Conveyance by Taxpayer Page1

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American Insurance Company, Plaintiff v. New York City Health and Hospitals Corporation, Defendant. New York City Health and Hospitals Corporation, Interpleader Plaintiff v. Levinson & Santoro Electric Corporation, et al., Interpleader Defendants.

U.S. District Court, So. Dist. N.Y. ; 99 Civ. 3891 (LAP), 265 FSupp2d 434, July 8, 2003 .

[ Code Sec. 6323]

Tax liens: Priority: Interpleader fund: Assignment of property interest. --

An assignment made by a delinquent taxpayer to an insurance company of certain contract funds constituted a complete transfer of the taxpayer's interest in those funds to the insurer pursuant to state ( New York ) law. Because the assignments effectively transferred the taxpayer's property interest in the funds before the government's federal tax lien could attach to the interpleaded monies, the insurer's claim had priority over the government's lien. However, the insurer's contention that it was entitled to priority over the tax lien because it qualified as a "purchaser" under federal law was rejected. The evidence did not establish that it met the adequate and full consideration standard of Code Sec. 6323(h)(6).

MEMORANDUM AND ORDER

PRESKA, District Judge: Interpleader defendant the United States (the "Government") and plaintiff American Insurance Company ("American") have cross-moved for summary judgment in this action concerning funds due Levinson & Santoro Electric Corporation ("L&S") under certain contracts with defendant-interpleader plaintiff New York Health and Hospitals Corporation ("NYHHC"). At issue is whether the Government or American has a priority claim to the interpleader fund.

BACKGROUND

The following facts are undisputed unless otherwise noted. In March 1987 and April 1994, L&S and certain others executed and re-executed a General Indemnity Agreement (collectively, the "Indemnity Agreements") as a precondition to American's issuance of payment and performance bonds on behalf of L&S in connection with certain construction projects. (American Rule 56.1 Statement ¶1). The Indemnity Agreements granted American certain rights including "an assignment of all monies due, or to be come due, to L&S in connection with bonded and unbonded projects, as well as a separate security interest in all monies due, or to become due, to L&S in connection with the bonded and unbonded projects." ( Id. at ¶ ¶2-3). In the fall of 19 95, L&S advised American that it needed financial assistance to complete its work under various construction contracts, and as a result, in December 1995, American and L&S entered into an agreement (the "Assistance Agreement"). ( Id. at ¶ ¶7-8). Under the Assistance Agreement, American "provided financial assistance to L&S for the completion of various bonded projects...." ( Id. at ¶8). On December 20, 1995, "as part of the consideration to American for the Assistance Agreement," L&S executed certain assignments (the "Assignments") "cumulative with American's existing rights under the [previously entered into] Indemnity Agreements, expressly assigning to American L&S' right to all contract funds in connection with various bonded and unbonded projects." ( Id. at ¶9). Specifically, L&S provided American "with an express assignment of its rights to receive existing or future Contract Funds" for two projects, the Queens Hospital Project and the Bellevue Project. ( Id. at ¶ ¶10-11). The Assignments, by their express terms, are "irrevocable" and provide that L&S "immediately assigns, transfers and sets over to" American "all right, title and ownership to all contract funds of any nature," whether those funds "are due now or shall, in the future, become due" for the Queens Hospital and Bellevue Projects. (American Rule 56.1 Statement at ¶ ¶13-14, 16-17). American states that in reliance on the Assignments and other agreements, it provided financial assistance to L&S and incurred "losses, costs, fees and expenses in the total amount of $11,741,485.90." ( Id. at ¶ ¶15, 18-19). The Government disputes the accuracy of this amount, arguing that American only provided financial assistance and/or incurred losses of no more than $7,050.71. (Gov. Response to American's Rule 56.1 Statement ¶ ¶15, 19).

L&S' tax liability for the tax periods ending September 30, 1995 and December 31, 1995 was assessed on March 11, 1996 and May 20, 1996, respectively. (Ex. A to the Declaration of David J. Kennedy, sworn to on July 30, 2002 ). On January 16, 1997 , the Internal Revenue Service (the "IRS") filed a federal tax lien against L&S in the amount of $753,393.33. (Gov. Rule 56.1 Statement ¶1). On March 10, 1997 , American served NYHHC with the Assignments. (American Rule 56.1 Statement ¶ ¶20-21). It is undisputed that as of that date, certain funds were due and owing to L&S under the Queens Hospital contract, although the Government disputes that American has proven that any funds were due and owing under the Bellevue Contract ¹ and that any funds under either contract remain due and owing L&S. ( Id. ¶22; Gov. Response to American Rule 56.1 Statement ¶ ¶23-25).

American commenced the instant action against NYHHC in 1999 in the Supreme Court of New York, New York County, and the case was subsequently removed to federal court. By notice of motion filed on or about July 31, 2002 , the Government moved for summary judgment in the amount of $758,174.73 plus interest from July 8, 2002 . American filed its cross-motion for summary judgment on or about August 21, 2002 . The Government argues that American does not qualify as either a purchaser or a holder of a security interest and that, therefore, the federal tax lien has a priority claim to the interpleader fund. In support of this argument, the Government points out that American has admitted that it did not file any U.C.C. financing statements with regard to the Assignments, thus defeating any claim that American holds a perfected security interest. In response, American argues that, contrary to the Government's characterization of its position, American does not base its claim on a security interest, but rather on the theory that it owns the monies due L&S based upon the Assignments. American argues that under New York law, the Assignments --executed in 1995 --made the funds the property of American and that, therefore, the federal tax lien against L&S --filed in 1997 --could not attach to the funds. ² In addition, or alternatively, American argues that it qualifies as a purchaser under 26 U.S.C. §6323(a) with an interest superior to that of the Government. American also adds a final argument regarding a subrogation claim under Article 3-A of the New York Lien Law for the approximately $7000 it expended on L&S' behalf.

DISCUSSION

I. Summary Judgment Standard

"A motion for summary judgment may not be granted unless the court determines that there is no genuine issue of material fact to be tried and that the facts as to which there is no such issue warrant judgment for the moving party as a matter of law." Chambers v. TRM Copy Centers Corp., 43 F.3d 29, 36 (2d Cir. 1994); see Fed. R. Civ. P. 56(c); see generally Celotex Corp. v. Catrett, 477 U.S. 317 (1986); Anderson v. Liberty Lobby, Inc., 477 U.S. 242 (1986); Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574 (1986). An issue of fact is genuine when "a reasonable jury could return a verdict for the nonmoving party," and facts are material to the outcome of the particular litigation if the substantive law at issue so renders them. Anderson, 477 U.S. at 248.

The burden of establishing that no genuine factual dispute exists rests on the party seeking summary judgment. Chambers, 43 F.3d at 36. "In moving for summary judgment against a party who will bear the ultimate burden of proof at trial," however, "the movant's burden will be satisfied if he can point to an absence of evidence to support an essential element of the nonmoving party's claim." Goenaga v. March of Dimes Birth Defects Found., 51 F.3d 14, 18 (2d Cir. 1995); accord Gallo v. Prudential Residential Servs., 22 F.3d 1219, 1223-24 (2d Cir. 1994) ("The moving party may obtain summary judgment by showing that little or no evidence may be found in support of the nonmoving party's case."). The moving party, in other words, does not bear the burden of disproving an essential element of the nonmoving party's claim.

If the moving party meets its burden, the burden shifts to the nonmoving party to come forward with "specific facts showing that there is a genuine issue for trial." Fed. R. Civ. P.56(e); accord Rexnord Holdings, Inc. v. Bidermann, 21 F.3d 522, 525-26 (2d Cir. 1994). The nonmoving party must "do more than simply show that there is some metaphysical doubt as to the material facts." Matsushita, 475 U.S. at 586. Instead, the nonmovant must "`come forward with enough evidence to support a jury verdict in its favor, and the motion will not be defeated merely ... on the basis of conjecture or surmise."' Trans Sport v. Starter Sportswear, 964 F.2d 186, 188 (2d Cir. 1992) (citation omitted).

On cross-motions for summary judgment, the court applies the same standard as that for individual motions and treats the facts in the light most favorable to the non-moving party. See Aviall, Inc. v. Ryder Sys., 913 F.Supp. 826, 828 (S.D. N.Y. 1996). "Simply because the parties have cross-moved, and therefore have implicitly agreed that no material issues of fact exist, does not mean that the court must join in that agreement and grant judgment as a matter of the law for one side or the other. The court may conclude that material issues of fact do exist and deny both motions." Id. (internal citation omitted). See also Heublein, Inc. v. United States [ 93-2 USTC ¶50,397], 996 F.2d 1455, 1461 (2d Cir. 1993).



II. Analysis

As noted at the outset, resolution of these motions turns on which party has a priority claim to the interpleader fund. Federal law determines the priority of competing liens, governed by the traditional rule of "first in time is first in right." See United States v. City of New Britain [ 54-1 USTC ¶9191], 347 U.S. 81, 85-86 (1954); United States v. Hage [ 76-1 USTC ¶9459], 417 F.Supp. 74, 76 (N.D. N.Y. 1976). As against a federal tax lien, a state lien can take priority only if, in addition to being first in time, it is choate, or fully established, before the federal lien attaches. See Don King Prods., Inc. v. Thomas [ 91-2 USTC ¶50,474], 945 F.2d 529, 533 (2d Cir. 1991) ("A choate lien is one in which the identity of the lienor, the property subject to the lien and the amount of the lien are established."); United States v. 110-118 Riverside Tenants Corp. [ 90-2 USTC ¶50,493], 886 F.2d 514, 518 (2d Cir. 1989); Hage [ 76-1 USTC ¶9459], 417 F.Supp. at 76-77. A federal tax lien attaches to "all property and rights to property, whether real or personal," belonging to the taxpayer, here, L&S. 26 U.S.C. §6321. The nature of the taxpayer's property interest is determined by state law, here the law of the State of New York . Thus, in order to make a determination as to priority, I must first consider when each party's rights to the interpleader fund arose. See Jaffie Contracting Co. v. Doff, No. 94 Civ. 2670, 1995 U.S. Dist. LEXIS 11765, at *9 (S.D. N.Y. Aug. 16, 1995). A federal tax lien arises at the time of assessment. 26 U.S.C. §6322. The dates of assessment for L&S' tax liability were March 11, 1996 and May 20, 1996 .

As stated above, American bases its claim to the interpleader fund primarily on the Assignments it executed with L&S for the Queens Hospital and Bellevue Projects. American argues that the Assignments conveyed L&S' property interest in the funds to American and that, therefore, the federal tax lien could not attach to the funds. I find that the language of the Assignments in this case --providing that L&S "immediately assigns, transfers and sets over to" American "all right, title and ownership to all contract funds of any nature," whether those funds "are due now or shall, in the future, become due" for the Queens Hospital and Bellevue Projects --constituted a complete assignment under New York law of all rights under the Queens Hospital and Bellevue contracts to American because L&S and American "intended a complete and immediate transfer of the interest at the time of the [A]ssignment[s]." Jaffie Contracting, 1995 U.S. Dist. LEXIS 11765, at *10; see also Continental Oil Co. v. United States [ 71-1 USTC ¶9296], 326 F.Supp. 266, 269 (S.D. N.Y. 1971). Under the Assignments, American received "a complete transfer of the entire interest of the assignor in the particular subject of assignment, whereby the assignor is divested of all control over the thing assigned." Continental Oil [ 71-1 USTC ¶9296], 326 F.Supp. at 269 (quoting 3 N.Y. Juris. Assignments §28) (quotation marks omitted). It is undisputed that the Assignments were executed in December of 1995, while the IRS did not assess the taxes against L&S until 1996 and file its federal tax lien until January of 1997. Accordingly, I find that American is entitled to priority because the Assignments effectively transferred L&S' property interest in the funds before the Government's federal tax lien could attach. ³

I have also considered American's argument that it qualifies as a "purchaser" under federal law. A federal tax lien imposed by Section 6321 is not valid "as against any purchaser [or] holder of a security interest ... until notice thereof ... has been filed by the Secretary," 26 U.S.C. §6323(a), and thus, if American qualified as a purchaser, it would be entitled to priority over the federal tax lien. As defined by 26 U.S.C. §6323(h)(6), a "purchaser" is "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." The requirement of adequate and full consideration is what sets a purchaser apart from a regular assignee and is a matter of federal law. See United States v. Paladin [ 82-1 USTC ¶9360], 539 F.Supp. 100, 103 (W.D. N.Y. 1982); see also 26 C.F.R. 301.6323(h)-1(f)(3) ("the term `adequate and full consideration in money or money's worth' means a consideration in money or money's worth having a reasonable relationship to the true value of the interest in property acquired"). While American states that it "provided good and valuable consideration for the Assignments, based on the monies advanced by American under the Assistance Agreement exceeding $11,741,485.90," (American Memo. at 12), I find there is insufficient evidence in the record supporting American's claim that it meets the "adequate and full consideration" standard. American has put in a spreadsheet of payments made on L&S' behalf, (Ex. A to the Declaration of Stacey M. Fleming, sworn to October 17, 2002 ("Fleming Reply Decl.")), and claims that these payments "demonstrat[e] the exchange of adequate and full consideration for the Assignments." (Fleming Reply Decl. at ¶4). While the spreadsheet indicates that some payments were made on the date the Assignments were executed, the payments appear to relate to work on the Mt. Sinai Electrical Multipurpose Building , and not for either the Queens or Bellevue Hospital Projects. (Ex. A to Fleming Reply Decl. at 2-3). Accordingly, I find that American has not demonstrated that it qualifies as a purchaser.

Finally, L&S has submitted papers attesting to settlement negotiations between the L&S and the Government, in the apparent hope that the Court will reduce the amount of the federal tax lien. However, L&S takes no position on whether American or the Government should be entitled to a priority claim to the interpleader fund. In response, the Government argues that L&S' submissions should be stricken from the docket as violating Fed. R. Evid. 408. Having found that American has a priority claim to the interpleader fund, I decline to make a finding on this issue.

CONCLUSION

For the foregoing reasons, the Government's motion for summary judgment is denied. American's motion for summary judgment is granted to the extent that I find American is entitled to a priority claim to the interpleader fund. Counsel shall confer and inform the Court by letter no later than July 14, 2003 of the steps necessary to resolve the action.

SO ORDERED

¹ However, the Government does not dispute that American made demands on NYHHC for payment under both the Queens Hospital and Bellevue contracts. (Gov. Response to American's Rule 56.1 Statement ¶ ¶26-29).

² In support of this argument, American points to a case decided in the Supreme Court of the State of New York , Nassau County , to which the Government was not a party. I agree with the Government that the conclusions reached by the court in that case are irrelevant for purposes of this case.

³ Because I find that American is entitled to a priority claim to the interpleader fund, I decline consideration of American's subrogation claim pursuant to Article 3-A of the New York Lien Law.

 

[2001-1 USTC ¶50,367] United States of America , Plaintiff v. Harold Morrell and Michael F. Morrell, Defendants

U.S. District Court, East. Dist. N.Y., 97 CV 5344 (NG), 3/23/2001

[Code Sec. 6323 ]

Liens and levies: Enforcement: Validity: Foreclosure: Transfer of property subject to lien.--Federal tax liens on a residence conveyed by married taxpayers to their son and an annuity traceable to securities also transferred to their son, in exchange for a promise of future support were valid and could be foreclosed. The parents conceded that they divested themselves of their assets through the conveyance, rendering them unable to satisfy their tax obligations and the son admitted that the purported agreement arose after the transfer had taken place. Further, there was no supporting documentation for the claim that the son purchased the securities with his own money. Thus, there was no basis for concluding that the shares had not been transferred to the son in the same manner as other securities were transferred or that the transfer occurred before the tax assessments were made.

[Code Sec. 6323 ]

Liens and levies: Enforcement: Validity: Foreclosure: Transfer of property subject to lien: Purchaser: Oral agreement.--An individual who promised to provide future support for his parents in exchange for their transfer to him of their home was not a purchaser whose interests in the transferred property were superior to federal tax liens on the property. The purported oral agreement under which the property was transferred was unenforceable under the statute of frauds and the son admitted that the agreement arose after the property was transferred. Moreover, courts have repeatedly rejected the argument that promises of future support constitute fair consideration.

[Code Sec. 6323 ]

Liens and levies: Enforcement: Validity: Foreclosure: Transfer of property subject to lien: Purchaser: Equitable subrogation.--An individual who promised to provide future support for his parents in exchange for their transfer to him of their home was not entitled equitable subrogation. He did not have an equitable lien superior to the government's lien because he did not satisfy a senior encumbrance on any of the properties, nor did his payments to his parents confer any benefit upon the government. Moreover, equitable principles did not point to the type of relief requested by the taxpayer.

ORDER

GERSHON, District Judge:

The United States moves pursuant to Rule 56, Fed. R. Civ. P., for summary judgment to declare the validity of certain tax liens and to order foreclosure on the liens and sale of property, consisting of a residence conveyed by taxpayers to their son and an annuity traceable to securities that had been transferred by taxpayers to their son, that is subject to the liens. Defendants oppose the motion, arguing that there are factual issues for trial: (1) that the son"s interests in the real and personal property that had been transferred to him are superior to the tax liens; (2) that some of the funds used to purchase the annuity came from the son's independently accumulated assets, or alternatively, from property transferred by the taxpayers before the liens attached; and (3) that the government is not entitled to the appreciation in the value of assets after the transfers by the parents to the son.

The Facts

The facts, which in part are set forth in a Joint Agreed Statement of Material Facts ("Joint Statement") entered into by the parties, are undisputed except as indicated. Defendant Harold Morrell invested in tax shelters and claimed deductions on his joint income tax returns filed with his wife, Dolores Morrell, for the years 1977--1980. ¹ The IRS disallowed the deductions for these four years and assessed deficiencies. Harold and Dolores Morrell contested the deficiencies in Tax Court. On August 13, 1990 , the Tax Court entered an agreed decision finding deficiencies for those years, exclusive of interest, of $182, 645, which with interest had grown to over $750,000 as of the date of the decision and approximately $1.4 million when the parties entered into the Joint Statement.

The IRS separately assessed the deficiencies and demanded payment for each of the years 1977--1980 between November 15 and December 10, 1990, thereby creating liens against all property of Harold and Dolores Morrell pursuant to 26 U.S.C. §§6321 and 6322. These statutes provide that a lien attaches at the time of assessment to "all property and rights to property" of the taxpayer for the amount of the assessment, including interest that may accrue, and continues until the liability is satisfied or becomes unenforceable by lapse of time. Tax liens were filed against Harold and Dolores Morrell in Suffolk County on September 11, 1991 . Harold Morrell does not contest the deficiencies, and agrees that judgment should be entered against him for the full amount of the liability.

Harold and Dolores Morrell transferred real estate, stocks and other securities to their son, defendant Michael F. Morrell. The real estate, a home in Suffolk County having a fair market value of approximately $400,000 at the time, was transferred by deed dated May 24, 1991 , after the assessment and attachment of the government's lien. ² Harold and Dolores Morrell continued to reside there after the transfer as they had before. There was no mortgage on the property. Harold and Dolores Morrell also transferred to Michael Morrell in May 1991 their holdings in municipal trusts worth over $217,000. The transfer was effectuated by transferring the holdings from the parents' account at Dean Witter to Michael's account at Dean Witter. Michael subsequently transferred the municipal trusts to a joint Dean Witter account of Michael and his spouse. In April 1992, Harold and Dolores Morrell transferred stock holdings worth approximately $200,000 from their Dean Witter account to the Dean Witter account of Michael and his spouse.

Harold Morrell claimed in his deposition that all of these transfers, which admittedly followed the assessment, were not undertaken to avoid payment of tax deficiencies. Instead, he asserted, the assets were transferred in light of the declining health of Dolores Morrell, so that the parents would qualify for government medical assistance. Michael Morrell testified in his deposition that he shared the same understanding of the reason for the transfers of assets, and was not aware at that time of his parents' tax difficulties. For purposes of the summary judgment motion, the government does not contest motivation, but asserts that it is entitled to foreclose on its liens regardless of motivation.

Michael Morrell's assertion of an interest superior to the government liens is based upon the defendants' claim that in exchange for the transfer of assets, Michael orally agreed to support his parents and in fact did so. Defendants argue that Michael Morrell therefore is a "purchaser" protected under 26 U.S.C. §6323(a) or, alternatively, that he is entitled to an equitable lien for the hundreds of thousands of dollars he spent to support his parents over the years following the transfers of assets.

Harold Morrell testified at his deposition that he and his wife transferred their residence, stocks and securities pursuant to a unitary plan to divest themselves of all assets, and that no other assets were left after the transfers. ³ Harold Morrell testified as follows as to the timing of the alleged support agreement in relationship to the transfer of property:

Q. In connection with the transfer of the assets, did your son later make some promises to you as to what he would do for you?

A. Well, we had set up for a planned estate, and he agreed after we transferred everything over to his name he would support us. We were concerned about our health, my wife's health, which subsequently has died, but concerned about Medicare, so we didn't want to have anything around. So we made a deal. We decided that we'll have Michael take everything now and then support us so that we wouldn't be exposing the assets to Medicaid.

*****

Q. At the time of the transfers that you made to your son, had your son agreed to give you support?

A. Yes.

*****

Q. And your recollection is that his promise for the support was before the transfers were made, not after?

A. I don't remember whether it was before or after. I don't remember that part, before or after.

Q. It could have been one or the other?

A. Yeah, it could have been.

*****

Q. Everything was oral?

A. Oral.

Q. Did your son ever tell you what he would do for you in the way of providing you support?

A. He would support us the way we were--the way we lived, you know.

Michael Morrell admitted at his deposition that he first found out about the transfer of property to him during a telephone call from his father saying, "here is what I've done, and I'm really doing this because of these Medicare issues." As far as Michael knew, the documentation for effecting the transfer of securities consisted simply of a name change in ownership of the Dean Witter account. Michael Morrell testified that the circumstances surrounding the support arrangement "was simply, We're going to give you this money, and, you know, I agreed to support them. I mean it was no--there was no formal arrangement." Michael reiterated that he thought "the transfer took place and then we had the discussion," which could have taken place one or two months after the transfer. The discussion was: "I would just pay all their expenses." In the deposition, Michael Morrell recollected that the transfer of securities occurred after the real estate had been transferred; he believed the transfer of securities took place in late 1991.

Michael Morrell's affidavit submitted in opposition to the summary judgment motion simply states, in reference to the purported agreement: "In exchange for the transfer of the assets, I agreed to support my parents for their lifetime," and that he "kept that promise" by the substantial deposits to his parents' bank accounts and his purchase of a townhouse in 1996 where his father lives rent free. The affidavit identifies the transferred assets as his parents' entire portfolio of stock and municipal bonds, and their home. The affidavit states that the home was transferred in May 1991, and the securities in May 1991 and April 1992.

In October 1995, Michael Morrell liquidated his joint Dean Witter account and used all of the proceeds to purchase a variable annuity for approximately $833,000. The government claims that its lien attaches to the entire amount of the annuity, which had increased in value to over $1 million as of March 31, 1998 . In opposition to the summary judgment motion, Michael Morrell claims that at least $380,000 in the Dean Witter account that was used to purchase the annuity represented separate savings accumulated by Michael and his wife and did not come from his parents. Michael also argues that the government should not be entitled to payment of the portion of the proceeds from his Dean Witter account used to purchase the annuity that represents appreciation in the Dean Witter account; Michael attributes that appreciation in asset value to his prudent and skillful management of the account.

The government agrees in principle that, to the extent that Michael could show that a portion of the annuity was purchased with funds that were not traceable to transfers from his parents after the lien attached, Michael would be entitled to retain a pro rata share of the proceeds of the annuity. However, the government contends that there is no genuine factual dispute that all of the funds in the Dean Witter account that were used to purchase the annuity are traceable to transfers made by Harold and Dolores Morrell after the tax liens had attached. The government also contends that, since the lien follows the property, it is entitled to foreclose on the entire value of the annuity, including any appreciation in value of the annuity or the Dean Witter fund used to purchase the annuity, until the deficiency, including accrued interest, is fully satisfied.

The property that Michael Morrell asserts had been purchased with his own funds is a tax free fund of Dean Witter. Neither Harold Morrell nor Michael Morrell produced most of their securities account records in discovery for the critical period of 1990 through the first few months of 1992, which would have shown all holdings and activity in the accounts in the periods preceding and following the assessments. Michael Morrell's affidavit in opposition to summary judgment attached his Dean Witter account statement for June 1991, which reflected a holding of 33,769 shares of Dean Witter New York Tax Free Inc. Fund, then worth approximately $378,000, as well as approximately $2,000 in a U.S. government money market fund. Michael claimed that these investments were acquired with his own funds and were not derived from property his parents transferred to him. Michael explained his failure to produce that statement and others or to discuss those holdings at his deposition by stating that he had only recently located some of these records, and that his memory had been impaired because of a heart condition. Michael Morrell did not produce any records that showed that he in fact purchased shares of this tax free fund from his own savings. The government responded to this new information by obtaining other records from Dean Witter, including the account statement for Harold and Dolores Morrell as of April 30, 1990 , showing that the exact same quantity, 33,769 shares of Dean Witter New York Tax Free Inc. Fund, then worth approximately $364,000, was held in the parents' account.

Because the account statements produced by the defendants and those obtained by the government from Dean Witter are incomplete, there is a gap between the April 1990 statement of the taxpayers and the June 1991 statement of Michael Morrell. Therefore, no document shows when, after April 1990, the 33,769 shares of Dean Witter New York Tax Free Inc. Fund were withdrawn from the taxpayers' account or where it went, or when, before June 1991, 33,769 shares of Dean Witter New York Tax Free Inc. Fund first were carried in Michael's account or where it came from. Defendants argue that there are factual issues, precluding the granting of summary judgment to the government, as to whether this fund was transferred from the parents to Michael Morrell, and if it was, when the transfer took place, i.e., before or after the tax liens attached in November and December, 1990.

Examination of the Dean Witter monthly statements for the account of Michael Morrell and his spouse from the end of 1991 until its liquidation in October and November 1995, when Michael used the entire proceeds to purchase the annuity, confirms the government's assertion that no new money or other assets were put into the account except for securities transferred by Harold and Dolores Morrell in April 1992. Defendants were afforded an opportunity after oral argument to identify any such assets that Michael put into the account, but their counsel notified the court that they had no further information to offer. The account statements show that there were few purchases and sales of securities, except for liquidations to withdraw funds from the account, and that all purchases of securities in the account during this time period were made with the proceeds from redemption of other securities held in the account and accumulated dividends and interest from those securities. Although Michael Morrell placed no new money in the account, he frequently made withdrawals from it between December 1992 and September 1995, for a total of approximately $119,000. The record contains no explanation of these withdrawals. As a result of these withdrawals, there was in fact negligible increase in the value of the account: it had a value of approximately $778,000 on March 31, 1992 , $807,000 on November 30, 1992 , $781,000 on February 28, 1995 , and $814,000 on May 31, 1995 , before being liquidated for approximately $833,000 in October and November, 1995.

Discussion

Summary Judgment Standards

Motions for Summary judgment are granted if there is no genuine issue as to any material fact, and the moving party is entitled to judgment as a matter of law. See Lipton v. Nature Co., 71 F.3d 464, 469 (2d Cir. 1995). The moving party must demonstrate the absence of any material factual issue genuinely in dispute. See id. A material fact is one whose resolution would "affect the outcome of the suit under governing law," and a dispute is genuine "if the evidence is such that a reasonable jury could return a verdict for the nonmoving party." Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248 (1986). The court must view the inferences to be drawn from the facts in the light most favorable to the party opposing the motion. See Matsushita Elec. Indus. Co., Ltd. v. Zenith Radio Corp., 475 U.S. 574, 587 (1986). However, the non-moving party may not "rely on mere speculation or conjecture as to the true nature of the facts to overcome a motion for summary judgment." Knight v. U.S. Fire Ins. Co., 804 F.2d 9, 12 (2d Cir. 1986). Nor may the non-moving party "simply show that there is some metaphysical doubt as to the material facts." Matsushita Elec., 475 U.S. at 586. The party must produce specific facts sufficient to establish that there is a genuine factual issue for trial. See Celotex Corp. v. Catrett, 477 U.S. 317, 322-23 (1986).

"Purchaser" Under 26 U.S.C. §6323(a)

Section 6323(a) of Title 26, United States Code, provides that "[t]he lien imposed by section 6321 shall not be valid as against any purchaser" until notice of the lien has been filed. A "purchaser" is defined in Section 6323(h)(6) as "a person who, for adequate and full consideration in money or money's worth, acquires an interest . . . in property which is valid under local law against subsequent purchasers without actual notice." The Treasury Regulations define "adequate and full consideration" to require "consideration in money or money's worth having a reasonable relationship to the true value of the interest in the property acquired." 26 C.F.R. §301.6323(h)-1 (f)(3). "Money or money's worth" is defined in the regulation as including "tangible or intangible property, services and other consideration reducible to a money value," but excluding such things as "love and affection . . . or any other consideration not reducible to a money value." Id. §301.6323(h)-1(a)(3).

No reasonable juror could find that Michael Morrell was a "purchaser" within the meaning of this provision. First, defendants conceded during oral argument of the summary judgment motion that the purported oral agreement by Michael Morrell to support the taxpayers for their lives is unenforceable under the statute of frauds. Obviously, an unenforceable promise of future support is not "adequate and full consideration in money or money's worth" under any rational construction of the statute.

Second, there is no genuine issue of fact as to the existence of an agreement, even an oral one, in which Michael Morrell furnished consideration in exchange for which Harold and Dolores Morrell transferred these properties to him. Michael Morrell testified at his deposition that his best recollection was that any discussion he had with his father concerning support occurred after the property had already been placed in his name by the unilateral action of his parents. Viewed most favorably to him, Harold Morrell admitted that he could not recall whether any such discussion preceded or followed the transfers. Accordingly, there is no basis for a reasonable jury to find that consideration was furnished in exchange for the transfers of property, even if any such promise would have been enforceable.

Third, even if there had been an agreement that was enforceable before the transfers took place, Michael Morrell's promise to support his parents is not "adequate and full consideration in money or money's worth" for the immediate conveyance of unencumbered assets worth over $800,000 (or almost $1.2 million when the Dean Witter New York Tax Free Inc. Fund is included, see pp. 13-14 infra). The issue of adequate consideration is a matter of federal and not state law, and as the Second Circuit has stated, "a finding that [taxpayer] conveyed the Property to her daughters for adequate consideration under New York law, while helpful, does not provide a rule of decision that [the daughters] are federally protected 'purchasers' under Section 6323(a)." United States v. McCombs [94-2 USTC ¶50,363], 30 F.3d 310, 330 (2d Cir. 1994). Nevertheless, in the absence of reported federal cases construing Section 6323's requirement of "adequate and full consideration" when the consideration furnished by the reputed purchaser is a promise of parental support, and notwithstanding the variations in statutory language, the New York decisions that have construed the requirement of "fair consideration" under Section 273 of New York Debtor and Creditor Law in similar circumstances are persuasive. ⁴ Courts have rejected repeatedly the argument that promises of future support constitute fair consideration within the meaning of Section 273. Schmitt, 98 A.D.2d at 936 (purchaser's promises to take over payments on mortgage, furnace and taxes, to permit debtors to remain in house rent-free, and to convey ten acres to debtors' sons did not constitute "fair consideration" under §273; "[s]uch promises . . . are akin to promises of future support, which are insufficient as a matter of law to be considered a fair equivalent of the property transferred"); Petition of National City Bank of New York, 269 App. Div. 1040 (2d Dep't 1945) (promise of future support is not fair consideration); see United States v. Bushlow [93-2 USTC ¶50,556 ], 832 F.Supp. 574, 582 (E.D.N.Y. 1993) (promises of future services are not "fair consideration" under §273).

Defendants concede that Harold and Dolores Morrell divested themselves of virtually all their assets when they conveyed their real and personal property to their son, which rendered them unable to satisfy their tax obligations, and received nothing in return except at most an oral promise of support. It is not reasonable to find this promise to be "adequate and full consideration in money or money's worth."

Equitable Lien

Defendants argue that, even if Michael Morrell is not a purchaser within the meaning of Section 6323(a), he is entitled to an "equitable lien," that is superior to the government's lien, for the hundreds of thousands of dollars he spent to support his parents. Pursuant to 26 U.S.C. §6323(i)(2), equitable subrogation applies in certain circumstances where a transferee of property or a junior lienor has satisfied a lien that is superior to the tax lien. The statute provides: "Where, under local law, one person is subrogated to the rights of another with respect to a lien or interest, such person shall be subrogated to such rights for purposes of any lien imposed by section 6321." Equitable subrogation is designed to avoid the unjust enrichment that would occur if the government could reap the benefit of having the senior lien satisfied but deprive the party who satisfied that senior lien of any benefit in a foreclosure proceeding. To avoid such unfairness, the party that satisfied the senior encumbrance is allowed to assume the position that had been occupied by the original holder of the senior lien, if equitable subrogation is authorized by state law. See United States v. Avila [96-2 USTC ¶50,357], 88 F.3d 229, 237-39 (3d Cir. 1996); Mort v. United States [96-1 USTC ¶50,315], 86 F.3d 890, 893-95 (9th Cir. 1996); Progressive Consumers Federal Credit Union v. United States [96-1 USTC ¶50,160], 79 F.3d 1228, 1234-37 (1st Cir. 1996).

Even assuming arguendo that the Second Circuit would recognize a non-statutory equitable doctrine applicable to tax liens, equitable principles do not point to the relief requested. ⁵ Michael Morrell did not satisfy a senior encumbrance on any of these properties; indeed, there was no mortgage on the real property. Nor did Michael's payments to his parents confer any benefit upon the government. Michael Morrell received property from his parents that they should have used to satisfy their indebtedness to the government and then gave money back to his parents so that they could continue to live in the same style as that to which they were accustomed, as if they had never incurred liability pursuant to an agreed judgment. Equity is not served by giving Michael Morrell credit for these payments to his parents.

Source of Funds for Annuity

It is undisputed that the residence and over $400,000 worth of securities were transferred from Harold and Dolores Morrell to Michael Morrell after the assessments were made. On review of the entire record, the undisputed facts also establish that additional securities worth approximately $380,000, consisting of 33,769 shares of Dean Witter New York Tax Free Inc. Fund also were transferred to Michael by his parents. With no supporting documentation of any kind, Michael Morrell claims that he purchased the 33,769 shares of the Dean Witter New York Tax Free Inc. Fund with his own money. There is no explanation for the astounding coincidence that a year before, the taxpayers had the exact same number of shares of the same fund in their account. Moreover, Harold Morrell testified that he transferred all of his assets to his son, ostensibly so that Harold and Dolores could qualify for government medical assistance, and defendants offer no other explanation for the fact that the 33,769 shares of the fund the parents held in 1990 were no longer owned by them later. Since all other securities were conveyed from parents to son by directing transfer of the securities from the parents' Dean Witter account to the son's Dean Witter account, there is no rational basis for concluding that the 33,769 shares in Michael Morrell's account had not also been transferred in the same manner.

Furthermore, no rational juror could find that the transfer of this fund was made by the parents to their son before the liens had attached. As set forth in the Facts section above, Harold Morrell testified that the transfer of all assets held by him and his wife to Michael took place pursuant to one plan to divest themselves of all assets. Michael Morrell testified that all securities he received from his parents were transferred after the residence had been conveyed to him; it is undisputed that the real property was transferred approximately six months after the assessments. The parties agree that the assessments were made in November and December 1990, the real property was conveyed in May 1991, and that other securities were transferred in May 1991 and April 1992. Accordingly, there is no basis in the undisputed evidence for finding that the Dean Witter New York Tax Free Inc. Fund was transferred before the assessments.

Appreciation

Michael Morrell's argument that the government is not entitled to foreclose on the annuity to the extent that it represents appreciation in the value of the security holdings after the transfers of assets from the taxpayers is erroneous. He does not question the well-settled principle that the lien follows the property. "The transfer of property subsequent to the attachment of the lien does not affect the lien, for 'it is of the very nature and essence of a lien, that no matter into whose hands the property goes, it passes cum onere. . . .' " United States v. Bess [58-2 USTC ¶9595], 357 U.S. 51, 57 (1958) (citations omitted). This principle has been held to mean that the lien attaches to any appreciation in the value of the property until the taxpayer's liability has been discharge. Avila [96-2 USTC ¶50,357], 88 F.3d at 231, 233-34 (government lien is not limited to taxpayer's equity when he conveyed the property subject to the lien; it also attaches to the appreciation in the value of the property after the conveyance); Han v. United States [91-2 USTC ¶50,486], 944 F.2d 526, 528-29 (9th Cir. 1991) (same); see United States v. Librizzi [97-1 USTC ¶50,263], 108 F.3d 136 (7th Cir. 1997) (government's lien extended to appreciated fair market value of deceased taxpayer's interest in the property at the time of foreclosure and is not limited to value at death).

Furthermore, the premises of defendant's argument, that the annuity was purchased with appreciated assets and that the appreciation is attributable to Michael Morrell's skillful and prudent management of his Dean Witter account, are unfounded under the undisputed facts recited earlier. Almost all of the appreciated value in the Dean Witter account was taken out of it by Michael between 1992 and the account's liquidation in late 1995; and, with the inclusion of approximately 380,000 from the New York Tax Free Inc. Fund that defendant omitted in advancing his contention, the remaining minimal appreciation is attributable to passive reinvestment of interest and dividends which there is no persuasive reason to exempt from the government lien.

Conclusion

The motion of plaintiff United States of America for summary judgment is granted. The government should submit a proposed judgment on fourteen days' notice to the defendants.

SO ORDERED.

¹ Dolores Morrell died after this action was commenced and is no longer a party.

² The parties agree that the fact that certain transfers were made after the attachment of the liens but preceded their filing, is not determinative in this case.

³ Harold and Dolores Morrell in fact continued to retain ownership of a condominium, but the government is not seeking to foreclose on that property in this proceeding.

⁴ N.Y. Debtor & Creditor Law §273 declares that any conveyance made by a person who is thereby rendered insolvent is constructively fraudulent as to creditors regardless of the transferor's "actual intent if the conveyance is made or the obligation is incurred without a fair consideration." Section 272 provides that "fair consideration" is given for property when, as a fair equivalent for it and in good faith, property is conveyed or an antecedent debt is satisfied, or when the property is received in good faith to secure a present advance or antecedent debt in an amount not disproportionately small as compared with the value of the property. Schmitt v. Morgan, 98 A.D.2d 934, 935 (3d Dep't 1983 ), appeal dismissed, 62 N.Y.2d 914 (1984).

⁵ In McCombs [94-2 USTC ¶50,363], 30 F.3d at 333, the court in dictum apparently applied the equitable subrogation doctrine of §6323(i)(2) without citing the statute.

 

 

[97-2 USTC ¶50,509] Carl G. Mueller, Jr., Plaintiff-Appellant v. United States of America , Defendant-Appellee

(CA-5), U.S. Court of Appeals, 5th Circuit, 96-20419, 6/10/97, Reversing a District Court decision, 96-1 USTC ¶50,298

[Code Secs. 6323 and 7403 ]

Actions to enforce liens: Validity of liens: Priority of liens: Conveyance by taxpayer: State recording statutes, notice provisions: IRS immunity: Inquiry notice: Unjust enrichment.--The IRS's seizure of half the proceeds of a sale of real property in order to satisfy several tax liens against the seller's son was improper. The IRS was not exempt from the notice provisions of a state ( Texas ) recording statute and, therefore, was charged with inquiry notice with respect to a late-recorded deed in which the son conveyed his ownership interests to his father. Moreover, under state ( Texas ) law, the father held equitable title under a purchase money trust because he paid all the costs associated with the purchase of the property. The son's only obligation was to convey the legal title to his father which he did. Finally, since the IRS waited until the father paid the mortgage in its entirety before it executed the tax liens on the property, the retention of the proceeds from the sale would have resulted in the government's unjust enrichment.

Carl G. Mueller, Jr., Three River Hollow, Houston, Tex. 77027-9401, pro se. Carol A. Barthel, Gary R. Allen, Bruce Raleigh Ellisen, Department of Justice, Washington, D.C. 20530, for defendant-appellee.

Before: POLITZ, Chief Judge, WIENER and STEWART, Circuit Judges.

è Caution: This court has designated this opinion as NOT FOR PUBLICATION. Consult the Rules of the Court before citing this case.ç

POLITZ, Chief Judge: ^*

This appeal involves questions of property ownership under Texas law, of legal and equitable title, and of the proper application of the Texas recording statute in the factual scenario presented herein. Concluding that the trial court erred in holding that Carl Mueller owned only a one-half interest in the subject property, we reverse the grant of summary judgment in favor of the Internal Revenue Service. For the reasons assigned we render summary judgment in favor of Carl Mueller.

Background

On November 1, 1979 Carl G. Mueller, Jr. and his son Clint purchased a piece of property near Houston , Texas known as the Braewick property. Carl paid the earnest money, down payment, and closing costs totaling $9,548.85. The remaining consideration consisted of a purchase money first mortgage in the sum of $58,000 signed by both Carl and Clint Mueller. It appears that Clint was included as a signatory on the note in order to secure a more favorable interest rate. ¹ The warranty deed was properly recorded on November 19, 1979 .

On December 5, 1979 Clint executed a deed conveying his interest in the property to his father. The instrument was "executed effective as of November 1, 1979 ." Carl expressly agreed therein to assume Clint's obligations on the $58,000 note. Clint and his wife Karen then promptly moved onto the Braewick property under an unrecorded written lease. Carl thereafter made all mortgage payments on the property and paid for all subsequent repairs, taxes, and insurance. Carl did not record the December 1979 deed, however, until January 1994 when he sold the property.

Unbeknownst to Carl, in January of 1987 the IRS filed a Notice of Federal Tax Lien in Harris County, Texas for the unpaid taxes of Clint and Karen for the years 1984 and 1985. The IRS filed additional tax liens through May 1993.

In December 1993, preparatory to selling the property, Carl paid the sum of $48,214.27 in full satisfaction of the purchase money mortgage. As noted, the following month he recorded the December 1979 deed. Believing the property free of encumbrances, on May 26, 1994 Carl closed the sale for the sum of $35,587.64. The IRS immediately seized one-half of the proceeds, $17,793.82, in partial satisfaction of its tax liens against Clint and Karen Mueller.

Carl filed the instant wrongful levy action against the IRS. Competing motions for summary judgment were filed. The IRS contended that by virtue of the Texas recording statute its tax liens had priority over the late-recorded December 1979 conveyance from Clint to his father. Carl contended that Clint never had an interest in the property to which the tax liens could attach and, even if he did, the IRS could not take advantage of the Texas recording statute because it was not a creditor "without notice." Finally, Carl maintained that when he paid the purchase money note he had become subrogated to the mortgagee's position which primed the tax liens. The district court rejected Carl's motion and granted that of the IRS, holding that Clint owned an undivided one-half interest in the subject property. Carl timely appealed.

Analysis

A. Standard of Review

We review a summary judgment de novo, applying the same standards used by district courts in such matters. ² The court must review the facts and draw inferences in favor of the nonmoving party. ³ Summary judgment is only proper when there is no genuine issue as to any material fact and the moving party is entitled to a judgment as a matter of law. ⁴

B. Notice Under the Texas Recording Statute

We previously have held ⁵ that the IRS could avail itself of the Texas recording statute ⁶ in the filing of a tax lien. We reject the contention of the IRS advanced herein, however, that it somehow is exempt from the notice provisions of that statute. ⁷ The recording statute requires that a creditor be without actual, constructive, or inquiry notice of the conveyance that it seeks to avoid, in this instance the 1979 deed from Clint to his father. ⁸

Mueller produced evidence that the IRS was on notice of his claim to full title to the property because his tax returns reflected his son's rental payments, his son's bankruptcy petition did not list the property, and the original deed did not specify the proportions of ownership thus creating the potential that he and his son did not have equal ownership. We need not consider each contention in excessive detail for we are persuaded beyond peradventure that no lending institution likely would have relied on an ambiguous deed if offered as collateral by the son, nor would any purchaser or Texas title company accept same as dispositive if the son were purporting to sell his half interest. ⁹ Prudence compels that more specific facts be determined. On this ground alone, the summary judgment in favor of the IRS must be reversed.

Carl contends that he is entitled to summary judgment. We must determine exactly what interests Carl and Clint acquired in the original purchase because, to satisfy Clint's tax obligations, the IRS may reach only the portion of the property that Clint acquired therein. At this stage of the inquiry, the Texas recording statute is irrelevant. ¹⁰

The IRS contends that it may rely on an irrebuttable presumption of equal interests when grantees take under a deed that is silent as to the respective interests. The district court apparently accepted this contention. We are mindful that a presumption of equal ownership initially arises when a deed is silent as to the respective interest of the grantees. ¹¹ We are also mindful of the proposition that "where two or more persons join in the purchase of property, they will, in the absence of an agreement to the contrary, hold title in the proportion in which each furnished consideration for the purchase." ¹²

The summary judgment record fully supports Carl's contention that it was never intended that his son would have an ownership interest in the property. In addition to the December deed, in which Clint conveyed all interests in the property and Carl assumed full responsibility for the purchase price effective back to the date of the original deed, it is not disputed that Carl made all payments all payments involved in the original transaction, all payments for interim mortgage, taxes, insurance, and repair and upkeep expenses, as well as the entirety of the mortgage satisfaction payment.

We are persuaded that although Carl and Clint originally took legal title, Carl alone had the equitable title. We understand such a situation to be covered by what, under Texas law, is referred to as a purchase money resulting trust.

A resulting trust arises by operation of law when title is conveyed to one person but the purchase price or a portion thereof is paid by another. The parties are presumed to have intended that the grantee hold title to the use of him who paid the purchase price and whom equity deems to be the true owner. ¹³

" 'From a practical viewpoint, a resulting trust involves primarily the operation of the equitable doctrine of consideration--the doctrine that valuable consideration and not legal title determines the equitable title or interest resulting from a transaction....' " ¹⁴

The summary judgment record abounds with the accepted indicators that a resulting trust was effectuated. As noted, the payments at original closing, the prompt execution of a deed reflecting the true legal status, the lease from father to son, the interim payments, and the final mortgage payout all substantiate the existence of a resulting trust. Clint's only obligation as the trustee of the resulting trust was to convey legal title to his father. ¹⁵ This he promptly did.

This leads then to a consideration of the relative equities of the parties to this litigation, for fairness and public policy considerations predominate when considering the propriety of a resulting trust. ¹⁶ The IRS placed its first tax liens in the Harris County deed records in January 1987. At that time approximately $50,000 remained unpaid on the mortgage. Had the IRS attempted to execute on the property it would have been unsuccessful because the mortgage lien was superior to its tax liens. The IRS waited seven years until Carl, unaware of its intentions, made the land marketable by paying off the mortgage in its entirety. The IRS then quickly confiscated one-half of the sales proceeds. During this seven-year interval Carl kept up with all mortgage payments, insurance, taxes, and other expenses. To allow the IRS to retain the benefits of these efforts would result in unjust enrichment, which is something the resulting trust doctrine is designed to remedy. ¹⁷

For the foregoing reasons, we REVERSE the summary judgment in favor of the IRS and RENDER judgment in favor of Carl G. Mueller, Jr.

^* Pursuant to Local Rule 47.5, the court has determined that this opinion should not be published and is not precedent except under the limited circumstances set forth in Local Rule 47.5.4.

¹ A lower interest rate was available if a party to the purchase money mortgage on the property was going to occupy the property. Carl attested that he planned to allow Clint and his wife Karen to lease the property.

² Brock v. Chater, 84 F.3d 726 (5th Cir. 1996).

³ Elliott v. Lynn , 38 F.3d 188 (5th Cir. 1994).

⁴ Fed.R.Civ.P. 56(c); Celotex Corp. v. Catrett, 477 U.S. 317 (1986).

⁵ United States v. Creamer Indus. [65-2 USTC ¶9527], 349 F.2d 625 (5th Cir. 1965).

⁶ Tex.Prop. Code Ann. §13.001(a) ( Vernon Supp. 1997). The statute provides in relevant part:

A conveyance of real property or an interest in real property or a mortgage deed of trust is void as to a creditor or to a subsequent purchaser for a valuable consideration without notice unless the instrument has been acknowledged, sworn to, or proved and filed for record as required by law.

⁷ Paris Grocer Co. v. Burks, 101 Tex. 106, 105 S.W. 174 (1907) (specifically holding that creditors, like purchasers, must be "without notice" to avoid an unrecorded deed under the recording statute); see also Prewitt v. United States [86-2 USTC ¶9513], 792 F.2d 1353 (5th Cir. 1986) (applying the "without notice" requirement to the IRS).

⁸ Harrison v. Boring, 44 Tex. 255 (1875); Wethered v. Boon, 17 Tex. 143 (1856). These cases treat "inquiry notice" as a subset of various forms of constructive notice. Semantics aside, however, the IRS is charged with knowledge of whatever a reasonable inquiry would have revealed. Woodward v. Ortiz, 150 Tex. 75, 237 S.W.2d 286 (1951).

⁹ See Collum v. Sanger Bros., 98 Tex. 162, 82 S.W. 459 (1904) (holding that facts placing a purchaser on inquiry notice will also place a creditor on inquiry notice).

¹⁰ The IRS appears to contend that the Texas recording statute somehow prevents Carl from arguing that Clint took no title in the original conveyance. The recording statute, however, only protects the IRS from a subsequent unrecorded conveyance of an interest in land of which it had no notice. See Tex. Prop. Code Ann. §13.001. It is well settled that "the superiority of [an equitable] title may be asserted against a judgment lien holder even though he had no notice of the equitable title at the time of fixing his lien." Gibralter Savings Ass'n v. Martin, 784 S.W.2d 555, 558 (Tex.App.--Amarillo 1990, writ denied); see also Johnson v. Darr, 114 Tex. 516, 272 S.W. 1098 (1925); Park Central Bank v. JHJ Investments Co., 835 S.W.2d 813 (Tex.App.--Fort Worth 1992, no writ); Jensen v. Bryson, 614 S.W.2d 930 (Tex.Civ.App.--Amarillo 1981, no writ); Northeast Indep . School Dist. v. Aldridge, 528 S.W.2d 341 (Tex.Civ.App.--Amarillo 1975, writ ref'd n.r.e.); Scull v. Davis, 434 S.W.2d 391 (Tex.Civ.App.--El Paso 1968, writ ref'd n.r.e.). Stated another way, the recording statute cannot affect an equitable title, which cannot be recorded, that was acquired in the original conveyance.

¹¹ Wooley v. West, 391 S.W.2d 157 (Tex.Civ.App.-Tyler 1965, writ ref'd n.r.e.). The case relied upon by the district court, Zephyr v. Zephyr, 679 S.W.2d 553 (Tex.App.-Houston [14th Dist.] 1984, no writ), likewise so holds.

¹² 16 Tex.Jur.3d Cotenancy & Joint Tenancy §9 (1981); see also Wooley; Bray v. Clark , 9 S.W.2d 203 (Tex.Civ.App.--Waco 1928, writ dism'd w.o.j.).

¹³ Lifemark Corp. v. Merritt, 655 S.W.2d 310, 316 (Tex.App.-Houston [14th Dist.] 1983, writ ref'd n.r.e.) (citing Cohrs v. Scott, 161 Tex. 111, 338 S.W.2d 127 (1960)); see also Elliot v. Mansfield , 398 S.W.2d 442 (Tex.Civ.App.-Beaumont 1965, writ ref'd n.r.e.) (holding that when property is transferred to one but paid for by another, a presumption of resulting trust arises).

¹⁴ Mills v. Gray, 147 Tex. 33, 210 S.W.2d 985 (1948) (quoting 54 Am.Jur. Trusts §188 (1945)).

¹⁵ NoLana Dev. Ass'n v. Corsi, 682 S.W.2d 246 ( Tex. 1984); George T. Bogert, The Law of Trusts and Trustees §454 (2d ed. 1991) (noting that claims of a resulting trust are often confirmed by a deed from the legal title holder to the payer of the purchase price).

¹⁶ See Eastham v. Roundtree, 56 Tex. 110 (1882) (holding that no resulting trust can spring from an act contrary to public policy); Bute v. Stickney, 160 S.W.2d 302 (Tex.Civ.App.--San Antonio 1942, writ ref'd w.o.m.) (holding that party seeking resulting trust must come with clean hands).

¹⁷ Nolana Dev. Ass'n.

 

 

[94-2 USTC ¶50,415] Marcella B. Alexander, Plaintiff v. United States of America , Defendant

U.S. District Court, Dist. Minn., Third Div., 3-93 CIV 325, 7/20/94

[Code Secs. 6323 , 6331 and 7426 ]

Tax liens: Validity of lien: Levy and distraint: Conveyance by taxpayer: Inadequate consideration: Real property.--An individual who purchased her daughter's real property for less than its fair market value after the assessment of a tax deficiency against the daughter was not entitled to the return of the property after seizure and sale by the IRS. The IRS lien arose when taxes were assessed and was superior to any interest that the mother subsequently acquired in the property. Further, the mother did not qualify as a "purchaser" because she did not pay adequate consideration for the property and did not live on the property or otherwise treat it as her own. Consequently, the government's interest in the property was proven to be superior to that of the mother, and its motion for summary judgment in the wrongful levy action was granted.

Marcella Beninda Alexander, 10799 Greentrail Dr., Boynton Beach, Fla. 33436, pro se. Tracy Anagnost Martinez, Thomas V. Linguanti, Department of Justice, Washington, D.C. 20530, for defendant.

ORDER

ALSOP, District Judge:

This matter is before the Court upon the defendant's motion for summary judgment pursuant to Rule 56(c) of the Federal Rules of Civil Procedure. Oral argument on the motion is scheduled for July 28, 1994 at 11:00 a.m. Upon review of the file and all submissions of the parties, the Court has concluded that oral argument is unnecessary. Accordingly, pursuant to Rule 78 of the Federal Rules of Civil Procedure, the matter will be resolved without oral argument. The hearing scheduled for July 28, 1994 is therefore canceled.

The plaintiff, Marcella Alexander ("Marcella"), commenced this action seeking the return of the real property located at 7515 Chicago Avenue South , Richfield , Minnesota , which has been seized and sold by the Internal Revenue Service ("IRS" or "the government") for payment of the federal income tax liabilities of Marcella's daughter, Donna Alexander ("Donna"). The IRS contends that the seizure was proper and that its interest in the property is superior to Marcella's. In the alternative, the IRS argues that the complaint should be stricken. Marcella argues in response that her interest in the property is superior to the government's.

I. BACKGROUND

On November 7, 1990 , the IRS assessed federal income tax deficiencies, including interest and penalties, against Donna for 1985, 1986, and 1987. Before February 8, 1991 , Donna was record owner of the property. On February 8, 1991 , Donna executed a warranty deed allegedly transferring her interest in the property to her mother, Marcella, who is now the record owner. Marcella paid Donna $1.00 in consideration for the property. The property was seized by the IRS on May 4, 1993 to collect the federal income taxes owed by Donna.

On May 14, 1993 , approximately ten days after the property was seized, Donna executed a "power of attorney" in favor of William Schreiber ("William"). William, who currently resides with Donna at the property in dispute, is not an attorney, nor has Marcella ever understood him to be an attorney. William signed and filed the complaint initiating this lawsuit, allegedly on Marcella's behalf, on May 24, 1993 . Marcella, however, did not see a copy of the complaint until May 19, 1994 , which was a day before her deposition was taken by the government. He has also signed and filed other documents on Marcella's "behalf." On July 8, 1994 , Magistrate Judge Noel denied Marcella's motion to have William represent her and directed the Clerk of Court to "remove from the docket in this case Mr. Schreiber's name and address" and to send documents in this action to Marcella at her Florida residence. Alexander v. United States, No. 3-93 CIV 325, slip op. at 2 (D. Minn. filed July 8, 1994).

II. SUMMARY JUDGMENT STANDARD

The Supreme Court has held that summary judgment is to be used as a tool to isolate and dispose of claims or defenses that are either factually unsupported or based on undisputed facts. Celotex Corp. v. Catrett, 477 U.S. 317, 323-24 (1986); Hegg v. United States , 817 F.2d 1328, 1331 (8th Cir. 1987). Summary judgment is proper, however, only if examination of the evidence in a light most favorable to the non-moving party reveals no genuine issue of material fact and the moving party is entitled to judgment as a matter of law. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 247 (1986).

The test for whether there is a genuine issue of material fact is two-fold. First, the materiality of a fact is determined from the substantive law governing the claim. Only disputes over facts that might affect the outcome of the suit are relevant on summary judgment. Liberty Lobby, 477 U.S. at 252; Lomar Wholesale Grocery, Inc. v. Dieter's Gourmet Foods, Inc., 824 F.2d 582, 585 (8th Cir. 1987), cert. denied, 484 U.S. 1010 (1988). Second, any dispute of material fact must be "genuine." A dispute is genuine if the evidence is such that it could cause a reasonable jury to return a verdict for either party. Liberty Lobby, 477 U.S. at 252. It is the non-moving party's burden to demonstrate that there is evidence to support each essential element of its claim. Celotex, 477 U.S. at 324.

III. DISCUSSION

A third-party claiming an interest in property may challenge a seizure in a wrongful levy action pursuant to Section 7426 of the Internal Revenue Code ("I.R.C."). I.R.C. §7426 (1992). The plaintiff has the initial burden of proving that she has an interest in the property and that the government levied on the property because of tax assessments against another person. Xemas, Inc. v. United States [88-1 USTC ¶9282 ], 689 F. Supp. 917, 922 (D. Minn. 1988), aff'd, 889 F.2d 1091 (8th Cir. 1989), cert. denied, 494 U.S. 1027 (1990); accord Security Counselors, Inc. v. United States [88-2 USTC ¶9584 ], 860 F.2d 867, 869 (8th Cir. 1988). The burden then shifts to the government to prove a nexus between the property and the taxpayer by substantial evidence. Xemas [88-1 USTC ¶9282 ], 689 F. Supp. at 922. The plaintiff, however, has the ultimate burden of proving that the levy was wrongful. Id.

Sections 6321 and 6322 provide that a federal tax lien arises against a delinquent taxpayer at the time the tax is assessed and continues until the liability is satisfied or becomes unenforceable by lapse of time. See I.R.C. §§6321 , 6322 (1992). The lien attaches to all property and rights to property then belonging or thereafter acquired by the taxpayer. See United States v. National Bank of Commerce [85-2 USTC ¶9482 ], 742 U.S. 713, 720 (1985). A federal tax lien arose against the property in dispute when tax deficiencies were assessed against Donna on November 7, 1990 .

Because Marcella acquired the property after the lien was assessed, the government's interest is superior to hers, unless she qualifies for one of the exceptions set forth in Section 6323 . See United States v. Powell [81-2 USTC ¶9637 ], 48 A.F.T.R.2d 81-5741, 81-5743 (S.D. Ga. 1981). Section 6323 provides that a "lien imposed by section 6321 shall not be valid as against any purchaser, holder of a security interest, mechanic's lienor, or judgment lien creditor until notice thereof . . . has been filed." ¹ I.R.C. §6323(a) (1992). The statutory exception germane to this action is that of a "purchaser," which is one who, "for adequate and full consideration in money or money's worth, acquires an interest . . . in property which is valid under local law against subsequent purchasers without actual notice." I.R.C. §6323(h)(6) (1992). Thus, if Marcella qualifies as a "purchaser" pursuant to Section 6323 , her interest has priority over the government's lien.

The Court finds that Marcella does not qualify as a "purchaser" for several reasons. First, and most obviously, the consideration paid was inadequate. To be considered "adequate," consideration must have a "reasonable relationship to the true value of the property acquired." United States v. Mac Cement Finishing Corp. [83-1 ustc ¶9183 ], 546 F. Supp. 52, 53 (N.D.N.Y. 1982); accord United States v. Powell [81-2 ustc ¶9637 ], 48 A.F.T.R.2d at 81-5743. Marcella paid only $1.00 in consideration for property that is clearly worth far more. Second, although Marcella is the current record owner, she has never actually lived on the property. Instead, Donna, William, and William's son currently reside there, Donna having lived there for about twelve years, and William and his son having lived with Donna for at least seven years. Third, Donna has never paid Marcella rent for living on the property. Fourth, Marcella does not take any federal income tax deductions in connection with the property, nor does she pay for utilities, repairs, fire/theft insurance, or property taxes. Accordingly, the Court finds as a matter of law that the government has met its burden of proving that its interest in the property is superior to Marcella's.

Since the government's interest in the property is superior, seizure of the property was justified pursuant to Section 6331 . I.R.C. §6331 (1992). That section provides that the IRS may collect unpaid taxes by admin istrative levy "upon all property and rights to property . . . belonging to the taxpayer or on which there is a lien provided in this chapter for the payment of such tax." Id. The Court will therefore grant the United States ' motion for summary judgment.

Having determined that summary judgment is appropriate, it is not necessary for the Court to reach a decision on the government's alternative motion to strike the complaint on the grounds that it was brought by William, a non-lawyer. ²

Accordingly, upon review of the files, motions, and proceedings herein,

IT IS HEREBY ORDERED That:

1. The defendant's motion for summary judgment is GRANTED;

2. That the hearing scheduled for July 28, 1994 in this matter is canceled; and

3. The Clerk of Court shall enter judgment against the plaintiff as follows:

IT IS ORDERED, ADJUDGED, AND DECREED That the plaintiff's complaint is dismissed in its entirety with prejudice.

¹ The government concedes that a notice of federal tax lien was not filed prior to the title transfer from Donna to Marcella. (Mem. in Supp. of Mot. for Summ. J. at 11 n.3.)

² The Court will note, however, that the plaintiff has had remarkably little involvement in this lawsuit. William signed the complaint on Marcella's "behalf," but she did not even see it until a day before her deposition, nor has she signed or seen most of the other documents submitted by William. In light of her lack of participation, the Court finds William's extensive participation somewhat disturbing, especially given his personal interest in the outcome of the lawsuit. This is precisely the scenario that laws prohibiting legal representation by a non-lawyer are intended to prevent.

 

 

[94-1 USTC ¶50,023] United States of America , Plaintiff v. Arthur D. Dalessandro, Defendant

U.S. District Court, Mid. Dist. Pa., 3:CV-93-00105, 12/10/93

[Code Secs. 6321 , 6322 and 6323 ]

Assessment and collection: Tax liens: Real estate: Deeds: "Purchaser": Recording.--The government's tax lien did not attach to an individual's alleged interest in real estate because, under state (Pennsylvania) law, the individual had conveyed his interest to his son before the government made assessments. It did not matter that the deed had not been recorded because the government had possession of the deed for investigative purposes two years before it began making assessments and, thus, had actual notice of the prior conveyance to the son. The son's interest was first in time, and therefore first in right, even though he was not a "purchaser" under Code Sec. 6323 because of his failure to record the deed.

John A. Morano, Jr., 309 Federal Bldg., Scranton, Pa. 18501, Shannon L. Hough, Angelo A. Fratarelli, Department of Justice, Washington, D.C. 20530, for plaintiff. Mark A. Ciavarella, Jr., 63 West River St. , Wilkes-Barre , Pa. 18702 , for defendant.

OPINION

MUIR, District Judge.

I. Introduction.

This action was commenced by the United States on January 22, 1993, by the filing of a complaint. Count I of the complaint seeks to reduce to judgment certain federal tax assessments made against Arthur D. Dalessandro for the taxable years 1982, 1983, 1984, 1985, 1986, 1987, 1988, and 1989. Count II seeks to foreclose existing federal tax liens on shares of stock and real estate owned by Dalessandro. Defendant stipulated to the assessments and the amounts due to the Government which form the basis of Count I, liquidated the shares of stock and turned over the proceeds to the Government. However, Defendant contends that the tax liens do not attach to the real estate located at 19 Fordham Road in Wilkes-Barre , Pennsylvania . Defendant's contention is the only issue in this matter. We set the matter for trial.

On August 10, 1993 , counsel for both parties met with the Court in Williamsport at the final pre-trial conference. At that conference the parties stated that there were no disputed facts and that they wished the matter submitted to the Court on a Case Stated. On August 18, 1993, pursuant to this Court's order of August 11, 1993, counsel for both parties stipulated that the principal balance owed by Dalessandro as of August 17, 1993, was $32,710.99, the interest balance owed by Dalessandro as of June 30, 1993, was $21,186.39, and the daily accrual interest rate for the third quarter of 1993 was seven percent.

On September 1, 1993 , counsel for both parties filed a Case Stated, supported by respective memoranda of law. On September 29, 1993 , we issued an order stating that the Case Stated was deficient in that no date of delivery to David Dalessandro of the deed from Defendant and his wife was stipulated to by the parties. The parties were given the opportunity to stipulate to the date of delivery, or, in the alternative, stipulate that there was no delivery of the deed to David Dalessandro.

On October 20, 1993 , the parties filed a statement that they were unable to stipulate as to whether there was a valid delivery of the deed from Defendant and his wife to David Dalessandro. On November 23, 1993 , we held a hearing to determine whether delivery of the deed occurred and, if so, the date thereof. The following are the Case Stated adopted by this Court and the Court's additional findings of fact, discussion, and conclusions of law.

II. Case Stated.

1. The Defendant and Florence G. Dalessandro were married on September 30, 1956 .

2. On May 28, 1969 , the Defendant and Florence G. Dalessandro purchased real estate situated at 19 Fordham Road , Oakwood Park , Wilkes-Barre , PA (" Fordham Road property").

3. On April 2, 1980 , the Defendant filed a Complaint in Divorce against Florence G. Dalessandro in the Court of Common Pleas of Luzerne County, PA (Case No. 1070-C of 1980).

4. On March 30, 1985 , the Defendant and Florence G. Dalessandro executed a deed ("Deed") conveying their entire interest in the Fordham Road property to their son, David Dalessandro.

5. The conveyance referred to in the preceding paragraph was done in consideration of one dollar ($1.00).

6. On May 13, 1986 , a hearing was held concerning the divorce proceedings described in paragraph 3.

7. During the hearing described in the preceding paragraph, the Deed was admitted into evidence as Court Exhibit 35-A.

8. Subsequent to the hearing described in paragraph 6, the Court of Common Pleas of Luzerne County ordered the Deed held in escrow pending the resolution of the divorce proceedings described in paragraph 3.

9. The Deed was not recorded prior to the court's order described in the preceding paragraph.

10. The Court of Common Pleas of Luzerne County retained possession of the Deed until August 31, 1989 .

11. On August 31, 1989 , the Court of Common Pleas of Luzerne County released the Deed to the custody of Alan Celusniak, Special Agent, Internal Revenue Service.

12. On May 26, 1992 , the Defendant and Florence G. Dalessandro entered into a stipulation resolving the divorce proceedings described in paragraph 3.

13. On May 26, 1992 , Court of Common Pleas Judge Richard D. Grifo released the Deed to the Defendant.

14. On June 22, 1992 , and again on October 26, 1992 , counsel for the Defendant wrote to Special Agent Alan Celusniak of the Internal Revenue Service and requested that the Deed be returned to the Defendant.

15. The Internal Revenue Service has been unable to locate the Deed.

16. To date, no documents evidencing the conveyance described in paragraph 4 have been recorded.

17. On September 9, 1991, a delegate of the Secretary of the Treasury made the following assessments against the defendant for federal income taxes, accrued interest and penalties according to law:

                      Type of  Amount of Tax

Taxable Period          Tax      Assessed      Interest    Penalty

1983 ................  1040     $  9,691.00   $11,596.95  $10,644.48

1984 ................  1040     $ 12,939.00   $12,382.88  $12,661.44

1985 ................  1040     $ 28,275.00   $21,232.77  $24,754.39

 

18. Proper notice and demand for payment was made on September 9, 1991 , the date of assessment.

19. On December 16, 1991, a delegate of the Secretary of the Treasury made the following assessments against the Defendant for federal income taxes, accrued interest and penalties according to law:

                        Type of  Amount of Tax

Taxable Period            Tax      Assessed     Interest    Penalty

1986 ..................  1040      $7,968.00    $5,016.87  $2,906.45

1987 ..................  1040      $6,446.00    $3,827.87  $3,472.48

 

20. Proper notice and demand for payment was made on December 16, 1991 , the date of assessment.

21. On August 31, 1992, a delegate of the Secretary of the Treasury made the following assessments against the defendant for federal income taxes, accrued interest and penalties according to law:

                        Type of  Amount of Tax

Taxable Period            Tax      Assessed     Interest    Penalty

1988 ..................  1040      $8,117.00    $4,313.05  $2,435.00

1989 ..................  1040      $1,341.00    $  127.04  $  268.00

 

22. Proper notice and demand for payment was made on August 31, 1992 , the date of assessment.

23. As of January 8, 1993 , the Defendant was indebted to the Plaintiff in the amount of $186,899.17, which sum includes interest and penalties that have accrued under law since the respective dates of assessment.

24. On June 16, 1992 , the Plaintiff recorded a Notice of Federal Tax Lien (lien serial number 239221173) in the amount of $214,813.02, representing unpaid income taxes for the years 1982 through 1985, against the defendant in the office of the Prothonotary in Luzerne County , PA.

25. On June 23, 1992 , the plaintiff recorded a Notice of Federal Tax Lien (lien serial number 239222099) in the amount of $15,891.32, representing unpaid income taxes for the year 1986, against the Defendant in the Office of the Prothonotary in Luzerne County , PA.

26. On July 22, 1992 , the Plaintiff recorded a Notice of Federal Tax Lien (lien serial number 239225387) in the amount of $13,746.35, representing unpaid income taxes for the year 1987, against the Defendant in the Office of the Prothonotary in Luzerne County , PA.

27.On July 24, 1992 , the Plaintiff recorded a Notice of Federal Tax Lien (lien serial number 239224835) in the amount of $29,637.67, representing unpaid income taxes for the years 1986 and 1987, against the Defendant in the Office of the Prothonotary in Luzerne County , PA.

28. On October 5, 1992 , the Plaintiff recorded a Notice of Federal Tax Lien (lien serial number 239231558) in the amount of $16,601.09, representing unpaid income taxes for the years 1988 and 1989, against the Defendant in the Office of the Prothonotary in Luzerne County , PA.

29. On or about January 27, 1993 , the Defendant paid $148,436.53 towards the liability referenced in paragraph 23.

30. The funds used to make the payment described in the preceding paragraph were derived from the sale of the shares of stock described in paragraph 21 of the Complaint.

31. The Defendant is currently indebted to the Plaintiff in the amount of $55,694.68, plus interest and penalties which will continue to accrue until the entire liability is paid.

III. Additional Findings of Fact.

1. In March, 1985, Defendant Dalessandro delivered to his son, David Dalessandro, who was then 21 years of age a deed to the Fordham Road property.

2. The deed at that time was signed only by Defendant Dalessandro.

3. On March 30, 1985 , David Dalessandro took the deed to his mother, who had an interest in the property, obtained her signature, took her to a notary before whom she acknowledged her signature, and redelivered the deed to his father, Defendant Dalessandro, a Judge, to do with it whatever remained to be done.

IV. Discussion.

This opinion addresses the issue of whether the federal tax liens that arose in 1991 and 1992 attached to the property that was allegedly conveyed to Defendant Dalessandro's son in 1985. The IRS had notice of the conveyance and the son's interest in the property on August 31, 1989 .

The Government contends that, since the deed to the Fordham Road property was not recorded as required by 21 Pa.C.S. §444 (1970), the conveyance was fraudulent and void. The Government argues that because of lack of recordation its tax liens attached to the property on the date of the first assessment. 21 Pa.C.S. §444 provides:

All deeds and conveyances . . . shall be recorded in the office for the recording of deeds where such lands, tenements or hereditaments are lying and being, within ninety days after the execution of such deeds or conveyance, and every such deed and conveyance that shall at any time after the passage of this act be made and executed in this commonwealth, and which shall not be proved and recorded as aforesaid, shall be adjudged fraudulent and void against any subsequent purchaser or mortgagee for a valid consideration, or any creditor of the grantor or bargainor in said deed of conveyance . . . .

The Government asserts that the conveyance was void as to the Government, a creditor of Defendant Dalessandro, because of the grantee's failure to record the deed within 90 days of the date of conveyance.

The Government contends that David Dalessandro is not protected as a "purchaser" of the Fordham Road property under Section 6323(a) of the Internal Revenue Code, 26 U.S.C. §6323(h)(6) (1989). Section 6323(h)(6) defines a "purchaser" as "a person who, for adequate and full consideration in money or money's worth, acquires an interest in property which is valid under local law against subsequent purchasers without actual notice." Therefore, the Government concludes that the interest, if any, which he acquired was not valid under Pennsylvania law against subsequent purchasers without actual notice since it was not perfected as against bona fide purchasers under Pennsylvania law.

Dalessandro argues that the United States may not claim the protection of either Section 351 or section 444 of the Pennsylvania recording statute. Section 351 provides:

All deeds, conveyances, contracts, and other instruments of writing . . . shall be recorded in the office for the recording of deeds in the county where such lands, tenements, and hereditaments are situate. Every such deed, conveyance, contract, or other instrument of writing which shall not be acknowledged or proved and recorded, as aforesaid, shall be adjudged fraudulent and void as to any subsequent bona fide purchaser or mortgagee or holder of any judgment, duly entered in the prothonotary's office of the county in which the lands, tenements, or hereditaments are situate, without actual or constructive notice unless such deed, conveyance, contract, or instrument of writing shall be recorded, as aforesaid, before the recording of the deed or conveyance or the entry of the judgment under which such subsequent purchaser, mortgagee, or judgment creditor shall claim.

21 Pa.C.S. §351 (1970)

Dalessandro asserts that under Pennsylvania law the tax liens cannot attach to the Fordham Road property since the property was conveyed to his son prior to the filing of the tax liens and the IRS had knowledge of this conveyance two years prior to the filing of its tax liens. Dalessandro contends that on August 31, 1989 , IRS Special Agent Celusniak obtained possession of the deed to further his investigation of Dalessandro and thus had notice of the prior conveyance of the property to David Dalessandro.

It is well settled that once a tax assessment is made, a lien arises in favor of the United States "upon all property and rights to property whether real or personal, owing to such person." 26 U.S.C. §§6321 -22. This Court must look to state law to determine whether the taxpayer, Defendant Dalessandro, has a property interest, and then to federal law to determine the priority of competing interests. Aquilino v. United States [60-2 USTC ¶9538 ], 363 U.S. 509, 513-14 (1960).

At the hearing to determine whether there was a delivery of the deed from Defendant and his wife to their son, David Dalessandro, David Dalessandro testified that in March, 1985, Defendant Dalessandro delivered to him a deed to the Fordham Road property; that the deed was signed by only his father; that he took the deed to his mother, obtained her signature, took her to a notary public for acknowledgment of the deed, and returned the deed to his father, Defendant Dalessandro, to complete the processing of the transaction.

We are of the view that a valid delivery of the deed to the Fordham Road property occurred on March 30, 1985 from Defendant and his wife to David Dalessandro.

Both parties agree that the federal tax liens arose subsequent to the conveyance of the Fordham Road property. The parties disagree on the application of the notice provisions of the Pennsylvania recording statutes. Section 351 expressly provides a notice exception which states that the statute does not protect those subsequent purchasers who had actual or constructive notice of an unrecorded deed. United States v. Purcell, 798 F. Supp. 1102, 1115 (E.D. Pa. 1991) (O'Neill, J.), aff'd per curiam, 972 F.2d 1334 (1992). The Pennsylvania Supreme Court has held the notice provision is implicit in section 444 . Smith v. Miller, 296 Pa. 340, 344, 145 A. 901 (1929).

In Purcell, the United States brought an action to reduce to judgment federal tax assessments made against a taxpayer. In that case, Defendant Purcell conveyed his interest in real property to Gingras for valuable consideration. The IRS, through its revenue agents, had notice of the conveyance prior to the filing of tax liens against Purcell. Purcell, 798 F. Supp. at 1109. Gingras waited five years until he recorded his deed. Id.

The parties in Purcell disagreed whether section 351 or section 444 applied. The court stated that it did not need to resolve the issue of which statute applied because "the government had notice of the transfer of Mr. Purcell's interest in the . . . property to [the purchaser] before the Internal Revenue Service assessed Mr. Purcell and filed its tax liens. The Government therefore is disqualified from the protection of either Pennsylvania recording act." Id. at 1115. The court held that the purchaser's interest in the real property was superior to the IRS's lien Id.

Under Pennsylvania law, either actual or constructive notice of a prior deed may defeat a subsequent claimant's interest in property. The Pennsylvania Supreme Court has stated that "a fundamental rule construing recording laws generally [is] that actual notice of an unrecorded instrument, if received by a subsequent lienor before his interest attaches, is equivalent to the constructive notice which the recording provides." In Re 250 Bell Road, 479 Pa. 222, 227 n.l, 388 A.2d 297, 299-300 n.1 (1978). The Government contends that focusing on the question of whether the IRS had notice of the conveyance prior to its federal tax assessments against Dalessandro is irrelevant. The Government argues that the real issue is whether Defendant Dalessandro "had, on the date the federal tax liens against him arose, a sufficient interest in [the Fordham Road property] to which the tax liens would attach."

On August 31, 1989 , the IRS, through Special Agent Celusniak, took possession of the deed to the Fordham Road property. On September 9, 1991 , the IRS made its first assessments against Dalessandro for federal income taxes. Clearly, the IRS had notice of the conveyance of the Fordham Road property by Dalessandro to his son, prior to the date that the tax assessments against Dalessandro arose.

The fact that David Dalessandro was not a "purchaser" under 26 U.S.C.A. §§6323(a) & (h)(6) is not determinative in this matter. Under Pennsylvania law the conveyance of the Fordham Road property to David Dalessandro was valid and prior in time to the federal assessment. At the time the taxes were assessed Defendant Dalessandro had no interest in the Fordham Road property.

The federal rule of priority is first in time, first in right. United States v. City of New Britain [54-1 USTC ¶9191 ], 347 U.S. 81 (1954). We are of the view that as a matter of state law David Dalessandro's interest is valid against the IRS interest.

V. Conclusions of Law.

1. On March 30, 1985 , a valid delivery of the deed to the Fordham Road property from Defendant and his wife to David Dalessandro occurred.

2. The IRS had notice of the conveyance of Dalessandro's interest in the Fordham Road property prior to the date that the tax assessments arose.

3. David Dalessandro's interest in the Fordham Road property was first in time to that of the IRS because the tax lien arose after Defendant Dalessandro deeded his interest in the property to his son.

4. The United States 's federal tax liens did not attach to the Fordham Road property.

An appropriate order will be entered.

ORDER

Judgment is entered in favor of Defendant Arthur D. Dalessandro and against the United States as to the validity of its claimed tax liens against the property known as 19 Fordham Road , Oakwood Park , Wilkes-Barre , Pennsylvania , in accordance with our opinion.

 

 

[92-2 USTC ¶50,552] Linda Hamilton, Plaintiff v. United States of America , Defendant

U.S. District Court, Dist. Conn., Civ. N-90-128 (TFGD), 8/28/92, 806 FSupp 326

[Code Secs. 6321 , 6323 and 7426 ]

Lien for taxes: Conveyances to third parties: Suits by nontaxpayers: Property owners.--The transfer of real property by an executed, but unrecorded, quitclaim deed to a third party prior to the imposition of a levy on the property was sufficient to transfer all of a taxpayer's rights in the property to the third party. Therefore, the levy on the property was wrongful, and the lien was ordered released. The third party had standing to bring suit because she was in possession of the property and the transfer of title was valid. The court rejected the government's argument that the failure to record the deed allowed the taxpayer to retain a right to the property. Although a subsequent grantee who recorded a deed to the property would prevail in a contest with the third party, the second sale by the taxpayer would be wrongful. Therefore, the taxpayer's ability to convey marketable title in a second sale did not constitute a property right under Code Sec. 6321 . Finally, the levy could not be upheld by reliance on a state recording statute that protected creditors. The government had not given credit to the taxpayer in reliance on the taxpayer's status as the record owner of the property.

MEMORANDUM OF DECISION

DALY, District Judge:

Plaintiff Linda Hamilton ("Plaintiff" or "Ms. Hamilton") brings this action against the United States ("the government" or "the defendant") for an alleged wrongful levy. 26 U.S.C. §7426(a)(1) . The case raises an issue of apparent first impression in this Circuit, to wit, whether an executed but unrecorded quitclaim deed purporting to transfer specified real property from the delinquent taxpayer to a third-party defeats the government's levy on that property.

Ms. Hamilton, the third-party in question, seeks to enjoin the government's sale of residential property located at 174-176 Thompson Street , New Haven , Connecticut ("the property"). Ms. Hamilton lives there with her family in a two-family dwelling and claims ownership to it through a quitclaim deed executed in her favor by the record owner, Brenda Jones Agnew ("Ms. Jones"). Ms. Hamilton did not record that quitclaim deed, however, until after the government had seized the property to satisfy Ms. Jones' tax liabilities. Essentially arguing that as a creditor without notice of the prior transaction it is entitled to the protections afforded by Connecticut's recording statute, Conn. Gen. Stat. §42 -10, the government contends that the levy is enforceable.

The matter has been tried to the Court and the parties have supplemented their presentations with post-trial written submissions. This opinion constitutes the Court's findings of fact and conclusions of law pursuant to Federal Rule of Civil Procedure 52.

FINDINGS OF FACT

Ms. Hamilton was looking for property to rent when, in 1983, a friend told her about a two-family home on Thompson Street that was available for sale at a relatively inexpensive price. Unemployed at the time, Ms. Hamilton was convinced that she could not obtain a mortgage for the property on her own. Ms. Jones, a long-time friend who owned two other properties and presumably could get a mortgage, offered to acquire the property, in name only, on Ms. Hamilton's behalf. The two women agreed that Ms. Hamilton would pay the closing costs and make the $3,000 down payment on the $30,000 purchase price. Thereafter, Ms. Hamilton would make all mortgage, tax and miscellaneous payments on the property. In exchange, Ms. Jones would execute a quitclaim deed transferring the property to Ms. Hamilton. This plan was chosen in lieu of a co-signing arrangement on the mortgage--with five people already waiting in line at the bank for the property, plaintiff was advised that such a co-signor arrangement would complicate matters and jeopardize any prospects she had of buying the property.

Both Ms. Jones and Ms. Hamilton were present at the November 1, 1983 closing on the property. Also present were Richard Shapiro, Ms. Hamilton's lawyer, and Owen Carber, a representative from New Haven Savings Bank ("the Bank")--both the seller of the property and the mortgagee. As the women had agreed, Ms. Hamilton paid the closing costs and the $3,000 down payment for the property. Mr. Carber executed a quitclaim deed on behalf of the Bank transferring the property to Ms. Jones. Trans. at 10. That deed was recorded with the Registry of Deeds, leaving Ms. Jones the record owner of the property. See id. at 83-84. The mortgage deed itself, in the amount of $27,000 in favor of the New Haven Savings Bank, also bore the name of Ms. Jones. Exh. 2.

On the same date as the closing, Ms. Jones executed a quitclaim deed purporting to transfer "all right, title, interest, claim and demand whatsoever" in the subject property to Ms. Hamilton. Exh. 1. ¹ Testifying at trial as to her understanding of the quitclaim deed, Ms. Jones stated that if there ever was a question as to who owned the property, the quitclaim deed "would prove that Linda owned it." Id. at 23. She later added that "I never owned the property. Only in name only did I own that property. I did not put up any money to [buy] that property. . . . I was . . . doing an honest deed for a friend." Id. at 36. The quitclaim deed, notarized and witnessed by Mr. Shapiro, was not delivered to Ms. Hamilton at the closing. Nor was it recorded until June 6, 1989 , some two months after the government's seizure of the property and approximately five and one-half years after the closing. ²

From shortly after the closing until the present, Ms. Hamilton has lived in the property with her children. The first floor of the house has also been periodically leased by her during this period. She has paid all expenses for improvements and repairs to the house as well as the mortgage and tax payments, albeit with the substantial assistance of her mother, her brother and friends. See exhs. 7 (New Haven Savings Bank payment book, in name of plaintiff's mother); 10 (payment receipts from New Haven Savings Bank): exh. 14 (various receipts for expenses incurred in improving/repairing the property). Utilities were set up by Ms. Hamilton when she moved into the house and have been paid by her. At least one bill (water/sewage) however, was initially placed under Ms. Jones' name. ³

Although she helped Ms. Hamilton move in and occasionally assisted with cleaning, Ms. Jones never made any payments in connection with the property, never lived there, never rented there, never stayed there and never made any improvements or repairs to it. However, she did list 174 Thompson Street as a source of $600 in rental income on her 1987 tax return. Exh. 502. Ms. Jones also cited the following rental expenses relating to the property on the same return: $1,313 in insurance, $2,894 in mortgage interest payments, $1,510 in repairs, $1,573 in taxes, $2,000 in utilities and $1,400 in depreciation expenses. The property was similarly listed in Ms. Jones' 1988 return, filed jointly with her husband. Exh. 505. That return listed $500 in rental income on the property and $7,983 in rental expenses, including depreciation. Id. Ms. Jones explained at trial that she and Ms. Hamilton were friends and that Ms. Hamilton had no objections to her "reaping the gain" from the property. Trans. at 41. Asked whether Ms. Hamilton knew about her representations on the tax returns, Ms. Jones replied simply "[w]hy not?" Id. Ms. Hamilton's testimony on this point was not nearly as clear. Asked whether she knew that Ms. Jones was "doing things on her return related to that home," Ms. Hamilton responded as follows: "I knew that she used the tax--I really don't know. I should not say anything, because I really do not fully understand all the terms. But I did know that [] something with the interest rate or something interest that you can deduct from your taxes." Id. at 100. She also testified that Ms. Jones had mentioned something to her about taking the interest deduction "the first year that I purchased the house" but that she could not recall any later such references. Asked whether she had voiced any concerns to Ms. Jones regarding such an interest deduction, Ms. Hamilton responded that she had not. Id. ⁴

On April 11, 1989 , the defendant, through IRS Collection Officer Alice Hammermann ("Officer Hammermann"), seized the subject property in order to satisfy Ms. Jones' unpaid tax liabilities. The seizure followed a property search by Officer Hammermann at the New Haven Town Hall, a review of Ms. Jones' 1987 tax return, an interview with Ms. Jones ⁵ and a check with the New Haven Tax Assessor's office, all of which indicated that Ms. Jones was the record owner of the property. Officer Hammermann also wrote a letter to the Southern Connecticut Water Authority to determine if there was any back money owed to the utility. The Water Authority's response also indicated that Ms. Jones was the owner of the property.

On April 12, 1989 , immediately after learning of the seizure, Ms. Hamilton telephoned Officer Hammermann and told her that she had a quitclaim deed that would establish that she, Ms. Hamilton, was the owner of the property. Officer Hammermann replied that no such deed had ever been recorded and that if Ms. Hamilton had such a document, she would like to see it. After a successful search for the unrecorded quitclaim deed, see supra note 2, Ms. Hamilton's lawyer, V. James Ferraro, sent Officer Hammermann a copy of the deed along with a letter advising her that he was having the deed recorded with the New Haven Land Records Office. Exh. 5 (June 5, 1989 dated letter from V. James Ferraro to Alice Hammerman[n]). The letter also requested that the government "release the property at 174-176 Thompson Street , New Haven from the IRS seizure, since Brenda Jones is not the owner of the property. The true owner is Linda Hamilton." Id. Notwithstanding Ms. Hamilton's claimed rights to the property, the IRS declined to release the levy. On March 13, 1990 , Officer Hammermann orally notified Ms. Hamilton that the IRS intended to advertise immediately and sell the property in order to satisfy Ms. Jones' liabilities. This suit was commenced two days later.

CONCLUSIONS OF LAW

Plaintiff brings this action pursuant to 26 U.S.C. §7426(a)(1) . That statutory section provides for suits by third-parties seeking recovery of property in which they claim an "interest," property allegedly "wrongfully" levied by the Internal Revenue Service ("IRS") in its efforts to collect taxes owing from a delinquent taxpayer. ⁶ A levy of property is "wrongful" if made "upon property in which the taxpayer had no interest at the time the lien arose or thereafter." 26 C.F.R. 301.7426-1 (1991); see also S. Rep. No. 1708, 89th Cong., 2d Sess. 3 (1978), reprinted in 1966 U.S.C.C.A.N. 3751 (" '[w]rongful,' as used here, refers to a proceeding against property which is not the taxpayer's"); Arth v. United States [84-2 USTC ¶9601 ], 735 F.2d 1190, 1193 (9th Cir. 1984) ("[p]roperty is wrongfully levied if it does not, in whole, or in part, belong to the taxpayer against whom the levy originated") (citations omitted).

The burden of proof in a §7426 proceeding rests on the plaintiff, in the first instance, to show that she has title or some other ownership interest in the property and that the government made a levy on that property because of a tax assessment against another taxpayer. Morris v. United States [87-1 USTC ¶9241 ], 813 F.2d 343, 345 (11th Cir. 1987). The burden is essentially that of establishing standing. Assuming the plaintiff proves standing, the burden then shifts to the government to prove a nexus between the property and the delinquent taxpayer. Id. The ultimate burden remains the plaintiff's--that of showing that the levy was wrongful, i.e., that the property did not belong to the taxpayer against whom the levy was directed but, in fact, belonged to the plaintiff. Security Counselors, Inc. v. United States [88-2 USTC ¶9584 ], 860 F.2d 867, 869 (8th Cir. 1988); Arth [84-2 USTC ¶9601 ], 735 F.2d at 1193.

As Ms. Hamilton is in possession of the property and as the record clearly indicates that the government made a levy on that property because of a tax assessment against another taxpayer, Ms. Hamilton has satisfied her initial standing burden. Marotta v. United States, 82-1 USTC (CCH) (N.D.N.Y. March 6, 1981) (MacMahon, J.) ("generally, courts have held possession a sufficient interest to meet the standing requirement of Section 7426 ") (citations omitted); compare Rabinof v. United States [71-2 USTC ¶9601 ], 329 F.Supp. 830, 843 (S.D.N.Y. 1971) (plaintiffs in action to enjoin enforcement of tax levy on valuable violin and bows had standing to sue under §7426 where plaintiffs had possession of the subject property) with Valley Finance, Inc. v. United States [80-2 USTC ¶9554 ], 629 F.2d 162, 168 (D.C. Cir. 1980), cert. denied, 451 U.S. 1018 (1981) (held that general creditors without a security interest in the property seized or some other "specific possessory right" did not have standing to sue under §7426 ). Defendant's arguments to the contrary are not persuasive.

The government first argues that as Ms. Jones executed the quitclaim deed on Ms. Hamilton's behalf before the Bank had even transferred the property to her, see supra note 1, she "had no rights in the Thompson Street property to quitclaim to the plaintiff at the time she executed the quitclaim deed." Gov't Post-Trial Brief at 6. As such, it submits, plaintiff acquired no legal interest in the property via the quitclaim deed. Defendant offers no legal support, however, for what the Court finds, in any event, a tenuous argument. It is sufficient, in the Court's view, that the two documents were part of the same transaction and that the execution of one was substantially contemporaneous to the execution of the other. See World Inv. Co. v. Kolburt, 317 S.W.2d 697, 701 (St. Louis Ct. of Appeals 1958) ("[t]he true test is whether [the instruments] were executed as integral acts in a series of acts which, taken together, constitute one continuous transaction, and were so intended, so that in order to carry out the intention of the parties the two instruments should be given contemporaneous operation and effect"); cf. Ethridge v. Allied Equip. & Supply Co., 26 N.J. Super. 586, --, 98 A.2d 590, 591 (1953) ("where, as in this matter, there is no intention to evade the statute and the parties contemplate the prompt execution and delivery of the prescribed title papers, the transaction should not be considered void merely because the papers were not delivered at the moment the bargain was struck or when the buyer took possession of the vehicle").

Defendant next argues that even assuming Ms. Jones had an interest in the property at the time she executed the quitclaim deed, there was no valid conveyance of the interest in the absence of actual delivery of the quitclaim deed to plaintiff. In making this argument, defendant assumes the burden of proving by clear and convincing evidence that there was no valid delivery. Lomartira v. Lomartira, 159 Conn. 558, 562, 271 A.2d 91, 93 (1970). It is well settled that "[t]he delivery of a deed with intent by the grantor to pass title is essential to a valid conveyance." City Nat'l Bank v. Morrissey, 97 Conn. 480, 483, 117 A. 493,--(1922). It is not necessary, however, that the instrument be delivered to the grantee in person; delivery to an authorized agent of the grantee is as effective as though made to the grantee herself. 23 Am. Jur. 2d, Deeds §§138 -39. In all cases, the "intent of the grantor is . . . the most important factor." D'Addario v. D'Addario, No. 256879S, 1991 Conn. Super. LEXIS 891, at *14 ( April 24, 1991 ); see generally 23 Am. Jur. 2d, Deeds §123 .

The evidence adduced at trial indicates that Ms. Jones' intent in executing the quitclaim deed was that of effecting a transfer of the property to the plaintiff. As Ms. Jones testified at trial, "it was explained to both [myself and Ms. Hamilton at the closing] that I did not own the property. This quit-claim deed meant that it would stay in the file and if it ever came a time of question [of] who owned the house, this would prove that Linda owned it." Trans. at 23. Equally evident at trial was the fact that Ms. Hamilton intended Mr. Shapiro to act as her agent in accepting delivery of the quitclaim deed. Evidence the following exchange between Ms. Hamilton and counsel for the government:

Q--So your understanding was that the deed was in the attorney's office and that protected you as the owner of the property?

A--Yes, yes. . . .

Q--Do you know why it wasn't recorded? Do you know why it wasn't recorded?

A--I fe[lt] there wasn't a need to. I just felt it was safe, you know. I thought it was legal just the way it was. Completely legal.

Q--You mean to have it in the attorney's possession?

A--Yes.

Id. at 60.

Under all the circumstances and particularly in view of the foregoing, the Court finds that Ms. Jones intended to pass title to Ms. Hamilton via the quitclaim deed and that delivery of that deed to her was constructively made through Mr. Shapiro. The government's claim to the contrary is without merit.

Having concluded that Ms. Hamilton has standing to bring this action, the Court's focus turns to whether the government has established the condition precedent to the government seizure, namely, that a nexus exists between Ms. Jones, the taxpayer, and the property. See 26 U.S.C. §6321 (affording the government a lien for delinquent taxes upon "all property and rights to property" belonging to the taxpayer). In determining the nature of the legal interest Ms. Jones had in the subject property at the time of the seizure, the Court must look to Connecticut law. Aquilino v. United States [60-2 USTC ¶9538 ], 363 U.S. 509, 513 (1960). Whether or not any state-created interest she had in the property can then be said to constitute possession of the "property or rights to property" to which a tax lien can attach under §6321 , is a question of federal law. United States v. National Bank of Commerce [85-2 USTC ¶9482 ], 472 U.S. 713, 727 (1985) ("[t]he question whether a state-law right constitutes 'property' or 'rights to property' is a matter of federal law") (citation omitted); Kimura v. Battley [92-2 USTC ¶50,397 ], No. 91-35010, 1992 U.S. App. LEXIS 15509, at *8 (9th Cir. July 10, 1992) ("[o]ur initial task is to understand and define the bundle of rights and privileges that Alaska law has created in favor of the holder of a liquor license. Concomitant with our state law inquiry, we must determine as a matter of federal law whether the interest created by the statute is 'property' or a 'right to property' to which the federal tax lien can attach") (citations omitted); Terwilliger's Catering Plus, Inc. v. United States [90-2 USTC ¶50,460 ], 911 F.2d 1168, 1171 (6th Cir. 1990), cert. denied sub nom. Ohio Dep't of Taxation v. IRS,--U.S.--, 111 S. Ct. 2815 (1991) (same). An interest is said to constitute possession of the "property or rights to property" where that interest is "an economic asset in the sense that it has pecuniary worth and is transferable." Little v. United States [83-1 USTC ¶9343 ], 704 F.2d 1100, 1106 (9th Cir. 1983); see also Kimura, supra ("a liquor license will constitute property, within the meaning of federal law, if the license has beneficial value for its holder and is sufficiently transferable") (citing Little); 21 West Lancaster Corp. v. Main Line Restaurant, Inc. [86-2 USTC ¶9516 ], 790 F.2d 354, 357 (3d Cir. 1986) (same).

In asserting that Ms. Jones had an economic asset in the property and thus rights to it, the government relies on Connecticut General Statute §47 -10, providing that "[n]o conveyance shall be effectual to hold any land against any other person but the grantor and his [or her] heirs, unless recorded on the records of the town in which the land lies." Conn. Gen. Stat. §47 -10 (emphasis added). Applying that provision to the circumstances present in the case at bar, the government submits that Ms. Hamilton's failure to record the duly executed quitclaim deed allowed Ms. Jones to retain marketable title to the property. She could pass that title to a bona fide purchaser for value who could record first and whose claim would then be superior to Ms. Hamilton's. Gov't Post-Trial Brief at 17. This is true despite the fact that as between Ms. Jones and the first purchaser, Ms. Hamilton, the quitclaim deed is valid and binding. ⁷ According to the government's analysis, the power to make this second sale amounts to an economic asset belonging to Ms. Jones. That alleged asset, in turn, would constitute a right to the property cognizable under §6321 . See Little, supra.

The Court finds the government's argument troubling. The position, akin to that taken by the government in United States v. V&E Engineering & Construction Company, would have this Court effectively sanction the knowing sale by a vendor of the same piece of property to two purchasers. 819 F.2d 331, 333 (1st Cir. 1987). In V&E, the First Circuit concluded that the Puerto Rico recording statute at issue, a race-notice statute, could not be presumed to work such a result. ⁸ As the Court explained:

[t]he government's argument amounts to asking that we construe the term "right to property" in section 6321 as referring to the possibility that the seller might fraudulently convey the sold property to an innocent third party. We cannot accept that Congress intended the term "right" to include the possibility that a party might engage in fraud. Under the Puerto Rico statutory scheme, a taxpayer, once having sold his property, no longer has a "right" to that property within the meaning of section 6321 .

Id. In so concluding, the First Circuit relied, inter alia, on a Puerto Rico statutory provision specifying that "a sale shall be perfected between vendor and vendee and shall be binding on both of them, if they have agreed upon the thing which is the object of the contract and upon the price, even when neither has been delivered." P.R. Laws Ann. tit. 31 §3746. Under that provision, noted the Court, "a vendor is bound by the sale of his property, regardless of the recording of that sale by the purchaser. He, therefore, has no 'right to property' under 26 U.S.C. §6321 ." 819 F.2d at 334.

Connecticut law regarding quitclaim deeds includes a comparable provision, Conn. Gen. Stat. §47 -36f (quoted above in note 7). Following the First Circuit's reasoning in V&E, Ms. Jones relinquished any valid right to make further transfer of the property in question when she executed the quitclaim deed transferring the property to Ms. Hamilton. ⁹ It is undoubtedly true that where, as here, the first grantee failed to record, any subsequent grantee of the property from Ms. Jones who does record would prevail in a contest with the first grantee. Nonetheless, the second transfer would have worked a fraud on the first transferee, here Ms. Hamilton. The Court is hard pressed to believe Congress would countenance this result. As there can be no valid right to sell the same property twice and as Conn. Gen. Stat. §47 -36f had the operative effect of divesting Ms. Jones of title to the property when the quitclaim deed was executed, her conceded ability to sell the property twice could only be wrongful and cannot be characterized as the kind of economic asset said to constitute a property interest under §6321 . See V&E, supra. The Court notes that had the Connecticut legislature enacted a provision outlawing the sale of real property one does not own, the government could not have made this argument. Ms. Hamilton should not be penalized merely because the precept is so obvious as to be virtually above legislating.

To the extent the United States v. Creamer Indus., Inc. and Prewitt v. United States cases in the Fifth Circuit compel a different result, the Court declines to follow them. As the First Circuit intimated in V&E, the persuasive dissent by the Honorable John R. Brown in Creamer and the concurrence by the Honorable E. Grady Jolly in Prewitt leave those decisions less than compelling authorities. Creamer involved the case of a delinquent taxpayer who had sold several tracts of land to a bona fide purchaser. [65-2 USTC ¶9527 ], 349 F.2d 625 (5th Cir.), cert denied, 382 U.S. 957 (1965). The deed subsequently recorded by the purchaser erroneously failed to include certain tracts of the land. The deed was later corrected to include the omitted property but only after a federal tax lien against the taxpayer had attached to that portion of the property. Over a vigorous dissent by Judge Brown, the majority held the lien enforceable, reasoning that the conveyance of the omitted property had not been timely recorded and that the IRS was therefore a creditor without notice and entitled to the protection of the applicable recording statute. Judge Brown made the following cogent argument in dissent: "the morality of the Government's taking property which the Court's opinion reflects was sold to, paid for by, and in equitable conscience and law belonged to a stranger, is so disturbing to me that before the heavy hand of the tax gatherer falls, it is for Congress to speak clearly to declare that this is the conscience of the country." Id. at 629-30 (Brown, J., dissenting); see generally Travis v. United States, No. 385991, 1989 U.S. Dist. LEXIS 12047, at *5 (E.D. Tenn. Sept. 27, 1989) (wherein the district court noted that Judge Brown's dissent had been "at the heart of" its ruling in favor of plaintiffs who had brought a similar claim).

Prewitt involved the filing of notice of a tax lien against real property previously owned by James and Johanna Damon. [86-2 USTC ¶9513 ], 792 F.2d 1353 (5th Cir. 1986). The notice named James Damon only. Before the notice was filed, however, Mrs. Damon had been awarded the whole of the property pursuant to a divorce decree and had subsequently sold it to Mr. Prewitt, a third-party without notice. Ms. Damon had not filed a copy of the divorce decree until after the filing of the levy notice at issue. Although conceding that on the date the lien notice was filed "James had no enforceable interest in the property as against Johanna, the divorce decree which awarded her the property having become final two months before," the Fifth Circuit reached the seemingly reluctant conclusion that it was bound by precedent to hold the lien enforceable. [86-2 USTC ¶9513 ], 792 F.2d at 1355 (noting that "[w]hile on its face somewhat appealing, [Mr. Prewitt's] argument is foreclosed by United States v. Creamer Industries, Inc."). Concurring in the majority opinion, the Honorable E. Grady Jolly explained that he fully agreed with Judge Brown's dissent in Creamer and was joining the majority "only because we are bound by our own precedent," namely Creamer. Id. at 1359 (Jolly, J., concurring). Judge Jolly then proceeded to criticize the illogical result dictated by Creamer:

Here, pursuant to the divorce decree, the property was transferred from the taxpayer to his wife in a final judgment on October 9, 1982 . From that point forward, the taxpayer had no interest or right whatsoever, legal or equitable, in this property. . . . Whatever the [subsequent] lien attached to, it did not attach to this property because it in no way, shape or form belonged to the taxpayer.

Id.

Neither the Creamer decision nor the Prewitt decision persuades the Court that the government's position here is a sound one. Neither case is on all fours with the one at bar, neither is binding on this Court and neither is overly persuasive, particularly when read in conjunction with Judge Brown's and Judge Jolly's respective opinions.

More persuasive, at least at first blush, is the government's argument that Ms. Jones also had a "right to the property" to the extent that she derived economic benefit from the purported ownership of it by taking related deductions on her 1987 and 1988 tax returns. However, while evident that her purported ownership of the property in that context held pecuniary worth for Ms. Jones, that interest was not transferable. See Little [83-1 USTC ¶9343 ], 704 F.2d at 1106. As discussed above, although she could actually have sold the property twice, thereby transferring the tax advantages accompanying it, the Court will not allow that she could have done so legitimately. ¹⁰ Plaintiff has one additional source of pecuniary worth in the property arising out of the protections extended lien creditors under the Connecticut recording statute. Prudent Projects v. Travelers Ins. Co., 3 Conn. App. 429, 431 n.3, 489 A.2d 396, 397 n.3 (1985). The government not having raised this argument, the Court will not address it.

The Court holds that the foregoing rationale defeats any claimed nexus between Ms. Jones and the property in question. ¹¹ In so holding, the Court has not ignored the fact that the IRS stands before it as a creditor who put a lien on the property without notice that, in fact, the property belonged to Ms. Hamilton. There is no evidence that before Officer Hammermann seized the property on April 11, 1989 she knew that Ms. Hamilton had been living there and had been making all payments relating to the property, albeit with the substantial assistance of family and friends. Nonetheless, the Court's decision finds additional support in a distinction between this creditor and other persons or entities seeking protection under Connecticut 's recording statute. While courts in Connecticut have extended the protections of the recording statute to creditors, see Prudent Projects, 3 Conn. App. at 431 n.3, 489 A.2d at 397 n.3, it is apparent that the courts had in mind those individuals or entities that had actually extended credit to the record owner in reliance on the land records. See Second Nat'l Bank of New Haven v. Dyer, 121 Conn. 263, 184 A. 386 (1936) ("we have gone beyond the express terms of the recording statute and . . . have given the protection of the recording system to those who have given credit to one appearing upon the record to be the owner of the property although he had no beneficial right in it") (citations omitted). Defendant here is not so situated. The record is devoid of any evidence that the government ever extended credit to Ms. Jones in reliance on her record ownership of the subject property. The case does not, in sum, involve the equitable stakes typically dispositive of the conventional recording statute dispute. It calls to mind instead Judge Brown's words in dissent in Creamer:

This is a startling result. Laws of Texas which are designed to protect innocent persons dealing in faith on the revelations of title records are twisted to permit the great national sovereign to take property from one who is the acknowledged owner of it to apply on the tax debts of another the former owner who--as the trial Court found and this Court does not dispute--has transferred the property. I do not believe that Congress ever intended any such result. I do not think that a Court should lend its hand to anything so demeaning to a sovereign.

[65-2 USTC ¶9527 ], 349 F.2d at 629 (Brown, J., dissenting) (footnotes omitted).

The government offers the alternative argument that Ms. Hamilton should be estopped, as an equitable matter, from denying Ms. Jones' alleged interest in the property. The Court finds this argument unavailing, premised as it is on the government's unsupported collusion theory. As noted earlier, see supra note 2, the Court is not convinced that either woman made a deliberate decision not to record the quitclaim deed with a wrongful purpose in mind. For example, plaintiff did not testify, as the government alleges, that "she would not have wanted to be named as titular owner at the time Brenda Jones purchased the property since her one stable source of income was welfare." Gov't Post-Trial Brief at 18. Although Ms. Hamilton testified that she did not inform the State Department of Income Maintenance that she had purchased a home, see Trans. at 103, the government's above paraphrase strikes the Court as a reaching extrapolation of that testimony. ¹²

CONCLUSION

In the absence of a finding that Ms. Jones possessed the property at issue or rights to it, the Court concludes that the challenged levy was wrongful. So concluding, the Court hereby ORDERS the Clerk of the Court to enter judgment for the plaintiff. Consistent with this Order, the Commissioner of the Internal Revenue Service is directed to cause the release of the lien at issue forthwith. ¹³

SO ORDERED.

¹ Ms. Hamilton's uncontradicted testimony at trial established that Ms. Jones signed the quitclaim deed transferring the property to Ms. Hamilton before she signed the quitclaim deed through which the Bank transferred the property to her. Trans. at 84.

² None of the witnesses at trial, including either Mr. Shapiro, Ms. Jones or Ms. Hamilton, could fully account for the failure to record the quitclaim deed immediately after the closing. It appears that the deed was only mistakenly returned to Mr. Shapiro's file without having been recorded. Although Ms. Hamilton testified that she did not believe it had to be recorded, there is no evidence that she advised Mr. Shapiro not to do so. The deed did not resurface until June, 1989, when Ms. Hamilton, confronted with the seizure of the property, conducted a search for it. Only then was it recovered from a file at Mr. Shapiro's former law firm.

The government suggested at trial and in its post-trial submission that Ms. Hamilton chose not to record the deed in order to avoid jeopardizing her entitlement to welfare payments. See, e.g., Gov't Post-Trial Brief at 14, 19. The argument, part and parcel of the government's theory of collusion between the two women, is not persuasive. As the Court noted at trial, the theory does not adequately explain Mr. Shapiro's role in the transaction and his testimony that he was under the impression that the quitclaim deed had been recorded. Mr. Shapiro's testimony allows of no inference that he knowingly agreed to keep the deed in his file without recording it.

³ The government's proposed finding of fact that all other utilities, including electricity, were held and paid in the name of Brenda Jones, finds no support in the record. See Gov't Post-Trial Brief at ¶11.

⁴ The record does not support the government's claim that Ms. Jones reported ownership of the property "[o]n her tax returns for tax years 1983 through 1988." Gov't Post-Trial Brief at ¶14. Only Ms. Jones' 1987 and 1988 returns were admitted at trial; the sole reference to returns from 1983 through 1986 came in the form of a question from government counsel that was not subsequently adopted by the witness. See Trans. at 31-32. Alleged exhibits 503 and 506, cited by the government in connection with this argument, see Gov't Post-Trial Brief at ¶15, are not part of the record in this case.

⁵ When Officer Hammermann met with Ms. Jones to secure a financial statement, Ms. Jones indicated to her that she owned the Thompson Street property. Trans. at 130 (Officer Hammermann's testimony).

⁶ Recognizing that the government's rigorous tax enforcement activities at times encroach upon persons other than the delinquent taxpayer, Congress sought through this provision to provide a measure of protection for the property rights of these third-parties. See Falcon Constr. Co. v. United States , No. F-87-332 (EDP), 1988 U.S. Dist. LEXIS 16730, at *9 (E.D. Cal. June 15, 1988) (citing the section's legislative history).

⁷ Connecticut law provides that a quitclaim deed, when duly executed, "has the force and effect of a conveyance to the releasee of all the releasor's right, title and interest in and to the property described therein . . ." Conn. Gen. Stat. §47 -36f. Thus, as between Ms. Jones and the plaintiff, the deed is valid, though not recorded, and in a contest between the two, Ms. Jones could successfully claim no interest in the property.

⁸ As here, V&E involved a situation where notice of an IRS tax lien was filed before the mortgage and deed of sale from an earlier transfer of the property by the delinquent taxpayer, V & E, were recorded. The government argued that the property remained subject to the tax lien even after V & E had sold the property to innocent third-parties.

⁹ The government's attempts to distinguish V&E are unpersuasive. See Gov't Post-Trial Brief at 15 n.2.

¹⁰ The government's additional claim, that "Ms. Jones was further able to list the parcel on any and all loan and other credit applications she may have chosen to make," has no evidentiary basis in the record and was presumably offered as hypothetical support for the government's position. See Gov't Post-Trial Brief at 10. This hypothetical interest, while also of obvious pecuniary value, is only as transferable, however, as the property itself. As noted above, the property itself cannot properly be transferred.

¹¹ The Second Circuit's recent decision in SEC v. Levine, reversing a District Court's holding that assets obtained by wrongful means could not properly be considered property of the taxpayer for §6321 purposes, does not compel this Court to reach a contrary finding. 881 F.2d 1165 (2d Cir. 1989), aff'g in part, rev'g in part 689 F. Supp. 317 (S.D.N.Y. 1988). The Second Circuit reversed the District Court's conclusion on two grounds. As an initial matter, the Court found no evidence to support the finding below that the assets had been obtained by wrongful means. Assuming, arguendo, that that finding was supportable, the Court found error in the District Court's ensuing legal analysis and, specifically, its conclusion that the applicable provision of the Securities Exchange Act of 1934 would have rendered the wrongful transaction at issue void. Because the statutory provision at issue only rendered the transaction voidable and not void, and because New York law provides that a culpable party to a voidable transaction nonetheless acquires title, albeit voidable title, to the transferred goods, the Court concluded that defendants had acquired property rights in the goods and that the contrary finding below was in error. Id. at 1176.

Unlike Levine, this case does not involve a contract voidable under federal law, nor does it involve any state law providing that a voidable transaction nonetheless extends good title to the property at issue.

¹² In view of the findings above, the Court need not address plaintiff's alternative argument that Ms. Jones held the record title under the resulting trust doctrine as trustee for the benefit of Ms. Hamilton.

¹³ As the mortgage on the property has not been repaid in full, the Court declines to grant the relief requested in paragraph 2 of plaintiff's prayer for relief--the issuance of a declaration that she is the sole and absolute owner of the subject property.

 

 

[92-2 USTC ¶50,524] Rob ert A. Miller, Kody Miller, by Rob ert A. Miller, Rob ert Miller, by Rob ert A. Miller, Carey Miller, Jeremiah Justin Miller, by Carey Miller, Rick Miller, James Miller, Plaintiffs-Appellees v. Tony Alamo, a/k/a Tony Fernando, a/k/a Tony Fernando Alamo, a/k/a Bernie Lazar, a/k/a Bernie Hoffman, a/k/a Bernie Lazar Hoffman, a/k/a Boris Lazar, a/k/a Papa Tony, individually and as officer and director of Tony & Susan Alamo Foundation & Music Square Church, Defendant-Appellee. Timothy J. Leathers, Commissioner of Revenues, Arkansas Department of Finance and Administration, Intervenor, United States of America, Intervenor-Appellant

(CA-8), U.S. Court of Appeals, 8th Circuit, 91-3116WA, 9/21/92, 975 F2d 547, Affirming an unreported District Court decision

[Code Secs. 6321 , 6323 and 7425 ]

Liens: Priority: Validity: Finality of lower court decision.--A judgment creditor was entitled to the proceeds of a sheriff's sale of the debtor's personal property, despite the fact that the IRS had a senior tax lien. Under state ( Arkansas ) law, the debtor had no rights with respect to the proceeds to which the IRS's lien could attach. Further, the tax lien was valid and the appeal was not moot. Prior to its sale, the auctioned property had been transferred from one debtor-controlled entity to another. Although the IRS's lien attached to the property of the former entity, the court had issued a prior ruling that both entities (and the debtor) were alter egos and, therefore, the tax lien attached to the auctioned property. Finally, the court had jurisdiction over the appeal because the lower court's order was final. The lower court decided who was entitled to the proceeds, the sole issue for decision, and the fact that it refused to rule on the validity or priority of the liens of the numerous other intervening claimants did not undermine the finality of that decision. Similarly, the debtor's pending Rule 60(b) motion seeking relief from the taxpayer's judgment did not thwart finality.

Before J. GIBSON, Circuit Judge, F. GIBSON, Senior Circuit Judge, and BEAM, Circuit Judge.

F. GIBSON, Senior Circuit Judge:

The government appeals the district court's ¹ determination that the Millers were entitled to the proceeds realized from a series of judicial sales. We affirm.

I. BACKGROUND

The Millers obtained a default judgment against Tony Alamo for violations of the Fair Labor Standards Act, 29 U.S.C. §§206(a)(1) and 207(a)(1) and for various claims arising under state law. See Miller v. Tony & Susan Alamo Found., 748 F.Supp. 695 (W.D. Ark. 1990). Following further proceedings in this case, the district court found that Alamo and various corporations, including the Tony & Susan Alamo Foundation ("the Foundation") and Music Square Church, Inc. ("Music Square") had no existence separate and apart from each other, and therefore held they were alter egos. The Foundation and Music Square appealed the judgment, and we affirmed the district court. See Miller v. Tony & Susan Alamo Found., 924 F.2d 143 (8th Cir. 1991).

On April 30, 1990 , the Millers recorded their judgment with the Crawford County, Arkansas, Circuit Clerk. After discovering the Foundation and Music Square had transferred their Arkansas property to Twentieth Century Holiness Tabernacle, Inc. ("Twentieth Century"), the Millers filed suit in the Crawford County Chancery Court, alleging that the conveyances were fraudulent and that Twentieth Century was yet another of Alamo 's alter egos. The Chancery Court granted the Millers relief on both theories in February 1991.

On June 11, 1990 , the Internal Revenue Service filed notices of federal tax liens with the Crawford County Circuit Clerk against the Foundation, Music Square , and Twentieth Century. All but one of these assessments were "jeopardy assessments" under 26 U.S.C. §6861 (1988); the other assessment was made against the Foundation for unpaid employment taxes. In November 1991, the jeopardy assessments were abated by the United States District Court for the Middle District of Tennessee. See 26 U.S.C. §7429(b)(3) (1988). ²

In February 1991, pursuant to a writ of execution issued the prior month, the United States Marshall seized real and personal property owned by Alamo and his corporate alter egos. The personal property consisted primarily of fancy denim jackets that Alamo and his corporations sold for profit. The personal property, which was sold in a series of sales held during the first part of April, produced (after admin istrative expenses) approximately $340,000.

A group of litigants (referred to as the "Mick Intervenors") claimed the right to intervene in the proceedings as beneficiaries of a judgment obtained by the Secretary of Labor against the Foundation. Additionally, the IRS and the Arkansas Department of Finance and Administration (DFA) sought to intervene. All motions to intervene were eventually granted. Meanwhile, the Marshall , based on the claims of the intervenors and other non-intervening creditors, refused to disburse the sales' proceeds absent a court order. The Millers moved for an order directing that they be paid the proceeds, and the district court granted the motion. In so doing, the district court expressly refused to determine the validity or priority of any of the intervenors' liens, holding that

to the extent any of these recent claimants had liens attaching to any of the property sold at the execution sales which were superior to those of the plaintiffs in this case, those liens are still attached to the property. It is only if the claimants' liens were inferior to those of the plaintiffs that they would have been extinguished. In either event, the liens of the various competing parties do not attach to the proceeds now in the hands of the U.S. Marshal, and those proceeds should be paid to the executing judgment creditors.

Miller v. Alamo, No. 88-2206, slip op. at 3 (W.D. Ark. June 7, 1991) (order granting disbursement of proceeds). The government appeals the order.

II. DISCUSSION

A. Jurisdiction

The Millers contend the district court's June 7 order is not final and we therefore lack jurisdiction over this appeal. The lack of finality is predicated on what the Millers believe are some still-lingering issues: the validity and priority of the various liens, the IRS' request for a ruling that it is entitled to any proceeds that exceed the Millers' judgment, the validity of a garnishment filed by the Millers against the IRS, and Alamo's continuing attempts to have the underlying judgment set aside.

Our jurisdiction extends only over final judgments, see 28 U.S.C. §1291 (1988); however, the concept of finality is elusive and is often difficult to ascertain. Eisen v. Carlisle & Jacquelin, 417 U.S. 156, 170 & n.9 (1974). Finality is to be determined by applying practical, not technical, considerations, which requires an appellate court to consider "the competing considerations underlying all questions of finality--'the inconvenience and costs of piecemeal review on the one hand and the danger of denying justice by delay on the other.' " Id. at 171 (quoting Dickinson v. Petroleum Conversion Corp., 338 U.S. 507, 511 (1950) (footnote omitted)). However, the concern about limiting piecemeal appeals is diminished when the appeal involves post-judgment orders. United States v. Washington, 761 F.2d 1404, 1406 (9th Cir. 1985), cert. denied, 474 U.S. 1100 (1986); Joseph & Hughes Co. v. United Plumbing & Heating, Inc. [68-1 USTC ¶9280 ], 390 F.2d 629, 630 (6th Cir. 1968). One reason is that the underlying dispute has already been settled, and there is little danger that prompt appeal of post-judgment matters will cause confusion, duplicative effort, or otherwise interfere with the trial court's disposition of the underlying merits. See King v. Ionization Intern., Inc., 825 F.2d 1180, 1184 (7th Cir. 1987). Another reason for downplaying the courts' traditional concern over piecemeal appeals is that further proceedings are not likely to produce an order that is any more final than the one at issue. See Washington , 761 F.2d at 1406. This case presents a prime example of the latter point. The issue presented to the district court was, simply, who should get the proceeds from the sale of the assets? The district court answered this question when it decided the Millers were entitled to the money. This mini-dispute is over insofar as the district court is concerned; nothing the court could do in the future will make its decision any more final. Though it is true the court did not decide the validity or priority of the various claimants' liens, it declined to do so because such a determination was unnecessary to decide the issue then before the court. The validity of the Millers' garnishment against the IRS has no bearing on the fund of money at issue in this case, and the IRS' request for a ruling that it is entitled to any proceeds in excess of the Millers' claim is irrelevant in that it appears there is no excess.

Alamo 's continuing efforts to undo the effects of the underlying judgment requires further discussion. Alamo filed a motion seeking relief from the Millers' judgment pursuant to Fed. R. Civ. Pro. 60(b). This motion was denied by the district court and Alamo has appealed that denial. ³ The Millers contend the underlying merits are theoretically still in jeopardy of reversal and therefore the issues raised by the government are not ripe for appellate review. The flaw in the Millers' argument is that Alamo 's Rule 60(b) appeal is not coupled with a direct appeal; indeed, the underlying judgment was rendered in 1990, and the time for filing a direct appeal has long since passed. A Rule 60(b) motion "does not affect the finality of a judgment or suspend its operation," Fed. R. Civ. Pro. 60(b), so "an appeal from the denial of a motion made under Rule 60(b) does not raise the underlying judgment for review; it presents the appellate court only with the question of whether the trial court abused its discretion in ruling on the motion." Sanders v. Clemco Indus., 862 F.2d 161, 169 (8th Cir. 1988). Thus, as a procedural matter, Alamo 's current efforts do not touch upon the merits of this case.

We are also concerned about the practical implications of the Millers' argument. The Millers' argument rests upon one of two premises: either (1) the present existence of a Rule 60(b) motion prevents finality, or (2) the existence of an avenue through which a judgment's merits may be reexamined prevents finality. Both premises are unacceptable. A Rule 60(b) motion may be filed for any one of six listed reasons, ⁴ and must be filed within a reasonable time. The rule prescribes that a motion based upon the first three grounds must also be filed within one year of the judgment; however, there is no outer time limit on the latter three grounds. "What constitutes a 'reasonable time' depends largely on the facts of each case under consideration. See In re Emergency Beacon Corp., 666 F.2d 754, 760 (2d Cir. 1981) (twenty-six month delay not unreasonable)." Harris v. Union Elec. Co., 846 F.2d 482, 484 (8th Cir. 1988). Thus, a losing party could always file a Rule 60(b) motion, regardless of how much time has passed since the court entered judgment. To be sure, as time passes the likelihood diminishes that the motion will be found to have been filed within a reasonable time; however, the district court would still be required to determine the reasonableness of the delay. If the Millers' argument is correct, the government can never appeal this order because Alamo will always have the ability to file a Rule 60(b) motion, have it granted (at least in theory), be relieved of the judgment, and thereby remove the judgment upon which the instant order depends. Clearly, this is not the law.

On the other hand, we cannot accept the premise that the presence of Alamo 's current Rule 60(b) motion in the judicial process thwarts finality. This premise leads to the conclusion that a judgment's finality could appear and disappear as each Rule 60(b) motion is denied and a new one is filed. Finality is not a transient concept, and this view would remove all meaning from Rule 60(b)'s specific admonishment that a motion will not affect finality.

B. Mootness

The Millers contend the government's appeal is moot because the jeopardy assessments were set aside, thereby extinguishing the IRS' lien. ⁵ The Millers concede the assessment for employment taxes was not a jeopardy assessment and therefore the lien for those taxes was unaffected by the setting aside of the jeopardy assessments; however, the Millers contend the assessment was made on the Foundation, and the property seized and sold pursuant to the instant execution had been conveyed by the Foundation to Music Square long before the IRS made the assessment. The government contends it has a lien against the Foundation, and there have been judicial determinations--in this case and in other cases--that the Foundation, Music Square , and Alamo are all alter egos. We agree that the district court's decision to that effect in this case prevents the government's appeal from being moot.

In holding the corporations and Alamo were alter egos of each other, the district court specifically found the corporations had no existence apart from Alamo, and that Alamo and the corporations were really the same entities. This ruling became the law of the case and should be applied, absent special circumstances not present here, throughout all subsequent proceedings in this case. Little Earth of United Tribes, Inc. v. United States Dep't of Housing & Urban Dev., 807 F.2d 1433, 1441 (8th Cir. 1986). As an intervenor in this case, the government is bound by all prior judicial decisions, Galbreath v. Metropolitan Trust Co. of Cal., 134 F.2d 569, 570 (10th Cir. 1943); Yankton Sioux Tribe of Indians v. Nelson, 604 F.Supp. 1146, 1151 (D.S.D. 1985), rev'd on other grounds, 796 F.2d 241 (8th Cir. 1986), and there is no principled justification for binding intervenors to unfavorable prior decisions while at the same time denying intervenors the benefits of favorable prior decisions. We also believe it would be anomalous to hold that, with respect to some parties, the defendant-entities are alter-egos, yet with respect to other parties, they are not. The combination of the government's lien on the Foundation's property and the court's prior ruling that the Foundation and Music Square (and Alamo) are the same entities means the government has, for purposes of this case, a lien on the clothing that was sold at the Marshall 's sales.

C. Disposition of the Proceeds

The government argues its lien on the clothing is superior to the Millers'. The Millers do not dispute this contention; therefore, we will assume the government's claim to be true. We begin sorting out the competing claims by first noting the government's tax lien attaches to all real and personal property owned by Alamo , even if the property was acquired after the lien's creation. 26 U.S.C. §6321 (1988); Glass City Bank v. United States [45-2 USTC ¶9449 ], 326 U.S. 265, 267, 268 (1945). However, in deciding whether the proceeds from these sales can be characterized as Alamo's property (thereby allowing the tax lien to attach), we must refer to Arkansas law. Aquilino v. United States [60-2 USTC ¶9538 ], 363 U.S. 509, 512-13 (1960).

Though our examination of Arkansas law has uncovered little that directly addresses this issue, we note there is absolutely nothing in Arkansas ' jurisprudence supporting the government's position that the sales' proceeds could be considered Alamo 's property. On the other hand, we have found some indications that Alamo had no rights with respect to the proceeds. First, funds obtained by a sheriff pursuant to a sale are to be turned over to the creditor; the sheriff's failure to pay the creditor gives rise to a cause of action against the sheriff. Fort Smith Seed Co. v. Jones, 132 S.W.2d 364, 365 ( Ark. 1939); see also Ark. Stat. Ann. §16 -66-118(c) & (d) (1987). The debtor receives funds only if there is money left after paying the judgment and costs of the sale. Id. §16 -66-413(b)(2); see also id. §16 -66-114(h) (corporate debtors). Arkansas law would recognize Alamo 's entitlement to any money in excess of the Millers' judgment and certain admin istrative costs, and the government's lien would attach to that amount. Cf. Byers v. Sheets, 643 F.Supp. 695, 697 (W.D. Mo. 1986) (holding that under Missouri law, debtor has sufficient rights with respect to surplus to allow federal tax lien to attach). However, there was no excess in this case; therefore Alamo would not be entitled to any portion of the money and there is no property belonging to Alamo to which the tax lien may attach.

Our conclusion in this regard is buttressed by the contrast between two Supreme Court opinions. In United States v. National Bank of Commerce [85-2 USTC ¶9482 ], 472 U.S. 713 (1985), the Court, in a 5-4 decision, held that a tax lien attached to all the money contained in a joint bank account even though the lax lien applied to only one of the three owners because the delinquent taxpayer had the right to withdraw the full amount contained in the account without notice to or permission from his codepositor. Id. at 723-24. In United States v. Bess [58-2 USTC ¶9595 ], 357 U.S. 51 (1958), the Court held that a tax lien did not attach to the proceeds of a life insurance policy insuring the life of the taxpayer (but did attach to the cash surrender value). In so holding, the Court relied on the fact that the insured/taxpayer could not receive the proceeds himself, even though he possessed the right to direct to whom the proceeds would be paid. Id. at 55-56. We believe the funds at issue in this case are more akin to those at issue in Bess; Alamo had no right to the funds, could not direct where they were paid, and could not expect to receive any part of the money. Arkansas law gives Alamo absolutely no rights with respect to these proceeds; consequently, federal law does not permit a lien to be placed on them.

The government is correct when it contends state law cannot curtail a lien. However, this doctrine merely means that once it has been determined state law would grant the debtor/taxpayer property rights, the tax lien attaches--even if state law would not allow other liens to attach. Thus, the cash surrender value of a life insurance policy is property to which a tax lien may attach, even if state law would exempt that property. Bess [85-2 USTC ¶9482 ], 357 U.S. at 56-57. Similarly, the tax lien may attach to the funds in a joint account, even if state law may not allow other creditors to garnish those funds. National Bank of Commerce [58-2 USTC ¶9595 ], 472 U.S. at 727. However, this rule of law applies only after it has been determined that the debtor has property; once it has been determined the debtor has property, state law cannot be used as a shield against the government's tax lien. We have not reached this point in the analysis because Arkansas law extends no rights or expectations to Alamo with respect to this money.

The government is not left without recourse. Given that the government's lien on the personal property is senior to the Millers', the government's lien survived the sales. 26 U.S.C. §7425(a) (1988); Ark. Stat. Ann. 16-66-203(a) (1987). The government recognizes its lien survives the sales, but contends it is still entitled to recover from the proceeds because it would be impractical to track down all the buyers and assert its superior lien position against each and every jacket purchaser. We cannot say whether or not it is practical or wise for the government to enforce its lien position; we need not do so because there is no doctrine of "virtual destruction" of a senior lien anywhere in the federal or state law. Federal statutes do not grant the government any rights to the proceeds realized from the sales of the jackets, and we cannot manufacture rights simply because the nature of the personal property in this case makes it difficult or impractical for the government to pursue the rights it does possess, or even because it would make the government's task easier.

III. CONCLUSION

Arkansas law does not bestow any rights with respect to the proceeds upon Alamo . Consequently, the proceeds are not Alamo 's property and the government's tax lien cannot attach. We affirm the district court. ⁶

¹ The Honorable Morris S. Arnold, then a United States District Judge for the Western District of Arkansas and currently a member of this court.

² The district court's decision setting aside the abatements is not reported. However, the court delivered its findings orally, at which time it stated that the abatements were unreasonable because the government made them solely to manufacture a lien position superior to the Millers.

³ Alamo 's appeal of the denial of his Rule 60(b) motion is pending in this court, and has not yet been assigned to a panel. We make clear that nothing contained in this opinion is intended to resolve any of the issues in that appeal, and this opinion should not bind the panel to which that appeal is ultimately assigned.

⁴ The six grounds for a Rule 60(b) motion are:

(1) mistake, inadvertence, surprise, or excusable neglect; (2) newly discovered evidence which by due diligence could not have been discovered in time to move for a new trial under Rule 59(b); (3) fraud . . . misrepresentation, or other misconduct of an adverse party; (4) the judgment is void; (5) the judgment has been satisfied, released, or discharged, or a prior judgment upon which it is based has been reversed or otherwise vacated, or it is no longer equitable that the judgment should have prospective application; or (6) any other reason justifying relief from the operation of the judgment.

Fed. R. Civ. Pro. 60(b).

⁵ This was not an issue in the district court because the jeopardy assessments were set aside after the court ruled on the disposition of the funds.

⁶ Because of the nature of our decision, we need not address the district court's alternative holding that the money was protected by 26 U.S.C. §6323(b)(8) (1988), which renders the tax lien invalid insofar as the property is subject to a lien for an attorney's services.