Halls
[sic] 50% ownership in Mariner Village Mobile Home Park.").
However, the Halls did not sign the Agreement. 2
April 21, 1994
, Plaintiffs deposited funds into a Plains Group bank account.
¶13. Smith then used the funds to purchase claims against the Halls'
bankruptcy estate. (Hankla Decl. Ex. C (Derrington Dep.) at 44).
Derrington accompanied Smith while he negotiated the claim purchases.
The claims appear to have been acquired in the name of the Plains Group.
(Hankla Decl. Ex. A ¶19).
Smith did not acquire all of the creditors' claims and the bankruptcy
trustee remained in control of the estate.
¶ ¶16-17. The Halls' fifty percent interest in
was sold through the bankruptcy proceeding, and the investors were
therefore limited to the claims for repayment of the investment.
November 2, 1994
, unbeknownst to Plaintiffs, the bankruptcy trustee made an interim
distribution on the claims acquired by the Plains Group in the amount of
¶22. The check distributing these funds was payable to Sloan Smith.
(Hankla Decl. Ex. D).
Smith did not inform Plaintiffs that he had received this distribution.
(Hankla Decl. Ex. A ¶22). Plaintiffs later learned of the distribution
from bankruptcy court records and demanded an accounting from Smith.
¶27. Smith informed Plaintiffs that he had reinvested the funds in
Shortly thereafter Plaintiffs hired an attorney and initiated a lawsuit
against Smith in the United States District Court for the District of
Oregon. In deposition testimony taken in that litigation the Plaintiffs
characterized the transaction as a loan to Smith or the Plains Group. See
Hankla Decl. Ex. C (Derrington Dep.) at 46 (testifying that he though he
was loaning money to Sloan Smith); Hankla Decl. Ex. B (Nortman Dep.) at
18-19 (testifying that he thought he was loaning money to Smith or the
Plains Group); Hankla Decl. Ex. F (Halver Dep.) at 18 (testifying that
he thought he was loaning money to the Plains Group). Plaintiffs
obtained a judgment against Smith and the Plains Group by default.
(Second Hankla Decl. Ex. F).
After the $373,848 distribution, approximately $235,000 remained due
from the Halls' bankruptcy estate on the Plains Group claims. (Hankla
Decl. Ex. I). Plaintiffs sued the bankruptcy trustee in an effort to
prevent distribution of the remaining amount to Smith. Id. Prior
to issuance of the default judgment against Smith in the Oregon
litigation, Plaintiffs and the bankruptcy trustee reached an agreement
whereby the trustee would deposit the remaining amount into Plaintiffs'
attorney's trust account pending resolution of the Oregon litigation.
However, before the bankruptcy trustee transferred the funds to the
trust account, the IRS issued a notice of levy to the trustee commanding
him to pay the Plains Group property to the IRS for taxes owed by Smith.
Decl. Ex. C). Plaintiffs and the IRS negotiated for several months
regarding whether the IRS might release the levy and pursue its tax
claim in the
litigation. (Hankla Decl. Ex. I). Plaintiffs and the IRS were unable to
reach an agreement, and Plaintiffs initiated a wrongful levy action
against the IRS in this Court. (Hankla Decl. Ex. L). On
June 14, 2000
, the Court dismissed that action as time-barred. (Hankla Decl. Ex. T).
In September of 2000 the IRS obtained the levied funds, amounting to
$239,498.29. The levied funds paid all of Smith's outstanding tax
liabilities with the exception of approximately $3,000 due for 1990.
(Bedford Decl. ¶18). In April of 2001, Plaintiffs filed
istrative claims with the IRS in an attempt to recover the money seized
by the IRS. (Colvin Decl. Ex. L). The IRS denied Plaintiffs' claims.
(Colvin Decl. Ex. M). Plaintiffs initiated this lawsuit on
May 22, 2002
B. Summary Judgment Standard.
Summary judgment is proper if the moving party shows that "there is
no genuine issue as to any material fact and that [it] is entitled to
judgment as a matter of law." Fed. R. Civ. P. 56(c).
Once a defendant who is seeking summary judgment has demonstrated the
absence of a genuine issue of fact as to one or more of the essential
elements of the plaintiff's claims, the plaintiff must make an
affirmative showing on all matters placed at issue by the motion as to
which the plaintiff has the burden of proof at trial. Celotex Corp.
v. Catrett, 477
317, 323 (1986). In such a situation Fed. R. Civ. P. 56(e)
"requires the nonmoving party to go beyond the pleadings and by her
own affidavits, or by the `depositions, answers to interrogatories and
admissions on file,' designate `specific facts showing that there is a
genuine issue for trial."'
at 324 (quoting Fed. R. Civ. P. 56(e)); see also Matsushita
Elec. Indus. Co., Ltd. v. Zenith Radio Corp., 475 U.S. 574, 586-87
(1986) ("When the moving party has carried its burden under Rule
56(c), its opponent must do more than simply show that there is some
metaphysical doubt as to the material facts.").
C. Ownership of the Claims Against the Hall Bankruptcy Estate.
All parties agree that the ownership of the claims against the Hall
bankruptcy estate is the key issue in this litigation. See Motion
at 12 ("The instant refund suit turns on a property question: who
owned the Plains Group claims against the Hall bankruptcy estate, Smith
or plaintiffs? If Smith owned the claims, then the government's liens
for taxes attached to them, the levy was proper, and this suit must be
dismissed."); Response at 13 ("[T]he only issue in this case
is who is the rightful owner of the funds levied upon by the IRS from
the Halls' bankruptcy estate? If Smith owned the claims, then the
Government's liens attached to that property and the levy was
proper."). When levying funds "the IRS `steps into the
taxpayer's shoes' ... [and] acquires whatever rights the taxpayer
himself possesses." United States v. National Bank of Commerce
USTC ¶9482], 472 U.S. 713, 725 (1985) (internal citation omitted).
"[S]tate law controls in determining the nature of the legal
interest which the taxpayer had in the property."
at 722. Therefore, if under state law Smith owned the claims, the IRS
properly stepped into Smith's shoes when it levied the funds payable for
In support of its argument that Smith owned the claims, the IRS cites
the above-quoted deposition testimony given by Plaintiffs in the
litigation in which each of the Plaintiffs testified that the
transaction involved a loan to Smith or the Plains Group. Additionally,
the IRS cites a letter plaintiff Nortman wrote to Smith regarding the
"Loan to Plains Group Ltd/Plains Mgmt Ltd/Sloan Smith" in
which Nortman discussed payment of all "principle
[sic]/points/interest" due to the investors. (Hankla Decl. Ex. A.
Ex. 5). Additionally, when the Halls sued the bankruptcy trustee,
Plaintiffs' prior attorney wrote a letter to the Halls' attorney
threatening Rule 11 sanctions. (Hankla Decl. Ex. J). In that letter
Plaintiffs' attorney stated that his clients had "lent money to
The IRS also notes that once it became apparent that if the investment
constituted a loan to Smith or the Plains Group, Plaintiffs would not
recover the funds levied the by IRS, Plaintiffs' prior attorney advised
them not to refer to the transaction as a loan. For example, Plaintiffs'
prior attorney advised his clients "never to say anything that
undercuts our position that you owned and own the claim." (Hankla
Decl. Ex. N). Plaintiffs' prior attorney also stated in a letter to
Plaintiffs that if Plaintiffs ultimately were considered lenders to
Smith or Plains Group, they could "[k]iss the $235,000 in
goodbye." (Hankla Decl. Ex. O).
Plaintiffs argue that their prior testimony that the transaction
constituted a loan to Smith or the Plains Group should be disregarded
because they were inexperienced investors. See Response at 14
("To an unsavvy investor, such as the Plaintiffs, an advance of
money to an agent for him to purchase bankruptcy claims for the
Plaintiffs may have the feel or color of a `loan;' however, this is
clearly not a `loan' in the legal sense."). Additionally,
Plaintiffs attempt to explain their prior testimony by stating that
reference to "`loaning' the investment funds to Smith ... was their
short-hand way of describing the investment they made through
at 15 (emphasis in original) (citing Derrington Decl. Ex. D; Nortman
Decl Ex. C; Colvin Decl. Ex. O). Finally, Plaintiffs submit a purported
transcript of a telephone conversation in which Plaintiffs contend that
Smith stated that the transaction did not constitute a loan to him. 3
See Colvin Decl. Ex. F at 6.
Having considered the evidence in the light most favorable to
Plaintiffs, the Court finds that the transaction constituted a loan by
Plaintiffs to Smith or the Plains Group. Not only is this demonstrated
by Plaintiffs' prior testimony, but examination of the terms of the
agreement, admitted by all parties, shows that Plaintiffs loaned the
funds to Smith or the Plains Group and did not own the claims in the
Hall bankruptcy estate. For example, Plaintiffs admit that the terms of
the investment called for a thirty-three percent return on investment: a
fifteen percentage point origination fee and eighteen percent in
interest. See, e.g., Hankla Decl. Ex. A (Derrington Decl.) Ex. 2
(original terms sheet); Hankla Decl. Ex. A (Derrington stating that
"[w]e were also going to receive a 15% loan fee and 18% interest).
Plaintiffs maintained that this was their expected return even after
they denied the transaction was a loan. See, e.g., Hankla Decl.
Ex. R (
March 30, 2000
Nortman Dep.) at 19 (testifying that the agreement with Smith called for
a return composed of a fifteen point fee and eighteen percent interest).
The undisputed terms of the investment demonstrate that Plaintiffs did
not contemplate an equity investment, in which they would assume the
risk that the claims would not cover the funds they advanced (or the
chance that the claims would be worth more than their principal and
expected return). Furthermore, Plaintiffs' recent redefinition of the
transaction as an "investment," rather than a
"loan," does not support Plaintiffs' position. A loan is a
particular kind of investment; the most common is known as a
The evidence before the Court demonstrates that Plaintiffs' investment
constituted a purchase money loan to Mr. Smith. Plaintiffs did not own
the claims levied by the IRS.
D. Constructive Trust.
Plaintiffs contend that even if the Court determines that they did not
own the claims, the Court should find that a constructive trust in their
favor arose prior to the time the IRS liens attached to the property.
(Response at 16-18). In support of this argument Plaintiffs cite F.T.C.
v. Crittenden, 823 F.Supp. 699 (C.D. Cal. 1993). Relying upon
law that a constructive trust may exist if a court finds "merely
that the acquisition of property was wrongful and that the keeping of
the property ... would constitute unjust enrichment," the
imposed a constructive trust retroactively to prime a federal tax lien. Crittenden,
823 F.Supp. at 703. Because the funds were wrongfully taken from
consumers when the taxpayer secretly overcharged them, by virtue of the
constructive trust "the funds ... belong[ed] to Crittenden's
injured customers, and not to Crittenden."
"[a] constructive trust arises where a person holding title to
property is subject to an equitable duty to convey it to another on the
ground that he would be unjustly enriched if he were permitted to retain
it." Baker v. Leonard, 120 Wn. 2d 538, 547-48 (1993). Here,
in contrast to Crittenden 4
, assuming that a constructive trust arose on Plaintiffs' behalf, such a
trust could not have been formed prior to the time the IRS liens
attached to the property. The parties do not dispute that Plaintiffs
intended Smith and the Plains Group to utilize Plaintiffs' funds to
acquire the creditors' claims. Smith could not have breached his duty to
convey the proceeds of those claims to Plaintiffs until he failed to
transfer to Plaintiffs the $373,848 interim distribution on
November 2, 1994
Because the IRS liens attached to the claims when they were purchased by
Smith/the Plains Group, any constructive trust on Plaintiffs' behalf
would have been inchoate when the tax liens attached and therefore would
not prime the liens. Blachy v. Butcher [ 2000-2
USTC ¶50,629], 221 F.3d 896, 906 (6th Cir. 2000).
For the foregoing reasons, the Court GRANTS the IRS's motion for summary
judgment (Dkt. # 15). The Clerk of the Court is directed to enter
judgment in favor of the IRS and against Plaintiffs. The Clerk of the
Court is also directed to send copies of this Order to all counsel of
Plaintiffs state that "at least on paper, the investors actually
entered into an agreement with the Halls in which the investors would
loan money to the Halls and the Halls agreed to pay points and
interest." (Response at 4). However, Plaintiffs admit that this was
not "the deal contemplated by the investors."
Additionally, it is unlikely that the Halls could have used such loan
proceeds to pay off creditors because at the time the Agreement was
signed the Halls were in bankruptcy proceedings.
Because the statement is made by a person other than the declarant to
prove the truth of the matter asserted, the transcript constitutes
inadmissable hearsay evidence. Fed. R. Evid. 801, 802. A party may not
defeat a motion for summary judgment on the basis of inadmissible
hearsay evidence. Orr v. Bank of
, NT & SA, 285 F.3d 764, 783 (9th Cir. 2002). Additionally, even
if this transcript did not constitute inadmissible hearsay evidence, it
would not likely assist Plaintiffs because Smith appeared to be
speculating regarding what Hall's attorneys would consider the
transaction to be based upon the written agreement. See Colvin
Decl. Ex. F at 6 ( "I mean she faxed all the stuff down to her
attorney's [sic] yesterday and those guys got it all and they're saying
what the hell is this? This loan was made to Clarise [Hall], this wasn't
made to Sloan Smith. Sloan Smith is the facilitator, he's the guy who's
managing it. There's no loan to Sloan Smith.").
In Crittenden the constructive trust arose at the time the
taxpayer secretly overcharged the customers.
Plaintiffs contend that "a constructive trust arose when Smith
wrongfully purchased the claims in the name of Plains Management, Ltd.
(not the Plains Group) for his own purposes, and intended to keep the
proceeds for himself." (Response at 17). However, the parties do
not dispute that Smith acquired the claims through the Plains Group,
subsequently transferred them to Plains Management, and finally
transferred them back to the Plains Group. See, e.g., Hankla
Decl. Ex. A ¶ ¶14, 19 (Smith and Derrington acquired claims from funds
in "Plains Group Ltd." account and "another entity called
Plains Management was assigned the claims"); Hankla Decl. Ex. L
(wrongful levy complaint) ¶15 ( "Eventually, Smith caused Plains
Group Ltd. to assign the claims to defendant Plains Management (USA)
Ltd., or Plains Management Ltd. Thereafter, Smith caused Plains
Management (USA) Ltd., or Plains Management Ltd. to reassign the claims
to Plains Group Ltd."). Even if a constructive trust arose when the
claims were assigned from the Plains Group to Plains Management, the
trust would have been inchoate when the tax liens attached and therefore
would not prime the IRS liens. Blachy v. Butcher [ 2000-2
USTC ¶50,629], 221 F.3d 896, 906 (6th Cir. 2000).
Bonding Co., Plaintiff v.
Internal Revenue Service, Defendants.
District Court, East.
May 2, 2003
Tax liens: Validity and priority against third parties: Constructive
subrogee was not entitled to summary judgment with respect to its claim
of priority interest over an IRS tax lien for funds held by its
subcontractor. The funds were property of the subcontractor and were not
held in trust pursuant to a public construction contract under state (
) law. A constructive trust had not been created to hold the funds
because the subrogee failed to show that the parties intended to
designate the funds as trust property, even though the bond identified
the payment obligation to the subrogee under the construction contract.
Finally, at the time the IRS filed its notices of tax liens, the
subrogee's alleged equitable lien had not been perfected because the
amounts in question were not certain.
Tax liens: Validity and priority against third parties: Indemnity
agreement: Surety's interest. --
subrogee was not entitled to summary judgment with respect to its claim
of priority interest over an IRS tax lien for funds held by its
subcontractor. The subrogee failed to show that an indemnity agreement
with the subcontractor predated the IRS tax lien and, as a result,
established its priority over the funds. The assignment of the contract
balances under the indemnity agreement would not occur until the
subrogee became obligated to perform under its surety agreement, the
date of which had not been determined. Moreover, a genuine issue of
material fact remained concerning whether the subrogee was required
under state (
) law to perfect its interest by recording its lien.
Tax liens: Validity and priority against third parties: Security
interest: Obligatory disbursement agreement. --
subrogee was not entitled to summary judgment with respect to its claim
of priority interest over an IRS tax lien for funds held by its
subcontractor. The court rejected the subrogee's argument that its
security interest qualified as an obligatory disbursement agreement
pursuant to Code
Sec. 6323(c)(1)(B). Even though the bonds issued for the contract
qualified as security interests, the subrogee failed to show that its
security interest was protected under local law. Also, a genuine issue
of material fact remained concerning when the subrogee's rights were
triggered under the bonds, and if that date predated the IRS's tax lien.
AND ORDER OF THE COURT DENYING PLAINTIFF'S MOTION FOR SUMMARY JUDGMENT
BATTANI, Judge: Before the Court is Plaintiff Merchants Bonding Co.'s
Motion for Summary Judgment on its complaint against Defendants United
States Internal Revenue Service ("IRS"),
("WB") and Utica Community Schools. Plaintiff and the IRS both
assert claims to the outstanding balances of two construction contracts
("contract balances" or "funds") between Smelser
Roofing Co. ("Smelser"), a contractor, and Defendant school
districts. Plaintiff claims that it is entitled to the funds since it
made payments to various subcontractors and suppliers pursuant to the
terms of its surety agreement with Smelser, while the IRS asserts the
priority of its federal tax lien on Smelser's property.
As preliminary matter, Defendant WB has been dismissed as a party to
this lawsuit, and has interpleaded into Court the amount due on its
contract with Smelser, or $91,947.56, pursuant to Fed.R.Civ.P. 67, for
disbursal to the proper party when this matter is resolved. Defendant
has filed an answer and partial concurrence in Plaintiff's motion for
summary judgment, except to the extent to which Plaintiff's motion seeks
interests, costs, expenses and attorneys fees against
still has in its possession the amount due on its contract with Smelser.
In its Motion for Summary Judgment, Plaintiff first argues that the
contract balances are not Smelser's "property" subject to
federal tax liens, since they have been held in trust for the benefit of
the subcontractors and suppliers who performed work on the construction
contracts. In connection with that argument, Plaintiff also asserts that
its rights have been equitably subrogated to the rights of these
subcontractors and suppliers, and therefore, that it can assert any
claim to the trust corpus that they may have had. Second, Plaintiff
argues that it received a superior interest in the funds pursuant to the
Indemnity Agreement it entered into with Smelser, and that this interest
became effective prior to the IRS' tax lien. Finally, Plaintiff asserts
that 26 U.S.C. §6323(c)
grants Plaintiff a lien superior to several of the liens held by the
In response, Defendant IRS argues that the Sixth Circuit's opinion in In
re Constr. Alternatives, Inc. [ 93-2
USTC ¶50,569], 2 F.3d 670 (6th Cir. 1993) controls the Court's
analysis here. In reliance upon this case, the IRS maintains that the
contract balances are "property" subject to the tax lien,
since Smelser completed the construction projects, and earned the right
to final payment from Defendant school districts. Second, Defendant
argues that no trust was created for the benefit of unpaid claimants
because the Indemnity Agreement and Payment Bonds do not reflect the
parties' intent to reserve a specific portion of the funds in trust for
the benefit of any ascertained beneficiaries, Third, Defendant contends
that Plaintiff's rights were not subrogated to the rights of the
subcontractors and suppliers because at the time the IRS filed its tax
liens, the amounts owed to those suppliers and subcontractors had not
been determined to any meaningful degree of certainty. Fourth, Defendant
contests Plaintiff's assertion that it had a "security
interest" in the funds, but argues, that even if it did, it did not
"perfect" that interest by filing a financing statement with
the Michigan Secretary of State. Therefore, because the IRS did
"perfect" its lien by filing notices of tax liens, its
interest takes priority over that of Plaintiff. For these same reasons,
Defendant maintains that Plaintiff's argument under §6323(c)
II. STANDARD OF REVIEW
F.R.C.P. 56 states that summary judgment "shall be rendered
forthwith if the pleadings, [ etc.,] show that there is no
genuine issue as to any material fact and that the moving party is
entitled to a judgment as a matter of law." Fed.R.Civ.P. 56. There
is no genuine issue of material fact if there is no factual dispute that
could affect the legal outcome on the issue. Anderson v. Liberty
Lobby, Inc., 477
242, 248-49 (1986). In other words, the movant must show that it would
prevail on the issue even if all factual disputes are conceded to the
non-movant. Additionally, for the purposes of deciding on a motion for
summary judgment, a court must draw all inferences from those facts in
the light most favorable to the non-movant. Matsushita Elec. Indus.
Co. v. Zenith Radio Corp., 475
574, 587 (1986).
Accordingly, in the instant case, the Court evaluates this motion with
the rule that it should defer to Defendant's factual account whenever
that account clashes with Judgment, Plaintiff asserts three separate
grounds for its claim to the funds, and each will be discussed
Equitable Subrogation and the Trust Theory
Plaintiff begins its argument by claiming its status as an equitable
subrogee. Equitable subrogation is a "legal fiction through which a
person who pays a debt for which another is primarily responsible is
substituted or subrogated to all the rights and remedies of the
other." Commercial Union Ins. Co. v. Med. Protective Co.,
109, 117 (1986). Merchants, having paid the claim of its principal,
asserts that it is subrogated to the rights of the principal, the
claimant receiving the payment, and the owner's right to withhold
contract balances. The Court agrees that Plaintiff is, by a fiction of
law, subrogated to whatever rights the claimant, principal, or owner may
have in the contract balances, Pearlman v. Reliance Ins. Co., 371
U.S. 132 (1962).
Plainitff seeks here to enforce its claim to the contract balances owed
by WB and
as the subrogee of the Claimants. Those funds, according to Plaintiff,
were the trust corpus held for the benefit of the unpaid subcontractors
and suppliers --the Claimants. As trust fund money, Smelser did not have
a property interest in it. Therefore, the IRS could not attach its lien.
In response, Defendant IRS asserts two grounds for its argument that
Smelser had a property interest in the funds. First, the IRS argues
that, according to Construction Alternatives, once a contractor
completes work on a construction contract, as Smelser did here, it earns
the right to receive payment. It is that right to receive payment that
constitutes a property interest to which a tax lien may legally attach. Constr.
Alternatives [ 93-2
USTC ¶50,569], 2 F.3d at 674-65. Second, the IRS asserts that the
contract balances are not a separate trust fund, because the parties did
not create such a trust for the benefit of any subcontractors or
suppliers. In light of this, then, the IRS maintains that Plaintiff was
not a subrogee of the rights of the so-called "trustees."
Finally, the IRS argues that, in any event, a state law subrogation
claim does not become perfected until the amounts owed to the claimants
are determined with certainty. Here, the amounts owed to the claimants
were uncertain at the time the IRS filed its federal tax liens, and, so,
the claims were not perfected.
In determining whether or not Smelser had an interest in the funds, the
Court's analysis is twofold. Setting aside Plaintiff's "trust"
argument for the moment, the Court must first decide whether Smelser
acquired an interest in the funds when it completed its work on the WB
projects. The Court finds that it did. Construction Alternatives
holds that once a contractor completes work on a construction contract,
its "right to receive its final progress payment ..." is
deemed "property" under §6321,
and can be subject to a federal tax lien.
Here, then, since the parties agree that Smelser completed its work on
the WB and
construction projects, its right to receive final payment from the
school districts is property that can be subject to the IRS tax lien.
This does not end the Court's inquiry, however, for it must now decide
whether the contract balances were held in trust for the benefit of
unpaid subcontractors and suppliers, leaving Smelser with no property
interest in the funds. To prove that the funds at issue here were held
in trust, Plaintiff must show either that: "1) [state] law provides
that a portion of the progress payments were subject to a constructive
trust for the benefit of unpaid suppliers and subcontractors 1
; or, 2) the suretyship agreement created an express trust with the Fund
as the trust corpus." Constr. Alternatives [ 93-2
USTC ¶50,569], 2 F.3d at 677.
First, when a public construction contract is involved, as is the case
here, Michigan law does not provide that a portion of an owner's
payments are to be held in trust for the benefit of unpaid suppliers and
Contract Fund Act,
Comp. L. 570.151 et. seq.,("MBCFA"), cited by Plaintiff,
applies only to private construction contracts, and provides
that, when such contracts are involved, balances paid to a contractor
are to be held in trust for the benefit of subcontractors and suppliers.
See In re Certified Question from U.S. Dist. Court for Eastern Dist.
of Michigan, 311 N.W.2d 731, 733 (
1981) (holding "the [MBCFA] applies only to private construction
contracts.") Here, however, the contracts were public, not private;
therefore, the MBCFA does not apply.
Since the MBFCA does not apply to create a constructive trust, the Court
must look to the agreements. Plaintiff argues that Smelser, WB and
created a trust, with the contract balances serving as the trust corpus.
To determine whether a trust was created, the Court looks to state law. Constr.
Alternatives [ 93-2
USTC ¶50,569], 2 F.3d at 675. In
, "it is a general principle of trust law that a trust is created
only if the settlor manifests an intention to create a trust, and it is
essential that there be an explicit declaration of trust accompanied by
a transfer of property to one for the benefit of another." Osius
v. Dingell, 134 N.W.2d 657, 660 (
1965). Further, "[t]o create a trust, there must be an assignment
of designated property to a trustee with the intention of passing title
thereto, to hold for the benefit of others. There must be a separation
of the legal estate from the beneficial enjoyments..." In re
Americana Found., 387 N.W.2d 586, 588 (Mich. App. 1985) (quotation
Here, Plaintiff argues that the language of the payment bonds issued for
the WB and
projects created an express trust for the benefit of subcontractors and
suppliers. Specifically, Plaintiff notes that paragraph 8 of the payment
bonds states as follows:
by the owners to the contractor under the construction contract shall be
used for the performance of the construction contract and to satisfy
claims, in any, under any construction performance bond. By the
contractor furnishing and the owner accepting this bond, they agree
that all funds earned by the contractor in the performance of the
construction contract are dedicated to satisfy obligations of the
contractor and the surety under this bond ..." (emphasis added)
Clearly, the bond at issue here identified Smelser's payment obligations
with respect to the monies received from WB and
under the construction contracts. However, this language, by itself,
does not establish that Smelser, WB and
created a trust in favor of the subcontractors and suppliers.
Rather, as discussed above, to establish that a trust existed, Plaintiff
must show that the parties involved intended to create a trust, and that
they designated certain funds as trust property. Osius, 134
N.W.2d at 660; In re
Found., 387 N.W.2d at 588. The Court finds that this is not
To begin, it is arguable that the use of the word "dedicated"
in the payment bond signifies an intention or declaration on the part of
Smelser, WB and
to create a trust for the benefit of the subcontractors and suppliers.
Nevertheless, regardless of whether this language manifested such
intent, Plaintiff's argument fails because none of the parties involved
delivered any funds into trust in accordance with
law. That is, the facts do not establish that the parties involved
intended to set aside a certain portion of the funds "in
trust" for the subcontractors or suppliers, and, in fact, at no
time did Smelser create a separate trust account for the contract
balances. The mere fact that Smelser earned the right to receive payment
for the school projects by completing its construction work does not, by
itself, make the money owed by WB and
The Court's analysis is guided, in part, by Construction Alternatives,
where the Sixth Circuit held that the language of an Indemnity Agreement
between a surety and a contractor did not create a trust under Ohio Law.
There, the Indemnity Agreement stated that "all monies due .. are
trust funds, for the benefit of and for payment of all such obligations
in connection with any such contract ... for which the Surety would be
liable under any of the ... bonds..." Constr. Alternatives [
USTC ¶50,569], 2 F.3d at 676, n. 4. The
law applied by the Sixth Circuit was very similar to
law, and provided that "the manifested intention" of the
parties governed whether or not the parties had created a trust.
In deciding whether a trust had been created in Construction
Alternatives, the Sixth Circuit examined whether the parties
intended that the money be kept or used as a separate fund for the
benefit of third persons.
at 677 (quoting Guardian Trust Co. v. Kirby, 50 Ohio App. 539
(1935)). Ultimately, the Court concluded that despite the actual
"trust" language contained in the Indemnity Agreement, no
trust was created, because "no provision of [the indemnity
agreement] required [the contractor] to keep any portion of the progress
payments as a separate trust fund, and the record does not indicate that
[the contractor] kept the progress payments in a separate account."
at 677. Similarly, here, because the language of the payment bond did
not require Semlser to set aside a portion of the payments in a separate
trust fund, no trust was created.
In light of this, Plaintiff's subrogation claim to a trust fund fails.
This does not mean, however, that Plaintiff is not an equitable
subrogee, for, as noted above, in paying Smelser's claims, Plaintiff
became subrogated to whatever rights those claimants had in the contract
balances, Pearlman v. Reliance Ins. Co., 371 U.S. 132 (1962).
Consequently, as an equitable subrogee, Plaintiff must establish that
its right to the funds takes priority over the IRS's tax lien.
Federal liens do not "automatically have priority over all other
liens." Constr. Alternatives [ 93-2
USTC ¶50,569], 2 F.3d at 676 (quotations omitted). Rather, they are
subject to the "first in time, first in right" rule.
For purposes of this rule, a federal tax lien is perfected at the time
the notice of the lien is filed, Constr. Alternatives [ 93-2
USTC ¶50,569], 2 F.3d at 676 (citations omitted), while a state
lien is perfected only "when the identity of the lienor, the
property subject to the lien, and the amount of the lien are
v. Dishman Indep. Oil Co. [ 99-2
USTC ¶50,992], 46 F.3d 523, 526 (6th Cir. 1995) (quoting United
States v. McDermott [ 93-1
USTC ¶50,164], 507 U.S. 447, 449 (1993)). In the context of
equitable subrogation, the Sixth Circuit held in Construction
Alternatives that a surety's alleged equitable lien did not have
priority because "[t]he amounts owed to the unpaid persons on the
project were not yet certain" at the time the tax liens were filed.
Constr. Alternatives [ 93-2
USTC ¶50,569], 2 F.3d at 676.
Here, the IRS filed its notices of tax lien on
August 30, 2000
January 2, 2001
May 21, 2001
June 27, 2001
. Plaintiff, however, has not established that its alleged equitable
lien was perfected as of those dates, because it has not shown that the
amounts owed to the unpaid subcontractors and suppliers were certain at
that time. In fact, the record does not contain any evidence as to the
dates and amounts of Plaintiff's payments, or to whom those payments
were made. As such, the Court finds that as an equitable subrogee,
Plaintiff has not established the priority of its lien, because there is
a genuine issue of material fact with respect to the payments Plaintiff
made under its bond agreement with Smelser.
Indemnity Agreement Theory
Plaintiff next argues that the Indemnity Agreement it entered into with
Smelser gave it a superior interest in the contract balances. In
particular, Plaintiff points to the language of the Agreement in which
Smelser agreed to assign and transfer its rights in the monies owed by
to Plaintiff as "collateral security" for performance of the
bond contract. According to Plaintiff, that assignment became effective
as of the date of execution of any bond, or
September 1, 1998
. And, since this preceded the dates upon which the IRS filed its notice
of tax lien, Plaintiff contends that it's interest takes priority over
the IRS lien.
In making this argument, Plaintiff acknowledges that, in most
circumstances, parties are required by Article 9 of Michigan's Uniform
Commercial Code to perfect their interests by filing financing
statements with the Michigan Secretary of State. However, in reliance
upon In Re V. Pangori Sons, Inc., 53 B.R. 711, 717 (Bankr. E.D.
Mich. 1985), Plaintiff asserts that, in
, Article 9 does not apply to indemnity agreements. In particular,
Plaintiff relies on the language in Pangori that states that a
surety may assert "its rights deriving from the agreement of
indemnity because even though it did not take the steps necessary to
perfect an Article 9 security interest, it did not need to do so."
This is so because "the assignment does not create a security
interest" in the contract balances.
Therefore, Plaintiff maintains that it did not have to perfect its
interest with the Secretary of State.
In response, the IRS counters that Plaintiff's claim to the funds is not
superior to the IRS lien because Plaintiff was, in fact, required to
perfect its interest by filing with the Secretary of State. In so
arguing, Defendant asserts that Pangori, a 1985 bankruptcy case,
was called into doubt by the Sixth Circuit's 1993 holding in Construction
Alternatives, where an Ohio U.C.C. provision, identical to the
Michigan statute relied upon by the Pangori court, was
interpreted to require a bond company to perfect its interest by filing
a financing statement with the Secretary of State. The IRS now asks this
Court to extend the Sixth Circuit's holding to
, and hold that, here, Plaintiff was required to file its Indemnity
Agreement with the Secretary of State.
Defendant's argument is quite compelling. For, as Defendant points out,
the relevant portion of the Michigan statute at issue in Pangori
is precisely the same as the Ohio statute analyzed in Construction
Alternatives. Both provisions provide that the UCC does not apply to
"a transfer of a right to payment under a contract to an assignee
who is also to do the performance under the contract...." Ohio Rev.
Code Ann. §1309.04;
Comp. Laws §19.9104. Thus, one could reasonably argue, as the IRS does
here, that the Sixth Circuit's interpretation and application of the
statute should carry over to
to require Plaintiff to file its Indemnity Agreement with the Secretary
The Court, however, declines to apply the holding in Construction
. The Sixth Circuit did not have the opportunity to consider the issues
raised in Pangori, even though it may have been applying similar
law. It simply held in one cursory sentence that a financing statement
would have to be filed. Pangori, on the other hand, contained a
more detailed analysis of Article 9 and its relationship to indemnity
agreements. See Pangori, 53 B.R. at 717. Therefore, the
Court will not disturb the Pangori decision, and what may have
practice since 1985, unless it is clearly required to do so.
The Court's analysis does not end here, because it is still necessary to
determine when Plaintiff's interest in the funds became effective.
According to Plaintiff, the express language of the Indemnity Agreement
provided that Smelser's assignment of the contract balances became
immediately effective as of the date of any bond, or
September 1, 1998
, when the Fringe Benefit Bond was executed. In making this argument,
Plaintiff relies on two Michigan cases, Pangori, discussed above,
and Early Dubey & Sons v. Macomb Contracting, 97 Mich. App.
553 (1980). According to Plaintiff, the indemnity agreements at issue in
those cases granted the plaintiffs assignment rights in construction
funds. Unlike the Indemnity Agreement at issue here, however, those
agreements provided that the operative date upon which the plaintiffs'
assignment rights became effective was the date of the contractor's
default. Here, according to Plaintiff, the Indemnity Agreement provided
a different operative date, namely the date of the execution of any
bond. Therefore, Plaintiff concludes that because the IRS did not have a
lien on Smelser's property as of
September 1, 1998
, when the Fringe Benefit Bond was executed, the IRS does not have a
superior claim to the funds.
The Court duly notes Plaintiff's argument, but finds that neither Pangori
nor Dubey stand for the proposition advanced by Plaintiff that
the language of the Indemnity Agreement governs the date upon which a
surety's assignment rights become effective. First, in Pangori,
the indemnity agreement contained language similar to the Indemnity
Agreement here; in particular, it stated that the assignment was to
"be effective as of the date of [a] bond or bonds..."
at 716. However, unlike the Indemnity Agreement in this case, the Pangori
agreement contained additional language indicating that the surety's
assignment rights did not become effective until "the event of
Ultimately, the surety's claim was held to be inferior to the judgment
lien creditor's competing claim, and the court did hold, as Plaintiff
asserts, that the relevant date for analyzing the priority of the
surety's claim was the date of the contractor's default.
Contrary to Plaintiff's assertion, however, the Pangori court did
not seem to rest its decision on the language contained in the indemnity
agreement. Rather, the court looked to
law, which essentially dictated that a surety's claim did not become
effective until the surety became obligated to pay under its bond
agreement with the contractor. Specifically, the Pangori court
law holds that a lien of a judicial lien creditor which attaches before
a surety becomes obligated to perform under its bond is prior in right
to the surety's claim. Thus, the rights of subrogation and
indemnification are not permitted to relate back to the date of the
initial suretyship agreement when a judicial lien intervenes.
Accordingly, because [the surety's] claim to the proceeds by virtue of
its contractual indemnity agreement is inferior to the rights of the
[bankruptcy] trustee, it may thus be avoided.
Pangori, 53 B.R. at 721.
Similarly, in Dubey, the Michigan Court of Appeals found that the
operative date upon which the surety's assignment rights became
effective was the date of the contractor's default. Unlike Pangori,
however, the Dubey court relied more heavily upon the language of
the indemnity agreement, which also provided that the surety's
assignment rights would "be effective as of the date of any such
bond, but only in the event of a default..." Specifically, the Dubey
court noted that "it is ... clear from the contractual language
that default, requiring completion of the project at [the surety's]
expense, triggers [the surety's] right to claim, by assignment, [the
contractor's] rights to the [construction] funds..." Dubey,
App. at 558. Thus, according to Dubey, the surety's assignment
rights were triggered as of the date of the contractor's default, and
those rights related back to the date of execution of any payment and
A careful review of the Dubey opinion reveals that, when
rendering its decision, the Michigan Court of Appeals did not rely
entirely on the language of the indemnity agreement, but rather, paid
considerable attention to the same
law that governed the court in the Pangori decision. In
particular, the court noted that:
[a] number of
cases ... impel the conclusion that [defendant surety], as performance
bond surety, had no contractual rights to the funds ... because as of
the date of plaintiff's writ of garnishment, [the surety] was not
obligated to perform under its surety contract. [I]f in fact, [the
surety] had become so obligated, then either under the terms of its
indemnification agreement with [the contractor] or under equitable
subrogation principles its rights would be superior to plaintiffs'.
Of particular importance to the Michigan Court of Appeals was the
overarching principle that "[i]n order for a surety to prevail over
competing creditors it is necessary that the contractor be in default as
a matter of fact, and that the surety be obligated under its bond to
Therefore, what appears to have guided the courts in Dubey and Pangori
was not the language contained in the indemnity agreements itself, but
rather, the well-founded principle that a surety's assignment rights are
triggered upon the contractor's default. In fact, this is quite
understandable given that a surety does not need to enforce its
assignment rights unless and until it is obligated to perform under its
agreement with the contractor; i.e., when the contractor defaults
on its own payment responsibilities.
Here, the Indemnity Agreement stated that Smelser assigned the right to
the contract balances to Plaintiff "as of the date of execution of
any Bond..." The Court disagrees with Plaintiff's assertion that,
for purposes of assessing priority, its claim to those funds became
effective as of
September 1, 1998
, or the date it issued the Fringe Benefit Bond. Rather, in light of the
rule of law stated in both Dubey and Pangori, Plaintiff's
assignment rights were triggered when it became obligated to perform
under its surety agreement. This is so despite the fact that the
Indemnity Agreement did not contain any specific "default"
language. For, the Court notes while not explicitly stated, it was
implicit in the Indemnity Agreement that Smelser's assignment of the
contract balances would occur only when Smelser defaulted. Therefore,
the Court finds that Plaintiff's claim to the funds was not effective as
of the date Plaintiff executed the Fringe Benefit Bond, but rather, as
of date of Smelser's default. Since the facts are unclear as to when
this occurred, the Court finds that Summary Judgment in Plaintiff's
favor is inappropriate at this time.
Lastly, Plaintiff argues that in the event that the Court finds that
Plaintiff is not entitled to all of the funds at issue here, it should
still receive a portion of the contract balances pursuant to 26 U.S.C. §6323(c).
This provision provides, in pertinent part, as follows:
General. To the extent provided in this subsection, even though notice
of a lien imposed by §6321
has been filed, such lien shall not be valid with respect to a security
interest which came into existence after tax lien filing but which --
(A) Is in
qualified property covered by the terms of a written agreement entered
into before tax lien filing and constituting --
Obligatory Disbursement Agreement, and
protected under local law against a judgment lien arising, as of the
time of tax lien filing, out of an unsecured obligation.
According to Plaintiff, the fringe benefit bond issued on
September 1, 1998
, and subsequent payment bonds issued in November and December, 2000,
qualified as security interests within the meaning of the statute in
that they were "obligatory disbursement agreements."
Furthermore, with respect to 26 U.S.C. §6323(c)(1)(B),
Plaintiff argues that "a surety's right of equitable subrogation
defeats a judgment lien, and therefore satisfies the second prong of the
... statute." Thus, according to Plaintiff, it should be
reimbursed, at the very least, for the amounts it paid on those bonds,
or approximately $177,000.
In response, Defendant argues that Plaintiff did not have a
"security interest" within the meaning of the statute, and
therefore, cannot assert priority based on §6323(c).
In particular, Defendant argues that the contract between Plaintiff and
Smelser was not an "obligatory disbursement agreement," and
more importantly, that Plaintiff's interest was not protected under
local law, since Plaintiff did not file its Indemnity Agreement with the
Secretary of State.
First, an "obligatory disbursement agreement" is "an
agreement (entered into by a person in the course of his trade or
business) to make disbursements, but such an agreement shall be treated
as coming within the term only to the extent of disbursements which are
required to be made by reason of the intervention of the rights of a
person other than the taxpayer." 26 U.S.C. §6323(c)(4)(A).
According to Amwest Sur. Ins. Co. v. United States [ 94-2
USTC ¶50,558], 870 F.Supp. 432, 434 (D. Conn. 1994), a surety bond
constitutes an obligatory disbursement agreement within the meaning of
the statute. Therefore, the Court agrees with Plaintiff that the bonds
issued for the construction contracts are covered by the first prong of §6323(c).
With respect to the second prong, the Court finds that Plaintiff has
failed to establish that its security interest was "protected under
local law" as required by §6323(c)(1)(B).
However, in so holding, the Court does not endorse Defendant's assertion
that, in order to protect its interest under local law, Plaintiff was
required to file its Indemnity Agreement with the Secretary of State.
For the reasons discussed above, Plaintiff was not subject to the filing
requirements of Article 9. Pangori, 53 B.R. at 717.
Plaintiff argues that it's interest was "protected under local
law" because it became equitably subrogated to the rights of
potential unpaid claimants on the dates it issued the bonds for the
school projects. In so arguing, Plaintiff relies on Amwest, which
provides that "[i]f the conditions of [ §6323(c)]
are met, a surety's interest in contract proceeds pursuant to a bond
executed before a tax lien is filed, will prevail over the lien even if
the surety payments are made after liens are filed." Amwest
USTC ¶50,558], 870 F.Supp. at 434 (citations omitted). Accordingly,
Plaintiff argues that regardless of when it was actually called upon to
make surety payments on its bonds, its claim to the funds is superior to
Defendant's because it executed some of those bonds prior to the IRS
The Court agrees with Plaintiff that in Amwest the court held
that the surety's interest accrued on the date it executed the bond, not
the date upon which it paid the contractor's outstanding debts to the
unpaid subcontractors and suppliers. With that said, however, the Court
notes that the Amwest decision is based on
, law, and therefore, does not control this Court's analysis.
Notably, in Amwest, the court's decision was based on
's endorsement of the relation back doctrine, which dictates that a
surety's equitable subrogation rights relate back to the date of the
bond. Amwest [ 94-2
USTC ¶50,558], 870 F.Supp. at 435. 2
, however, has not adopted the relation back doctrine as it relates to a
surety's equitable subrogation rights. Rather, in
, "the right to subrogation accrues upon payment of the debt."
Dubey, 296 N.W.2d at 585. Therefore, "[i]n order for the surety to
prevail over competing creditors it is necessary that the contractor be
in default as a matter of fact, and that the surety be obligated under
its bond to perform..."
In Pangori, which Plaintiff relied on in the previous issue, the
Court, when analyzing the surety's equitable subrogation claim, applied
the Michigan Court of Appeals' holding in Dubey and found that
"[i]n Michigan, as long as the surety's liability is contingent and
has not become an actual obligation triggered by its principal's
default, its equitable rights may be subordinated to an intervening
judicial lien creditor." Pangori, 53 B.R. at 719. Therefore,
the Pangori court held, "[t]he court's conclusion in Dubey
may be summarized as stating that two elements were necessary for the
surety to prevail: first, it must show that there was an actual default
prior to garnishment; second, it must show that it actually became
obligated to pay."
at 719-20 (citing Dubey, 97
App. at 559-60).
Clearly, then, Michigan law differs from that of Connecticut with
respect to a surety's right of equitable subrogation and the relation
back doctrine. In
, the relation back doctrine does not apply in the context of equitable
subrogation to make the effective date of a surety's interest, for
priority purposes, the date upon which it issued its bond. Rather, an
equitable subrogee's rights are triggered when it actually becomes
obligated to pay on the bonds; i.e., when the principal defaults.
The opposite is true in
. Amwest [ 94-2
USTC ¶50,558], 870 F.Supp. at 435.
Here, as the Court is bound by
law, it must follow the holdings set forth in Dubey and Pangori.
As such, the Court finds that Plaintiff's equitable subrogation rights
did not accrue until it was obligated to perform under its bond
agreement with Smelser. The Court cannot determine when this actually
occurred, however, since the details of Plaintiff's payments under the
bonds are unknown. Accordingly, since there is a genuine issue of
material fact with respect to these issues, the Court must deny
Plaintiff's Motion for Summary Judgment.
Therefore, for the reasons stated above, Plaintiff's Motion for Summary
Judgment is hereby DENIED.
IT IS SO ORDERED.
Construction Alternatives involved the application of
law, which Plaintiff claims renders it inapplicable to the facts at
hand. The Court disagrees with Plaintiff, and finds that the Sixth
Circuit's analysis in Construction Alternatives is applicable so
long as appropriate allowances are made for Michigan law.
After the court issued its ruling in Amwest, the
moved for reconsideration, [ 95-2
USTC ¶50,340], 1995 WL 452992, No. Civ. 3:92CV221 (D.Conn.
May 10, 1995
), arguing that the court improperly relied upon several cases that had
been repudiated by the Eighth Circuit's holding in Int'l Fid. Ins.
Co. v. U.S. [ 92-1
USTC ¶50,004], 949 F.2d 1042 (8th Cir. 1991). Notably, the Eight
Circuit in Int'l Fid. Ins. Co. rejected the relation back
doctrine, and held that a surety's equitable subrogation claim to a
contractor's progress payments did not accrue on the date the bonds were
at 1046. Upon reconsideration, however, the Amwest court adhered
to its original ruling, noting that Int'l Fid. Ins. Co. was based
USTC ¶50,654] In re Nerland Oil, Inc., Superpumper, Inc.,
Claimant-Appellant v. Nerland Oil, Inc., Debtor-Appellee.
United States of America
through The Internal Revenue Service, Creditor-Appellee
Court of Appeals, 8th Circuit, 01-2962,
App. LEXIS 18725. Affirming an unreported District Court decision
Secs. 6321 , 6323 and
Tax liens: Bankruptcy: Priority: Creation of lien: Time of
assessment: Judgment creditor: Setoff.--Federal tax liens against a
debtor corporation's property interests, which were filed in conjunction
with assessments made before a third party obtained a final judgment
enforcing an attempted setoff transaction with the debtor, had priority
with respect to the distribution of property in the bankruptcy estate.
The setoff involved the third party's promissory note to the debtor and
payments owed to it by the debtor in connection with unrelated
contracts. As an inferior lienholder, the third party could not effect a
setoff to compensate it for losses incurred under the contracts before
the superior tax liens were satisfied. The tax liens attached to all of
the debtor's property interests, including the promissory note, which
had clear value and transferability. Because the third party's debt
under the promissory note was owed to the IRS, not to the debtor,
nothing was owed to the debtor to set off the amount that it was
obligated to pay the third party.
Secs. 6323 and 7403 ]
Tax liens: Bankruptcy: Priority: Judgment creditor: Setoff:
Constructive trust.--Federal tax liens against a debtor
corporation's property interests, which were filed in conjunction with
assessments made before a third party obtained a final judgment
enforcing an attempted setoff transaction with the debtor, had priority
with respect to the distribution of property in the bankruptcy estate.
The setoff involved the third party's promissory note to the debtor and
payments owed to it by the debtor in connection with unrelated
contracts. The third party was barred from claiming, for the first time
on appeal, that the amounts owed to it were wrongfully converted by the
debtor and represented its own funds held in constructive trust.
Further, it did not qualify for relief under Code
Sec. 6323 , which protects specific types of creditors in a
bankruptcy proceeding from the priority rule favoring the IRS. The
attempted setoff did not convert the third party into a purchaser of the
right to receive payments under the promissory note. Also, the debtor
never accepted the setoff. Thus, the third party was a judgment lien
creditor whose interest in the setoff became choate after the tax liens
Meschke, Pringle & Herigstad,
, for claimant-appellant. Kip M. Kaler, Kaler Law Office,
, Jay D. Carlson,
, for debtor-appellee. Lynn E. Crooks, United States Attorney's Office,
Fargo, N.D., Bruce R. Ellisen, Anthony T. Sheehan, Ellen P. DelSole,
Daniel R. Conrad, Department of Justice, Washington, D.C. 20530, for
MCMILLAN, BOWMAN and MURPHY, Circuit Judges.
Chapter 7 bankruptcy matter filed by the debtor Nerland Oil, Inc.
("Nerland Oil"), Superpumper, Inc. ("Superpumper")
appeals from a final order entered in United States District Court for
the District of North Dakota 1
affirming the bankruptcy court's 2
grant of summary judgment in favor of the United States, through the
Internal Revenue Service ("IRS"), on the ground that federal
tax liens previously assessed by the IRS against Nerland Oil took
priority over a North Dakota state court judgment affirming an
arbitration award enabling Superpumper to setoff its debt to Nerland
Oil. See In re Nerland Oil, Inc., No. A3-01-05 (D. N.D.
June 13, 2001
) (memorandum and order). For reversal, Superpumper argues that the
district court erred in determining that (1) Superpumper did not
complete a valid setoff under state law in 1996, (2) unfiled federal tax
liens prevented Superpumper's setoff of debt, and (3) Superpumper could
not assert the same defenses against the IRS as it could against Nerland
Oil. For the reasons discussed below, we affirm the order of the
in the bankruptcy court was proper based upon 28 U.S.C. §157(b)
(transferring jurisdiction of cases arising in or related to Title 11
from district court to bankruptcy court), pursuant to 28 U.S.C. §1334
(providing original federal jurisdiction for Title 11 bankruptcy cases).
Jurisdiction in district court was proper based upon 28 U.S.C. §158(a)(3)
(enabling district court to consider interlocutory orders of bankruptcy
courts). Jurisdiction in this court is proper based upon 28 U.S.C. §158(d)
(authorizing appeals from final district court judgments reviewing
bankruptcy court appeals). The notice of appeal was timely filed
pursuant to Fed. R. App. P. 4(a).
stipulated to the following facts in the bankruptcy court's record. In
the mid-1970s, Brent Nerland founded Nerland Oil, a petroleum products
wholesale marketing business. Nerland Oil established a
"jobber" relationship with Conoco, in which it contracted with
Conoco to distribute Conoco products to Conoco retail stations and to
forward credit card receivables to Conoco retail stations after Conoco
processed the credit card transactions. Over time, Nerland Oil acquired
several convenience stores, including a Conoco retail station and
convenience store called the Dakota Fuel Stop in
In June 1995,
Superpumper, an owner and operator of convenience stores, bought the
Dakota Fuel Stop from Nerland Oil. To partially finance the purchase,
Superpumper executed a promissory note payable to Nerland Oil in the
amount of $350,000 and secured by a second mortgage on the Dakota Fuel
Stop. The note required Superpumper to make quarterly payments of $7,545
to Nerland Oil at an annual interest rate of nine percent. The balance
of the note was to be paid on
September 30, 2000
, or earlier if Superpumper sold the Dakota Fuel Stop.
As a condition
of the purchase, Superpumper agreed to arrange future fuel supply and
freight in a form acceptable to Nerland Oil, and therefore entered into
two contracts with West Fargo Truck Stop, Inc. ("WFTS"),
another company owned by Brent Nerland. Together the contracts credited
Superpumper with $579,332 toward the purchase price of the Dakota Fuel
Stop. The first agreement designated WFTS as the exclusive supplier of
the Dakota Fuel Stop's Conoco brand fuel requirements. The second
contract required WFTS to haul fuel products to various Superpumper
locations in the
Both contracts contained clauses requiring disputes to be submitted to
binding arbitration. Although neither contract established Nerland Oil
as the Conoco jobber to service the Dakota Fuel Stop, Nerland Oil acted
in that capacity. Consequently, Nerland Oil was responsible for
forwarding from Conoco to Superpumper the credit card receivables
generated by the Dakota Fuel Stop. Superpumper and Nerland Oil did not
have a contract governing this relationship, but it is a well-known
industry practice which is generally not recognized in writing.
By the spring
of 1996, Nerland Oil began failing to remit the Dakota Fuel Stop credit
card receivables from Conoco to Superpumper, and the amount of the
arrearage grew over the course of the year. As of
October 31, 1996
, Nerland Oil owed Superpumper $348,856.26 in credit card receivables,
and Superpumper owed Nerland Oil $359,790.18 under the promissory note
and mortgage. On
October 28, 1996
, Superpumper terminated its jobber relationship with Nerland Oil. At
that time, Superpumper desired to apply the outstanding balance of
credit card receivables against the amount due under the promissory note
and mortgage held by Nerland Oil. Nerland Oil refused the proposed debt
January 28, 1997
, Superpumper commenced a lawsuit against Nerland Oil in
state court seeking to setoff the debts. Because the contracts at issue
contained arbitration clauses, the state court ordered that the dispute
be submitted to arbitration. After Superpumper unsuccessfully appealed
the arbitration order to the state supreme court, the dispute went to
arbitration before a three-member panel of attorneys. On
August 18, 1999
, the arbitration panel granted Superpumper's request for setoff.
November 5, 1999
, before judgment confirming the arbitration award was entered in state
court, Nerland Oil filed a Chapter 7 bankruptcy petition. As a result,
Nerland Oil's bankruptcy estate was subject to an automatic stay which
barred issuance or enforcement of any state court judgment affecting the
estate. See 11 U.S.C. §362(a)(1), (2). Therefore, on
November 18, 1999
, Nerland Oil and WFTS resisted confirmation of the arbitration decision
in state court and WFTS moved to vacate the arbitration award. Although
the state trial court originally adopted the arbitration award, the
state supreme court reversed the trial court's decision, holding that,
due to the automatic stay triggered by the bankruptcy filing, the
arbitration award was not final or enforceable. Superpumper, Inc. v.
Nerland Oil, Inc., 2000 ND 220, 620 N.W.2d 159 (N.D. 2000).
then initiated this adversary proceeding on
April 19, 2000
, seeking summary judgment to adopt the arbitration award in the United
States Bankruptcy Court for the District of North Dakota. See 28
U.S.C. §§157, 1334; 11 U.S.C. §553 (enabling creditor of bankruptcy
estate to offset a mutual debt arising before commencement of bankruptcy
filing). Nerland Oil counterclaimed, seeking reversal of the arbitration
award and monetary damages resulting from Superpumper's breach of the
long-term supply and freight agreements with WFTS.
, through the IRS, cross-moved for summary judgment against Nerland Oil,
arguing that it possessed a superior interest in the promissory note
payments on the basis of several prior federal tax liens against Nerland
Oil. The federal tax liens originated in the early 1990s, when the IRS
assessed unpaid federal excise and employment taxes against Nerland Oil
for the following dates: August 9, 1993, August 30, 1993, September 20,
1993, December 27, 1993, January 3, 1994, December 9, 1996, December 31,
1996, November 3, 1997, December 22, 1997, and September 20, 1999.
Nerland Oil did not pay these tax assessments, and the IRS filed proper
notice of its federal tax liens against Nerland Oil on September 21 and
22, 1998. At the time Nerland Oil filed its bankruptcy petition, it owed
the IRS $1,693,979.57 for federal tax liens covering the 1993 and 1994
time period, which occurred prior to the sale of the Dakota Fuel Stop to
Superpumper. The IRS argued that it should not be bound by the
arbitration award since it was not a party to the arbitration.
September 19, 2000
, the bankruptcy court conducted a hearing to consider the cross-motions
for summary judgment. At the hearing, the parties agreed to rely on the
record established during the arbitration proceeding, supplemented by
evidence regarding the federal tax liens. The bankruptcy court addressed
for the first time the impact of the federal tax liens on Superpumper's
right of setoff. On October 20, 2000, the bankruptcy court denied
Superpumper's motion for summary judgment and granted summary judgment
in favor of the IRS, concluding that (1) the federal tax liens became
choate when the federal taxes were assessed against Nerland Oil in 1993
and 1994, thus giving the IRS priority over Superpumper in collecting
its debt from Nerland Oil, and (2) because Superpumper did not qualify
as a holder of an implied security interest, the IRS's lien collection
right was not invalid under 26 U.S.C. §6323(a). See Superpumper,
Inc. v. Nerland Oil, Inc., No. 99-31826 (Bankr. D. N.D.
Oct. 20, 2000
appealed the bankruptcy court decision to the district court. The
district court affirmed, agreeing with the bankruptcy court that the
federal tax liens took priority over Superpumper's setoff. The district
court also clarified that, because a setoff does not introduce any new
money into the estate, it is treated as a lien, not a payment, for
purposes of determining priority, and therefore must be treated as a
lien inferior to the federal tax liens. Further, the district court
concluded that because Superpumper was unable to identify or trace the
credit card receivables, as a result of Nerland Oil's commingling the
receivables with its general funds, Superpumper must be classified as a
general creditor of the Nerland Oil bankruptcy estate and therefore
assume an inferior position for debt repayment. Last, the district court
refused to categorize Superpumper as a "purchaser" under 26
U.S.C. §6323 because the asset in question was not the convenience
store itself, but Nerland Oil's right to receive payments under the
promissory note. See In re Nerland Oil, Inc., No. A3-01-05 (D.
June 13, 2001
). This appeal followed.
August 31, 2001
, pursuant to Fed. R. Civ. P. 27(a) and 8th Cir. R. App. P. 27A, Nerland
Oil's bankruptcy trustee moved to dismiss this appeal on the ground that
the bankruptcy judgment was not a final appealable order. On
September 19, 2001
, pursuant to Fed. R. Civ. P. 54(b), the bankruptcy court certified that
October 20, 2000
judgment was final. See Superpumper, Inc. v. Nerland Oil, Inc.,
No. 99-31826 (Bankr. D. N.D.
Sept. 19, 2001
). The district court affirmed. On
November 9, 2001
, this court denied Nerland Oil's bankruptcy trustee's motion to dismiss
the appeal for lack of a final appealable order. See Superpumper,
Inc. v. Nerland Oil, Inc., No. 01-2962 (8th Cir.
Nov. 9, 2001
) (denial of motion to dismiss).
October 17, 2001
, the bankruptcy court lifted the bankruptcy stay. As a result, Nerland
Oil moved to vacate and modify the arbitration award in state court, and
Superpumper renewed its motion to confirm the arbitration award in state
court. The state trial court denied the motion to vacate the arbitration
June 6, 2002
, and affirmed the arbitration award on
June 18, 2002
. Superpumper accordingly supplemented the record in this appeal to
reflect the state court's favorable order. See Superpumper, Inc. v.
Nerland Oil, Inc., No. 01-2962 (8th Cir.
July 10, 2002
We review a
grant of summary judgment de novo, viewing the evidence in the
light most favorable to the nonmoving party, to determine whether there
is no genuine issue of material fact so that the moving party is
entitled to judgment as a matter of law. Fed. R. Civ. P. 56(c); Minnesota
Dep't of Revenue v. United States [99-2
USTC ¶50,715 ], 184 F.3d 725, 727 (8th Cir. 1999) (Minnesota
Dep't of Revenue) (reviewing de novo a grant of summary
judgment regarding priority of federal tax lien).
Priority of Federal Tax Liens
for purposes of federal law is governed by the common-law principle that
'the first in time is the first in right.' " Minnesota Dep't of
USTC ¶50,715 ], 184 F.3d at 728 (quoting United States v.
USTC ¶50,164 ], 507 U.S. 447, 449, 123 L.Ed.2d 128, 113 S.Ct. 1526
(1993)). According to federal law, " 'the priority of a lien
depends on the time the lien attached to the property in question and
became choate.' "
at 728 (quoting Cannon Valley Woodwork, Inc. v. Malton Construction
Co., 866 F.Supp. 1248, 1250 (D.
1994)). A federal tax lien attaches and becomes choate at assessment. See
26 U.S.C. §§6321 (consequence of unpaid taxes after assessment is
"a lien in favor of the
upon all property and rights to property, whether real or personal,
belonging to such person"), 6322 (lien arises at the time
assessment of unpaid taxes is made against delinquent taxpayer).
Therefore, a federal tax lien's priority order is based upon the time
when the lien is assessed, not when it is filed. See United
States v. Jepsen [2001-2
USTC ¶50,698 ], 268 F.3d 582, 584 (8th Cir. 2001) (tax assessment
creates a lien in favor of the United States on all property and rights
to property pursuant to 26 U.S.C. §§6321, 6322); Minnesota Dep't of
USTC ¶50,715 ], 184 F.3d at 728 ("The lien arises
automatically when the assessment is made and continues until the
taxpayer's liability is either satisfied or becomes unenforceable due to
the lapse of time."); Horton Dairy Inc. v. United States [93-1
USTC ¶50,195 ], 986 F.2d 286, 291 (8th Cir. 1993) (Horton Dairy)
("Federal law determines choateness, and the federal rule is that
liens are perfected in the sense that there is nothing more to be done
to have a choate lien--when the identity of the lienor, the property
subject to the lien, and the amount of the lien are established.")
USTC ¶9191 ], 347 U.S. 81, 84, 98 L.Ed. 520, 74 S.Ct. 367 (1954)
(internal quotations omitted)).
In this case,
federal tax liens totaling $1,693,979.57 against Nerland Oil were
assessed and became choate over the course of 1993 and 1994. A competing
state interest cannot take priority over those assessments unless (1)
the state interest became choate before the federal tax assessment, see
Minnesota Dep't of Revenue [99-2
USTC ¶50,715 ], 184 F.3d at 728, or (2) the state interest falls
within the statutorily-defined exceptions to the IRS's lien priority
order. See 26 U.S.C. §6323.
Inferiority of the Attempted Setoff Transaction
federal law to determine the priority order of liens competing with
federal tax liens. See Minnesota Dep't of Revenue [99-2
USTC ¶50,715 ], 184 F.3d at 728 (citing Aquilino v. United
USTC ¶9538 ], 363 U.S. 509, 513-14, 4 L.Ed.2d 1365, 80 S.Ct. 1277
(1960)). However, we apply state law to determine the nature of the
competing legal interest at stake. See Bremen Bank & Trust Co. v.
United States [98-1
USTC ¶50,116 ], 131 F.3d 1259, 1263 (8th Cir. 1997).
asserted its claim under 11 U.S.C. §553(a), which preserves rights of
creditors to offset mutual debts arising before a bankruptcy petition is
v. Gerth, 991 F.2d 1428, 1431 (8th Cir. 1993). However, §553(a)
only preserves setoff rights that are otherwise valid under applicable
nonbankruptcy law. See In re Sauer, 223 B.R. 715, 724 (Bankr. D.
N.D. 1998). When Superpumper demanded a setoff of the mutual debts from
Nerland Oil in October 1996, its state-law interest in the attempted
setoff transaction became choate. See Horton Dairy [93-1
USTC ¶50,195 ], 986 F.2d at 291 (state-created right of setoff
becomes choate when it is exercised).
October 1996, $1,693,979.57 in unpaid federal taxes already had been
assessed against Nerland Oil (some as early as 1993). As a result, any
subsequent transaction, including Superpumper's attempted setoff
transaction, must take an inferior position to the federal tax liens. See
id. (treating the holder of an inchoate state-created setoff right
as a lienholder inferior to a choate federal tax lien). As an inferior
lienholder, Superpumper may not effect a setoff transaction to
compensate it for the loss of the credit card receivables until after
the superior federal tax liens are satisfied. See 26 U.S.C. §6322
(federal tax lien remains in effect until liability "is satisfied
or becomes unenforceable"). As a practical matter in the present
case, satisfaction of the federal tax liens will deplete entirely the
Nerland Oil bankruptcy estate. See In re: Nerland Oil, Inc., No.
99-31826 (Bankr. D. N.D. 2000).
scope of the federal tax liens includes all the delinquent taxpayer's
property interests, including interests acquired after the liens were
assessed. See 26 U.S.C. §§6321; Shawnee State Bank v. United
USTC ¶9513 ], 735 F.2d 308, 310 (8th Cir. 1984) ("the lien
attaches to all the property of the defaulting taxpayer, including
property acquired by the taxpayer after the lien arises") (citing Glass
City Bank v. United States [45-2
USTC ¶9449 ], 326 U.S. 265, 267-69, 90 L.Ed. 56, 66 S.Ct. 108
(1945)). Consequently, the federal tax liens attached to all of Nerland
Oil's property interests, including the promissory note acquired in
exchange for the sale of the Dakota Fuel Stop, which was signed after
the federal tax liens were assessed.
attempts to distinguish this case from a typical lien priority case,
arguing that (1) as Nerland Oil's debtor, not its creditor,
Superpumper's debt was not part of the property subject to the federal
tax liens; (2) because the funds used to complete the setoff
transaction--the credit card receivables--were actually Superpumper's
own funds held in trust by Nerland Oil, not the property of Nerland Oil,
those funds were not part of the property subject to the federal tax
liens; and (3) because the bankruptcy filing occurred after
Superpumper's completion of the setoff transaction, 4
only the remaining amount on the promissory note and mortgage should be
considered part of the bankruptcy estate. 5
We find these
arguments unpersuasive. Nothing distinguishes this case from typical
lien priority cases. First, Superpumper's debt in the form of the
promissory note constitutes the type of property typically subject to a
federal tax lien. See St. Louis Union Trust Co. v. United States
¶9282 ], 617 F.2d 1293, 1301 n.11 (8th Cir. 1980) (considering
escrow agreement providing income payable to debtor-taxpayer to be
property available to satisfy federal tax lien). We apply federal law to
determine whether or not the interest at stake constitutes property for
purposes of federal tax lien satisfaction. See Drye v. United States
¶51,006 ; 99-2
USTC ¶60,363 ], 528 U.S. 49, 50, 145 L.Ed.2d 466, 120 S.Ct. 474
(1999) ("whether a statelaw right constitutes 'property' or 'rights
to property' under §6321 is a matter of federal law") (quoting United
States v. National Bank of Commerce [85-2
USTC ¶9482 ], 472 U.S. 713, 727, 86 L.Ed.2d 565, 105 S.Ct. 2919
(1985) (internal quotations omitted)). "Property" broadly
includes "every species of right or interest protected by law and
having an exchangeable value."
The promissory note clearly has value--the right to collect payments on
it--as well as transferability. See Black's Law Dictionary 1085
(7th ed. 1999) (defining "promissory note" as a
"negotiable instrument"); see also UCC §3-104
(categorizing a promissory note as a negotiable instrument).
Superpumper incorrectly classifies the property at stake as the funds
used to complete the setoff transaction. Superpumper confuses the issue
by conflating two separate debts: (1) Superpumper's debt to Nerland Oil
under the promissory note, and (2) Nerland Oil's debt to Superpumper
resulting from its failure to remit the credit card receivables.
Superpumper seeks to treat the two debts interchangeably, as the
attempted setoff transaction would have done. However, we recognize that
the two debts are separate and distinct from one another, and thus
involve different rights and consequences.
We agree with
the district court that the relevant property interest is Superpumper's
debt to Nerland Oil involving the right to collect payments under the
promissory note. See In re Nerland Oil, Inc., No. A3-01-05 (D.
June 13, 2001
). The federal tax liens transferred to the IRS the right to all of
Nerland Oil's property, including Nerland Oil's later-acquired right to
collect Superpumper's debt under the promissory note. Therefore,
Superpumper's debt under the promissory note was owed to the IRS, not
Nerland Oil. It does not matter what type of funds the credit card
receivables are, because by the time Superpumper attempted the setoff
transaction, there was no debt owed to Nerland Oil to setoff the debt
Nerland Oil owed to Superpumper. 6
date of the attempted setoff transaction in relation to the bankruptcy
filing is irrelevant because, as already discussed, the assessment of
the federal tax liens occurred as early as 1993 and 1994 and thus
predated the attempted setoff transaction in October 1996 and thus
Applicability of 26 U.S.C. §6323
only recourse lies in 26 U.S.C. §6323, which protects specific types of
creditors in a bankruptcy proceeding from the priority rule favoring the
IRS. See 26 U.S.C. §6323(a) 7
; Millers Mutual Ins. Assoc. of Illinois v. Wassall [84-2
USTC ¶9621 ], 738 F.2d 302, 304 n.5 (8th Cir. 1984) (" '[26
U.S.C.] section 6323 of the Federal Tax Lien Act of 1966 is the
exclusive source of exceptions to the priority of federal tax liens'
") (quoting Campagna-Turano Bakery, Inc. v. United States [80-1
USTC ¶9292 ], 632 F.2d 39, 41 (7th Cir. 1980)). Section 6323(a)
invalidates properly filed federal tax liens against purchasers, holders
of security interests, mechanic's lienors, and judgment lien creditors. See
Hoggarth v. Somsen, 496 N.W.2d 35, 39 (N.D. 1993) (federal priority
statutes give IRS priority unless competing state interests are accorded
"purchaser" status prior to IRS filing). A
"purchaser" is defined as "a person who, for adequate and
full consideration in money or money's worth, acquires an interest
(other than a lien or security interest) in property which is valid
under local law against subsequent purchasers without actual
notice." 26 U.S.C. §6323(h)(6).
contends that it should be considered a purchaser within the meaning of
§6323(a) because (1) it made continuing installment payments of the
purchase price of the Dakota Fuel Stop through the promissory note, and
(2) the setoff transaction acted as a payment on the purchase-money
Even if the
installment payments made pursuant to the promissory note could
transform Superpumper into a purchaser, at most Superpumper was a
purchaser of the Dakota Fuel Stop, not a purchaser of the right to
receive payments under the promissory note. Therefore, Superpumper would
only be protected by §6323(a) against any taxes levied against the
Dakota Fuel Stop, which is not an issue in this case.
next advances the theory that it purchased the right to receive payments
under the promissory note by virtue of the attempted setoff transaction.
Superpumper attempted the setoff transaction in October 1996, prior to
the filing of the federal tax liens in September 1998. If Superpumper
was a purchaser under §6323 at that time, then it would be protected
against the unfiled federal tax liens. However, "parties claiming
the protected status of [§] 6323(a) have the burden of proving that
they qualify for that protection." Hoggarth v. Somsen, 496
N.W.2d at 39. To satisfy that burden, Superpumper must prove that (1) it
gave "adequate and full consideration in money or money's
worth," (2) it acquired an interest in property "other than a
lien or security interest," and (3) the interest is "valid
under local law against subsequent purchasers." 26 U.S.C. §6323(a).
We do not
agree that the attempted setoff transaction converted Superpumper into a
purchaser within the meaning of §6323. Because the two interests
involved in the attempted setoff transaction were mutual debts, there
was no exchange of "adequate and full consideration in money or
Rather, Superpumper sought to obtain the right not to pay the balance on
the promissory note. We agree with the district court's reasoning that
because the attempted setoff transaction did not propose to pay any new
money into the bankruptcy estate, it cannot be considered a payment in
exchange for the right to receive payments under the promissory note.
considered a payment, either money or something of value must be
"given and accepted in partial or full discharge of an
obligation." Black's Law Dictionary 1150. The record does not
contain any evidence to indicate that, at the time Nerland Oil began
failing to remit the credit card receivables, Superpumper gave Nerland
Oil permission to cease remitting the credit card receivables in
exchange for release of its obligation to pay the amounts owed under the
promissory note. Nor is there any evidence demonstrating that Nerland
Oil accepted this arrangement. On the contrary, the record reflects that
Superpumper sought the setoff as an after-the-fact remedy and that
Nerland Oil rejected the proposed setoff. 8
See Black's Law Dictionary 1376 (defining "setoff" as
the "right to reduce the amount of debt by any sum the debtor owes
exceptions permitted under §6323 are carefully crafted and narrowly
limited," Janssen v. United States [97-2
USTC ¶50,860 ], 213 B.R. 558, 564 (B.A.P. 8th Cir. 1997) (quoting Battley
(In re Berg) [97-2
USTC ¶50,665 ], 121 F.3d 535, 537 (9th Cir. 1997)), and we cannot
justify expanding the definition of purchaser as Superpumper urges.
Rather, we think Superpumper is characterized more accurately as a
judgment lien creditor, whose interest in the attempted setoff
transaction was perfected and became choate on
June 18, 2002
, the date the state court entered final judgment enforcing the
attempted setoff transaction. Because that date occurred after the IRS
properly filed its tax liens in September 1998, Superpumper is not
entitled to superpriority under the protection of §6323(a). See
Horton Dairy [93-1
USTC ¶50,195 ], 986 F.2d at 291 (treating a setoff as a competing
lien when determining priority); United States v. Scovil [55-1
USTC ¶9137 ], 348 U.S. 218, 221, 99 L.Ed. 271, 75 S.Ct. 244 (1955)
(considering transaction involving cancellation of debt not to be a
purchase for purposes of taking priority over a federal tax lien).
As a result,
we hold that the district court did not err in affirming the bankruptcy
court's decision to give priority to the federal tax liens when
distributing the property in Nerland Oil's bankruptcy estate.
the order of the district court is affirmed.
The Honorable Rodney S. Webb,
District Court for the District of North Dakota.
The Honorable William A. Hill, United States Bankruptcy Judge for the
District of North Dakota.
The existence of these contracts is puzzling, as WFTS was not a Conoco
jobber authorized to sell the Conoco fuel products required, nor did it
have any trucks that could haul fuel.
Superpumper defines the date of completion of the setoff transaction as
August 18, 1999
, the date on which the arbitration panel applied state law to conclude
that the setoff should be mandated. The bankruptcy petition was filed on
November 5, 1999
If the setoff transaction was valid, $10,994 remained on the promissory
note and mortgage.
Although Superpumper does not claim explicitly an action for
constructive trust based on wrongful conversion of the credit card
receivables, it appears that Superpumper intends to pursue that theory
by claiming that the credit card receivables were Superpumper's own
funds held in trust by Nerland Oil and therefore should be exempted from
the bankruptcy estate property accessible to satisfy the IRS tax liens.
However, North Dakota law imposes a substantial evidentiary burden on
the party seeking to establish a constructive trust, see Napoleon
Livestock Auction, Inc. v. Rohrich, 406 N.W.2d 346, 356 (N.D. 1987),
and it is impossible for us to review whether that burden has been
satisfied because (1) the issue was not raised before the original
factfinder of the bankruptcy court, see First Bank Investors' Trust
v. Tarkio Coll., 129 F.3d 471, 476-77 (8th Cir. 1997) (requiring
factual issues to be considered on appeal to be presented to bankruptcy
court first), and (2) Superpumper agreed to stipulate to the facts
already in the record following the arbitration panel proceeding, which
are insufficient to substantiate a constructive trust claim. See
Napolean [sic] Livestock Auction, Inc. v. Rohrich, 406
N.W.2d at 356-57 (imposition of constructive trust not allowed in
absence of both parties' recognition of issue and acquiescence in the
introduction of evidence on that issue).
In 1966, Congress enacted the Federal Tax Lien Act, codified at 26
U.S.C. §6323, which carved out specific exemptions from the otherwise
broad scope of federal tax liens imposed by the IRS. "Before 1966,
the requirement of choateness . . . generally operated to prevent a
nonfederal lien from gaining priority over a federal tax lien with
respect to property acquired by the debtor after the tax lien had
arisen." Shawnee State Bank v. United States [84-1
USTC ¶9513 ], 735 F.2d at 310. The purpose of the Act was "to
specifically enumerate certain 'superpriorities' . . . and commercial
financing transactions . . . that defeat a federal tax lien." Dugan
v. United States [73-1
USTC ¶9211 ], 472 F.2d 944, 950 n.9 (8th Cir. 1973).
We note that Superpumper's "setoff as payment" theory was not
presented to the bankruptcy court and the record contains no evidence to
substantiate that theory. We address the issue only insofar as we may
draw legal conclusions from the established record. We consider any
argument requiring additional factual findings to have been waived. See
First Bank Investors' Trust v. Tarkio Coll., 129 F.3d 471, 476-77
(8th Cir. 1997) (enabling appellate court to consider arguments not
raised in bankruptcy court only " 'when the argument involves a
purely legal issue in which no additional evidence or argument would
affect the outcome of the case' ") (quoting Universal Title Ins.
Co. v. United States [92-1
USTC ¶50,106 ], 942 F.2d 1311, 1314-15 (8th Cir. 1991)).
USTC ¶50,629] Jobst W.F. Blachy, et al., Plaintiffs-Appellees v.
ert E. Butcher and Rosemary Butcher, co-personal representatives of the
Estate of Alexander Michael Butcher, deceased, Rosemary Butcher,
individually, Little Traverse Development Company, a Michigan
Corporation, H.C. Development Company, a Michigan Corporation,
Defendants-Appellants (99-1185/99-1492), United States of America, on
behalf of the Internal Revenue Service, Defendant-Appellant (99-1523)
Court of Appeals, 6th Circuit, 99-1185/99-1492/99-1523,
App. LEXIS 17509. Affirming in part and reversing in part a District
Court decision, 99-1
Secs. 6321 and 6323 ]
Tax liens: Priority: Constructive trust:
law: Choateness: Equitable considerations.--A constructive trust was
properly imposed on real property had been held by delinquent taxpayers
and was later purchased by the owners of condominiums constructed on the
property. However, imposition of the constructive trust did not defeat a
federal tax lien against the property because a judicially created
equitable remedy cannot be applied retroactively to defeat a choate tax
lien. While imposing the trust was appropriate to protect the
condominium owners from the taxpayers' possible fraudulent conduct, the
condominium owners exercised a lack of diligence when they failed to
discover a conveyance of the realty back to the taxpayers. Thus, from an
equity standpoint, it would be unfair to the IRS to retroactively apply
a constructive trust in favor of the condominium owners that would have
priority over the tax claim.
Bankruptcy: Property of bankruptcy estate: Bankruptcy Court
jurisdiction: Shared jurisdiction.--The interest in real property
that an individual received from her husband by quitclaim deed was not
exempt from a constructive trust on the property as part of her
bankruptcy estate. Since the case did not concern enforcement of a debt,
jurisdiction existed over prepetition claims against property that she
acquired postpetition from her late husband by quitclaim deed. Once the
bankruptcy court transferred the constructive trust count to the federal
district court and lifted the automatic stay, the district court had
jurisdiction to adjudicate the constructive trust issue with respect to
the wife's nonbankruptcy interest in the property. Although the
bankruptcy court had jurisdiction over the wife's property, it was not
barred from transferring selected issues to the district court.
District court: Statute of limitations: Recovery of land.--Condominium
owners' constructive trust claim against delinquent taxpayers who held
real property was not barred by the statute of limitations. Although the
taxpayers claimed that the applicable limitations period was six years,
a 15-year period applied because the case involved the recovery of land,
and the condominium owners brought suit within that period.
District court: Removal.--Delinquent taxpayers' suit challenging
imposition of a constructive trust on real property was removable to
federal court even though the IRS, rather than the government, as the
proper party, was named in the suit. That defect did not prevent removal
of the action.
, for plaintiffs-appellees.
ert E. Butcher, Trenton, Mich., Joan I. Oppenheimer, Alice L. Ronk,
William S. Estabrook, Department of Justice, Washington, D.C. 20530, for
WELLFORD, SILER and GILMAN, Circuit Judges.
Even a diabolical
bar examiner would be reluctant to impose this case's complex mixture of
subject matter jurisdiction, fraud, real estate, marital property,
bankruptcy, tax liens, contributory negligence, equitable remedies, and
civil procedure upon hapless law school graduates. Because reality often
marches in where creators of hypotheticals fear to tread, however, we
are the "hapless" appellate court judges obliged to struggle
with this twisted tale of true-life conflict.
The essence of
this complicated case is that twelve condominium owners and their title
insurance company, Lawyers Title Insurance Corporation, have filed suit
against Rosemary C. Butcher, the representatives of the estate of her
late husband Alexander M. Butcher, Little Traverse Development Company
(LTDC), H.C. Development Company (HCDC), and the Internal Revenue
Service (IRS), claiming that the condominium owners should be declared
the legal titleholders of certain property previously owned by Alexander
and Rosemary Butcher as tenants by the entirety. After eight years of
proceedings in multiple courts, the United States District Court for the
Western District of Michigan granted the plaintiffs' motion for summary
judgment, imposing a constructive trust upon the disputed property owned
by the Butchers and later purchased by the condominium owners. The
Butchers, LTDC, and HCDC (collectively the Butcher defendants) have
appealed, challenging the imposition of the constructive trust. Another
key issue on appeal, brought by the
on behalf of the IRS, challenges the portion of the district court's
decision holding that a federal tax lien encumbering the Butchers'
property is subordinate to the plaintiffs' constructive trust. For the
reasons set forth below, we REVERSE the judgment of the district
court regarding the status of the IRS's tax lien, but AFFIRM its
judgment in all other respects.
Rosemary Butcher sought to develop resort condominiums in northern
through LTDC, a
corporation owned solely by Alexander. On
June 30, 1978
, Cedar Cove, a
limited partnership in which Alexander was a partner, conveyed four
parcels of land, consisting of approximately 100 acres in Little
Traverse Township, to Alexander and Rosemary for the price of $640,000.
By warranty deed dated
July 6, 1978
, the Butchers conveyed two of these four parcels, consisting of 40.81
acres, to LTDC. Both the June 30 and July 6 deeds were recorded on
July 12, 1978
. That same day, Alexander signed a warranty deed in his capacity as
president of LTDC, conveying the unmortgaged portion of the property,
consisting of 17.83 acres, back to the Butchers as tenants by the
entirety. This deed was recorded on
July 14, 1978
request, Lawyers Title issued a title commitment to LTDC for the full
40.81 acres on
July 18, 1978
. Lawyers Title failed to discover the 17.83 acre conveyance from LTDC
back to the Butchers, presumably because the
July 12, 1978
warranty deed had been recorded only four days earlier. Alexander also
failed to inform Lawyers Title of its existence. As a result, the title
commitment erroneously listed LTDC as the owner of all 40.81 acres,
which included the 17.83 acres no longer in LTDC's name.
Alexander, on behalf of LTDC, executed a master deed dated
November 1, 1978
that created Harbor Cove Phase II on the entire 40.81 acres. From 1981
to 1984, LTDC constructed and sold condominiums on portions of the
acreage that included the 17.83 acres in dispute, nine of which were
sold to the plaintiffs or their predecessors-in-interest.
May 8, 1984
, Alexander formed HCDC. He was the majority stockholder, president, and
a director of this new corporation. In late October of 1984, Alexander
signed a warranty deed on behalf of LTDC, purporting to convey 12.60 of
the 17.83 acres to HCDC. Alexander, as president of HCDC, then signed a
master deed creating Harbor Cove Phase III on the 12.60 acres. He also
granted a mortgage to Northwestern Savings and Loan Association on this
acreage in order to secure a construction loan. After Lawyers Title
issued a title commitment for the transaction, HCDC constructed
condominiums on the development. It began selling the condominiums in
December of 1985, three of which were sold to the plaintiffs or their
In the deeds
conveying the condominiums to the plaintiffs, Alexander, acting as
president of both LTDC and HCDC, represented that one or the other of
those entities held title to the particular condominium being sold. He
also stated under oath on several occasions that LTDC was the owner of
the Phase II property and that HCDC was the owner of the Phase III
In August of
1988, the IRS issued an assessment against the Butchers for
approximately $61,000 in unpaid federal income taxes that arose from the
taxable year 1986. On
September 9, 1988
, acting on behalf of the IRS, filed a tax lien against the Butchers'
property, seeking to attach Rosemary's and Alexander's interest in the
17.83 acres. The unpaid balance of the tax liability now exceeds
March 1, 1991
, Rosemary filed for bankruptcy. Soon thereafter, the condominium owners
learned of the
July 12, 1978
conveyance from LTDC to the Butchers. On
September 17, 1991
, Rosemary amended her bankruptcy schedules to claim ownership of the
17.83 acres. Prior to that date, the Butchers had taken no action to
claim title to any portion of the property. In fact, it was the
plaintiffs, not the Butchers, who have paid the property taxes on the
17.83 acres over the years. Alexander quitclaimed his interest in the
17.83 acres to Rosemary on
October 31, 1991
. He died in December of that year.
her Chapter 7 bankruptcy petition in the United States Bankruptcy Court
for the Eastern District of Michigan. Seven and a half months later,
Lawyers Title and the condominium owners to whom Lawyers Title issued
title insurance policies sued Alexander, LTDC, HCDC, and the IRS in
Emmet County Circuit Court. The plaintiffs did not sue Rosemary because
she was under the protection of the bankruptcy court.
served with the complaint, the IRS removed the state court action to the
United States District Court for the Western District of Michigan on
November 18, 1991
. The district court entered an order staying the Western District
action while the plaintiffs pursued an adversary proceeding in
Rosemary's bankruptcy case. In both actions, the plaintiffs sought the
imposition of a constructive trust.
Alexander's death in late 1991, the Butcher defendants moved to dismiss
the district court action because Alexander's estate had not been
substituted as a party following his death. The plaintiffs responded by
moving to transfer venue to the bankruptcy court. On August 16, 1993,
the district court denied the Butcher defendants' motion to dismiss,
holding that the order staying the district court action pending the
adversary proceeding in the bankruptcy court tolled the time limit for
substituting the estate of Alexander into the suit under Rule 25(a)(1)
of the Federal Rules of Civil Procedure. (This part of the district
court's order is not being contested on appeal.) The district court also
granted the plaintiffs' motion to transfer venue to the Bankruptcy Court
for the Eastern District of Michigan in the same order.
plaintiffs' Western District action and Rosemary's bankruptcy proceeding
were consolidated on
November 18, 1993
in the bankruptcy court. On
February 11, 1994
, the bankruptcy court issued an order substituting the representatives
of Alexander's estate, being Rosemary and her brother-in-law
ert E. Butcher, for Alexander.
November of 1994, the bankruptcy court granted the plaintiffs' motion
for summary judgment, imposing a constructive trust over the 17.83 acres
for the benefit of the condominium owners. The bankruptcy court also
concluded that the constructive trust related back to 1978, thus
predating the IRS's tax lien that arose against the Butchers in 1988.
appealed the bankruptcy court's ruling to the United States District
Court for the Eastern District of Michigan. On
July 31, 1995
, the bankruptcy court's award of summary judgment to the plaintiffs was
reversed by the district court. The district court's decision was based
upon the case of XL/Datacomp, Inc. v. Wilson (In re Omegas Group,
Inc.), 16 F.3d 1443 (6th Cir. 1994), in which this court held that a
bankruptcy court may not impose a constructive trust over estate
property. See id. at 1452-53. Because of In re Omegas Group,
the district court concluded that the proper remedy would be to have the
debt declared nondischargeable. The case was then remanded to the
the bankruptcy court, still believing that a constructive trust was the
appropriate remedy, entered an order transferring the plaintiffs' claim
for a constructive trust over Rosemary's nonbankruptcy interest (being
the interest that she acquired from Alexander) back to the United States
District Court for the Western District of Michigan. It also lifted the
automatic stay, which prohibits actions against debtors in bankruptcy,
in order to permit the plaintiffs to add Rosemary as a defendant and to
add a fraudulent conveyance count against the Butchers.
After the case
was transferred back to the Western District, the plaintiffs in fact
moved to amend their complaint to add Rosemary as a defendant and to add
a fraudulent conveyance count against the Butchers. The motion was
granted. All of the parties then filed cross-motions for summary
judgment. Concluding that the facts of the case compelled the imposition
of a constructive trust, the district court granted the plaintiffs'
motion. It ruled that the Butcher defendants' arguments relating to
standing, jurisdiction, and the statute of limitations were without
merit. The district court also held that the constructive trust arose as
July 12, 1978
, which was the date of the conveyance of the 17.83 acres by LTDC to
Rosemary and Alexander. Because the district court retroactively applied
the constructive trust as of that date, it concluded that the 1988
federal tax lien was subordinate to the plaintiffs' interest in the
property and therefore ineffective.
defendants filed a motion for reconsideration, arguing that a
constructive trust should not have been imposed over Rosemary's interest
(Rosemary's interest refers solely to her nonbankruptcy interest unless
otherwise stated) because she had not been served with a summons and a
copy of the amended complaint. Acknowledging this oversight, the
district court ordered the plaintiffs to serve Rosemary with a summons
and a copy of the amended complaint within fourteen days. It further
ordered that Rosemary file a response, setting forth her reasons why a
constructive trust should not be imposed over her interest in the 17.83
also filed a motion to clarify and reconsider, arguing that the district
court appeared to be placing the constructive trust over both Rosemary's
bankruptcy and nonbankruptcy interests. A supplemental motion for
reconsideration was then filed by the Butcher defendants, arguing that
summary judgment should be denied, but acknowledging that Rosemary's
attorney had received a summons and a copy of the amended complaint
pursuant to an agreement with opposing counsel. Shortly thereafter,
Rosemary filed a twenty-one page response, setting forth her reasons why
a constructive trust should not be imposed.
made in the Butcher defendants' motion for reconsideration, their
supplemental motion for reconsideration, and the
's motion to clarify were all rejected, except for the argument that the
constructive trust was overbroad. Because the scope of the constructive
trust was unclear in its initial order, the district court declared in a
supplemental order that the scope of the constructive trust would be
limited to the nonbankruptcy portion of Rosemary's overall interest in
the 17.83 acres. The Butcher defendants then filed another motion to
reconsider, which was denied. This appeal followed.
Standard of review
defendants and the IRS are appealing various legal issues relating to
the district court's grant of summary judgment on the plaintiffs'
constructive trust claim. This court reviews de novo a district
court's grant of summary judgment. See Smith v. Ameritech, 129
F.3d 857, 863 (6th Cir. 1997).
The district court's imposition of the constructive trust was proper
One of the
Butcher defendants' primary arguments is that the district court erred
when it imposed a constructive trust over Rosemary's interest in the
17.83 acres. The plaintiffs counter that a constructive trust was
necessary in order to prevent Rosemary from being unjustly enriched by
her and Alexander's inequitable conduct.
law, the imposition of a constructive trust is appropriate in order
"to do equity or to prevent unjust enrichment. . . . Hence, such a
trust may be imposed when property has been obtained through fraud,
misrepresentation, concealment, . . . or any other similar circumstances
which render it unconscionable for the holder of the legal title to
retain and enjoy the property. . . ." Kammer Asphalt Paving Co.
v. East China Township Schs., 443
176, 504 N.W.2d 635, 641-42 (
1993) (internal quotation marks and citations omitted).
Based on the
following sequence of events, the district court imposed a constructive
trust in order to prevent the Butchers from being unjustly enriched at
the plaintiffs' expense: On
July 12, 1978
, the Butchers recorded warranty deeds conveying the 17.83 acres from
Cedar Cove to the Butchers and from the Butchers to LTDC. That same day,
Alexander, in his capacity as president of LTDC, conveyed the 17.83
acres back to himself and Rosemary as tenants by the entirety.
Thereafter, the Butchers, through their corporate entities, secured
approval from the State of
for the necessary building permits, obtained financing for the projects
through various loans and mortgages, and sold the finished condominium
units to the plaintiffs or their predecessors in title. During the
process of obtaining the proper permits and financing, the Butchers,
both individually and through LTDC and HCDC, represented to the State of
, to the lenders, and to the purchasers that the 17.83 acres was owned
by either LTDC or HCDC. Because the Butchers did not claim any
individual ownership interest in the 17.83 acres until after Rosemary
had filed her bankruptcy petition, the condominium owners had no reason
to doubt the soundness of their insured legal title to the acreage in
question. They also paid the property taxes in the intervening years.
argue that the district court did not find that they had committed
fraud. A constructive trust, however, may be imposed without a finding
of fraud. See McCreary v. Shields, 333 Mich. 290, 52 N.W.2d 853,
856 (Mich. 1952) (holding that a constructive trust is imposed in order
to prevent injustice, and that such a trust may be imposed when the
circumstances show that it would be inequitable for the holder of legal
title to retain the property). Because the Butchers participated or
acquiesced in actions certifying LTDC's and HCDC's ownership of the
17.83 acres when they knew that they had retained legal title to the
property as individuals, and because the Butchers stood silent while the
plaintiffs paid the property taxes on the 17.83 acres, the district
court's imposition of the constructive trust over Rosemary's interest
was proper. See Kren v. Rubin, 338
288, 61 N.W.2d 9, 11 (
1953) (observing that a very strong justification for imposing a
constructive trust arises when a party allows another to pay his
also argue that they were under no obligation to expressly inform the
plaintiffs about the
July 12, 1978
conveyance from LTDC to the Butchers. Assuming this to be true, they
were still under an obligation not to deceive and mislead the plaintiffs
by warranting that LTDC and HCDC owned the property and by allowing the
plaintiffs to pay the property taxes.
Butchers argue that imposing a constructive trust is inappropriate
because the plaintiffs' remedy is against Lawyers Title for negligently
failing to discover the
July 12, 1978
conveyance back to the Butchers. The Butchers' misleading and deceptive
conduct, however, will not be rewarded or justified simply because
Lawyers Title failed to catch it. See Grzesick v. Cepela, 237
Mich. App. 554, 603 N.W.2d 809, 815 (Mich. Ct. App. 1999) ("A
comparative negligence defense is inapplicable to a claim of intentional
tort"); Law Offices of Steven D. Smith, P.C. v. Borg-Warner Sec.
Corp., 993 P.2d 436, 444 (Alaska 1999) ("Mere negligence of the
plaintiff is not a defense to an intentional tort.") (internal
quotation marks omitted). Although the facts may not conclusively
demonstrate fraud, Alexander's and Rosemary's failure to inform Lawyers
Title of the July 12, 1978 conveyance back to themselves just before
Alexander requested Lawyers Title to issue a title commitment to LTDC
that included the 17.83 acres is a strong indication of fraud.
Consequently, we affirm the district court's decision to impose a
The constructive trust does not defeat the IRS's tax lien
court determined that the constructive trust should be retroactive to
July 12, 1978
, the date of the deed from LTDC to the Butchers. Accordingly, the
district court held that the Butchers did not have an interest in the
property to which the 1988 tax lien could attach. It thus concluded that
the tax liens were subordinate to the plaintiffs' beneficial interest in
the property arising from the constructive trust. The
appeals this ruling, arguing that any constructive trust claim that the
plaintiffs may have had does not affect the validity of the federal tax
U.S.C. §6321 provides that "if any person liable to pay any tax
neglects or refuses to pay the same after demand, the amount . . . 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."
"The threshold question . . . in all cases where the Federal
Government asserts its tax lien, is whether and to what extent the
taxpayer had property or rights to property to which the tax lien could
attach." Aquilino v. United States [60-2 USTC ¶9538], 363
U.S. 509, 512, 4 L.Ed.2d 1365, 80 S.Ct. 1277 (1960) (internal quotation
marks omitted). "Although state law creates legal interests and
rights in property, federal law determines whether and to what extent
those interests will be taxed." United States v. Irvine
[94-1 USTC ¶60,163], 511 U.S. 224, 238, 128 L.Ed.2d 168, 114 S.Ct. 1473
law, a "constructive trust is strictly not a trust at all, but
merely a remedy
istered in certain fraudulent breaches of trusts." Soo Sand
& Gravel Co. v. M. Sullivan Dredging Co., 259
489, 244 N.W. 138, 140 (
1932). Accordingly, a constructive trust does not arise until a judicial
decision imposes such a trust under
law. The federal tax lien in the present case arose in 1988. Because the
constructive trust was not judicially imposed over the 17.83 acres until
a decade later, the government argues that the federal tax lien should
be given precedence over the plaintiffs' interest.
law allows the doctrine of "relation back" to give the
beneficiary of a constructive trust priority over private intervening
interests, this would not be determinative as to the IRS. The priority
of a federal tax lien against competing claims is governed by federal
law. See United States v. Dishman Independent Oil, Inc. [99-2
USTC ¶50,992], 46 F.3d 523, 526 (6th Cir. 1995) ("It is undisputed
that when a federal lien is involved, the relative priority between
competing liens is a question of federal law determined by the principle
'the first in time is the first in right.' "). Federal law,
however, makes no provision for the subordination of a tax lien through
the use of the "relation back" doctrine. See id. at
527; United States v. Security Trust & Savings Bank of
[50-2 USTC ¶9492], 340 U.S. 47, 50, 95 L.Ed. 53, 71 S.Ct. 111
(1950) (holding that a property right that comes into existence by court
action, such as a judgment lien, does not relate back to some earlier
date to destroy the priority of a federal tax lien); Drye v. United
States, U.S. [99-2 USTC ¶51,006], 120 S.Ct. 474, 478, 145 L.Ed.2d
466 (1999) (holding that a state disclaimer law, which applies
retroactively and treats the disclaimant as having predeceased the
decedent, does not defeat a federal tax lien that has already attached
to the disclaimant's property).
claims that meet the federal standard of "choateness" before
the federal tax lien arises can prime a federal tax lien. See United
States v. Equitable Life Assurance Society of the United States
[66-1 USTC ¶9444], 384 U.S. 323, 328, 16 L.Ed.2d 593, 86 S.Ct. 1561
(1966) (holding that a federal tax lien was entitled to priority over a
mortgagee's inchoate claim for attorney's fees). A state-created lien is
choate only when "there is nothing more to be done," i.e.,
"when the identity of the lienor, the property subject to the lien,
and the amount of the lien are established." United States v.
City of New Britain [54-1 USTC ¶9191], 347 U.S. 81, 84, 98 L.Ed.
520, 74 S.Ct. 367 (1954). In Dishman, the issue was "whether a
state attachment lien has priority over a federal tax lien if the
property subject to the liens was attached prior to the time the federal
tax lien was filed, although final judgment on the attachment lien was
not handed down until after the federal tax lien was filed." Dishman
[99-2 USTC ¶50,992], 46 F.3d at 526. This court held that the state
attachment lien was subordinate to the federal tax lien because the
state lien only became choate upon the state judgment, which came after
the federal tax lien was filed. See id. at 526-27. Furthermore,
in In re Omegas Group, 16 F.3d 1443 (6th Cir. 1994), this court
held that "because a constructive trust, unlike an express trust,
is a remedy, it does not exist until a plaintiff obtains a judicial
decision finding him to be entitled to a judgment "impressing"
defendant's property or assets with a constructive trust."
Based on the
reasoning in Dishman and In re Omegas Group, the
plaintiffs' constructive trust claim only became choate when the
district court granted judgment in 1998. The district court, however,
relied upon the following three cases for its holding that a
constructive trust can be retroactively applied to defeat a federal tax
lien: FTC v. Crittenden, 823 F.Supp. 699 (C.D. Cal. 1993), aff'd,
19 F.3d 26 (9th Cir. 1994), Reliance Insurance Co. v. Brown, 40
B.R. 214 (W.D. Mo. 1984), TMG II v. United States [91-2 USTC ¶50,513],
778 F.Supp. 37 (D.D.C. 1991), aff'd in part and rev'd in part
[93-2 USTC ¶50,503], 1 F.3d 36 (D.C. Cir. 1993). We find these cases
unpersuasive because they fail to explain how a constructive trust that
is judicially imposed after the filing of a federal tax lien can
retroactively meet the federal standard of "choateness," thus
priming the lien. Furthermore, these cases are inconsistent with this
court's decisions in Dishman and In re Omegas Group. The
district court's only mention of In re Omegas Group was in a
footnote supporting the proposition that a district court may impose a
constructive trust, and it did not mention Dishman at all.
agree that the equitable remedy as between the Butchers and the
plaintiffs is to impose a constructive trust, the analysis is different
with respect to the IRS. The IRS properly perfected its interest by
filing a tax lien against the Butchers' property. On the other hand, the
plaintiffs, directly or indirectly, exercised a lack of diligence in
failing to discover the
July 12, 1978
conveyance back to the Butchers. It was this lack of diligence that
contributed to the present legal quagmire. Consequently, from an equity
standpoint, we believe that it would be unfair to the IRS, a party
without "fault," to prime the IRS's choate tax lien by
retroactively applying a constructive trust in favor of the plaintiffs.
If the condominium owners wish to recover for the monetary loss caused
by the tax lien, they might have a remedy against Lawyers Title.
In summary, a
judicially-created equitable remedy cannot be applied retroactively to
defeat a choate federal tax lien. Also, as between the plaintiffs and
the IRS, the equities favor the IRS. We therefore reverse the ruling of
the district court on this issue.
The district court for the Western District of Michigan had jurisdiction
over the nonbankruptcy portion of Rosemary's interest in the 17.83
acres, and neither Alexander's quitclaim deed nor his subsequent death
extinguished the plaintiffs' constructive trust claim
The interest that Rosemary received from Alexander's quitclaim deed was
not part of her bankruptcy estate
argue that because Rosemary and Alexander owned the 17.83 acres as
tenants by the entirety, all of the property became part of her
bankruptcy estate when she filed her bankruptcy petition. Alternatively,
they claim that Rosemary became the sole owner of the property when
Alexander quitclaimed his interest in the property to her shortly before
his death. Either way, they argue that the district court in the Western
District of Michigan lacked jurisdiction over this dispute because
exclusive jurisdiction over the entire property resided in the
bankruptcy court for the Eastern District of Michigan. We disagree.
As to the
Butchers' tenants-by-the-entirety argument, there is no doubt that
Rosemary's tenancy interest in the 17.83 acres became part of her
bankruptcy estate when she filed for bankruptcy on
March 1, 1991
. See 11 U.S.C. §541(a)(1) (providing that the property of the
estate includes "all legal or equitable interests of the debtor in
property as of the commencement of the case"). Moreover, in In
re Grosslight, 757 F.2d 773 (6th Cir. 1985), this court discussed
's tenants-by-the-entirety concept in relation to federal bankruptcy law
is among the minority of states retaining the common law tenancy by the
entirety. Tenants by the entirety, who must be husband and wife, hold
under a single title with right of survivorship. Neither husband nor
wife acting alone can alienate any interest in the property, nor can the
creditors of one levy upon the property; but their joint creditors can
reach entireties property. . . . It is now established law that [ 11
U.S.C. §541(a)] brings entireties property into the bankruptcy estate.
at 775 (citations omitted).
to the existence of separate interests in entireties property, this
court has made the following ruling regarding
's similar property regime:
law, Arango does not, as an individual, have a present possessory
interest in entireties property. Instead, Arango and his wife, as a unit
which is separate and apart from them as individuals, have a present
possessory interest in entireties property. The practical effect of
Tennessee's legal construct is that Arango has the right to use and
enjoy entireties property, at least until his wife may predecease him or
he and his wife, together, convey their present possessory interest,
despite the legal belief that Arango does not have a present possessory
interest. Under the Bankruptcy Code, on the other hand, Arango does have
a present possessory interest in entireties property which is considered
part of his individual bankruptcy estate under section 541(a)(1).
v. Third National Bank (In re Arango),
992 F.2d 611, 614 (6th Cir. 1993). By recognizing an interest in
entireties property that is part of a debtor's bankruptcy estate, In
re Arango implicitly recognized the corresponding interest that
would not be part of the debtor's estate.
further light on the issue of how the bankruptcy of one spouse affects
entireties property, a leading bankruptcy treatise provides that a
"trustee can sell [a debtor's interest in entireties property],
subject to the spouse's right of first refusal. The non-filing spouse
receives his or her share of the proceeds and the trustee keeps the
balance for distribution." Daniel R. Cowans, Bankruptcy Law and
Practice §7.5, at 290 (7th ed. 1998); Finneran v. Associates Fin.
Servs. (In re Blair), 151 B.R. 849, 851 (Bankr. S.D. Ohio
1992), aff'd, 33 F.3d 54 (6th Cir. 1994) (observing that
"division of entireties equity between the estate and the debtor's
spouse or co-owner is supported by a majority of courts."); 11
U.S.C. §363(j), (h) (providing that "the trustee shall distribute
to the debtor's spouse" his or her portion of the proceeds from the
sale of tenancy-by-the-entirety property).
that there is no separate property interest that can be reached by
creditors of only one of the entireties tenants, the Butchers rely
heavily upon the case of Craft v. United States [98-1 USTC ¶50,305],
140 F.3d 638 (6th Cir. 1998). The Craft case is distinguishable,
however, because the property at issue was not part of a bankruptcy
estate. Consequently, this court did not consider how a bankruptcy
filing might affect the respective interests in entireties property of a
debtor and non-debtor spouse. In contrast, this was precisely the
situation in both Grosslight and Arango.
other theory concerning the Western District of Michigan's alleged lack
of jurisdiction relates to Alexander's quitclaiming his portion of the
17.83 acres to Rosemary on October 31, 1991, which was seven months
after Rosemary had filed for bankruptcy. This conveyance terminated the
tenancy by the entirety. See M.C.L. §557.101 (providing that a
conveyance of an entireties interest by one spouse to the other
terminates the entireties interest). Because Alexander did not quitclaim
his interest in the 17.83 acres until after 180 days had passed since
the filing of Rosemary's bankruptcy petition, however, Rosemary
possessed this interest outside of bankruptcy. See generally, 11
U.S.C. §541(a)(5)(A) (providing that if a debtor receives property
within 180 days of her bankruptcy petition, then the interest becomes
property of the estate). At this point, Rosemary had an interest in the
17.83 acres that was under the control of the bankruptcy trustee, and
she had an interest in the 17.83 acres that was held outside of
There was no
merger of these separate interests. In fact, during the bankruptcy
proceedings, the Butchers argued that Rosemary held a separate,
nonbankruptcy interest in the 17.83 acres. The Butchers, however, are
not judicially estopped from now taking a different position because
there is no evidence that the Butchers were successful with this
argument, which is a necessary element of judicial estoppel. See
Teledyne Industries, Inc. v. NLRB, 911 F.2d 1214, 1217-18 (6th Cir.
1990) (observing that a party is not bound by an unsuccessful argument
in a prior proceeding).
after the bankruptcy court transferred the constructive trust count to
the district court in the Western District of Michigan and lifted the
automatic stay, the district court had jurisdiction to adjudicate the
constructive trust issue with respect to Rosemary's nonbankruptcy
interest in the 17.83 acres. The Butchers' argument that the district
court did not have jurisdiction to impose a constructive trust on
property that Rosemary acquired postpetition because the constructive
trust was based upon the plaintiffs' prepetition claims ignores the fact
that the trust was imposed by a district court, not a bankruptcy court,
that the automatic stay had been lifted, and that the constructive trust
only applies to Rosemary's nonbankruptcy interest.
further argue that the plaintiffs are not entitled to the benefit of a
constructive trust over Rosemary's interest because she is not liable
for the actions of Alexander, LTDC, and HCDC. This argument is
unavailing because Rosemary stands in the shoes of Alexander with
respect to her nonbankruptcy interest in the 17.83 acres, and if
Alexander was not entitled to retain his interest in the property, then
that interest is subject to a constructive trust despite the fact that
Rosemary now owns it. See Florida East Coast Railway Company v.
Patterson, 593 So.2d 575, 577 (Fla. Dist. Ct.App. 1992) ("One
who accepts a quitclaim deed is conclusively presumed to have agreed to
take the title subject to all risks as to defects. . . .")
(citation and internal quotation marks omitted).
if Rosemary's interest in the property was not burdened by the actions
of Alexander, a constructive trust could still be imposed over her
interest because she herself does not have clean hands. Rosemary
acquiesced in the July 12, 1978 conveyance from LTDC to herself and her
husband, she did not inform the plaintiffs of the July 12 conveyance,
and she allowed the plaintiffs to pay the taxes on the property without
disclosing that she and Alexander held legal title. The fact that
Rosemary did not play as big a role as Alexander in deceiving and
misleading the plaintiffs is not determinative.
Alexander had a separate interest in the 17.83 acres that did not become
part of Rosemary's bankruptcy estate either at the time she filed her
bankruptcy petition or when she acquired Alexander's interest through
his quitclaim deed. Accordingly, we affirm the district court's ruling
on this issue.
The bankruptcy court can share its jurisdiction
In a related
argument, the Butchers claim that because 28 U.S.C. §1334(e) gives the
bankruptcy court exclusive jurisdiction over the debtor's property, that
the district court in the Western District of Michigan lacked
jurisdiction to rule on the constructive trust claim. The plaintiffs
counter that the bankruptcy court's transfer of the constructive trust
claim back to the district court was proper because the bankruptcy court
can share its jurisdiction.
1334(e) provides as follows: "The district court in which a case
under title 11 is commenced or is pending shall have exclusive
jurisdiction of all of the property, wherever located, of the debtor as
of the commencement of such case, and of property of the estate."
In the first place, the bankruptcy court only transferred the
plaintiffs' constructive trust claim on Rosemary's nonbankruptcy
interest to the Western District of Michigan. Because Rosemary's
interest was acquired from Alexander long after she had already filed
for bankruptcy, this transfer of jurisdiction does not offend §1334(e).
Second, in Noletto v. Nations Bank Mortgage (In re Noletto), 244
B.R. 845 (S.D. Ala. 2000), the district court held that §1334(e) must
be read narrowly in order to avoid a conflict with the other bankruptcy
venue provisions. See id. at 852-53. The district court in Cook
v. Cook, 220 B.R. 918 (Bankr. E.D. Mich. 1997), also addressed §1334(e)
and concluded that this section does not prevent a bankruptcy court from
transferring selected issues to another court. See id. at 922. We
agree with the decisions in In re Noletto and Cook and
hold that a bankruptcy court can share its jurisdiction with other
courts. Accordingly, we affirm the district court on this point.
The plaintiffs have standing to sue for a constructive trust
defendants argue that the plaintiffs have no standing to bring or
maintain their cause of action for multiple reasons, including the lack
of a demonstrable chain of title, the non-appearances of several
plaintiffs, the sale of some of the condominium units prior to
initiating the cause of action, the purchase or sale of condominium
units with knowledge of the title defects, attempted double recovery,
and that the contracts and deeds that the plaintiffs rely upon are void
and therefore create no legal or equitable rights in the property. These
arguments are unavailing because they do not address the elements that
To satisfy the
constitutional requirement of standing, a plaintiff must establish three
elements: "(1) an injury in fact that is concrete and
particularized; (2) a connection between the injury and the conduct at
issue--the injury must be fairly traceable to the defendant's action;
and (3) likelihood that the injury would be redressed by a favorable
decision of the Court." Southwestern Pa. Growth Alliance v.
Browner, 144 F.3d 984, 988 (6th Cir. 1998) (internal quotation marks
and citation omitted). The plaintiffs have alleged injury in fact in the
form of defective title, which is traceable to the Butcher defendants'
conduct, and the injury can be redressed through the imposition of a
constructive trust. Lawyers Title has standing pursuant to the
subrogation clauses in the title insurance policies it issued to the
condominium owners. We thus affirm the district court on this issue.
The case could be removed despite the fact that the plaintiffs named the
IRS in their suit rather than the United States
defendants next argue that because the plaintiffs named the IRS in their
original complaint and in their amended complaint rather than the United
States, the action cannot be removed to federal court pursuant to 28
U.S.C. §1444. This section allows for the removal of any case where
suit is brought against the
regarding one of its liens. Even though the Butcher defendants are
correct that the IRS has no capacity to be sued, and that the plaintiffs
should have named the
as a party instead of the IRS, such defects are not fatal. See Labry
v. Internal Revenue Serv., 940 F.Supp. 148, 149 (E.D. La. 1996)
(holding that although the United States rather than the IRS was the
proper party, a misnomer does not preclude removal under 28 U.S.C. §1444);
Bernard v. Internal Revenue Service [92-1 USTC ¶50,148], 1991
U.S. Dist. LEXIS 19839, No. 91-30253- RV, 1991 WL 327960 (N.D. Fla. Dec.
13, 1991) (same). We agree with the reasoning of these decisions, and
conclude that the plaintiffs' technical defect did not preclude removal
in this case.
The plaintiffs' constructive trust claim is not barred by the statute of
defendants also argue that the plaintiffs' constructive trust claim is
barred by the statute of limitations, which they insist is six years.
The applicable statute of limitations, however, is fifteen years for the
recovery of land. See M.C.L. §600.5801(4); Gorte v.
Department of Transportation, 202
App. 161, 507 N.W.2d 797, 799 (
Ct.App. 1993). Because the first deed was not delivered to the
October 22, 1981
, and because the plaintiffs brought suit in state court against the
October 16, 1991
, the plaintiffs' constructive trust claim is not barred by the statute
defendants, on the other hand, contend that the accrual date of the
plaintiffs' claim is
July 12, 1978
, the date on which LTDC conveyed title to the Butchers. This contention
is erroneous because the plaintiffs' claim did not accrue until they
became entitled to the possession of the land, which was when they
received their warranty deeds. See M.C.L. §600.5829(5)
("The claim accrues when the claimant or the person under whom he
claims first becomes entitled to the possession of the premises under
the title upon which the entry or action is founded."). In any
event, even an accrual date of
July 12, 1978
is still within fifteen years of
October 16, 1991
. Accordingly, we affirm the district court on this issue.
The district court's order granting summary judgment is valid as to
defendants next contend that the constructive trust is void as against
Rosemary because it was imposed on
December 14, 1998
, at which time Rosemary had not yet been served with a summons and copy
of the amended complaint. This argument was first raised in their motion
for reconsideration, following the award of summary judgment to the
plaintiffs. The district court partially agreed with this argument and
ordered the plaintiffs to serve Rosemary with a summons and copy of the
amended complaint. It then gave her an opportunity to respond to the
plaintiffs' arguments. Shortly thereafter, the Butcher defendants filed
a supplemental motion for reconsideration. In that motion, they argued
that the district court's order, which imposed the constructive trust,
was void because the court had no authority to assert personal
jurisdiction over Rosemary after entering a final judgment. Contrary to
the Butcher defendants' arguments, the district court had the authority
to amend its judgment based on its mistaken belief that Rosemary had
been served in her individual capacity. See Kingvision Pay-Per-View
Ltd. v. Lake Alice Bar, 168 F.3d 347, 350 (9th Cir. 1999) (holding,
in a case where the plaintiff had argued that "the district court
lacked jurisdiction to amend its judgment more than ten days after
entry, because that is the time limit under Federal Rule of Civil
Procedure 59," that a district court can amend its judgment because
of mistake or inadvertence months after judgment has been entered
pursuant to Rule 60(b) of the Federal Rules of Civil Procedure.) We
agree with this reasoning, and conclude that the district court
correctly rejected this argument.
to personal jurisdiction, the district court obtained jurisdiction over
ert Butcher, counsel for the Butcher defendants, received a copy of the
amended complaint on Rosemary's behalf. He had agreed to accept service
of the amended complaint on her behalf and to return a waiver of service
of the summons. Rosemary's argument that acceptance of the amended
ert Butcher was contingent upon her receipt of additional time to
respond to the district court's order should have been immediately
raised and clearly articulated in a proper motion. Because she failed to
do so, this argument is procedurally defaulted. See Trustees of
Central Laborers' Welfare Fund v. Lowery, 924 F.2d 731, 732 (7th
Cir. 1991) ("A party may waive a defense of insufficiency of
process by failing to assert it seasonably in a motion . . . Where a
defendant leads a plaintiff to believe that service is adequate . . .
courts have not hesitated to conclude that the defense is waived.")
Rosemary had been previously served with the amended complaint in her
capacity as a personal representative of Alexander's estate. She had
notice and an opportunity to be heard. In fact, Rosemary, in her
individual capacity, filed a twenty-one page response on
February 19, 1999
, arguing that the plaintiffs should not be granted summary judgment.
also properly added as a defendant because Alexander's interest in the
property, which is the subject of the suit, was transferred to her
during the course of the litigation. Rule 25(c) of the Federal Rules of
Civil Procedure provides as follows:
In case of any
transfer of interest, the action may be continued by or against the
original party, unless the court upon motion directs the person to whom
the interest is transferred to be substituted in the action or joined
with the original party. Service of the motion shall be made as provided
in subdivision (a) of this rule.
25(c) does not require that anything be done after an interest has been
transferred." Luxliner P.L. Export, Co. v. RDI/Luxliner, Inc.,
13 F.3d 69, 71 (3d Cir. 1993) (internal quotation marks and citation
omitted). Moreover, "although substitution is usually effected
during the course of litigation, substitution has been upheld even after
litigation has ended as long as the transfer of interest occurred during
the pendency of the case."
The addition of Rosemary as a defendant was based upon her receipt of
Alexander's interest after the case was filed against Alexander. Because
the plaintiffs' claim against Rosemary is a continuation of their claim
against Alexander, that claim is not barred by the applicable statute of
limitations. See id. at 71. Consequently, Rosemary's substitution
into the case was appropriate.
Other arguments raised by the Butcher defendants
defendants have also raised arguments that (1) the statute of frauds
prevents imposition of the constructive trust, (2) the bankruptcy court
had no authority to transfer the constructive trust claim to the Western
District of Michigan because the claim had been rendered moot, (3) the
action was rendered moot when Alexander was substituted out of the case,
(4) there is no unjust enrichment when a title insurer pays its policy
claims, (5) equity has no jurisdiction where the legal relief is
adequate, (6) there can be no constructive trust because the plaintiffs
never acquired good title, and (7) if Alexander obtained the 17.83 acres
improperly, then he did not have any interest to quitclaim to Rosemary.
Most of these arguments are poorly articulated and are variations of
other arguments that have already been addressed. All are totally
without merit. Accordingly, after carefully reviewing the arguments and
finding them unavailing, we affirm the district court on these issues
for the reasons set forth in its order and judgment without further
For all of the
reasons set forth above, we REVERSE the portion of the district
court's judgment holding that the IRS's tax lien is subordinate to the
plaintiffs' constructive trust. In all other respects, we AFFIRM
the judgment of the district court.
IN PART, DISSENTING IN PART
part and dissenting in part. I would affirm the decision of the district
court in full. Therefore, I concur in most of the conclusions made by
the majority opinion, but I dissent from that part of the decision which
holds that the district court erred in finding that the constructive
trust was retroactive to 1978 and, therefore, was superior to the 1988
tax lien filed by the IRS.
the majority finds, there is language in cases from this court which
would support a determination that the federal tax lien is superior to
the interest of constructive trust beneficiaries, those cases arose
under entirely different circumstances. For instance, while In re
Omegas Group, Inc., 16 F.3d 1443, 1451 (6th Cir. 1984), declared
that a constructive trust does not exist until a judicial decision
determines that it exists, it arose out of a bankruptcy proceeding. It
was enforcing a bankruptcy policy under 11 U.S.C. §541(d), as the court
cited with approval the decision in The Oxford Organization, Ltd. v.
Peterson, 144 B.R. 385, 388 (1992). It related the general policy
that the statute does not allow a claimant of the debtor "to take
ahead of all creditors, and indeed, ahead of the trustee." In re
Omegas Group, Inc., 16 F.3d at 1451.
the case of
v. Dishman Indep. Oil, Inc. [99-2 USTC ¶50,992], 46 F.3d 523,
526 (6th Cir. 1995), this court held that the federal tax lien in that
case was superior to a prejudgment lien filed by the creditor of the
taxpayer. It did not involve a constructive trust at all. It set out the
priority of a federal tax lien under the Tax Code, which is not directly
in point here, because the prejudgment lien was not the same as a
would follow the decision of the district court in finding that there is
no Sixth Circuit authority on the priority of a federal tax lien over a
constructive trust beneficiary who has been declared a beneficiary
relating back to a time prior to the filing of the tax lien. One of the
cases cited by the district court, Reliance Ins. Co. v. Brown, 40
B.R. 214 (W.D. Mo. 1984), appears to be in conflict with the decision of
In re Omegas Group, so it is of no benefit. Another case relied
upon by the district court, however, held that the IRS cannot have any
better rights than a taxpayer did. See Hobson v. United States
[58-2 USTC ¶9877], 168 F.Supp. 117, 119 (W.D. Mich. 1958). A similar
conclusion was reached in FTC v. Crittenden, 823 F.Supp. 699, 704
(C.D. Cal. 1993), aff'd, 19 F.3d 26 (9th Cir. 1994); see also TMG II
[91-2 USTC ¶50,513], 778 F.Supp. 37, 46 (D.D.C. 1991), aff'd in
part and rev'd in part [93-2 USTC ¶50,503], 1 F.3d 36 (D.C. Cir.
1993) (IRS conceded that "tax liens do not attach to property
subject to constructive trust.")
majority feels that the IRS is a party without "fault," I
would not find that it is more faultless than the condominium owners,
who relied upon legal opinions that they had proper title. It was the
fault of their title company, not the condominium owners themselves. One
might even argue that the IRS could have gone upon the property and seen
all of the construction of the condominiums, which would put some
persons on notice that the Butchers no longer owned the property. Thus,
I would find that neither party seems to be more at fault than the
other, but that the IRS had no better rights than did the Butcher
family. Their property was held through a series of fraudulent moves. If
one were to accept the majority ruling here, I wonder what the result
would be if the Butchers had instead purchased the real estate from the
condominium owners with counterfeit money or cold checks and the IRS had
filed tax liens against the Butchers before the condominium owners had
discovered the fraud. Under the majority's decision, if a court later
declared a constructive trust over the realty, the federal tax lien
would prevail. That would be both unfair and inequitable to the
condominium owners and I do not think it should be the law of this
would affirm the district court in full.
¶50,525] National City Bank of
, Plaintiff v. Stash Brothers, Inc., and Internal Revenue Service,
Defendants. Damon G. Stash, Mark G. Stash, Brian G. Stash and George
Stash, Jr., Intervenor-Defendants
District Court, West.
, Civ. 97-0731,
Lien for taxes: Priority of IRS lien: Constructive trust:
Interpleader action.--The IRS was a priority lien holder with
respect to certificates of deposit (CDs) because it had properly
recorded its notice of tax lien. As a result, its interest in the CDs
was superior to that of individual intervenors in the case who had not
recorded interests in the CDs but who had sought to establish equitable
ownership. The intervenors failed, however, to produce credible evidence
of a constructive trust in the CDs.
MEMORANDUM OPINION AND ORDER
Court is the motion of the defendant Internal Revenue Service
("IRS") for summary judgment on its behalf on the Certificates
of Deposit that are the subject of this interpleader action filed by
plaintiff National City Bank, and removed to this Court by the IRS.
Defendant Stash Brothers, Inc., and intervenor-defendants, Damon, Mark,
Brian and George Stash, Jr., are the only remaining claimants to the
The Court will enter summary judgment in favor of the IRS on their
federal tax liens which greatly exceed the amount of the CDs, and which
cannot be defeated by the intervenor-defendants conclusory and
unsupported assertions of equitable ownership by way of a
Rule 56(c) of
the Federal Rules of Civil Procedure reads, in pertinent part, as
Judgment] shall be rendered forthwith if the pleadings, depositions,
answers to interrogatories and admissions on file, together with the
affidavits, if any, show that there is no genuine issue as to any
material fact and that the moving party is entitled to judgment as a
matter of law.
interpreting Rule 56(c), the United States Supreme Court has stated:
language . . . mandates entry of summary judgment, after adequate time
for discovery and upon motion, against a party who fails to make a
showing sufficient to establish the existence of an element essential to
that party's case, and on which that party will bear the burden of proof
at trial. In such a situation, there can be no genuine issue as to
material fact, since a complete failure of proof concerning an essential
element of the non-moving party's case necessarily renders all other
Corp. v. Catrett, 477
317, 322 (1986).
An issue of
material fact is genuine only if the evidence is such that a reasonable
jury could return a verdict for the non-moving party. Anderson v.
Liberty Lobby, Inc., 477
242, 248 (1986). The Court must view the facts in a light most favorable
to the non-moving party and the burden of establishing that no genuine
issue of material fact exists rests with the movant.
at 242. The "existence of disputed issues of material fact should
be ascertained by resolving 'all inferences, doubts and issues of
credibility against the moving party.' " Ely v. Hall's Motor
Transit Co., 590 F.2d 62, 66 (3d Cir. 1978), quoting Smith v.
Pittsburgh Gage & Supply Co., 464 F.2d 870, 874 (3d Cir. 1972).
Final credibility determinations on material issues cannot be made in
the context of a motion for summary judgment, nor can the district court
weigh the evidence. Josey v. Hollingsworth Corp., 996 F.2d 632
(3d Cir. 1993); Petruzzi's IGA Supermarkets, Inc. v. Darling-Delaware
Co., 998 F.2d 1224 (3d Cir. 1993).
non-moving party will bear the burden of proof at trial, the moving
party's burden can be "discharged by 'showing'--that is, pointing
out to the District Court--that there is an absence of evidence to
support the non-moving party's case." Celotex, 477
at 325. If the moving party has carried this burden, the burden shifts
to the non-moving party who cannot rest on the allegations of the
pleadings and must "do more than simply show that there is some
metaphysical doubt as to the material facts." Matsushita Elec.
Indus. Co. v. Zenith Radio Corp., 475
574, 586 (1986); Petruzzi's IGA Supermarkets, 998 F.2d at 1230.
When the non-moving party's evidence in opposition to a properly
supported motion for summary judgment is "merely colorable" or
"not significantly probative," the Court may grant summary
judgment. Anderson, 477
the most common forms of evidence used on a summary judgment motion is
affidavits . . . in support of or opposition to a Rule 56 motion. . .
." Wright, Miller & Kane, 10A Federal Practice and Procedure,
§2722 at 54. Hearsay evidence contained in affidavits and deposition
testimony may be sufficient to survive summary judgment motion unless
such evidence clearly would not be admissible at trial. Clark v.
, 885 F.Supp. 694, 709 n. 3 (E.D. Pa. 1995), citing Petruzzi's
IGA Supermarkets, 998 F.2d at 1234 n. 9.
standards to the IRS's motion for summary judgment, it is clear from the
joint Stipulation of Facts and Exhibits (Document No. 38) that it has
met burden of showing its entitlement to the CDs as priority lien holder
of a federal tax lien pursuant to 26 U.S.C. §6323(a), inasmuch as the
IRS duly recorded its notice of tax lien and intervenor-defendants have
never recorded any liens or other interest in the CDs. Accordingly, it
became incumbent upon intervenor-defendants to show that it had some
interest that could defeat the IRS's priority lien, and to meet this
burden, "the non-moving party . . . cannot rest on the allegations
of the pleadings and must 'do more than simply show that there is some
metaphysical doubt as to the material facts.' " Matsushita,
determines whether the taxpayer has any interest in property upon which
the IRS seeks to levy or lien, and if so, the nature and extent of that
taxpayer's interest. E.g. United States v. Durham Lumbar Co.
[60-2 USTC ¶9539], 363 U.S. 522 (1960). It is true that the existence
of even an unrecorded constructive trust in assets upon which the IRS
has recorded or noticed a federal tax lien may defeat such a lien
where, under applicable state law, the equitable interest in the liened
property renders the lien upon the legal title ineffective. See,
e.g., United States v. Fontana [82-1 USTC ¶9237], 528 F.Supp, 137,
143-44 (S.D.N.Y. 1981).
& Wilkins Co. v. Reliance Insurance Co., 500 Pa. 399, 404, 456
A.2d 1348, 1351 (1983), the Pennsylvania Supreme Court stated: "As
this Court has often stated, a constructive trust is not a trust in the
ordinary sense of the term but simply an equitable remedy designed to
prevent unjust enrichment." A constructive trust
where a person holding title to property is subject to an equitable duty
to convey it to another on the ground that he would be unjustly enriched
if he were permitted to retain it." Denny v. Cavalieri, 297
Pa.Super. 129, 133, 443 A.2d 333, 335 (1982). "Such a trust may
arise where there is a breach of confidential relationship by the
transferee, or it may arise out of circumstances evidencing fraud,
duress, undue influence or mistake."
The controlling factor is not the specific intent between the
parties to create a constructive trust but whether imposition of a
constructive trust is necessary to prevent unjust enrichment.
(citations omitted). One who seeks to construct a trust bears a heavy
burden of proof; the evidence must be "clear, direct, precise and
convincing." Masgai v. Masgai, 460 Pa. 453, 460, 333 A.2d 861,
865 (1975), quoting Policarpo v. Policarpo, 410 Pa. 543, 189 A.2d
171 (1963) (additional citations omitted) "[U]nless the evidence
of the existence of [a constructive trust] is of the highest probative
value, equity should not act to convert an absolute ownership into
an estate of lesser quality." Masgai v. Masgai, supra at
460, 333 A.2d at 865, quoting Sechler v. Sechler, 403
1, 7, 169 A.2d 78, 81 (1961). Here, there was neither a confidential
relationship between the parties nor evidence of fraud or other
circumstances requiring the construction of a trust in order to do
equity and avoid unjust enrichment.
erson v. Davis,
580 A.2d 39, 40-41 (Pa. Super. 1990 (emphasis added; certain citations
omitted). Moreover, in "order to support a claim for a constructive
trust and to defeat the presumption that funds in a corporate account
belong to the corporation, the claimant must be able to trace and
identify its funds. See
v. Collins, 624 F.2d 659 (5th Cir. 1980)." In Re: Craig
Service Corp, 1991 WL 155750, *14 (Bankr. W.D. Pa. 1991).
"proof" of a constructive trust in the CDs in question offered
by intervenor-defendants does not even rise to the level of metaphysical
doubt, let alone a substantial legal doubt. The Court will assume, for
purposes of this summary judgment motion, that the highly dubious
assertions in affiant George Stash Jr.'s affidavit are true, i.e.,
that the CDs were purchased by cash "loans" made to Stash
Brothers, Inc., by his then 13 and 15 year old sons and his wife,
although there are no receipts or any written evidence of such loans,
nor supporting affidavits by the now adult sons of Mr. Stash or his
wife. Nevertheless, the mere loan of money to Stash Brothers,
Inc., to purchase assets is woefully insufficient to satisfy
intervenor-defendants' burden of showing, by clear and convincing,
highly probative evidence, that there was any breach of any confidential
relationship by the transferee, or that the loans arose out of
circumstances evidencing fraud, duress, undue influence or mistake, or
that George Stash Jr. or Stash Brothers, Inc., will be somehow unjustly
enriched by maintaining equitable interest in addition to the legal
title to the CDs. If George Stash's assertions are true, his sons and
wife perhaps could sue him as creditors on their "loans," but
they cannot defeat the IRS's legitimate, priority tax liens on the
strength of the "proof" of constructive trust they have
offered the Court.
Bank opposes summary judgment for the IRS to the extent the bank seeks
payment of attorney's fees and costs incurred in initiating this
interpleader action. While it is within the Court's discretion to award
attorney's fees and costs to the interpleader plaintiff, the Court does
not find sufficient justification warranting the imposition of
attorney's fees and costs in this case. National City Bank's request
therefore is denied.
for the foregoing reasons, the
' Motion for Summary Judgment (Document No. 19) is GRANTED, and
summary judgment is entered in favor of the
United States of America
It is FURTHER
' liens are HEREBY FORECLOSED against the interpleaded funds
which, together with accrued interest, shall be distributed promptly to
United States of America
, Internal Revenue Service, c/o R. Scott Clark, Esquire, Tax Division,
U.S. Department of Justice,
, Ben Franklin Station,
Thomas Lyons, Jr., t/d/b/a Thomas Lyons, Jr., & Associates, and
Joyce's Jewelry, Inc. previously were terminated as defendants because
they agreed the IRS federal tax liens had priority over any claims they
had in the CDs.