¶9304]Puritan Dairy Products Company, etc., Plaintiff v. Alfred
Christoffers, et al., Defendants
Court of N. J., Chancery Div.,
, Docket No. F-2858-56, 148 A2d 223, 1/30/59
[1954 Code Sec. 6323(a)]
Tax lien: Validity against mortgagee: Extinguishment by foreclosure
sale.--A lien of the Government for taxes is effectively
extinguished by a foreclosure proceeding conducted according to state
law and rule of court, where the filing of the notice of tax lien took
place after the foreclosure had been commenced and a notice of lis
pendens had been filed.
Goldman, Spitzer & Sills, Elias A. Kanter, for plaintiff. Simandl
ert H. Simandl, for defendants.
Superior Court Judge:
in this case was filed
August 12, 1957
to foreclose a mortgage given by defendants, Alfred and Priscilla
Christoffers, to the plaintiff. The suit proceeded as an uncontested
foreclosure and final judgment was entered
March 28, 1958
. The property was sold at public sale by the Sheriff of Union County on
June 11, 1958
and was bid in by one Helen Christoffers for $6,710. After the property
was struck off to her, the bidder had a title examination made and found
that, after the filing of the lis pendens in the cause, three
federal liens had been filed by the Internal Revenue Service against the
defendant, Alfred Christoffers. The filing dates were
September 24, 1957
July 29, 1958
. The premises were owned by Alfred and Priscilla Christoffers as
tenants by the entirety.
Christoffers now moves for an order relieving her of her bid and
directing the return of her deposit on the ground that there are liens
and encumbrances of record against the property, i.e., the federal tax
liens, "which liens and encumbrances were not inserted in the
notices and advertisements required by law and in the conditions of
sale," nor disclosed at the time of sale.
by a countermotion, seeks the entry of an order adjudicating that Helen
Christoffers has defaulted in the terms of purchase and directing that
an alias writ of execution be issued so that the property can be
resold--the costs of sale to be charged against the bidder's
deposit--and that the balance of the deposit, if any, be paid over to
the plaintiff, if upon resale the amount realized shall not be
sufficient to pay the amount due the plaintiff upon its judgment.
The motion of
the bidder will be dealt with first, since, if that motion is decided in
her favor, the plaintiff's motion must be denied.
Is Effectiveness of Tax Liens]
The gist of
the argument of the bidder is that the liens of the federal government
established by the filing of the three notices in 1957 and 1958 were not
barred or cut off by the foreclosure judgment in this case. No question
is raised about the regularity of the foreclosure proceedings and they
appear to have been conducted completely in accordance with our rules
and statutes. No issue is raised concerning the timely and proper filing
of the lis pendens under N. J. S. 2A:15-6 et seq. It is
the effect of this statute on the federal liens which is questioned.
relies principally upon the decision is Sherwood v. United States,
5 Fed. (2d) 991 (D. C., E. D. N. Y. 1925) [1925 CCH ¶7088], where the
District Court held that the lien of the
was not extinguished by the foreclosure of a mortgage in the state
court. The lien of the
was filed after the filing of the lis pendens in the state court
action but before the sale. The court held that under the decision in United
States v. Snyder, 149
210, 37 L. Ed. 705 (1893), the government lien was not extinguished.
several significant differences between the Sherwood case and the
present one. In the first place, neither the provisions of the New York lis
pendens act nor its effect on subsequent liens was discussed by the
court, so that it is not clear whether that statute gave the same
protection to the mortgagee in foreclosure actions as does the New
Jersey statute. Next, the mortgagees in Sherwood conceded that
the liens of the federal government constituted a cloud on their title.
The plaintiff here takes exactly the opposite position. Further, the
present federal statute, 28 U. S. C. A., Sec. 2410, permitting
the joining of the federal government as a party defendant to a mortgage
foreclosure proceeding in the state court, was not then in effect. It
was admitted by the government in the Sherwood case that the lien
of the mortgage was prior to the government's tax liens and that taxes
and other advances made by the mortgagees to protect the property were
also prior to the tax liens.
The court, in Sherwood,
based its decision upon the conclusions reached in United States v. Snyder, supra. Examination of the opinion in that case
reveals that it does not stand for the rule of law for which it was
cited in Sherwood. The question in the Snyder case was
whether the failure of the
to file its tax lien in the mortgage office of the Parish of New
Orleans, as required by the
statute, deprived it of priority as against a subsequent bona fide
purchaser of property who had no notice of the lien. The federal statute
at that time did not require the filing of the lien, but provided that
the failure to pay any tax after demand made the tax a lien on all of
the taxpayer's property and the Commissioner of Internal Revenue could
enforce the lien by suit in the federal court and by sale. See 26
C. A., Sec. 6321. Payment of the tax had been demanded in 1879; the
property had been sold by the taxpayer in 1881; and the suit to collect
the tax by a sale of the property was instituted in 1885. The defense
was that the failure of the government to file its lien, as required by
statute, made it unenforceable as against an innocent purchaser for
value without notice. The court held that the sole question involved was
whether or not the tax system of the
was subject to the recording laws of any state and decided that it was
not and that the tax lien had priority. That decision, made in 1893, was
before the enactment of 26 U. S. C. A., Sec. 6323, and its
predecessors, which requires the filing of the government's tax lien in
order to give it priority over mortgagees, pledgees, purchasers or
judgment creditors. The Snyder case stands only for the
proposition that state statutes cannot interfere with the assessment of
federal taxes or set up limitations of time within which they must be
It is not
sought in this foreclosure suit to extinguish the federal lien, nor to
prevent its collection, but only to discharge it from the mortgaged
C. A., Sec. 2410(c).
Not Directly Controlled by Authority]
research of counsel nor of the Court has revealed any federal case,
other than Sherwood, supra, in which the question of whether the
federal tax lien is discharged by a state court foreclosure, when the
lien is recorded after a lis pendens has been filed, has been
C. A., Sec. 6323, provides that the lien of the
, imposed by Section 6321 of the same title, shall not be valid as
against any mortgagee, etc., until the lien is properly filed.
Admittedly, the liens in this case were filed after the recording of the
mortgage, the institution of suit and the filing of the lis pendens.
There is no question as to the priority of the mortgage. The lis
pendens was filed immediately after the complaint.
pendens act, N. J. S. 2A:15-7, provides that after the filing
of a lis pendens any person claiming a lien upon the real estate
shall be bound by any judgment entered in the suit in which the lis
pendens was filed as though such lien holder had been made a party
to the suit and served with process. The bidder, while admitting the
effect of the statute on ordinary liens, claims that such a statute is
not binding upon the
. But, aside from the Sherwood case, supra, no authority
is cited for that position. As shown above, the Sherwood case
cannot be considered authority for that proposition.
of Recent Decisions]
And, the more
recent decisions in the federal courts are to the contrary. For example,
in United States v. Boyd, 246 Fed. (2d) 477 (5 Cir. 1957) [57-2
USTC ¶9791], cert. denied 355 U. S. 889, 2 L. Ed. 2d 188 (1957), the
court held that where a sale under a power of sale contained in a
mortgage has been completed after the recording of a government tax
lien, but before the government institutes a foreclosure thereof under 26
U. S. C. A., Sec. 7403, there is an extinguishment of the tax lien.
The court went on to say, at p. 484, that "to say that it
thereafter continues in any form (apart from particular statutory
rights, if any, of redemption after sale) would be to destroy the
absolute priority which Section 6323 was so plainly intended to
provide" to the mortgagee. The court observed that to hold
otherwise would be to render it unsafe to buy at a foreclosure sale, to
bring about confusion in the foreclosure proceedings in the several
states and to disturb the flow of credit by interfering with wellknown
business procedures. It concluded that Congress could not have meant to
do that by enacting 26 U. S. C. A., Sec. 7403. As it pointed out,
if every such sale was vulnerable, no one could safely buy at a mortgage
sale until there had been an exhaustion of the proceedings contemplated
by Section 7403. This would result in completely clogging the dockets of
both the state and federal courts.
To the same
effect is United States v. American Nat. Bank of Jacksonville,
255 Fed. (2d) 504 (5 Cir. 1958) [58-2 USTC ¶9564], cert. denied
October 13, 1958
, 3 L. Ed. 2d 72. In that case, also, the court upheld the validity of a
mortgage foreclosure over the lien claim filed by the government. This
case also holds that the lien of the government does not attach to the
estate of the husband, where the husband and wife own the real estate as
tenants by the entirety, because the lien can only attach to the
husband's separate interest and he will have none unless he survives his
wife. United States v. Hutcherson, 188 Fed. (2d) 326 (8 Cir. 1951) [51-1 USTC ¶9249].
In the Boyd
case, supra, there was a non-judicial sale. In the American
National Bank case, supra, there was a judicial sale. The
type of foreclosure action, therefore, is not important.
Lien Was Extinguished]
here to be decided is whether the foreclosure proceedings in this case,
conducted in accordance with our statute and rules of court, effectively
discharge the federal liens so far as this property is concerned. I am
of the opinion that it does and that the federal cases are not to the
Against Contrary Holding]
difficulties which will arise if a mortgagee, in order to protect
himself in foreclosing his mortgage by eliminating any question
concerning the possible filing of a federal lien between the time of
filing his lis pendens and the holding of the Sheriff's sale,
joins the federal government, alleging that it may have some lien upon
the mortgaged premises, see 81 N. J. L. J., p. 120. Such a
procedure obviously will only tend to further confuse matters and it may
be doubted whether, if followed, it will have validity, since by the
provisions of 28 U. S. C. A., Sec. 2410, the United States has
waived its immunity to suit only in the type of cases enumerated in that
section and not in all kinds of actions. To be properly in court under
this section, the government must have, or claim to have, a mortgage or
other lien. Gordon v. Bank of
, 150 Fed. Supp. 772 (D. C., Cal. 1957) [57-1 USTC ¶11,694]; United
States v. Cless, 150 Fed. Supp. 687 (D. C., Pa. 1957). Since at the
time this suit was brought the
did not, as to the mortgaged premises, have or claim "a mortgage or
other lien," there is considerable doubt as to whether or not it
could properly have been made a party.
impossible to conclude that Congress, having given priority to a
mortgage by virtue of 26 U. S. C. A., Sec. 6323, and permitted
the foreclosure of such a mortgage to "discharge" the lien of
the United States under 28 U. S. C. A., Sec. 2410(c), intended
that, where a suit has been started and a lis pendens properly
filed under state law, the proceedings in the state court should be
rendered ineffective merely because at some time subsequent to the
filing of the lis pendens, but prior to the Sheriff's sale, a
federal lien is filed. Such a finding would result in rendering the
judgments of this Court in foreclosure actions impotent to discharge any
federal lien filed after their entry. To carry this a step further, if
the lien were filed after the property has been advertised for sale by
the Sheriff, the advertising would be ineffective and the plaintiff
would lose these not inconsiderable costs because, under the argument
advanced by the bidder, plaintiff would be obliged to set aside the
judgment, reopen the proceedings to join the United States and then,
after entering an amended judgment, readvertise. No one could ever be
sure that foreclosure proceedings were effective until after completion
of Sheriff's sale, as required by R. R. 4:83-5.
Bound By State Law]
Nat. Bank and Trust Co. v. MacGarvie, 22 N. J. 539 (1956), modifying
41 N. J. Super. 151 (Ch. Div. 1956) [57-1 USTC ¶9262], the Court
discussed the priority of federal liens as opposed to other liens--a
problem with which we are not here confronted, since admittedly the
mortgage under foreclosure is prior to the lien of the United
States--and said, at p. 544:
it is a fundamental principle of the conflict of laws that legal
consequences attaching to a right of redemption and the method of
foreclosure are governed by the law of the lex rei sitae. 2 Beale on
The Conflict of Laws, secs. 227.1-228.1 (1935). The federal courts
have long recognized and given effect to these matters as substantive
rules of state property law. Metropolitan Nat. Bank v. Conn. Life
Ins. Co., 131 U. S. Appendix clxii, 24 L. Ed. 1011 (1878); Parker
v. Dacres, 130 U. S. 43, 9 S. Ct. 433, 32 L. Ed. 848 (1889); cf. United
States v. Hutcherson, 188 Fed. (2d) 326 (8 Cir. 1951) [51-1 USTC ¶9249].
* * * ."
matters governed by the Federal Constitution or by acts of Congress, the
law to be applied in any case is the law of the state, whether it be
declared by its legislature in a statute or by its highest court in a
decision. Erie Railroad Co. v. Tompkins, 304
64, 82 L. Ed. 1188.
of 28 U. S. C. A. evinces an intent on the part of Congress that
the United States shall be bound by the local law because it provides in
subsection (c) that the judicial sale shall have the same effect to
discharge property from the lien of the United States as may be provided
with respect to such liens by the local law of the place where the
property is situated. As was said in First Nat. Bank and Trust Co. v.
MacGarvie, supra, at p. 544:
* * the rights of the sovereign are to be determined upon the same plane
and with the same equitable attitude accorded claims in competition
therewith. * * *."
The lien of
the federal government does not give it rights beyond those which the
taxpayer had in the property sought to be levied upon, and the lien can
rise no higher than the rights of the taxpayer. Bankers Title and
Abstract Co. v. Ferber Co., 15 N. J. 433, 441 (1954) [54-2 USTC ¶9459].
The rights of the government are solely dependent upon the rights of the
taxpayer and the recovery against him can only be to the extent of his
interest in the property. Zwaska v. Irwin, 52 N. J. Super. 27, 33
(Ch. Div. 1958).
This being so,
there is no reason to hold that the lien of the federal government
should be outside the scope of N. J. S. 2A:15-7, but on the
contrary the filing of the lis pendens should as effectively cut
off a subsequently filed federal lien as it does any other lien.
The cases of Integrity
Trust Co. v. United States, 3 Fed. Supp. 577 (D. C., N. J. 1933)
[1933 CCH ¶9469], and Fox v. Queens County Sales Co., Inc., 52
Fed. (2d) 794 (D. C., E. D. N. Y. 1931) [1931 CCH ¶9381], cited by the
bidder, are not in point.
bidder argues that under the decision in United States v. White Bear
Brewing Co., 350 U. S. 1010, 100 L. Ed. 871 (1956) [56-1 USTC ¶9440],
the federal lien is not subject to being discharged by the foreclosure
action, even though it is subsequent in point of time to the lien of the
mortgage and was filed after the institution of the foreclosure
proceedings. This case, however, and the cases of United States v.
Security Trust & Sav., 340 U. S. 47, 95 L. Ed. 53 (1950) [50-2
USTC ¶9492]; United States v. Acri, 348 U. S. 211, 99 L. Ed. 264
(1955) [55-1 USTC ¶9138]; United States v.
81, 98 L. Ed. 520 (1954) [54-1 USTC ¶9191], do not deal with mortgage
liens. The liens there in suit were mechanics' liens, tax liens and
liens secured by attachment proceedings. In these cases, the liens were
held to be inchoate, or not perfected, before being reduced to judgment
and, since the federal lien in each case had been filed prior to the
entry of judgment, the cited cases hold that the federal liens were not
discharged or extinguished by the judgments. Thus, in the case of
attachment, the Supreme Court held that this lien was inchoate and it
was not until the entry of judgment that the lien became a determined,
or choate, lien. The difference between these cases and those involving
the foreclosure of mortgages is evident.
this, a mortgage under our law is not merely a "choate lien,"
to adopt the term used by the United States Supreme Court. Our Supreme
Court, in Jaffe v. Zilinski, 14 N. J. 24 (1953), quoting from Thompson
v. Boyd, 22 N. J. L. 543 (E. & A. 1849), said, at p. 29:
mortgagee holding, as against the mortgagor, the legal title, subject
only to the condition or equity of redemption, may unite that equitable
interest to his legal title, either by foreclosure or by the voluntary
release or conveyance of the mortgagor. Such union of the legal and
equitable estate extinguishes or, as the phrase is, merges the equitable
in the legal estate, and the latter becomes absolute. The estate which
was before a fee simple, is still the same, but it is relieved of the
condition or equity with which it had been previously encumbered. * *
also, Reilly v. Griffith, 141 N. J. Eq. 154, 169 (
1947), aff'd 142 N. J. Eq. 724 (E. & A. 1948); Sears, Roebuck
& Co. v. Camp, 124 N. J. Eq. 403 (E. & A. 1938).
is appearent that the mortgagee under our law has more than a lien. He
has an estate in the lands upon which he hold a mortgage. The reasons
which prompted the court to accord priority to the federal liens in the White
Bear Brewing Co. and other cases do not exist here.
If, as has
been held in a long line of cases, recognition of the rights of the
sovereign are to be determined upon the same plane and with the same
equitable attitude accorded claims in competition therewith (First
Nat. Bank and Trust Co. v. MacGarvie, supra), and if, as stated in
the same opinion, the legal consequences attaching to a right of
redemption are governed by local law, there is no reason why the lien of
the federal government should not be just as effectively discharged in a
foreclosure suit conducted according to statutes of New Jersey as are
other liens, when a lis pendens is properly filed under N. J.
S. 2A:15-6. Jaffe v. Zilinski, supra; Finley v. Keene, 136 N. J. Eq.
An order will
be entered dismissing the motion of the bidder to be relieved of her bid
and granting the motion of the plaintiff to require the bidder to
complete her purchase within sixty days of the entry of such order, or,
in the alternative, that the property be advertised for resale, with the
costs thereof to be deducted from the bidder's deposit now in the hands
of the Sheriff of Union County and any loss on resale to be charged
against the balance of such deposit then remaining. No costs.
¶9670]Southern Bank of Lauderdale County, Plaintiff-Appellee v.
Internal Revenue Service, United States of America,
Defendants-Appellants Mid-State Homes, Inc., Plaintiff-Appellee v.
United States of America, Defendant-Appellant
U. S. Court of Appeals, 11th Circuit, Nos. 84-7280, 84-7501, 770 F2d
1001, 9/13/85, Reversing and remanding District Court opinions, 84-1
USTC ¶9245, 586 F. Supp. 12, and 84-1 USTC ¶9533
[Code Secs. 6321, 6323, and 7425]
Lien for taxes: Nonjudicial foreclosure sales: Equitable principles
v. legal principles: Property subject to tax liens: Mortgaged
property.--Certain actions by two mortgagees in a "title"
State, whereby they conducted nonjudicial sales of the mortgaged
properties without giving notice to the IRS, elevated two junior tax
liens on the taxpayer-mortgagors' equitable rights of redemption to
first liens on the realty. When the mortgagees purchased the properties
at the foreclosure sales, the doctrine of merger operated to extinguish
the mortgage indebtedness and the related liens. No equitable
considerations precluded the harsh result because the result could have
been easily avoided by the mortgagee-purchasers and it was consistent
with the plain language of Code Sec. 7425, its legislative history, and
the overall purpose of the tax collection system. In addition, State law
was inapplicable and, therefore, the mortgagee-purchasers' contention
that the government only held a statutory right of redemption after the
sales was meritless.
Higginbotham, 206 S. Pine St., Florence, Ala. 35630, William B. Tatum,
Ford, Caldwell, Ford & Payne, 218 Randolph Ave., Huntsville, Ala.
35804, James M. Edwards, Copeland, Franco, Screws & Gill, P. O. Box
347, Montgomery, Ala. 36101, for plaintiffs-appellees. Frank W.
Donaldson, United States Attorney, Caryl P. Privett, Assistant United
States Attorney, Birmingham, Ala. 35203, Glenn L. Archer, Jr., Assistant
Attorney General, Curtis L. Muncy, Michael L. Paup, Wynette J. Hewett,
Steven I. Frahm, Department of Justice, Washington, D. C. 20530, for
KRAVITCH and CLARK, Circuit Judges, and WRIGHT *,
Senior Circuit Judge.
cases, which were consolidated for oral argument purposes, present
questions about the federal tax lien and the notice provisions of 26 U.
S. C. §7425(b). In both cases the district court granted summary
judgment in favor of the appellees Southern Bank of Lauderdale County
(Southern Bank) and Mid-State Homes, Inc. (Mid-State). For the reasons
discussed below, we reverse.
The facts in
both cases are undisputed. The appellees, Southern Bank and Mid-State,
obtained their respective interests in the property by either the
assignment or execution of mortgages upon which the taxpayers were
These mortgagees were properly recorded. Thereafter, the Internal
Revenue Service (IRS) made assessments against the taxpayers for unpaid
taxes and properly filed notices of the federal tax liens pursuant to 26
U. S. C. §6323. 2
defaulted on their mortgages. Thereafter, Southern Bank and Mid-State
conducted nonjudicial foreclosure sales in accordance with the power of
sale contained in the mortgages. Both Southern Bank and Mid-State admit
that they did not provide the United States with notice of the sales as
set forth under 26 U. S. C. §7425. Nor did the
consent to the sales. 3
Southern Bank and Mid-State were the purchasers of the property at the
nonjudicial sales. 4
that its initial foreclosure was ineffectual against the
because of its failure to give notice, Mid-State foreclosed on the
property approximately eleven months after the first foreclosure sale. 5
On this second occasion, however, Mid-State gave proper notice of the
foreclosure sale to the
pursuant to 26 U. .S. C. §7425. Mid-State was the purchaser of the
property at this second sale and thereafter recorded its foreclosure
Proceedings in the District Court and Arguments on Appeal
Bank. Southern Bank filed its complaint seeking: (1) to quiet title
to the property; (2) an injunction prohibiting the IRS from selling the
property under its notice of levy; (3) a discharge of the tax lien; and
(4) a determination that Southern Bank was the owner of the property
with the rights of the IRS or any other interested party to be governed
by the redemption provisions of the Code of Alabama. 6Record, No. 84-7280 at 3, 6.
argues that under 26 U. S. C. §6321 the tax lien only applied to the
interest the taxpayer held in the property prior to the foreclosure
sale, that state law controlled the legal interest the taxpayers held in
the property, and that federal law limited the tax lien to only that
property interest. Because
is a "title" state, which means that legal title passes to the
mortgagee upon execution of the mortgage, Southern Bank argues that the
only interest retained by the taxpayer prior to foreclosure was its
equitable right of redemption. Thus, the tax lien only attached to this
equitable right of the taxpayer, which was a right the taxpayer had to
gain legal title by paying off the note secured by the mortgage.
According to Southern Bank, the government's interest in the property,
subsequent to the foreclosure sale, was only a statutory right of
Southern Bank concedes that because notice of the sale was not given to
the IRS, the tax lien remained in effect to that extent.
maintains that due to its lack of notice of the sale, its lien was
undisturbed by the foreclosure. Because the sale extinguished Southern
Bank's mortgage, the
contends that its junior lien was automatically elevated to a first lien
against the real estate acquired by the purchaser at the sale.
court concluded that Southern Bank had a better equitable and legal
argument. The court observed:
Thus, the IRS
lien could only attach to what the mortgagor had and could not leap
ahead of Bank simply because Bank purchased at foreclosure. It would be
unfair in the extreme to make a distinction here between foreclosure
sales where a third party purchases and where the mortgagee purchases.
The court must therefore conclude that, as to IRS, the
nonjudicial foreclosure sale conducted by Bank on
March 30, 1982
is a nullity. Legal title to the property in issue under the law of
was held by Bank prior to the sale and continues to be held by the Bank.
The effect of this court's ruling is to place the parties in the same
position vis-a-vis each other as they were in just prior to Bank's
nonjudicial foreclosure sale. This means, of course, that the court
disagrees with the Bank's contention that IRS only has a statutory right
Bank, 586 F. Supp. at 14 emphasis
levied and seized possession of the subject property, Mid-State filed
its complaint alleging that the
wrongfully levied upon the property. Mid-State argues that 26
C. §7425 was unconstitutional as written or applied and that the
procedures required under the statute had not been followed. Mid-State
sought to enjoin the
from enforcing its lien and sought to have the subject property
returned. Record, No. 84-7501 at 32.
In finding in
favor of Mid-State the court stated:
Court has not changed its mind since it wrote Southern Bank, and
therefore believes that Mid-State's second foreclosure was successful in
U. S. A.
's tax lien, leaving
U. S. A.
with no more than a lien creditor's statutory right to redeem.
on the conclusions which this Court has reached there is no necessity
for expressing an opinion on the question of the constitutionality of 26
C. §7425 or an opinion on the alleged failure of
U. S. A.
to comply with 26
C. §6331(a). These issues are mooted by the rationale of this Court.
No. 84-7501 at 113, 114.
on Appeal. The parties raise similar arguments on appeal. The
essentially argues that the district court erred when it concluded that
"where a nonjudicial foreclosure sale was held without notice to
, the sale was a nullity insofar as the Government was concerned and the
foreclosing mortgagee consequently retained a lien against the property
that was superior to the federal tax liens." Appellant's Brief,
No. 84-7501 at 8. It further contends that in Mid-State the
district court erred when it treated the second sale as effective to
extinguish the federal tax lien on the basis of its holding in Southern
takes the position that the court's holdings are contrary to the plain
language of the statute, its interpretation by the courts, and its
admits in its brief:
A federal tax
lien attaches to the taxpayer's interest in property and becomes
enforceable against the property whether his interests are extensive or
limited. IRS also correctly asserts that state law controls in
determining what interest the taxpayer has in the property, and that
federal law determines whether a lien attached to the property and the
priority of competing liens. Aquilino v. United States [60-2 USTC
¶9538], 363 U. S. 509, 80 S. Ct. 1277, 4 L. Ed. 2d 1365 (1960); United
States v. Brosnan [60-2 USTC ¶9516], 363 U. S. 237, 80 S. Ct. 1108,
4 L. Ed. 2d 1192 (1960); United States v. Bess [58-2 USTC ¶9595],
357 U. S. 51, 78 S. Ct. 1054, 2 L. Ed. 2d 1135 (1958). There is no
controversy as to these statements of law.
Brief, No. 84-7280 at 5.
argue that 26 U. S. C. §7425 was only designed to protect the
government's interest in property prior to a nonjudicial foreclosure if
the I. R. S. was not given notice of the sale and that the protection
continued because the I. R. S. lien remained after the sale as a lien
junior to that of each appellee's lien. They urge that a failure to give
notice should not create a "wind fall" or greater interest in
the property than the
held prior to closeclosure. Mid-State points out that "[t]here is
nothing in the language of the statute or the legislative history [sic]
to suggest that Congress intended to leapfrog priorities. Instead, the
clear directive of the satute is simply that the tax lien continues if
notice of foreclosure is not given." Appellee's Brief, No.
84-7501 at 5. Both Mid-State and Southern Bank claim that under
law the taxpayers only held an equitable right of redemption, and that
this was the only interest to which the tax lien could attach. Thus, it
is argued that to obtain title to the property the IRS must first make
payment in full of the prior mortgage indebtedness. The appellees
contend that if the government had been given notice before the
foreclosure sales, it would have had to purchase the property at
foreclosure for the full amount owed to each mortgagee in order to
protect the tax lien and obtain any revenue for the government. To
change the priorities because of lack of notice, it is urged, would be
against the principles of equity and fairness. It is apparent the
district court was persuaded by these arguments. We now address the
issues raised by this appeal.
of a Mortgagee to Provide Notice of a Nonjudicial Foreclosure
Pursuant to 26 U. S. C. §7425. When a taxpayer, who is liable to
pay any tax, neglects or refuses to pay the tax after demand, the amount
becomes "a lien in favor of the United States upon all property and
rights to property, whether real or personal, belonging to such
person." 26 U. S. C. §6321. 8
"The overriding purpose of the tax lien statute obviously is to
ensure prompt revenue collection." United States v. Kimbell Foods, Inc., 440
715, 734-35, 99
1448, 1462, 59 L. Ed. 2d 711 (1979). As we observed in United States v. Second National Bank of North Miami [74-2 USTC ¶9739], 502
F. 2d 535 (5th Cir. 1974), cert. denied, 421
1567, 43 L. Ed. 2d 777 (1975), "[i]t has long been recognized that
liens to guarantee payment of taxes are an important element of the
sovereign's taxing power." Id.
at 545. With these objectives in mind, we must rule on the questions
presented in this appeal. We initially determine the consequences that
arise when a mortgagee fails to provide notice to the government of a
forclosure sale and subsequently purchases property this is subject to a
valid federal tax lien.
Under 26 U. S.
C. §7425(b) "a sale of property on which the United States has or
claims a lien . . . shall . . . be made subject to and without
disturbing such lien or title, if notice of such lien was filed or such
title recorded in the place provided by law for such filing or recording
more than 30 days before such sale and the United States is not given
notice of such sale in the manner prescribed in subsection (c). . .
The statute sets forth two requirements that must exist before a sale of
property, upon which the
has a tax lien, can be made subject to the lien. First, the
must file its notice of lien 30 days prior to the sale. Second, the
must not be furnished with notice of the sale in the time and manner
prescribed by 26
C. §7425(c)(1). One commentator, in discussing these notice provisions,
made the following observation:
judicial or nonjudicial procedures provided under local law by which the
holder of a senior mortgage or other lien may foreclose the interests of
the debtor and of junior lienors may not suffice to extinguish a junior federal
lien, unless the senior lienor complies with the further requirements
prescribed by Congress for the protection of the Government.
Federal Liens and Priorities--Agenda for the Next Decade III, 77
Yale L. J. 1104, 1168 (1968) (emphasis in original).
determined that the liens attached to the property in question. 9
It is undisputed that the government filed notice of the tax liens at
least 30 days prior to the foreclosure sale. It is also undisputed that
the mortgagees, Southern Bank and Mid-State, did not provide the
government with notice of the sales pursuant to 26
C. §7425(c). Since both of the requirements for a sale to be made
subject to the tax lien have occurred in these cases, we hold that the
sales of the property subject to the tax liens were made subject to
and without disturbing the federal tax liens.10
is supported by Myers v. United States [81-2 USTC ¶9490], 647 F.
2d 591 (5th Cir. Unit A 1981). 11
In Myers, the mortgagee held the senior encumbrance on the
property. The tax lien, which was duly recorded, was junior to the
mortgage. After the tax lien was filed a sheriff's sale was held
pursuant to a nonjudicial foreclosure proceeding initiated by the
mortgagee and the mortgagee purchased the property. The mortgagee
subsequently sold the property to Myers, a third party. At no time
during the foreclosure proceedings was the
joined as a party or served with notice of the sale. The government
levied on the property and served Myers with a notice of the seizure.
Myers brought an action for wrongful levy.
that the tax lien was not discharged by the nonjudicial foreclosure sale
because of the mortgagee's failure to give notice, we observed that 26
U. S. C. §7425 "was intended to protect the United States, where
its tax lien is junior, from its discharge under state law without prior
notice to the United States of proceedings by which the property is
at 596. We concluded that:
7425(b) provides that where notice of a federal tax lien is duly filed
more than thirty days prior to the date of the foreclosure sale, the
sale will be made subject to the federal lien unless written notice of
the sale is served upon the
at least twenty-five days before the sale is held. It is undisputed that
such notice was not given in the present case. It therefore follows that
the second federal lien was not discharged by the foreclosure sale.
Id. at 601.
v. United States [83-1 USTC ¶9343], 704 F. 2d 1100 (9th Cir. 1983),
the Ninth Circuit reached a similar conclusion. The court observed that
"[s]ection 7425(b) expressly provides that a nonjudicial sale of
property on which the United States has a lien . . . shall be made
'subject to and without disturbing such lien or title' if the
United States is not given notice of such sale in the manner prescribed
in subsection (c)(1)." Id.
at 1107 (emphasis in original) (footnote omitted). 12
And, in United States v. Rodgers, 461
2132, 76 L. Ed. 2d 236 (1983), the Court noted that "[o]nce a lien
has attached to an interest in property, the lien cannot be extinguished
(assuming proper filing and the like) simply by transfer or
conveyance of the interest."
Id. at 2141 n. 16.
of the Federal Tax Lien From its Junior Status. Southern Bank and
Mid-State argue that to allow the government to summarily levy on the
property would allow it to "leapfrog priorities." Their
contention is that this would cause an inequitable result for it would
put the government in a better position than prior to the foreclosures.
arguments relate to the priority and overall operation of the federal
tax lien law. It is established that matters directly affecting the
nature and operation of the federal tax lien and its relative priority
present federal questions. See United States v. Brosnan [60-2
USTC ¶9516], 363 U. S. 237, 240, 80 S. Ct. 1108, 1110, 4 L. Ed. 2d 1192
(1960) ("[M]atters directly affecting the nature or operation [of
federal tax liens] are federal questions, regardless of whether the
federal statutory scheme specifically deals with them or not."); Aquilino
v. United States [60-2 USTC ¶9538], 363 U. S. 509, 513-14, 80 S.
Ct. 1277, 1280, 4 L. Ed. 2d 1365 (1960) ("[O]nce the tax lien has
attached to the taxpayer's state-created interests, we enter the
province of federal law, which we have consistently held determines the
priority of competing liens asserted against the taxpayer's 'property'
or 'rights to property.'").
principle in mind, we address the appellees' arguments. The federal tax
lien has been elevated to its current status because of the principles
regarding merger and foreclosure sales and due to the operation of 26 U.
S. C. §7425. When a mortgagee forecloses on property, the doctrine of
merger generally operates to extinguish the mortgage indebtedness and
the lien held by the mortgagee. "In other words, the mortgage is no
longer in existence, and thus the original holder of the mortgage no
longer has a mortgage lien which can be foreclosed a second time, even
if the original indebtedness is not satisfied from the sales
proceeds." Baldwin County Savings & Loan Assoc. v. United
States, 81-2 USTC ¶9619 at 88,065 (S. D.
1981). "The equity of redemption in either case, however, is
extinguished by a valid foreclosure sale. . . ." Trauner v.
Lowrey, 369 So. 2d 531, 534 (
Southern Bank and Mid-State conducted the foreclosure sales and
purchased the subject property it is reasonable for us to conclude that
a complete merger of title resulted, vesting the fee simple title to the
property in the mortgagees. This title is superior to all liens except
those not extinguished, such as state, county and city taxes, a federal
tax lien properly perfected as in this case, and such other liens as
federal and local governments may determine are not extinguishable by a
nonjudicial foreclosure sale. 13
For this reason, it was impossible for Mid-State to conduct a second
correcting foreclosure sale. It follows that when Southern Bank's and
Mid-State's liens were extinguished, the tax liens, were naturally
elevated from their junior status.
In our view,
the appellees' failure to provide notice to the government of the sale
and their subsequent purchase of the property has placed the government
in a position to exercise any of its collection remedies including levy
and seizure of the property. The appellees argue that this result is
harsh and that it violates principles of equity.
Before we rule
on their equitable arguments, we examine the legislative history of 26
C. §7425. It illustrates that the statute was designed to make a
"provision for a timely notice to the Government where it has the
status of a junior lienor and there is no plenary proceeding."
Federal Tax Lien Act of 1966, S. Rep. No. 1708, 89th Cong., 2d Sess., reprinted
in 1966 U. S. Code Cong. & Ad. News 3722, 3748. The Committee on
Finance indicated that "[t]here [did] not appear to be any reason
why in these cases there should not be a timely notice of the
proceedings to the Government where notice of its tax lien is on file.
The requirement of notice gives the Government an opportunity to review
its position and determine the appropriate action without placing an
undue burden on the foreclosing creditor."
Id. (emphasis added). In specifically discussing 26
C. §7425(b) it was observed:
bill provides that, in the case of all other foreclosure proceedings,
where timely notice of the proceedings is given to the Government, the
Government's claim to property under a tax lien is to be discharged in
the manner provided by local law.
foreclosures covered by this provision are made without proper notice to
the Government, the bill provides that this does not affect the
Government's claim under a tax lien (as where the Government is not
joined in a judicial foreclosure). In these cases, the Government's
claim continues against the property into the hands of a third party.
Id. at 3749.
commentator, in seeking reform of the notice provisions, made the
Notice of a
sale enables the tax collector to drum up interest among potential
bidders, to observe the fairness of the sale, and to reach the surplus
proceeds, if any. Notice well in advance of the sale seems necessary
only for the first of those purposes; but the tax collector is likely to
utilize the opportunity to drum up bids only in the case of real
property . . . and in these cases 25 days may be too short to be
. . .
seems desirable also to provide that the Government's remedy for
inadequacy of the notice shall be only against the selling creditor, and
that the innocent purchaser's title shall not be impaired if he behaved
reasonably. Plumb, Federal Liens and Priorities--Agenda for the
Next Decade III, 77 Yale L. J. 1104, 1171-72 (1968) (emphasis added)
Even if this
commentator's suggestions for reform were adopted, Mid-State and
Southern Bank would not prevail. The commentator advocates that the
remedy for inadequate notice should be against the selling creditor
rather than an innocent purchaser who behaved reasonably. E.g.,
as in Myers, supra. Mid-State and Southern Bank were neither
innocent purchasers nor did they behave reasonably under the
appellees contend that our interpretation of the statute produces a
harsh result, we think it is consistent with the plain language of the
statute, the legislative history, and the overall purpose of our tax
collection system. The appellees claim in each case the value of the
property was much less than the amount of the debt, that I. R. S. in
neither case would have paid off the debt if notice had been properly
given, and that the government is unjustly enriched if it now has a
first lien against the property. To accept appellees' argument would
result in a disparate, unequal and impossible application of the federal
notice statute. Appellees would have the notice statute apply only when
the value of the land exceeded the mortgagor's debt to the mortgagee.
This would require litigation by the government of every non-notice case
so that it would be able to conduct a comparison of the value of the
security to the amount of the indebtedness. Congress required the simple
expediency of notice by the mortgagee to the government prior to
foreclosure in every case. We cannot and do not wish to rewrite the
statute. Equitable principles do not persuade us to reach a contrary
conclusion for the harsh results now imposed could have easily been
avoided by Mid-State and Southern Bank.
Southern Bank, as mortgagees, were in the best position to provide
notice to the government and extinguish the liens. If as in Myers,
an innocent third party purchaser takes the property subject to the
lien, these experienced mortgagees certainly should not receive
is bolstered by the supremacy clause of the United States Constitution
which provides that:
Constitution, and the Laws of the United States which shall be made in
Pursuance thereof; and all Treaties made, or which shall be made, under
the Authority of the United States, shall be the supreme Law of the
Land; and the Judges in every State shall be bound thereby, and Thing in
the Constitution or Laws of any State to the Contrary notwithstanding.
S. Const. Art. VI, cl. 2.
As the Supreme
Court stated in Commonwealth Edison Company v. Montana, 453 U. S.
609, 634, 101 S. Ct. 2946, 2962, 69 L. Ed. 2d 884 (1981) `[p]re-emption
of state law by federal statute or regulation is not favored' in the
absence of persuasive reasons--either that the nature of the regulated
subject matter permits no other conclusion, or that the Congress has
unmistakably so ordained." Id.
of taxes serves a vital national interest. The federal tax lien is one
of the tools utilized by the government to achieve this objective.
Because of this important interest, we cannot permit states to nullify
the effectiveness of the federal tax lien by enacting nonjudicial
foreclosure laws or by applying various equitable principles recognized
by the state. The legislative history of 26
C. §7425 makes clear that Congress did not intend such a result.
hold that the failure of the mortgagees to comply with the notice
provisions of 26
C. §7425 before they conducted the foreclosure sales and purchased the
property, caused their mortgage liens to be extinguished and the federal
liens to be elevated from their junior status.
Interest to which the Tax Lien Attached. One issue we must decide is
whether each taxpayer had a sufficient property interest for the federal
tax liens to attach to the underlying property.
classifies itself as a "title" state with regard to mortgages.
Thus, "[e]xecution of a mortgage passes legal title to the
mortgagee. The mortgagor is left with an equity of redemption, but upon
payment of the debt, legal title revests in the mortgagor." Trauner
v. Lowrey, 369 So. 2d 531, 534 (
1979) (citations omitted). The equity of redemption is extinguished by a
valid foreclosure sale. Thus, a "mortgagor or his vendee is left
only with the statutory right of redemption." Id.
follows the title theory, the appellees contend that the only interest
to which the liens could attach was each taxpayer's equity of
redemption. When foreclosure occurred, each taxpayer was left with a
statutory right of redemption. Thus, the appellees contend that the
holds only a statutory right of redemption in the property.
the appellees, the
, as a holder of a statutory right of redemption, could not claim legal
title to the property prior to the foreclosure sale unless it paid the
mortgage in full and cannot now seek to recover the property until it
has paid the mortgage in full.
We agree with
the appellees that under
law the property interest held by each taxpayer was an equitable right
of redemption. In
, this is a valuable property interest for it may be conveyed by the
mortgagor and it allows a mortgagor, who has retained possession of the
subject property, to be possessed of legal title against all of the
world except the mortgagee or its assignee. See Trauner v. Lowrey,
369 So. 2d 531, 534 (
1979); Jones v.
, 237 So. 2d 460, 462 (
1970). We therefore conclude that each taxpayer had "property"
and "rights to property" under U. S. C. §6321 to which the
tax lien could attach. See Little v. United States [83-1 USTC ¶9343],
704 F. 2d 1100, 1105 (9th Cir. 1983) for a discussion of a right of
redemption being a "right to property" since such a right is
an economic asset, has a pecuniary worth, and is transferable.
In its brief,
Mid-States relies upon Gilliland v. United States, 47 A. F. T. R.
2d 1364, 81-1 USTC ¶9322 at 86,837 (M. D. Tenn. 1981), arguing the
In a dispute
involving similar facts, the courts in Gilliland noted that since
the taxpayer held only equitable rights to the property, the IRS' lien
could attach solely to these rights. The courts also noted that a
foreclosure sale without notice to the IRS did not discharge the IRS'
lien, which continued on after the sale.
Brief, No. 84-7501, at 8. The
court in that opinion held the following:
However, it is
clear that the lien did in fact attach to Webb's interests in the
realty, even though those interests were equitable in nature. See Howard
v. United States, 566 S. W. 2d 521 (
1978) (federal tax lien attached to the equitable interest of income
beneficiary in a spendthrift trust). And, since Webb's equitable
interests in the property continued to exist until terminated by the
foreclosure sale, the issue now before the court is whether that sale
was also effective to extinguish the government's rights under the tax
foreclosure sale was precisely the kind of non-judicial sale
contemplated by 26
C. §7425(b), and in the absence of the notice required by the statute,
the sale could not operate to discharge the government's tax lien. That
tax lien, having previously attached to Webb's equitable interests in
the subject property, clearly survived the trustee's foreclosure sale.
¶9322 at 86,840.
by the appellees that the government had only a statutory right of
redemption inferior to their title is meritless. The interest of the
government after the foreclosure sale was that of an enforceable lien
against the realty in each instance and
's statutory redemption provisions have no application to this case.
of the district court in each case is reversed. In reversing, we do not
divest the district court of any jurisdiction it needs with respect to
the enforcement of the government's tax liens.
Honorable Eugene A. Wright, U. S. Circuit Judge for the Ninth Circuit,
sitting by designation.
In Southern Bank of Lauderdale County v. Internal Revenue Services,
United States of America [84-1 USTC ¶9245], 586 F. Supp. 12 (N. D.
Ala. 1984) [hereinafter cited as Southern Bank], the taxpayer,
Florence Reinforced Plastics, Inc., an Alabama Corporation, executed two
mortgages to Southern Bank on a parcel of real property located in
Lauderdale County, Alabama.
Homes, Inc. v. United States [84-1 USTC ¶9533], No. 83-AR-1072-S,
slip op. (N. D. Ala. May 22, 1984) [hereinafter cited as Mid-State],
the taxpayers, the Fergusons, executed a first mortgage to Jim Walters
Homes, Inc. who later assigned the mortgage to Mid-State.
In Southern Bank, the taxpayer was assessed $19,025.61. In Mid-State,
the taxpayers were assessed $8,580.18.
Under 26 U. S. C. §7525(c)(1), notice of a nonjudicial or other sale of
property "shall be given . . . in writing, by registered or
certified mail or by personal service, not less than 25 days prior to
such sale, to the Secretary." The statute further provides that a
nonjudicial or other sale of property "shall discharge or divest
such property of the lien or title of the
consents to the sale of such property free of such lien or title."
26 U. S. C. §7425(c)(2).
Southern Bank purchased the property at the nonjudicial foreclosure sale
for $37,714.18. Southern Bank, 586 F. Supp. at 13. Mid-State
purchased the property at the nonjudicial sale for $12,542.74. Record,
No. 84-7501 at 109.
The first sale was held on
December 30, 1981
. The second sale was held
November 30, 1982
Southern Bank reaches this conclusion because it held legal title before
and after the foreclsoure sale and the foreclosure eliminated the
mortgagor's right of equitable redemption. The mortgagor then only had a
statutory right of redemption. Southern Bank, 586 F. Supp. at 13.
See Infra at §III C for a discussion of this issue.
If any person
liable to pay any tax neglects or refuses to pay the same after demand,
the amount (including any interest, additional amount, addition to tax,
or assessable penalty, together with any costs that may accrue in
addition thereto) shall be a lien in favor of the United States upon
all property and rights to property, whether real or personal, belonging
to such person.
Mid-State agrees that the property is "subject to" the federal
tax lien. However, it argues that it has legal title to the
property "subject to" the government's statutory right of
redemption. As we shall demonstrate in the following sections of this
opinion, this argument is without merit.
In Bonner v. City of Prichard, 661 F. 2d 1206 (11th Cir. 1981)
(en banc), this court adopted as binding precedent all of the decisions
of the former Fifth Circuit handed down prior to the close of business
on September 30, 1981. Id.
Another case that is consistent with our position is Baldwin County
Savings & Loan Association v. United States, 81-2 Tax Ct. Rep.
(CCH) ¶9619 (S. D. Ala. 1981). In Baldwin, the taxpayer executed a mortgage in favor of the
plaintiff/mortgagee. The mortgage was duly recorded. The
subsequently filed a notice of federal tax liens against the taxpayer.
The mortgagee, without providing notice pursuant to 26
C. §7425, conducted a nonjudicial foreclosure sale. The mortgagee
purchased the property at the sale.
court found that the tax liens attached to the real property in issue.
It concluded that because the
was not given notice of the sale, the federal tax liens were not
discharged. Thus, the court held that "by purchasing the property
for an amount equal to the unpaid balance of the promissory note, not
only was the mortgage extinguished, but also the debt was paid.
Accordingly, the tax liens on the subject real property were promoted to
a senior lien status, and that is the position they enjoy today." Id.
appellee attempts to distinguish Myers, by which we are bound,
nor Little, by which we are not bound, but which we find
To this statement about extinguishment of junior liens in a nonjudicial
foreclosure, we must attach a caveat. This holding is limited to this
case and these facts. Because of our decision in this case, it is not
necessary for us to discuss the constitutional implications inherent in
's nonjudicial mortgage foreclosure statute which on its face permits
extinguishment by a mortgagee of subordinate liens without any notice to
those lienors except by publication in the newspaper. At this point in
time, to the knowledge of this court, no court has held such a
foreclosure statute unconstitutional. However, for a discussion of such
a constitutional problem, see Federal Deposit Insurance Corporation
v. Morrison, 747 F. 2d 610 (11th Cir. 1985), reh'g denied,
763 F. 2d 419 (1985) (Clark, J., dissenting with opinion); Note, Mortgages--Does
Foreclosure Under Power of
Violate Due Process Right?, 4 Cum.-Sam. L. Rev. 507 (1974); (G.
Osborne, G. Nelson and D. Whitman, Real Estate Finance Law §7.23 at 497
¶9277]Maurice J. Zink, Plaintiff v.
United States of America
S. District Court, So. Dist.
Div., Civil Action No. H-79-535, 6/5/81
[Code Secs. 6321 and 7425]
Tax liens: Validity: Notice of nonjudicial sale.--Where a tax
lien was filed more than 30 days prior to a nonjudicial foreclosure
action and the trustee of the subject property failed to notify the IRS
that the property was being offered for sale to satisfy a promissory
note made by the delinquent taxpayer who was the record owner, the tax
lien was not discharged by the trustee's sale. Therefore, ths tax lien
was a valid lien, outstanding against the property on the date of the
levy by the IRS, and the government was entitled to sell the property
even though the title was no longer held by the delinquent taxpayer.
Davis, Dyche & Wright, P. O. Box 2409, Houston, Texas 77001, Maurice
Bresenhan, Bresenhan & Wingate, 5010 Dincans, Houston, Texas 77098,
for plaintiff. Shawna L. Brown, Department of Justice,
, for defendant.
May 24, 1975
, the plaintiff sold two parcels of real property in
, to Fred M. Crawford, Jr., which property is described as follows:
TRACT: All that tract or parcel of land situated in
, out of Joshua Fletcher League, and being the 16.6 acre tract described
in a deed from Kinley A. Ullrich and wife to Otto Ullrich, recorded in
Book 117, Page 288, Washington County Deed Records, more particularly
described as follows:
iron pin and fence corner in the southwest line of the J. Fletcher
League at the East corner of the W. S. Townsend Survey, said point being
the south corner of the 16.6 acre tract.
the southwest line of the Fletcher League, N. 46 deg. 43 min. 39 sec. W.
695.26 ft. (250.29 v.) to an iron pin and fence corner at the west
corner of the original 151.5 acre Otto Ullrich tract.
the northwest line of said tract N. 43 deg. 56 min. 30 sec. E. 471.83
ft. (169.86 v.); N. 42 deg. 23 min. E. 543.50 ft. (195.66 v.) to the
most northwestern corner of Henry Ullrich's 165.5 acre tract.
the southwest line of Henry Ullrich tract S. 48 deg. 11 min. 30 sec. E.
680.23 ft. (244.88 v.) to an iron pin and fence corner at the north
corner of the John Ullrich tract.
the northwest line of said tract S. 42 deg. 15 min. 50 sec. W. 1032.77
ft. (371.8 v.) to the point or place of beginning, containing 16.086
acres of land. Surveyed by D. R. Muzzy, Registered Public Surveyor,
July 24, 1962
Being the same
tract described in Contract of Sale to Purchase from Veterans Land Board
of the State of
to Howard H. Peacock, dated
September 2, 1962
, and recorded in Volume 243, page 300, Deed Records of Washington
TRACT: All that tract or parcel of land being a 6.871 acre tract out
of the Joshua Fletcher League, Washington, County, Texas, more
particularly described as follows:
an iron pin and fence corner in the southwest line of a public road at
the east corner of the Parks tract and the northwest line of the Ullrich
said line S. 42 deg. 44 min. W. 450.38 ft. (162.14 vrs.) to an iron pin
at the north corner of the 16.086 acre H. Peacock tract.
the Northeast line of said tract S. 48 deg. 11 min. 30 sec. 680.23 ft.
(244.88 vrs.) to the east corner of said Peacock tract.
THENCE N. 42
deg. 20 min. 50 sec. E. 431.67 ft. (155.4 vrs.) to an iron pin in the
southwest line of a public road.
said road line N. 46 deg. 32 min. 20 sec. W. 647.29 ft. (233.02 vrs.);
N. 48 deg. 11 min. 30 sec. W. 30.00 ft. (10.8 vrs.) to the point or
place of beginning, containing 6.871 acres of land.
property described above is hereinafter referred to as "Real
consideration for the sale consisted of the execution of a promissory
note by Fred M. Crawford, Jr., in the amount of $33,345, with interest
at the rate of 9 percent, and a Deed of Trust to secure the note.
May 28, 1975
, a Warranty Deed was recorded transferring the Real Property from the
plaintiff to Fred M. Crawford, Jr. In addition, on that date, the Deed
of Trust was filed for record. The trustee named in the Deed of Trust
was Julian E. Weisler, II. The Deed of Trust provided that, in the event
of a default by Fred M. Crawford, Jr., on the promissory note, the
plaintiff could cause the trustee to sell the Real Property by public
auction to satisfy the indebtedness.
Spetember 7, 1977, the Internal Revenue Service filed a Notice of
Federal Tax Lien in the amount of $23,430.56 against Fred M. Crawford,
Jr., with the Clerk of Washington County, Texas. This lien reflected
income taxes and statutory additions due from Fred M. Crawford, Jr., for
the taxable year ended
December 31, 1975
September 7, 1977
, the Internal Revenue Service filed a Notice of Federal Tax Lien in the
amount of $3,549.14 against Fred M. Crawford with the Clerk of
Washington County, Texas. This lien reflected employment raxes and
statutory additions due from Fred M. Crawford, Jr., for the taxable
December 31, 1976
september 26, 1977
, the Internal Revenue Service filed a Notice of Federal Tax Lien in the
amount of $10,501.80 against Fred M. Crawford with the Clerk of
Washington County, Texas. This lien reflected employment taxes and
statutory additions due from Fred M. Crawford, Jr., for the taxable
March 31, 1977
June 30, 1977
December 21, 1977
, the Internal Revenue Service filed a Notice of Federal Tax Lien in the
amount of $13,985.86 against Fred M. and D. G. Crawford with the Clerk
of Washington County, Texas. This lien reflected income taxes and
statutory additions due from Fred M. Crawford, Jr., for the taxable year
January 17, 1978
, the Internal Revenue Service filed a Notice of Federal Tax Lien in the
amount of $9,254.02 against Fred Maurice Crawford, Jr., with the Clerk
of Washington County, Texas. This lien reflected employment taxes and
statutory additions due from Fred M. Crawford, Jr., for the taxable
September 30, 1977
December 31, 1977
9. At the time
each Notice of Tax Lien was filed, Fred M. Crawford, Jr., was still the
record owner of the Real Property.
10. Early in
1978, Fred M. Crawford, Jr., defaulted on the promissory note, and the
plaintiff caused the trustee to hold the foreclosure sale on
March 7, 1978
. The plaintiff was the highest bidder at the sale and purchased the
property for $29,900. A Substitute Trustee's Deed transferring the
property from Aubrey Dickson Martin, Jr., Trustee, to the plaintiff was
filed for record on
March 10, 1978
11. On the
date of the foreclosure sale, Fred M. Crawford, Jr., was indebted to the
plaintiff for $31,346.80, which amount consisted of the following:
Principal due as of March 7, 1978:$25,842.42
Interest due as of
March 7, 1978
Attorney's fees incurred in connection
Trustee's fees incurred in connection
Filing fees incurred in connection
the plaintiff nor the trustee gave any notice to the District Director
of Internal Revenue for the district in which the property was located
that the Real Property was being offered for sale to satisfy the note
held by the plaintiff.
13. On June 5.
1978, the plaintiff was served by the Internal Revenue Service with a
levy and a Notice of Seizure against the Real Property. The Internal
Revenue Service then proceeded to offer the Real Property for sale as a
sealed bid sale in which bids were to be opened on
June 28, 1978
. The purpose of the levy was to collect federal income taxes and
statutory additions owed by Fred M. Crawford, Jr., for the taxable year
1975, in the amount of $15,471.55. The tax liabilities underlying the
other four liens outstanding as of
March 7, 1978
, had been satisfied prior to that date by seizure and sale of
Crawford's property other than the Real Property involved herein. Only
the 1975 income tax liability remained unpaid as of the date of the
levy; consequently, only the amount of that liability, plus statutory
additions, was included in the levy.
June 13, 1978
, before the sealed bid sale occurred, the plaintiff redeemed the Real
Property by a payment of $15,360.29 to the Internal Revenue Service.
That payment was applied to the 1975 income tax liability of Crawford
pursuant to the levy. On the same day, a Release of Levy was filed by
the Internal Revenue Service with respect to the Real Property. Also on
June 13, 1978
, Certificates of Release of Federal Tax Lien were filed by the Internal
Revenue Service with respect to the liens referred to in paragraphs 4,
6, 7, and 8 above. On
July 20, 1978
, a Certificate of Release of Federal Tax Lien was filed by the Internal
Revenue Service with respect to the lien referred to in paragraph 5
15. On or
about March 21, 1979, the plaintiff filed the instant action which
alleged that the June 6, 1978, levy against the plaintiff's Real
Property located in Washington County, Texas, was wrongful and prayed
for judgment in the amount of $15,471.55 and interest thereon.
1. This Court
has jurisdiction to determine this matter under the provisions of 28 U.
S. C., Sec. 1346(e), and Section 7426 of the Internal Revenue Code of
1954 (26 U. S. C.).
6321 of the Internal Revenue Code of 1954 provides that there shall be a
lien in favor of the
if any person liable to pay any tax neglects or refuses to pay the tax
after demand. Section 6321 further provides that such lien shall be upon
all property and rights of property, whether real or personal, belonging
to that person.
3. The lien
for taxes provided in Section 6321 includes a lien for all additions to
tax, including interest and assessable penalties, together with any
costs that have accrued in addition thereto.
4. The lien
for the unpaid taxes of Fred M. Crawford, Jr., for the taxable year 1975
was filed for record on
September 7, 1977
, under the provisions of Section 6323(f) of the Internal Revenue Code
of 1954, and became a valid lien as to all third parties on all property
of the taxpayer, Fred M. Crawford, Jr. The plaintiff's property which
was levied upon by the Internal Revenue Service was property of Fred M.
Crawford, Jr., when the
' tax lien arose and when that lien was filed for record on
September 7, 1977
7425 of the Internal Revenue Code of 1954 states the conditions for a
discharge of a tax lien from property encumbered by such liens. In
pertinent part, Section 7425(b)(1) provides that nonjudicial foreclosure
and sale of property on which the United States claims a lien shall not
disturb the United States' lien, if notice thereof has been filed more
than 30 days before such sale and the United States is not given notice
of such sale in the manner prescribed by Section 7425(c)(1). Section
7425(c)(1) requires that notice of nonjudicial foreclosure and sale
shall be made in writing by registered or certified mail or by personal
service, not less than 25 days prior to such sale, to the Secretary of
the Treasury or his delegate. Treasury Regulations on Procedure and
Administration (1954 Code), Sec. 301.7425-3(a)(1) (26 C. F. R.),
provides that the notice of sale is to be given to the District Director
of the Internal Revenue District in which the sale is to be conducted.
6331 of the Internal Revenue Code of 1954 provides as follows:
SEC. 6331. LEVY
Authority of Secretary.--If any person liable to pay any tax
neglects or refuses to pay the same within 10 days after notice and
demand, it shall be lawful for the Secretary to collect such tax (and
such further sum as shall be sufficient to cover the expenses of the
levy) by levy upon all property and rights to property (except such
property as is exempt under section 6334) belonging to such person or on
which there is a lien provided in this chapter for the payment of such
tax. * * *
The term "levy" as used in this title includes the power of
distraint and seizure by any means. * * * In any case in which the
Secretary may levy upon property of rights to property, he may seize and
sell such property or rights to property (whether real or personal,
tangible or intangible).
7. As the tax
lien in question in this
1975) was filed more than 30 days prior to the nonjudicial foreclosure
action and the trustee failed to make the notification required by
Section 7425(c)(1), the tax lien was not discharged on the subject
property which was foreclosed by the trustee's sale of March 7, 1978.
Therefore, the tax lien in question was a valid lien, outstanding
against the subject property on the date of the levy by the Internal
June 6, 1978
8. In light of
the foregoing, the
was entitled to levy on and sell the subject property even when the
title was held by Maurice J. Zink.
therefore, the opinion of this Court that the plaintiff's Complaint is
dismissed with prejudice, each party to bear its own costs.
came on for trial before the Court, Honorable Norman W. Black, United
States District Judge, presiding, and the issues having been duly tried
and the Court having entered its Findings of Fact and Conclusions of
Law, it is hereby.
ADJUDGED, and DECREED that judgment be entered for the defendant, United
States of America, and against the plaintiff, Maurice J. Zink, and that
plaintiff take nothing by virtue of his Complaint, and the Complaint is
hereby dismissed, and the defendant shall recover its costs incurred in
United States of America
, Plaintiff v. Augustin Romero Fernandez, Augustin O'Neil Perez, and
Miriam Romeras Casterro, Defendants
S. District Court, Dist. Puerto Rico, Civil No. 80-2537(PG), 12/11/81
[Code Secs. 6321 and 7425]
Lien for taxes: Discharge: Judicial sale: Puerto Rico executory
process.--A federal tax lien on real property located in Puerto Rico
filed prior to the institution of a foreclosure suit was not
extinguished by the suit and the purchaser of the property at a judicial
sale following foreclosure took the property subject to the tax lien.
Puerto Rico's executory process was a judicial sale within the meaning
of Code Sec. 7425 and since the
was not joined as a party to the foreclosure proceedings and had
properly filed its notice of lien before the proceedings commenced, its
lien was not extinguished.
Montilla, Assistant United States Attorney Ponce, Puerto Rico 00918,
Paige E. Reffe, Department of Justice, Washington, D. C. 20530, for
plaintiff. Manuel Pizarro-Colon, P. O. Box 243, Ponce, Puerto Rico 00731, for
was brought by plaintiff to collect unpaid tax liabilities of Augustín
Romero Fernández. The suit seeks, specifically, to reduce the tax
liabilities to judgment and to foreclose the tax liens on a real
property which belonged to the taxpayer Augustín Romero Fernández, but
which is now owned by third persons.
of this Court is based on 28
C. 1340 and 1345 and under 26 U. S. C. 7402. Defendants Augustín O'Neil
and his wife, Miriam Romeras Castrero, filed a motion for summary
September 29, 1981
, requesting the dismissal of plaintiff's complaint. On Octover 24,
1981, the plaintiff filed a cross-motion for summary judgment along with
a memorandum in support of its motion. Defendant Augustín Romero Fernández
has made no appearance in the case.
court such as this one is faced with cross-motions for summary judgment,
great care must be exercised to assure that no genuine material issues
of fact remain to be resolved before entering judgment. 1
In SEC v. American Commodity Exchange, Inc., 546 F. 2d 1361 (10
Cir., 1976) it was stated at pages 1365-66:
that there were joint motions does not result in any waiver of judicial
determination of whether a material issue of fact exists on either side
of the case. See Rains v. Cascade Industries, Inc., 402 F. 2d
241, 245 (3rd Cir. 1968). This does not mean, however, that the making
of cross-motions is without significance, for it is. This court's
decision in H. B. Zachry Co. v. O'Brien, 378 F. 2d 243, 245 (10th
Cir. 1967), held that the filing of cross-motions under Rule 56, F. R.
Civ. P. raises the inference that there is no evidence other than the
pleadings and supporting instruments to be considered, and so the trial
court need only examine those materials in ascertaining whether an issue
of material fact exists."
with great care all the pleadings and supporting instruments in this
case, including a written stipulation of all uncontested facts in a
Pre-Trial Order filed on September 30, 1981, we are satisfied that there
are no material issues of fact in controversy and that the only issue to
be resolved is one of law. Thus, the Court makes the following:
O'Neil Pérez and his wife, Miriam Romeras Castrero, are the owners of a
residential real estate located at Calle 3 No. E-44, Urbanización El
, which property the Government now seeks to foreclose. See Exhibit A
attached to defendants' motion.
2. They bought
this property from Zenaida Feliciano on
March 1, 1979
, Deed No. 8, before Notary Public Manuel Pizarro Colón. See Exhibit A
attached to defendants' motion.
Secretary of the Treasury for the United States Government made
assessments against the taxpayer Augustín Romero Fernández for unpaid
taxes and demanded payment thereof.
4. The total
liability of the taxpayer for Federal Insurance Contribution Act (FICA)
taxes and Federal Unemployment Tax Act (FUTA) taxes, and interests,
amounted to $2,904.87 as of
May 20, 1980
. See Exhibit A attached to plaintiff's motion.
Romero Fernández failed to pay the assessments. By virtue of the
failure to pay the assessments, federal tax liens arose under the
provisions of 26
C. 6321 and attached to all the property and rights to property of the
6. A federal
tax lien with respect to the unpaid FICA and FUTA tax liabilities,
Document No. 0328675, for the amount of $2,122.02, was recorded on
November 17, 1975
, in the Ponce Registry of Deeds, at page 73, seat 3 of the Federal
Liens Volume and in the United States District Court. This lien
encumbered the property described in fact No. 1. See Exhibit B attached
to plaintiff's motion.
7. A first
deed of trust mortgage was recorded in the Ponce Registry of Deeds on
February 9, 1970
, at page 160 of volume 1131, for the amount of $21,800.00. This
mortgage was held by the Federal National Mortgage Association in
guarantee of a promissory note subscribed by defendant Augustín Romero
Fernández. The property was also encumbered by a lien executed in favor
in the amount of $397.81, as tax on real estate. This lien was filed on
March 7, 1977
, and entered on the margin of page 166, volume 1131 of the Ponce
Registry of Deeds.
taxpayer defaulted on his mortgage payments, and on
February 15, 1978
, the Federal National Mortgage Association filed a complaint in the
Superior Court of Puerto Rico, Ponce Part, requesting that the property
previously described be sold by the Court Marshal at public auction to
the best bidder, free of liens and encumbrances of any kind. The
complaint stated it was plaintiff's understanding that there were no
junior or senior liens affecting the property. See Exhibit C attached to
9. In its
September 27, 1978
, the Court recognized the existence of the junior lien holders and
ordered that the Court Marshal advise the defendants of the auction so
that their successors or legal representatives might attend to protect
their interest. A sale of the property at public auction was also
ordered. See Exhibit D attached to plaintiff's motion.
10. A letter
was sent to the Internal Revenue Service on
January 5, 1979
, advising the I. R. S. of the sale to take place on
January 31, 1979
, in the Office of the Marshal of the Superior Court of Puerto Rico,
Ponce Part, Civil Section. See Exhibit E attached to plaintiff's motion.
was not made a party to the suit requesting judicial sale. The docket
clerk of the United States Attorney's Office in Puerto Rico has no
record of the
having been served process in Civil No. CS78-1414, nor has the Attorney
General of the
in Washington, D. C., been served process in any such suit by registered
or certified mail. See Exhibits F and G attached to plaintiff's motion.
January 31, 1979
A. M., in the Superior Court of Puerto Rico, Ponce Part, the property
was sold at public auction to the only bidder present, Félix Rodríguez
Molina, on his bid of $26,747.95. See Exhibit H attached to plaintiff's
February 1, 1979
, the plaintiff, Federal National Mortgage Association, moved that the
proceeds from the sale be paid over. See Exhibit I attached to
February 8, 1979
, the State Court granted the motion described in paragraph 13 above.
See Exhibit J attached to plaintiff's motion.
February 22, 1979
, the purchaser moved to have the State Court cancel the liens in favor
since neither was present at the sale to protect their interest. See
Exhibit K attached to plaintiff's motion.
February 22, 1979
, the State Court granted the motion mentioned in paragraph 15 above.
See Exhibit L attached to plaintiff's motion.
March 14, 1979
, the Federal National Mortgage Association also moved through its
lawyers to cancel the liens held by the
. See Exhibit M attached to plaintiff's motion.
March 17, 1979
, the State Court granted the motion named in paragraph 17 above. See
Exhibit N attached to plaintiff's motion.
December 19, 1980
filed the present suit.
presented in this case is whether or not a federal tax lien which was
filed prior to the institution of the foreclosure suit is extinguished
when there is a judicial sale instituted by a senior lienholder, when
is not made a party to the suit requesting the sale. Under 28
C. 2410, Congress consented to the joinder of the
in civil actions in any federal or state court having jurisdiction of
certain types of actions. These actions include suits to foreclose a
mortgage or other lien upon real property which the United States has or
claims a mortgage or other lien. The United States is made a party to an
action brought under this section through the procedures set forth in 28
U. S. C. 2410(b) 2.
26 U. S. C. 7425 sets out the methods by which tax liens may be
discharged. The first method is the "judicial proceeding": 3
the government in a plenary judicial proceeding where it has properly
filed a tax lien before the proceedings commence must be joined as a
party in a foreclosure suit to validly discharge the tax lien. The
second method is "other sales", in which the Secretary of
Internal Revenue or the District Director must be given written notice
at least twenty five days before the sale. If the foreclosing creditor
does not comply with the statute, either by joining the government as a
party to the suit in a plenary judicial proceeding, or does not given
adequate notice to the District Director in an "other sale"
proceeding, inferior tax liens will not be discharged by the foreclosure
sale, but will follow the property into the hands of a third party.
Prior to the
Federal Tax Lien Act of 1966 (80 Stat. 1125), which added a new
provision to the internal revenue laws requiring the government to be
made a party in a plenary judicial foreclosure proceeding, the
principles controlling this matter were set forth in United States v.
Brosnan [60-2 USTC ¶9516], 363 U. S. 237 (1960). The opinion in Brosnan
held that state law governing divestiture of federal tax liens is to be
adopted as federal law, except as to the extent Congress may have
entered the field. Since 28 U. S. C. 2410 and 26 U. S. C. 7403 permit
the United States to be made a party to a foreclosure action, Brosnan
held that these federal statutes do not require the United States to be
joined in a foreclosure action. In such a case, under state laws where
private junior liens are extinguished if not joined in a foreclosure
action, federal liens are also divested. However, after the Federal Tax
Lien Act of 1966 was passed, in Hotchkiss v. Starke [75-2 USTC ¶9807],
36 A. F. T. R. 2d 75-6047, a case similar to the case at bar, it was
Brosnan has not been overruled by case law, a reading of 28 U. S.
C. 2410 in conjunction with the Federal Tax Lien Act of 1966 (80 Stat.
1125) shows that the decision in Brosnan is no longer controlling
in the case before us. . . . However, if, as in this case, the
government has properly filed notice of a tax lien before the
proceedings commence, but the government is not joined as a party in the
judicial proceedings, in the event of a judgment to foreclose a
mortgage, or a judicial sale pursuant to such judgment, the property
remains subject to the lien of the United States. Int. Rev. Code of
1954, Section 7425(a)(1); 1966 U. S. Code Cong. and Adm. News 3748-49
It is now
necessary, in order to determine whether the tax lien was properly
discharged in this case, to examine whether Puerto Rico's executory
process is a "judicial proceeding", or whether a foreclosure
sale pursuant to executory process is an "other sale", as
those terms are used in the statute. A review of the legislative history
of Section 7425 reveals no exact definition of what judicial proceeding
However, in A. H. and R. S. Coal Corp. v. United States [78-2
USTC ¶9624] 461 F. Supp. 752 (W. D. Pa., 1978), it was stated:
may accurately be denominated as a judicial sale is not very well
settled' but a judicial sale must have certain basic ingredients. City
v. Whaley's Heirs, 102
Super. 492, 496, 157 A. 503, 504 (1931). A judicial sale is distinct
from an execution sale which may 'issue by mere praecipe of the judgment
creditor'. Yazoo & M. V. R. R. Co. v. City of Clarksdale, 257
U. S. 10, 42 S. Ct., 27, 66 L. Ed., 104 (1921), United States v.
Branch Coal Corp., 390 F. 2d 7, 9-10 (3d. Cir. 1968). To be
classified as a judicial sale, the sale 'must be based upon an order,
decree or judgment directing sale'. Baton Coal Co. Appeal, 365
519, 523, 76 A 2d 194, 196 (1950)".
executory process requires that "an order of sale shall be issued
to the marshal of any district where such property may be, directing him
to seize and sell the same in satisfaction of the judgment in the manner
provided by law for the sale of property under execution". 5
A review of the proceedings in this case reveal that an order was issued
pursuant to a judgment in an ordinary judicial proceeding as provided by
law. This case can be distinguished from Myers v. United States
[80-1 USTC ¶9180], 483 F. Supp. 1154 (D. C. La., 1980), where it was
stated that Louisiana's executory process was used to effect the seizure
and sale of property without previous citation and judgment and that the
Louisiana Supreme Court had even held it constitutionally permissible
for a clerk of court to sign the order of seizure and sale. Because of
the above stated, the court decided in Myers that the foreclosure
sale was an "other sale" instead of a "judicial
In this case
we are convinced that the foreclosure sale was a judicial sale since the
is clear in that the seizure and sale of property cannot be executed
without a previous judgment. Therefore, in view of the fact that the
government had properly filed notice of its lien before the proceedings
commenced and was not joined as a party, the judgment did not disturb
its tax lien on the property, and as in this case, when the property is
sold pursuant to judgment, the government's lien over the property
continues into the hands of the third party. 6
Therefore, the government has valid and subsisting liens upon the
property mentioned in this case. The Court is not in a position to enter
an order to the effect that the liens of the government be foreclosed on
the property at issue herein since the taxpayer has not made an
appearance in the present case.
plaintiff's motion for summary judgment, is GRANTED, and the defendants'
motion for summary judgment, is DENIED.
The Clerk of
the Court shall enter judgment accordingly.
IT IS SO
Wright and Miller, Federal Practice and Procedure, Civil Section 2720.
actions or suits involving liens arising under the internal revenue laws
the complaint or pleading shall include the name and address of the
taxpayer whose liability created the lien and, if a notice of the tax
lien was filed, the identity of the internal revenue office which filed
the notice, and the date and place such notice of lien was filed. In
actions in the State courts service upon the United States shall be made
by serving the process of the court with a copy of the complaint upon
the United States Attorney for the district in which the action is
brought or upon an Assistant United States Attorney or clerical employee
designated by the United States Attorney in writing filed with the clerk
of the court in which the action is brought and by sending copies of the
process and complaint, by registered mail, or by certified mail, to the
Attorney General of the United States at Washington, District of
United States is not joined as a party, a judgment in any civil action
or suit described in subsection (a) of section 2410 of title 28 of the
United States Code, or a judicial sale pursuant to such judgment, with
respect to property on which the United States has or claims a lien
under the provisions of this title--
(1) shall be
made subject to and without disturbing the lien of the United States, if
notice of such lien has been filed in the place provided by law for such
filing at the time such action or suit is commenced, . . ."
S. Rep. No. 1708, 89th Cong., 2d Sess. (1966), 1966 U. S. Code Cong.
& Admin. News, pp. 3722, 3748-9.
The orders of the Superior Court of Puerto Rico extinguishing the
federal tax liens were not effective. The Court is aware that the result
of the decision would allow a good-faith third party purchaser to buy
real property upon which all liens have been currently cancelled on the
public records, yet, be subject to government foreclosure action;
However, Congress has entered the field governing divestiture of federal
tax liens. See United States v. Brosnan, supra.
¶9405]United States of America, Plaintiff v. Joan Weakley, in her own
person and as Executrix of the Estate of Lester T. Weakley, and Keith
Schoonover and Charlotte R. Schoonover, Defendants
S. District Court, East. Dist.
, North. Dist., No. N77-22C, 4/9/80
[Code Secs. 6323 and 7425]
Validity of tax lien: Purchasers of property: Non-judicial sale: No
notice.--The district court determined that the United States had a
valid tax lien on property owned by the taxpayer which was sold at an
execution sale. By virtue of its filing a notice of lien the government
acquired a lien which was superior to the lien under which the property
was sold because only an order to enter judgment, rather than the
judgment itself, was filed by the creditors prior to the filing of the
government's lien. Also, as the property was sold at a non-judicial
sale, there was no discharge of the tax lien because no notice had been
given to the government. The court also held that the purchasers of the
property were not entitled to subrogation to the taxpayer for any
amounts they would have to pay to the
by virtue of the lien because such payments were voluntary in nature.
[Code Sec. 6502]
Clerical error: Collection after assessment: 6 year statute of
limitations.--The court determined that a clerical error in the date
of assessment did not prejudice the purchasers of property encumbered by
a federal tax lien and did not operate to bar the government's
foreclosure on the property.
Moore, Assistant United States Attorney,
, for plaintiff. Austin Parham, Wasinger and Parham, 2801 St. Mary's
, for defendants.
This matter is
before the Court for a decision on the merits on the stipulated record
filed by the parties in lieu of trial.
brought this action pursuant to 26
C. §§ 7402, 7403(b), and 28
C. §§ 1340 and 1345 to reduce tax claims of the
to judgment and to foreclose a federal tax lien. The action was brought
in two claims by the
, the first against the defendant Weakley and the second is for the
valid lien against certain real estate in Marion County, Missouri, now
owned by defendants Schoonover.
Weakley did not answer and was apparently in default. On
March 29, 1978
, on the application of the
, the Clerk of this Court entered a default judgment against her in the
amount of $4,713.52.
Schoonover deny that a lien exists against their property and allege
that the six year statute of limitations for levy or court proceeding to
collect taxes had expired by the time this action was brought. 26 U. S.
C. §6502(a)(1). They allege further that, if this Court concludes that
the statute has not run and that the United States is therefore entitled
to collect from them the taxes owed, that they are entitled to an equity
judgment from this Court against the defendant Weakley in her own person
and as Executrix of her husband's estate by virtue of their having paid
taxes that were in fact owed by another.
At the outset
the Court notes that the amount in question at the time of the original
assessment was $3,382.68, less $3.01 paid on
December 17, 1971
, reducing the amount to $3,379.67. Because of the accrual of interest,
that amount was increased to $4,713.52 on
February 1, 1978
. The record reveals that the interest costs on the assessment add $0.51
per day since that time. Accordingly, the amount in question now totals
filed the instant action on
June 23, 1977
. The suit was authorized by the Chief Counsel of the Internal Revenue
Service, a delegate of the Secretary of the Treasury, and was brought at
the direction of the Attorney General of the United States, pursuant to
26 U. S. C. §§ 7401 and 7403. Defendants Keith and Charlotte
Schoonover are proper defendants in an action such as this as parties
having an interest in property involved in the action. 26 U. S. C. §7403(b).
in question in this action is a parcel of real property in
described as follows:
fifteen in Oakview Subdivision, First Addition, in the City of Hannibal,
County of Marion, Missouri and known as 23 Pauline Drive, Hannibal,
assessment in question was made on June 25, 1971, and was for personal
income taxes against Lester T. Weakley, now deceased, and his wife Joan
Weakley for their tax year ending December 31, 1968. Lester and Joan
Weakley did not make payment of the assessment beyond the $3.01 noted
above despite notice and demand for payment. As a result, the
filed a notice of lien with the Recorder of Deeds of Marion County on
March 23, 1972.
At the time of
the assessment the Weakleys owned
15 as described above. They had acquired it by a warranty deed on
December 20, 1965
. The federal tax lien attached to their interest in this property.
On March 11,
1972, the Hannibal Court of Common Pleas, Marion County, Missouri,
entered an order in which it was "ORDERED, ADJUDGED and
DECREED" that a judgment be entered in favor of the North Missouri
Lumber Company and against the Weakleys. The case was entitled Riney
Construction Co. v. Lester T. Weakley et al., Docket No. 24442. This
was not the final judgment, however; it was an order requiring that it
be entered. The final judgment in the matter was entered on March 31,
1972. That judgment ordered the execution sale of Lot 9, another Weakley
, and created liens in favor of the judgment creditors on all the
Weakley real estate in
pursuant to Missouri Civil Rule 74.34. On April 5, 1972 one judgment
creditor, the North Missouri Lumber Company obtained a writ of
execution. The Sheriff of Marion County subsequently levied upon the
property described above as
15 and, on May 6, 1972, sold it at an execution sale to defendants Keith
and Charlotte Schoonover.
was not given notice of the Sheriffs sale of
15 to the Schoonovers. Also, subsequent to that sale, the Schoonovers
conveyed the property to William and Georgia Blackler. The property was
later reconveyed to the Schoonovers, who currently hold record title to
Schoonovers argue that the sale by which they bought Lot 15 was by
virtue of a lien which is senior to that of the
. They base their argument on the assertion that the order of Judge
Elgin T. Fuller entered on March 11, 1972 created the lien in favor of
the North Missouri Lumber Company, and that the lien of the
was not filed until March 23, 1972. This Court finds otherwise. The
"Order" of Judge Fuller entered on
March 11, 1972
, when considered in the total circumstances and upon full reading of
the document, appears to be exactly what it says it is, an order for the
entry of judgment, and not the judgment itself. See Government's
Exhibit 6. No appeal could have been taken from that order, as it does
not appear to be a final resolution of the rights of the parties.
Rather, the judgment entered on
March 31, 1972
sets out the final resolution of the parties. See
Civil Rules 74.01 and 74.02. The fact that an entry in the file by way
of an earlier order appears to set forth the rights of the parties by
virtue of its language ordering that terms of a stipulation, decree and
judgment be furnished the Court does not make the matter final. See,
e.g., Corley v. McGaugh, 555 S. W. 2d 376 (Mo. App. 1977); Riverside
Chemical Co. v. Hawkins, 555 S. W. 2d 369 (Mo. App. 1977); See also
Comment, "Problems of Finality of Judgments for Purposes of Appeal
L. Rev. 727, 741-44 (1979). Accordingly, the lien in favor of the
creditors from whom the Schoonovers bought Lot 15 did not come into
March 31, 1972
, after that of the
, which was filed on
March 23, 1972
argues that its lien on the Weakley property could not have been
discharged by the sale of
15 to the Schoonovers because it was not given any notice of the sale.
The record reflects, and this Court finds that no such notice was given
to the Government. As the sale to the Schoonovers was a
"nonjudicial sale", 26 C. F. R. 301.7425-2, such notice was
required in order for a tax lien to be extinguished. 26 U. S. C. §7425(b).
virtue of its March 23, 1972 filing of notice of lien, which had arisen
against the Weakleys' property interests pursuant to 26 U. S. C. §§
6321 and 6322, with the Recorder of Deeds for Marion County, the
Government acquired a valid lien on that date in accordance with
Missouri and federal law. See R. S. Mo. §14.010 (1969); 26 U. S. C. §6323(a)
and (f). And, as noted above, that lien has not been extinguished and
therefore still encumbers the land now owned by the Schoonovers.
Schoonovers contend further that this action is out of time, havinb been
filed more than six years after the filing of the assessment. 26 U. S.
C. §6502(a). The notice of lien filed on
March 23, 1972
with the Recorder of Deeds in
recites erroneously that the date of assessment was
May 28, 1971
. If such were true, the Government's action filed
June 23, 1971
would indeed be out of time. Evidence in the record shows, however, that
May 28, 1971
date is an error and that
June 25, 1971
is the correct date of assessment. Furthermore, the Court finds that the
Schoonovers were not prejudiced by the recording error when they
purchased the property on foreclosure on
May 6, 1972
. At that time the question whether the assessment date was
May 28, 1971
June 25, 1971
would have been inconsequential to them. The assessment date is
therefore relevant only to determine the statute of limitations and such
a clerical error in the notice of the lien cannot operate to bar this
As a final
matter, the Schoonovers assert that they are entitled to a judgment on
their cross-claim against defendant Weakley in her own person and as
Executrix of her husband's estate in any amount they may be required to
by virtue of the lien. The Schoonovers concede that there is no
for such a right but cite to the Court the case of Trueman Fertilizer
v. Allison, 81 So. 2d 734 (Fla. 1955) in which the Florida Supreme
Court held that one who pays a prior tax lien to protect his interest in
property is not a volunteer and therefore entitled to equitable relief
against those who should have paid the taxes. Several reasons exist for
not following this decision. First, and not entirely dispositive, is the
fact that the Schoonovers have not yet paid any taxes, although such
payment seems imminent by virtue of this decision. Secondly, on the
principle of comity this Court is not inclined to create such a right in
in view of the particular circumstances of this case. And thirdly,
contrary case law from other jurisdictions exists. In Gronstal v. Van
Druff, 261 N. W. 638 (Iowa 1935) the Supreme Court of Iowa held that
one who voluntarily paid another's tax assessment was not entitled to
subrogation, and in doing so found that the payment of another's taxes
in order to relieve a lien on one's own property was not payment out of
compulsion but rather was voluntary in nature. Accordingly, the Court,
sua sponte, will dismiss without prejudict the cross-claim of
adopts the foregoing as its findings of fact and conclusion of law in
accordance with Fed. R. Civ. P. 52.
judgment will be entered in favor of the
and against the Schoonovers, and the Schoonovers' cross-claim against
defendant Weakley will be dismissed without prejudice.
¶9238]United States of
, Plaintiff v. Louis Von Cseh; Irene Von Cseh; Claude T. Allen; and Mary
Babicki Podgoursky, Individually and as Independent Executrix of Ivan
Podgoursky, Deceased, Defendants
S. District Court, So. Dist. Tex., Houston Div., Civil Action No.
70-H-1069, 354 FSupp 315, 11/1/72
[Code Secs. 6323 and 7425]
Tax lien: Validity and priority against certain purchaser: Superior
status of government: Form of filing: Texas law: Judicial sale:
Purchaser priority.--Since Allen purchased the property at a regular
judicial sale pursuant to a judgment in a civil action in which the
government's claimed lien could have been asserted and since no notice
of the lien had been filed locally at commencement of the action, the
provisions of Code Sec. 7425(a)(2) applied, and the interests of the
Government were subordinated under Texas law to those of Allen. The
Government also failed to prove that the purchase price was inadequate.
Anthony J. P.
Farris, United States Attorney, Olney Wallis, Assistant United States
Attorney, Houston, Tex., Michael Andolina, Department of Justice,
Washington, D. C. 20530, for plaintiff. Ralph S. Carrigan, Baker &
Botts, 300 One Shell Plaza,
, for Mr. & Mrs. Claude T. Allen, Mitchell M. Bailey,
345 Park Ave.
, N. Y., for I. Von Cseh, for defendants.
Opinion and Order
brought this suit to foreclose a tax lien. This Court has jurisdiction
by virtue of Sections 1340 and 1345 of Title 28, United States Code, and
Section 7402(a) of the Internal Revenue Code of 1954 [26 U. S. C. §7402(a)].
It would seem
that either Mark Twain or Will Rogers said something that would cover
this situation, but it is hard enough to find the applicable law, so the
facts will have to speak for themselves.
June 27, 1972
, the Government presented its case against attorney Claude T. Allen and
his wife in an effort to foreclose on a painting owned by Mrs. Allen.
The Government claimed a lien existed against the painting through its
former owner. The painting's previous owner had been the defendant,
Irene Von Cseh. The painting had been purchased for Mrs. Allen by Mr.
Allen's secretary at a judicial sale at which Mr. Allen and Houston
attorney James Cowan served as "trustees" for the painting to
be auctioned. If that is not confusing enough, Allen had represented
Count Ivan Podgoursky in a federal suit in which Mr. and Mrs. Von Cseh,
represented by Cowan, sued Podgoursky to recover possession of the
painting (Civil Action No. 13,453, So.
). By way of counterclaim, Podgoursky sought to establish that he owned
the painting by virtue of a lien against Louis Von Cseh for services
performed. The Von Csehs maintained that ownership was in Irene, not
Louis, and that the claimed lien was without effect. Podgoursky died
while the litigation was pending and shortly thereafter his attorney
(Allen) reached a settlement with the Von Csehs, and on November 1,
1965, Judge Hannay signed a final judgment which ordered the sale of the
painting at public auction, unless sold within one year, with the first
three thousand dollars to go to Podgoursky's executrix and all proceeds
in excess of that amount to go to Irene Von Cseh. The attorneys Allen
and Cowan were appointed "trustees" of the painting "for
the benefit of Irene Von Cseh" pending the sale. Allen and Cowan
attemped unsuccessfully to sell the painting and on
December 6, 1966
, auctioned the painting. The high bid was made by Allen's secretary who
purchased the painting for Allen's wife. The bid was two hundred and
portrays three kings paying homage to the Christ-child and has been
referred to as the "Adoration of the Magi." The testimony
indicates that Von Cseh attributed its creation to Sir Anthony Van Dyke
(1599-1641). A portrait painter of great renown, Van Dyke was born in
and was a student of Rubens. In later life he was the painter to the
court of the Infanta Isabella of the Spanish Netherlands and to the
court of King Charles I of
who knighted him.
Government nor the defendant presented any proof as to its origin,
although the Government did present proof on the issue of value.
Fortunately, this Court does not have to decide whether a great
portraitist executed the painting in suit. The issue is whether or not
may have the sale set aside.
advances two theories. First, that the sale by the trustee, Allen, to
his wife violates provisions of the Texas Trust Act, V. A. T. S. Art.
7425b-12, and is therefore void as to the Government which is a creditor
of Mrs. Von Cseh. Second, that the Government has liens totaling
$18,787.55 against Mrs. Von Cseh which attached to the painting and that
Mrs. Allen is not a "purchaser" protected from those liens
within the meaning of 26 U. S. C. §6323. The defense contends that the
Government has no standing to attack the sale since it is only
"voidable" and can be attacked only by beneficiaries of the
trust; that Allen was not a "trustee"; that Mrs. Allen was a
"purchaser," and even if she was not, that she purchased at a
judicial sale and is protected by the terms of 26 U. S. C. §7425(a).
It is the
policy of the law to sustain judicial sales and they are presumptively
valid. McCardell v. Lea, 235 S. W. 518 (
Imp. Dist. No. 2 v. Dean, (Tex. Civ. App. 1963, ref. n. r. e.); and see,
Cameron v. Saathoff, 363 S. W. 2d 884 (Tex. Civ. App. 1962, ref. n.
r. e.). This policy is as applicable here as it is in the case of a
question then is the validity of the sale. Since the sale was the
product of a diversity suit then, under the rule of Erie R. Co. v.
law determines the sale's validity. The burden is on the complaining
party to establish invalidity. Kolbo v. Blair, 379 S. W. 2d 125
(Tex. Civ. App. 1964, ref. n. r. e.). For the sale to be void the
complainant must show either a fraud which deceived the complainant, Dilley
v. Jasper Lumber Co., 122 S. W. 255 (
1909), or "both irregularity calculated to affect the sale and a
gross inadequacy of price."
Jur. 2d Judicial Sales §13 citing Dilley v. Jasper Lumber Co.
The Government has never contended that Allen engaged in actual fraud,
but it has contended that the sale contained an irregularity and that
the price was woefully inadequate.
United States did not perfect its lien against Irene Von Cseh until
February 22, 1972, when it was filed in New York City (Govt. Ex. 8), it
may have been a judgment creditor of Irene Von Cseh (the beneficiary of
the trust created by the court order) and as such would have the
requisite interest to attack the sale's validity. 35
Jur. 2d Judicial Sales §13. The Court uses "may have been"
advisedly since the Government introduced certificates of assessments
and payments of Louis and Irene Von Cseh (Govt. Ex. 1-3) but did
not introduce the judgment of the Tax Court in Louis Von Cseh and
Irene Von Cseh v. Commissioner (Dkt. No. 87790, August 28, 1964)
claimed to support one of the assessments, nor did the United States
prove a demand for payment upon Irene Von Cseh, a prerequisite to the
establishment of a lien under 26 U. S. C. §6321.
should not go off on a "standing" question especially where
the Court is convinced that if allowed to reopen the Government could
easily prove the existence of the judgment of the Tax Court.
of Claimed Irregularity]
Government's contention that the sale is void by reason of an
irregularity coupled with a grossly inadequate price must fail. The
claimed irregularity is that in the "Notice To All Persons"
the painting's trustees included a recitation of the existence of a
federal tax lien against Louis Von Cseh for $242,675.19, and stated that
title would be conveyed to the successful bidder subject to whatever
rights the Government might have by virtue of the lien, (Govt. Ex. 6).
However, at the time immediately preceding the auction the Government
claimed that the painting was the property of Louis Von Cseh and that it
had a valid existing lien against Louis filed of record in New York City
on May 19, 1965, and that the Government's position had been made known
to Allen and a copy of the lien filed with the County Clerk of Harris
County, Texas, on December 6, 1966, (Deft. Ex. 4, 7 and 8). For all
Allen and Cowan knew the
might be correct in its assertions. If the auction notice was to be
adequate and equitable it would have to include this information. The
Government could not really be "harmed" thereby, since this
would simply reinforce the "notice" of its lien which it had
filed at the Harris County Court House. The Government has also argued
that such a restriction in the notice was not authorized by either the
Internal Revenue Service or the court order establishing the sale. IRS
authorization was unnecessary since the Government had filed its own
notice of lien locally and since equity required Allen and Cowan to
include these facts which could affect any title acquired by the
successful bidder. Finally, the Government has misconstrued the words
"without reserve" in Judge Hannay's order. They do not mean
"without restriction." "Without reserve" is a term
of art when used in reference to an auction and means that the property
will go to the bidder who offers the highest price and will not be
withdrawn from sale before the acceptance of a bid. Blossom v.
Milwaukee & Chi. R. Co., 3 Wall. 196, 18 L. Ed. 43 (
1865); Annot. 37 ALR 2d 1049 §§ 2 and 5; Zuhak v. Rose, 58 N.
W. 2d 693 (Wisc. 1953), 37 ALR 2d 1041; 7 Am. Jur. 2d Auctions and
Auctioneers §21; and see U. C. C. §2-328(3) and Texas Business
and Commerce Code §2.328(c) (effective
September 1, 1967
of Inadequate Price]
has not carried its burden of proving the inadequacy of the price paid
by the successful bidder. If the painting is a Van Dyke then it would
have considerable value. The Government did not attempt to prove its
value by proving that it is an authentic Van Dyke. The Government did
offer Judge Hannay's order as proof that the parties and their attorneys
considered the painting to have some value, at least in excess of
$3,000.00, but this does not show the painting's value. The only other
proof of value offered by the Government was a letter consigning the
painting to Podgoursky and stating a value of $35,000.00 (Govt. Ex. 5),
but it was not admitted on the issue of value.
Government's second argument, that its post-auction lien against Irene
Von Cseh is superior to the rights of the high bidder, Mrs. Allen, in
that she is not a "purchaser" within the meaning of 26 U. S.
C. §6323(a) and (h)(6), is also rejected. Since Mrs. Allen purchased
the property at a regular judicial sale pursuant to a judgment in a
civil action in which the claimed lien could have been asserted under 28
U. S. C. §2410 or 26 U. S. C. §7424 and since no notice of the lien
had been filed locally at commencement of the action, then the
provisions of 26 U. S. C. §7425(a)(2) 1
apply, and the interests of the United States must be subordinated under
Texas law to those of the purchaser at the judicial sale.
The claims of
are rejected and judgment will be entered for the defendant Claude T.
Allen that the
take nothing by its suit. Counsel for the defendant will submit an
appropriate judgment within twenty days of today's date after submitting
it to counsel for the Government for approval as to form.
enter this Memorandum Opinion and provide counsel with true copies.
proceedings. If the United States is not joined as a party, a
judgment in any civil action or suit described in subsection (a) of
Section 2410 of title 28 of the United States Code, or a judicial sale
pursuant to such judgment, with respect to property on which the United
States has or claims a lien under the provisions of this title--
(2) shall have
the same effect with respect to the discharge or divestment of such lien
of the United States as may be provided with respect to such matters by
the local law of the place where such property is situated, if no notice
of such lien has been filed in the place provided by law for such filing
at the time such action or suit is commenced or if the law makes no
provision for such filing.
provisions became effective
November 2, 1966
, and applied to all titles or liens of the
regardless of when they arose.
¶9262]First National Bank and Trust Company, Woodbury, New Jersey, a
National Banking Corporation, Plaintiff-Respondent v. James B.
MacGarvie, The Atco National Bank, a National Banking Corporation,
bins, Sr., and the State of New Jersey, Defendants-Respondents and the
United States of America, Defendant-Appellant
Court of New Jersey, No. A30, September Term 1956, 126 A2d 880, 11/13/56
[1939 Code Secs. 3670, 3671 and 3672--similar to 1954 Code Secs. 6321,
6322 and 6323, respectively]
Tax lien: Right of government to redeem upon foreclosure and sale of
property by senior lienholder: Statutory interpretation.--Upon the
initiation of foreclosure proceedings by a first mortgagee on property
subject to a junior tax lien, a second mortgagee, whose lien was junior
to that of the government's tax lien, purchased the first mortgage,
foreclosed on the same and bid $100 at the sale to secure a deed. Less
than a year later, the government tendered the new owner $106 and
demanded a conveyance of the property. It based this action on the
authority of 28 U. S. C. A. Sec. 2410(c), which gave the government a
period of one year in which to come in and redeem from a sale of
property subject to a tax lien, but sold to satisfy a senior lien. The
government contended that under the statute, it was necessary only to
offer the amount bid at the sale plus interest, and not the amount of
the first mortgage plus interest and costs. The Supreme Court of New
Jersey disagreed with the government's interpretation on the ground that
the purpose of the federal statute was simply to preserve the
government's right to redeem the property if Congress deemed it wise and
appropriated the necessary funds. The statute did not attempt to limit
the right of the state in which the property was located to determine
the amount necessary to effectuate the foregoing right of redemption,
which, in the instant case, would be the amount of the first mortgage
plus interest and costs.
McCarthy, Herman Scott, United States Attorney, Federal Building,
Newark, N. J., Charles H. Nugent, Assistant United States Attorney,
Federal Building, Camden, N. J. (Charles K. Rice, Andrew D. Sharpe, A.
F. Prescott, Department of Justice, were with John J. McCarthy on
brief), for defendant-appellant. Norman Heine, 126 North Broadway,
Camden, N. J., for plaintiff-respondent, The Atco National Bank,
Assignee of First National Bank and Trust Co., Woodbury, N. J.
National Bank and Trust Company,
, held a first mortgage on property of defendant MacGarvie securing a
sum of nearly $30,000. Default occurred and foreclosure proceedings were
initiated by the first mortgagee. There were other parties who had liens
encumbering the property at this time, in the following order of
bins, a judgment creditor (approximately $1400): the United States of
America by virtue of a federal tax lien (approximately $21,000); the
Atco National Bank, a second mortgagee (approximately $7,000).
prior to the foreclosure sale, Atco National Bank purchased the first
mortgage of the First National, and itself prosecuted the foreclosure.
was had and the property bought in by Atco for $100 on
April 22, 1955
. It received a deed and went into possession and has paid some $1,284
in taxes and insurance to protect the property.
April 20, 1956
tendered $106 (representing the purchase price at the sale and interest
thereon) to Atco and demanded a conveyance of the property. The
invitation was declined. A motion was addressed to the Superior Court,
Chancery Division, for an order and decree directing that the property
be vested in the
in view of this exercise of its right of redemption. The motion was
denied after hearing before Judge Goldmann, 41 N. J. Super. 151 (
1956). An appeal was addressed to the Superior Court, Appellate
Division, and we have certified the cause prior to a review below.
There is no
issue on the joinder of the
as a defendant in the foreclosure suit. The procedural preliminaries
were taken in view of 28 U. S. C. A. sec. 2410 (1950). This section
constitutes a waiver of sovereign immunity by the
in any action brought to quiet title or to foreclose a mortgage or other
lien on real or personal property on which the
has or claims a mortgage or other lien. Gerth v.
, 132 Fed. Supp. 894 (D. C. S. D. Cal. 1955) [55-2 USTC ¶9692]; cf.
Wells v. Long, 162 Fed. (2d) 842 (C. C. A. 9th 1947); Van
Keuren v. United States, 138 N. J. Eq. 66 (
1946) (the latter two cases involved the substantially similar
antecedent of section 2410 (28 U. S. C. A. secs. 901-905 (1940 ed.)).
significance here is subsection (c) of section 2410:
A judicial sale in such action or suit shall have the same effect
respecting the discharge of the property from liens and encumbrances
held by the
as may be provided with respect to such matters by the local law of the
place where the property is situated. A sale to satisfy a lien inferior
to one of the
, shall be made subject to and without disturbing the lien of the
, unless the
consents that the property may be sold free of its lien and the proceeds
divided as the parties may be entitled. Where a sale of real estate
is made to satisfy a lien prior to that of the
shall have one year from the date of sale within which to redeem. In
any case where the debt owing the United States is due, the United
States may ask, by way of affirmative relief, for the foreclosure of its
own lien and where property is sold to satisfy a first lien held by the
United States, the United States may bid at the sale of such sum, not
exceeding the amount of its claim with expenses of sale, as may be
directed by the head of the department or agency of the United States
which has charge of the
istration of the laws in respect of which the claim of the United States
arises." (Italics supplied.)
did not seek "affirmative relief" in the instant case)
, through its attorneys, contended below and asserts here, that by
virtue of the statutory sentence emphasized above it is entitled to
redeem the property from the foreclosure sale by paying the purchaser
Atco National Bank the price bid and paid at the sale. We are told that
redemption refers either to the equitable right before sale or the
statutory right after sale; that in the former case the right is
exercised by tendering the amount due on the prior encumbrances while in
statutory redemption it is only necessary to pay the amount realized at
the foreclosure sale; that section 2410(c) represents the statutory
right as opposed to the equitable right of redemption.
court, although admitting the ingenuity of the argument, concluded that
the term "redeem" appearing in the statute could not be so
interpreted, for Congress could not be charged with "any such
inequitable and unconscionable thing as to allow the Government at any
time up to a year after the sale to come in, offer what was paid at the
foreclosure sale, and immediately assume the position of senior
lienholder, ousting everyone else into the background, and thus, by
wiping out the foreclosure bid, gain an advantage which they could never
get at the foreclosure sale, or before it, by redeeming without paying
the amount of the mortgage, the interest, the fees, and everything else
that might be due to the senior lienor. Redemption in our State has
always meant repurchase, which means buying back, receiving back by
paying off the existing obligation."
argues that the trial court erred in interpreting "redeem"
law, urging a cardinal rule of construction in the area of federal
taxation that statutory terms should be so defined as to receive a
uniform application. See, e.g., United States v. Gilbert Associates,
361, 97 L. ed. 1071 (1953) [53-1 USTC ¶9291]. Whether the error in
approach is well founded need not detain us. We reach the same result
solely upon a study of section 2410(c).
is to be observed that the relative priority of federal tax liens, with
other liens, absent statutory authority to the contrary, is governed by
the principle "first in time, first in right," United States v.
81, 98 L. ed. 520 (1954) [54-1 USTC ¶9191]; United States v.
Sampsell, 153 Fed. (2d) 731 (C. C. A. 9th 1946) [46-1 USTC ¶9186],
a recognition that the rights of the sovereign are to be determined upon
the same plane and with the same equitable attitude accorded claims in
competition therewith. Cf. Potter v.
, 111 Fed. Supp. 585 (D. C. R. I. 1953) [53-1 USTC ¶9323].
is a fundamental principle of the conflict of laws that legal
consequences attaching to a right of redemption and the method of
foreclosure are governed by the law of the lex rei sitae. 2 Beale
on The Conflict of Laws, secs. 227.1-228.1 (1935). The federal courts
have long recognized and given effect to these matters as substantive
rules of state property law. Metropolitan Nat. Bank v. Conn. Life
Ins. Co., 131 U. S. clxii Appx., 24 L. ed. 1011 (1878); Parker v.
Dacres, 130 U. S. 43, 32 L. ed. 848 (1889); cf. United States v.
Hutcherson, 188 Fed. (2d) 326 (C. C. A. 8th 1951) [51-1 USTC ¶9249].
At the same time, however, statutes concerning federal revenues are to
be construed in the light of uniformity, and their provisions "are
not to be taken as subject to state control or limitation unless the
language or necessary implication of the section involved makes its
application dependent on state law." United States v. Pelzer,
399, 402, 85 L. ed. 913, 916 (1941) [41-1 USTC ¶10,027].
intricacies of "statutory redemption" may not be
overemphasized. As a general proposition there are but two types of
redemption--the equitable right, which is barred by the decree and sale,
Union B. & L. Asso. Camden v. Childrey, 97 N. J. Eq. 20 (
1924), and the statutory right, which does not arise until the sale
takes place. See Eiceman v. Finch, 79 Ind. 511 (Sup.
1881); Spurgin v. Adamson, 62
661, 18 N. W. 293 (Sup.
1884); 3 Wiltsie on Mortgage Foreclosure, par. 1060 (5th ed.). No right
of redemption exists in
after sale following the foreclosure of the equity of redemption
excepting by virtue of a statute, N. J. S. 2A:50-4, where the
foreclosing creditor obtains a deficiency judgment in an action on the
bond which the mortgage secures. The theory of redemption after
foreclosure is to drive the sale price at foreclosure to an amount
approximating fair value. Durfee & Doddridge, Redemption from
--The Uniform Mortgage Act, 23
L. Rev. 825, 838-841 (1925). This is one common factor in
"statutory redemption," but the internal workings of the
system under the various state statutes which incorporate the theory
exhibit "manifold variations." Durfee, Cases on Security, p.
289 (1951). Professor Durfee goes on to state, ibid:
pretending to have examined all the redemption statutes with the
minuteness they deserve, I venture the following analysis of their
the statutes say more or less upon the following points. (a) The persons
who may redeem: though the statutes vary widely in their phraseology,
the net result is usually to give this privilege to all who, at the time
of the sale, are interested in the equity of redemption. (b) The period
within which redemption may be made: often there is one period for one
class of persons, another period for another class; sometimes the
periods run concurrently (overlapping), sometimes they run serially; the
total period varies from three months to two years. (c) The sum that
must be paid to redeem: the basic factor is the sale price, to which is
added interest at a specified rate and almost invariably some other
charges. (d) The effect of the redemption: here we meet questions so
vexing that it would be silly to attempt any summation--the whole
subject must be left to more leisurely exposition later on."
In the light
of these initial observations it is not unreasonable to believe that had
Congress intended that which the Executive branch now seeks it would not
have confined itself to a single sentence expression. Lack of decisional
istrative interpretation by the Commissioner of Internal Revenue to
support the defendant's position would not seem to be without reason.
originated in the 71st Congress as H. R. 980 and became the Act of
March 4, 1931
, c. 515, 46 Stat. 1528. The Senate version had provided for joinder of
as a party defendant in a foreclosure action if the sale were delayed
one year after institution of suit. This was deleted by a Joint
Committee of both Houses which substituted the sentence now in issue.
Referring to the change the Committee stated:
The Senate amendment contains a clause allowing the court to stay
proceedings on sale until the expiration of the next session of
Congress. This was no doubt intended to allow Congress to appropriate
money to enable the United States, if a junior lien holder, to bid
enough at the sale to take care of prior liens and thus protect its own.
In place of that the substitute bill provides that if a junior lien
shall have a year in which to redeem. That does away with any necessity
for a delay of sale. In many States of the
there are now laws allowing junior lien holders as well as fee owners a
year in which to redeem from execution and foreclosure sale of real
estate. It is true that in other States no such equity of redemption
exists. However, the provision adds nothing to the present difficulties
in States which allow no redemption period, as under present conditions
where present lien holders cannot sue the
, the rights of the
never are barred by foreclosure decree." 74th Cong. Record, Part 6,
suggested that the problem was essentially one of appropriation of funds
and it would so appear. But the United States goes on to argue that
because the original provision calling for postponement of the
foreclosure sale was omitted that Congress rejected any equitable right
of redemption in the federal government, favoring instead a redemption
from the sale itself, and the legislative statement is said to indicate
that the latter safeguard was modeled on statutes in some 21 states
providing for "statutory redemption." Implicit in this
interpretation is that only in those 21 states could the
be made a party to foreclosure proceedings under section 2410(c).
We do not
think the statute was intended to be so restricted. The statute applies
to quiet title actions and foreclosure proceedings, to lienors both
senior and junior to the position of the
, and both state and federal courts are proper forums. Subsection (c)
announces at the very outset that "A judicial sale in such action
or suit shall have the same effect respecting the discharge of the
property from liens and encumbrances held by the
as may be provided with respect to such matters by the local law of the
place where the property is situated." This is not restrictive
language. Furthermore, statutes permitting redemption from sale
generally recognize a right of redemption in junior lienors, Durfee
& Doddridge, supra, 23 Mich. L. Rev. at 835-836, hence the
creation of such a right under section 2410(c) would be superfluous
under the restrictive interpretation argued for.
that the statute neither adopts the intricate machinery of statutory
redemption nor does the sovereign's consent depend upon the existence of
such machinery under state law. Consent is dependent upon state
recognition of the federal right of redemption within 1 year after the
foreclosure sale, but the amount necessary to effectuate the right is
governed by the lex rei sitae. We recognize the federal right and
will give it effect where a sufficient tender is made within the time
prescribed by section 2410(c). Cf. Miners Sav. Bank v.
, 110 Fed. Supp. 563 (D. C. M. D. Pa. 1953).
court by its order has discharged the lien of the
upon the property involved because the sum tendered in exercise of the
right was insufficient. Cf. Keiler v. Bunn, 84 N. J. Eq. 519 (
1915). The tender was made in good faith and was based upon a
construction of 28 U. S. C. A. 2410(c) which the United States Attorney
deemed correct. It would thus seem equitable and proper that the United
States be given a period of 30 days from the issuance of the mandate
herein to petition the Superior Court, Chancery Division, to determine
the full amount due the first mortgagee or its assignee which is
necessary to redeem the premises and to make tender thereof.
In this latter
respect the order of the trial court is so modified and as modified, the
judgment is affirmed.
No costs will
be taxed to any party.
¶9860]Jennie Reiter, Plaintiff v. Margaret R. Kille, William A.
Mousley, also known as W. Ashton Mousley, Borough of Folcroft, Clifton
Heights National Bank, Alexander F. Porter, Elizabeth M. Hunlock and
Fred S. Hunlock, James J. Kelly and United States of America, Defendants
S. District Court, East. Dist. Pa., Civil Action No. 19260, 143 FSupp
[1939 Code Sec. 3672(a)--similar in 1954 Code Sec. 6323(a)(1)]
Collection: Federal tax liens: Validity against third parties: Not
valid against tax sale purchaser where deed unrecorded.--The county
commissioners acquired certain realty at a public sale by the county
treasurer because the former owner was delinquent in real estate taxes.
They sold it at a public sale to a purchaser against whom the
filed a federal tax lien, and the treasurer sold the property at a
public tax sale as the property of the former owner. An action to quiet
title was brought by the subsequent purchaser against the purchaser and
among others, and the former was granted a summary judgment. The notice
of the lien was not effective and the lien did not attach to the
property since the deed evidencing the intervening purchaser's ownership
was never recorded as provided by the Pennsylvania statute,
notwithstanding the government's contention that in the county records
there were evidence of the sale to the purchaser and that a minimal
investigation in connection with the tax sales would have disclosed the
for plaintiff. W. Wilson White, United States Attorney, and Alan J.
Swotes, Assistant United States Attorney, Philadelphia, Pa., for the
This is an
action to quiet title to real estate brought by the plaintiff against
various defendants including the
United States of America
. The matter is presently before the Court on cross motions for summary
judgment filed by the plaintiff and the defendant,
United States of America
was originally instituted in the Court of Common Pleas of Delaware
County, Commonwealth of Pennsylvania, and was removed to this Court upon
a petition for said removal by the United States of America under the
authority granted by 28 U. S. C. A. §1444. Originally the complaint
named 9 defendants and service was made upon all said 9 defendants by
the Sheriff of Delaware County. With the exception of the Borough of
Folcroft and the
United States of America
, no appearances were entered or answers filed on behalf of the
remaining defendants. The facts giving rise to this action are as
Prior to May
1, 1940, two lots situated in the Borough of Folcroft, Delaware County,
Commonwealth of Pennsylvania, known as lots Nos. 237 and 238 Charmount
Avenue, (hereinafter collectively referred to as the
"property") were owned by Frank Briggs, Jr. Because of a
delinquency in real estate taxes, on that date the property was sold at
public sale by the Treasurer of Delaware County to the Commissioners of
the said County for the sum of $30.18, the amount of the delinquency. A
deed from the Treasurer to the Commissioners was thereafter recorded in
the Office of the Recorder of Deeds of Delaware County. On
May 27, 1947
the Commissioners of Delaware County sold the property at public sale to
William A. Mousley for the sum of $215.29. The deed evidencing this
transaction was never recorded as provided by the Pennsylvania Statute,
but a copy thereof was found filed among the records of the said
Tax Lien Filed]
October 19, 1949
United States of America
filed a Federal Tax Lien against W. Ashton Mousley in the amount of
$65,739.92 in Federal Tax Lien Docket No. 1, Page 71, in the Office of
the Prothonotary of Delaware County. The defendant,
United States of America
, as part of its motion for summary judgment, filed an Affidavit on
information and belief that W. Ashton Mousley and William A. Mousley
were one and the same person. Since no one has seriously contraverted
that assertion, for the purposes of this opinion the Court will consider
that they are one and the same person.
one month after the filing of the aforesaid lien, on November 14, 1949,
the Treasurer of Delaware County sold the property at public sale, not
as the property of William A. Mousley but as the property of Frank
Briggs, Jr., to one William Reiter for the sum of $36.87, the amount due
for delinquent Delaware County 1947 Real Estate Taxes. The deed
evidencing this transaction was recorded on
November 27, 1951
in Deed Book No. 1481, Page 363, in the Office of the Recorder of Deeds
of Delaware County. William Reiter died intestate on
November 6, 1950
, and his interests in the said property by adjudication of the
vested in his widow, Jennie Reiter, plaintiff herein.
It is the
contention of the plaintiff that the lien of the
did not attach to the property because Mousley's ownership of the
property never appeared of record in the Office of the Recorder of Deeds
and that by purchase plaintiff's predecessor in title took it free and
clear of the Government's lien. On the other hand, the Government
asserts in its affidavit that in the records of Delaware County there
was evidence of the sale to Mousley; that a minimal amount of
investigation in connection with the tax sales would have disclosed
Mousley's ownership and, therefore, the Court should determine that the
plaintiff had constructive notice of the existence of the lien and that
the property was purchased subject to the Government's lien.
In the recent
case, In the Matter of Harry G. Litt, individually and trading as
People's Market, 128 Fed. Supp. 34 (1955) [55-1 USTC ¶9187], this
Court had occasion to review the scope of Sections 3670 and 3672 of the
Internal Revenue Code, 26
C. A. §§ 3670, 3672. It was therein determined that it was necessary
for any litigant asserting the invalidity of a Federal Tax Lien to bring
himself within the scope of the exempted classes (mortgagee, pledgee,
purchaser or judgment creditor) and have such status before the filing
of the Government's lien in accordance with the laws of the state or
territory in which the property subject to the lien is situated.
and 3672(a) of the Internal Revenue Code were reenacted as Sections 6321
and 6323(a) of the Internal Revenue Code of 1954, Public Law 591,
August 16, 1954
, and read as follows:
subject to lien.
person liable to pay any tax neglects or refuses to pay the same after
demand, the amount (including any interest, penalty, additional amount,
or addition to such tax, together with any costs that may accrue in
addition thereto) shall be a lien in favor of the United States upon all
property and rights to property, whether real or personal, belonging to
Invalidity of lien without notice.
lien shall not be valid as against any mortgagee, pledgee, purchaser, or
judgment creditor until notice thereof has been filed by the collector *
State or Territorial laws.
accordance with the law of the State or Territory in which the property
subject to the lien is situated, whenever the State or Territory has by
law provided for the filing of such notice; * * *"
courts in several cases have passed upon the question of the validity of
a tax lien, see Investment and Securities Co. v. United States,
140 Fed. (2d) 894 (C. A. 9, 1944) [44-1 USTC ¶9210], and United
States v. Maniaci, 116 Fed. (2d) 935 (C. A. 6, 1940) [40-2 USTC ¶9786],
affirming 36 Fed. Supp. 293 (D. C. Mich. 1939) [39-1 USTC ¶9307], the
exact point raised in this case was not involved. No decided cases
touching this point have been brought to the attention of the Court. The
precise problem involved in this action is whether a notice of a tax
lien against an intervening purchaser who never recorded his deed is
effective against a subsequent purchaser at a public tax sale.
The laws of
are very explicit as to the manner in which a deed is to be recorded;
Act of 1925, P. L. 613, as amended by the Act of 1931, P. L. 558 (21 P.
S. 351). The pertinent parts of the statute read as follows:
deeds, conveyances, contracts and other instruments of writing wherein
it shall be the intention of the parties executing the same to grant,
bargain, sell and convey and lands, tenements or hereditaments situated
in this Commonwealth . . . 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 . . . which shall not be
acknowledged or proved and recorded, as aforesaid, shall be adjudged
fraudulent and void as to any subsequent bona fide purchasers . . .
without actual or constructive notice unless such deed . . . shall be
recorded, as aforesaid, before the recording of the deed . . . which
said subsequent purchaser . . . shall claim. . . ."
set forth in the commentary of Title 21 of Purdon's Statutes, the
primary purpose of the recording statute and intention of the
legislature is set forth as follows:
primary purpose of recording a deed 'is to give public notice in whom
the title resides: so that no one may be defrauded by deceptious
appearance of title.' For this reason recording is obligatory, on peril
of having an unrecorded deed adjudged fraudulent and void as against
subsequent purchasers, mortgagees and creditors."
It is clear
that Congress in enacting Section 3672 of the Internal Revenue Code
intended to give effect to the recording statutes of the several states.
Therefore, in interpreting the law the Court must give effect to the
State recording requirements so long as they are reasonable. Investment
and Securities Co. v. United States, supra; United States v. Beaver Run
Coal Co., 99 Fed. (2d) 610 (C. A. 3, 1938) [38-2 USTC ¶9540]. If
the Court should fail to give effect to the recording statutes of
under the facts of this case it would destroy the primary purpose of the
recording statutes of
. An unrecorded deed in the
is ordinarily presumed to be fraudulent and void as against subsequent
purchasers for value. The present owner's predecessor in title,
following the usual procedure in a search of title under
law and practice, was entitled to rely upon observance of the Recording
Act by any intervening purchaser. To require the plaintiff in this case
to make a further investigation dehors the record would defeat
rather than give effect to the intention of Congress in passing Section
3672 of the Internal Revenue Code. United States v. Beaver Run Coal
Co., supra. See also Heyward v. United States, 2 Fed. (2d)
467 (C. A. 5, 1924) [1925 CCH ¶7019]; Re Glover-McConnell
, 9 Fed. (2d) 683 (D. C. Ga. 1925) [1926 CCH ¶7050]; United States v. Maniaci, supra.
Not Attached to Realty]
In the case of
Murdock Acceptance Corp. v. United States, 350 U. S. 488, decided
March 26, 1956 [56-2 USTC ¶9754], petitioner, a finance company which
had accepted an assignment of a conditional sales contract when the
automobile was purchased, sought remission of a forfeiture to the
Government for violation of the liquor laws to the extent of its
interest under 18 U. S. C. A. §3617. That section provides that in
forfeiture proceedings the District Court shall have exclusive
jurisdiction to remit the forfeiture, but that the Court "shall not
allow" remission unless the finance company acquired its interest
in good faith, had no reason to believe that the automobile would be
used in violation of the liquor laws, and finally had made inquiry at one
of several offices including the sheriff, chief of police, principal
Federal Internal Revenue officer engaged in the enforcement of the
liquor laws, or other principal local or Federal law-enforcement officer
of the locality as to whether the purchaser had a record or reputation
for violating laws of the United States, or of any State relating to
liquor. Petitioner in that case had made timely inquiry regarding the
purchaser of the automobile to the State office of the Federal Alcohol
and Tobacco Unit from which it received a reply that the purchaser had
no record with that office as a liquor law violator. The answer also
disclaimed knowledge of the purchaser's reputation among State and local
officers. In reversing a forfeiture the Court stated that the very
purpose of prescribing in detail in the statute the type of inquiry to
be made was to avoid uncertainty over the extent of investigation
necessary to protect finance companies against forfeitures. While not in
point, by analogy it would seem that the responsibility of purchaser's
predecessor in title here was fully satisfied in making an investigation
of the records of the Recorder of Deeds only. No further investigation
was required by
law and practice. The tax lien of the Government never attached to the
property here involved and plaintiff herein is entitled to judgment in
her favor upon her motion for summary judgment.
decree in favor of the plaintiff may be submitted.
Presented by Alvin Brown and Associates,
tax attorney, formerly with the Office of the Chief Counsel of the
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