Constructive Trust

---

Donald Derrington, et al., Plaintiffs v. United States of America , Defendant.

U.S. District Court, West. Dist. Wash. , at Seattle ; C02-5257L, September 12, 2003 .

[ Code 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.

ORDER GRANTING MOTION FOR SUMMARY JUDGMENT

I. INTRODUCTION

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.

II. DISCUSSION

A. Background.

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. Id. ¶4. In November of 1993, the IRS recorded nominee liens against Plains Group. Id. ¶5; see also Bedford Decl. Exs. A-B (notices of federal tax lien).

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, United States Bankruptcy Court, Western District of Washington . (Hankla Decl. Ex. A (Derrington Decl.) ¶2). The Halls held a fifty percent interest in the Mariner Village Mobile Home Park in Everett , Washington . Id.

Plaintiffs learned of an investment opportunity involving the Halls' bankruptcy through John Widmer, a mutual friend of Plaintiffs and the Halls. Id. ¶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 Mariner Village . Id. ¶ ¶5, 12. Plaintiffs initially planned to use an individual named Tim Golden ("Golden") to raise the funds and implement the investment plan. Id. ¶5. Golden gave a presentation to Plaintiffs in which he used a term sheet that described a one-year loan to an unspecified borrower. Id. 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. Id.

Golden was unable to complete the deal. Id. ¶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. Id. ¶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 Mariner Village 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 Mariner Village manufactured home park. We were also going to receive a 15% loan fee and 18% interest. If the Halls ended up with Mariner Village , we were going to be paid out over time. If the Halls did not end up with Mariner Village , 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 trustee.

 

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 .

Id. ¶ ¶12-13.

Plaintiffs and Smith signed a document entitled "Agreement to Consolidate Loans and Negotiate Settlement" (the "Agreement"). Id. 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

On April 21, 1994 , Plaintiffs deposited funds into a Plains Group bank account. Id. ¶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. Id. 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. Id. ¶ ¶16-17. The Halls' fifty percent interest in Mariner Village was sold through the bankruptcy proceeding, and the investors were therefore limited to the claims for repayment of the investment. Id. On 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 $373,848. Id. ¶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. Id. ¶27. Smith informed Plaintiffs that he had reinvested the funds in other ventures. Id. 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. Id. 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. ( Bedford 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 Oregon 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 admin 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 U.S. 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."' Id. 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 [ 85-2 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." Id. 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 the claims.

In support of its argument that Smith owned the claims, the IRS cites the above-quoted deposition testimony given by Plaintiffs in the Oregon 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 Plains Group." Id.

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 Seattle 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 Smith." Id. 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 "bond."

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 California 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 Crittenden Court 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." Id.

In Washington "[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 . ⁵ 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).

III. CONCLUSION

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 record.

¹ 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." Id. at 5.

² 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.

³ 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 America , 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.").

⁴ In Crittenden the constructive trust arose at the time the taxpayer secretly overcharged the customers.

⁵ 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).

 

 

Merchants Bonding Co., Plaintiff v. Utica Community Schools , West Bloomfield School District , and United States Internal Revenue Service, Defendants.

U.S. District Court, East. Dist. Mich. ; 01-60194, May 2, 2003 .

[ Code Sec. 6323]

Tax liens: Validity and priority against third parties: Constructive trust. --

A third-party 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 ( Michigan ) 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.

[ Code Sec. 6323]

Tax liens: Validity and priority against third parties: Indemnity agreement: Surety's interest. --

A third-party 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 ( Michigan ) law to perfect its interest by recording its lien.

[ Code Sec. 6323]

Tax liens: Validity and priority against third parties: Security interest: Obligatory disbursement agreement. --

A third-party 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.

OPINION AND ORDER OF THE COURT DENYING PLAINTIFF'S MOTION FOR SUMMARY JUDGMENT

I. INTRODUCTION

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"), West Bloomfield School District ("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 Utica 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 Utica . Utica 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 IRS.

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) also fails.



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 U.S. 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 U.S. 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 accordingly.

1. 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., 426 Mich. 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 Utica 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 and Utica 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. Id. Here, then, since the parties agree that Smelser completed its work on the WB and Utica 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 subcontractors. The Michigan Building Contract Fund Act, Mich. 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 ( Mich. 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 Utica 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 Michigan , "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 ( Mich. 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 omitted).

Here, Plaintiff argues that the language of the payment bonds issued for the WB and Utica 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:

[a]mounts owed 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 Utica under the construction contracts. However, this language, by itself, does not establish that Smelser, WB and Utica 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 Americana Found., 387 N.W.2d at 588. The Court finds that this is not established here.

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 Utica 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 Michigan 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 Utica trust property.

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 [ 93-2 USTC ¶50,569], 2 F.3d at 676, n. 4. The Ohio law applied by the Sixth Circuit was very similar to Michigan 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. Id. 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." Id. 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. Id. 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 established." United States 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 and 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.

2. 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 WB and Utica 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 Michigan , 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." Id. This is so because "the assignment does not create a security interest" in the contract balances. Id. 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 Michigan , 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; Mich. Comp. Laws §19.9104. Thus, one could reasonably argue, as the IRS does here, that the Sixth Circuit's interpretation and application of the Ohio statute should carry over to Michigan to require Plaintiff to file its Indemnity Agreement with the Secretary of State.

The Court, however, declines to apply the holding in Construction Alternatives to Michigan . 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 been the Michigan 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..." Id. 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 default..." Id. 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 Michigan 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 held that:

Michigan 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, 97 Mich. 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 performance bonds. Id. at 559.

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 Michigan 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 perform..." Id. at 559-60.

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.

3. Statutory Theory

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:

(1) In 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 --

 

...

 

(iii) an Obligatory Disbursement Agreement, and

 

(B) is 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 [ 94-2 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 liens.

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 Connecticut , not Michigan , law, and therefore, does not control this Court's analysis.

Notably, in Amwest, the court's decision was based on Connecticut '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 Michigan , however, has not adopted the relation back doctrine as it relates to a surety's equitable subrogation rights. Rather, in Michigan , "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..." Id.

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." Id. at 719-20 (citing Dubey, 97 Mich. 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 Michigan , 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 Connecticut . Amwest [ 94-2 USTC ¶50,558], 870 F.Supp. at 435.

Here, as the Court is bound by Michigan 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.



V. CONCLUSION

Therefore, for the reasons stated above, Plaintiff's Motion for Summary Judgment is hereby DENIED.

IT IS SO ORDERED.

¹ Construction Alternatives involved the application of Ohio 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.

² After the court issued its ruling in Amwest, the United States 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 issued. Id. at 1046. Upon reconsideration, however, the Amwest court adhered to its original ruling, noting that Int'l Fid. Ins. Co. was based on Missouri , not Connecticut , law.

 

[2002-2 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

(CA-8), U.S. Court of Appeals, 8th Circuit, 01-2962, 9/12/2002 , 2002 U.S. App. LEXIS 18725. Affirming an unreported District Court decision

[Code Secs. 6321 , 6323 and 6871 ]

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.

[Code 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 were perfected.

Herbert L. Meschke, Pringle & Herigstad, Minot , N.D. , for claimant-appellant. Kip M. Kaler, Kaler Law Office, Fargo , N.D. , Jay D. Carlson, Fargo , N.D. , 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 creditor-appellee.

Before: MCMILLAN, BOWMAN and MURPHY, Circuit Judges.

OPINION

MCMILLIAN, Circuit Judge:

In this 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 district court.

Jurisdiction

Jurisdiction 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).

Background

The parties 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 Jamestown , North Dakota .

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 Red River Valley . ³ 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 setoff.

On January 28, 1997 , Superpumper commenced a lawsuit against Nerland Oil in North Dakota 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.

On 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).

Superpumper 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.

Additionally, the United States , 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.

On 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 ).

Superpumper 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. N.D. June 13, 2001 ). This appeal followed.

On 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 its 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).

On 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 award on 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 ) (order).

Discussion

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).

I. Priority of Federal Tax Liens

"Priority 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 Revenue [99-2 USTC ¶50,715 ], 184 F.3d at 728 (quoting United States v. McDermott [93-1 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.' " Id. at 728 (quoting Cannon Valley Woodwork, Inc. v. Malton Construction Co., 866 F.Supp. 1248, 1250 (D. Minn. 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 United States 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 Revenue [99-2 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.") (quoting United States v. New Britain [54-1 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.

II. Inferiority of the Attempted Setoff Transaction

We apply 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 States [60-2 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).

Superpumper 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 filed. See United States 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).

However, by 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).

Moreover, the 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 States [84-1 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.

Superpumper 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 [80-1 USTC ¶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 [99-2 USTC ¶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." Id. 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).

Second, 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. N.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

Third, the 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 nullified it.

III. Applicability of 26 U.S.C. §6323

Superpumper's 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).

Superpumper 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 mortgage.

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.

Superpumper 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 money's worth." Id. 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.

To be 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 the creditor").

"The 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 v. United States (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.

Conclusion

Accordingly, the order of the district court is affirmed.

¹ The Honorable Rodney S. Webb, Chief Judge , United States District Court for the District of North Dakota.

² The Honorable William A. Hill, United States Bankruptcy Judge for the District of North Dakota.

³ 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.

⁴ 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 .

⁵ If the setoff transaction was valid, $10,994 remained on the promissory note and mortgage.

⁶ 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).

⁷ 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).

⁸ 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)).

 

 

[2000-2 USTC ¶50,629] Jobst W.F. Blachy, et al., Plaintiffs-Appellees v. Rob 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)

(CA-6), U.S. Court of Appeals, 6th Circuit, 99-1185/99-1492/99-1523, 7/21/2000 , 2000 U.S. App. LEXIS 17509. Affirming in part and reversing in part a District Court decision, 99-1 USTC ¶50,177

reconsidered

99-1 USTC ¶50,381 .

[Code Secs. 6321 and 6323 ]

Tax liens: Priority: Constructive trust: Michigan 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.

[Code Sec. 6871 ]

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.

[Code Sec. 7402 ]

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.

[Code Sec. 7402 ]

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.

Jeffrey G. Raphelson, Detroit , Mich. , for plaintiffs-appellees. Rob ert E. Butcher, Trenton, Mich., Joan I. Oppenheimer, Alice L. Ronk, William S. Estabrook, Department of Justice, Washington, D.C. 20530, for defendants-appellants.

Before: WELLFORD, SILER and GILMAN, Circuit Judges.

OPINION

GILMAN, Circuit Judge.

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 United States 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.

I. BACKGROUND

A. Factual history

Alexander and Rosemary Butcher sought to develop resort condominiums in northern Michigan through LTDC, a Michigan corporation owned solely by Alexander. On June 30, 1978 , Cedar Cove, a Michigan 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 .

At Alexander's 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.

Thereafter, 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.

On 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 predecessors-in-interest.

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 property.

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 , the United States , 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 $150,000.

On 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.

B. Procedural history

Rosemary filed 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.

After being 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.

Subsequent to 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.

Both the 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 Rob ert E. Butcher, for Alexander.

In late 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.

The defendants 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 bankruptcy court.

Upon remand, 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 of 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.

The Butcher 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 acres.

The United States 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.

The arguments made in the Butcher defendants' motion for reconsideration, their supplemental motion for reconsideration, and the United States '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.

II. ANALYSIS

A. Standard of review

The Butcher 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).

B. 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.

Under Michigan 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 Mich. 176, 504 N.W.2d 635, 641-42 ( Mich. 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 Michigan 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 Michigan , 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.

The Butchers 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 Mich. 288, 61 N.W.2d 9, 11 ( Mich. 1953) (observing that a very strong justification for imposing a constructive trust arises when a party allows another to pay his property taxes).

The Butchers 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.

Finally, the 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 constructive trust.

C. The constructive trust does not defeat the IRS's tax lien

The district 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 United States appeals this ruling, arguing that any constructive trust claim that the plaintiffs may have had does not affect the validity of the federal tax lien.

Title 26 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 (1994).

Under Michigan law, a "constructive trust is strictly not a trust at all, but merely a remedy admin istered in certain fraudulent breaches of trusts." Soo Sand & Gravel Co. v. M. Sullivan Dredging Co., 259 Mich. 489, 244 N.W. 138, 140 ( Mich. 1932). Accordingly, a constructive trust does not arise until a judicial decision imposes such a trust under Michigan 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.

Even if Michigan 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 San Diego [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).

Only competing 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." Id. at 1451.

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.

Although we 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.

D. 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

1. The interest that Rosemary received from Alexander's quitclaim deed was not part of her bankruptcy estate

The Butchers 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 Michigan 's tenants-by-the-entirety concept in relation to federal bankruptcy law as follows:

Michigan 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.

Id. at 775 (citations omitted).

With respect to the existence of separate interests in entireties property, this court has made the following ruling regarding Tennessee 's similar property regime:

Under Tennessee 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).

Arango 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.

To shed 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).

In arguing 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.

The Butchers' 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 bankruptcy.

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).

Consequently, 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.

The Butchers 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).

Moreover, even 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.

In short, 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.

2. 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.

Section 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.

E. The plaintiffs have standing to sue for a constructive trust

The Butcher 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 constitute standing.

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.

F. The case could be removed despite the fact that the plaintiffs named the IRS in their suit rather than the United States

The Butcher 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 United States 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 United States 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.

G. The plaintiffs' constructive trust claim is not barred by the statute of limitations

The Butcher 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 Mich. App. 161, 507 N.W.2d 797, 799 ( Mich. Ct.App. 1993). Because the first deed was not delivered to the plaintiffs until October 22, 1981 , and because the plaintiffs brought suit in state court against the defendants on October 16, 1991 , the plaintiffs' constructive trust claim is not barred by the statute of limitations.

The Butcher 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.

H. The district court's order granting summary judgment is valid as to Rosemary

The Butcher 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.

With respect to personal jurisdiction, the district court obtained jurisdiction over Rosemary when Rob 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 complaint by Rob 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.")

Moreover, 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.

Rosemary was 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.

"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." Id. 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.

I. Other arguments raised by the Butcher defendants

The Butcher 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 discussion.

III. CONCLUSION

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.

CONCURRING IN PART, DISSENTING IN PART

SILER, Circuit Judge

concurring in 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.

Although, as 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.

Similarly, in the case of United States 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 judgment lien.

Instead, I 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 v. United States [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.")

Although the 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 circuit.

Therefore, I would affirm the district court in full.

 

 

[98-2 USTC ¶50,525] National City Bank of Pennsylvania , 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

U.S. District Court, West. Dist. Pa. , Civ. 97-0731, 5/22/98

[Code Sec. 6323 ]

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

LEE, District Judge:

Before the 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 CDs. ¹ 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 "constructive trust."

Rule 56(c) of the Federal Rules of Civil Procedure reads, in pertinent part, as follows:

[Summary 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.

In interpreting Rule 56(c), the United States Supreme Court has stated:

The plain 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 facts immaterial.

Celotex Corp. v. Catrett, 477 U.S. 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 U.S. 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. Id. , 477 U.S. 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).

When the 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 U.S. 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 U.S. 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 U.S. at 249-50.

"One of 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. Commonwealth of Pennsylvania , 885 F.Supp. 694, 709 n. 3 (E.D. Pa. 1995), citing Petruzzi's IGA Supermarkets, 998 F.2d at 1234 n. 9.

Applying these 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, 475 U.S. at 586.

State law 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).

In Partrick & 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

"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." 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." Id. 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 Pa. 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.

Rob 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 Rosenberg v. Collins, 624 F.2d 659 (5th Cir. 1980)." In Re: Craig Service Corp, 1991 WL 155750, *14 (Bankr. W.D. Pa. 1991).

The "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.

National City 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.

Accordingly, for the foregoing reasons, the United States ' 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 ORDERED the United States ' liens are HEREBY FORECLOSED against the interpleaded funds which, together with accrued interest, shall be distributed promptly to the United States of America , Internal Revenue Service, c/o R. Scott Clark, Esquire, Tax Division, U.S. Department of Justice, P.O. box 227 , Ben Franklin Station, Washington D.C. 20044 .

Case closed.

¹ 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.