Judicial Sale

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[59-1 USTC ¶9304]Puritan Dairy Products Company, etc., Plaintiff v. Alfred Christoffers, et al., Defendants

Superior Court of N. J., Chancery Div., Union County , 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.

Wilentz, Goldman, Spitzer & Sills, Elias A. Kanter, for plaintiff. Simandl and Leff, Rob ert H. Simandl, for defendants.

Opinion

SCHERER, Superior Court Judge:

The complaint 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 and July 29, 1958 . The premises were owned by Alfred and Priscilla Christoffers as tenants by the entirety.

Helen 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.

The plaintiff, 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.

[Issue 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.

The bidder 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 United States was not extinguished by the foreclosure of a mortgage in the state court. The lien of the United States 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 U. S. 210, 37 L. Ed. 705 (1893), the government lien was not extinguished.

[Cited Authorities Distinguished]

There are 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 United States to file its tax lien in the mortgage office of the Parish of New Orleans, as required by the Louisiana 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 U. S. 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 the Louisiana 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 United States 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 collected.

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 property. 28 U. S. C. A., Sec. 2410(c).

[Question Not Directly Controlled by Authority]

Neither the 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 decided.

26 U. S. C. A., Sec. 6323, provides that the lien of the United States , 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.

The lis 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 United States . 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.

[Trend 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.

[Tax Lien Was Extinguished]

The problem 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 contrary.

[Reasons Against Contrary Holding]

For the 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 America , 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 United States 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.

It is 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.

[Government Bound By State Law]

In First 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:

"Secondly, 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]. * * * ."

Except in 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 U. S. 64, 82 L. Ed. 1188.

Section 2410 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.

Finally, the 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. New Britain , 347 U. S. 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.

Further than 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:

"The 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. * * *."

See also, Reilly v. Griffith, 141 N. J. Eq. 154, 169 ( Ch. 1947), aff'd 142 N. J. Eq. 724 (E. & A. 1948); Sears, Roebuck & Co. v. Camp, 124 N. J. Eq. 403 (E. & A. 1938).

It, therefore, 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. 347 ( Ch. 1945).

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.

 

 

[85-2 USTC ¶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

(CA-11), 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.

John E. 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 defendants-appellants.

Before KRAVITCH and CLARK, Circuit Judges, and WRIGHT ^*, Senior Circuit Judge.

CLARK, Circuit Judge:

These two 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.

I. Facts

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 obligated. ¹ 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

The taxpayers 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 United States consent to the sales. ³ Southern Bank and Mid-State were the purchasers of the property at the nonjudicial sales. ⁴

Recognizing that its initial foreclosure was ineffectual against the United States 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 United States pursuant to 26 U. .S. C. §7425. Mid-State was the purchaser of the property at this second sale and thereafter recorded its foreclosure deed.

II. Proceedings in the District Court and Arguments on Appeal

A. Southern 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. ⁶ Record, No. 84-7280 at 3, 6.

Southern Bank 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 Alabama 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 redemption. ⁷ Southern Bank concedes that because notice of the sale was not given to the IRS, the tax lien remained in effect to that extent.

The United States 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 United States contends that its junior lien was automatically elevated to a first lien against the real estate acquired by the purchaser at the sale.

The district 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 Alabama 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 to redeem.

Southern Bank, 586 F. Supp. at 14 emphasis in original).

B. Mid-State. Because the United States levied and seized possession of the subject property, Mid-State filed its complaint alleging that the United States wrongfully levied upon the property. Mid-State argues that 26 U. S. 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 United States 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:

This Court has not changed its mind since it wrote Southern Bank, and therefore believes that Mid-State's second foreclosure was successful in cutting off U. S. A. 's tax lien, leaving U. S. A. with no more than a lien creditor's statutory right to redeem.

* * *

Based on the conclusions which this Court has reached there is no necessity for expressing an opinion on the question of the constitutionality of 26 U. S. C. §7425 or an opinion on the alleged failure of U. S. A. to comply with 26 U. S. C. §6331(a). These issues are mooted by the rationale of this Court.

Record, No. 84-7501 at 113, 114.

C. Arguments on Appeal. The parties raise similar arguments on appeal. The United States essentially argues that the district court erred when it concluded that "where a nonjudicial foreclosure sale was held without notice to the United States , 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 Bank. The United States takes the position that the court's holdings are contrary to the plain language of the statute, its interpretation by the courts, and its legislative history.

Southern Bank 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.

Appellee's Brief, No. 84-7280 at 5.

The appellees 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 United States 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 Alabama 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.

III. Discussion

A. Failure of a Mortgagee to Provide Notice of a Nonjudicial Foreclosure Sale 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 U. S. 715, 734-35, 99 S. Ct. 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 U. S. 912, 95 S. Ct. 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). . . ." Id. The statute sets forth two requirements that must exist before a sale of property, upon which the United States has a tax lien, can be made subject to the lien. First, the United States must file its notice of lien 30 days prior to the sale. Second, the United States must not be furnished with notice of the sale in the time and manner prescribed by 26 U. S. C. §7425(c)(1). One commentator, in discussing these notice provisions, made the following observation:

The 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.

Plumb, Federal Liens and Priorities--Agenda for the Next Decade III, 77 Yale L. J. 1104, 1168 (1968) (emphasis in original).

We have 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 U. S. 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

Our conclusion 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 United States 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.

In deciding 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 sold." Id. at 596. We concluded that:

Section 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 United States 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.

In Little 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 U. S. 677, 103 S. Ct. 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.

B. Elevation 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.

These 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.'").

[Doctrine of Merger]

With this 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. Ala. 1981). "The equity of redemption in either case, however, is extinguished by a valid foreclosure sale. . . ." Trauner v. Lowrey, 369 So. 2d 531, 534 ( Ala. Sup. Ct. 1979).

Because 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 U. S. 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 U. S. C. §7425(b) it was observed:

The 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.

Where 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.

One legal commentator, in seeking reform of the notice provisions, made the following observations:

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 meaningful.

. . . .

[I]t 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) (footnotes omitted).

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 circumstances.

Although 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.

Mid-State and 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 different treatment.

Our conclusion is bolstered by the supremacy clause of the United States Constitution which provides that:

This 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.

U. 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.

The collection 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 U. S. C. §7425 makes clear that Congress did not intend such a result.

We therefore hold that the failure of the mortgagees to comply with the notice provisions of 26 U. S. 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.

C. Property 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.

The appellees argue that Alabama 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 ( Ala. 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.

Because Alabama 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 United States holds only a statutory right of redemption in the property.

According to the appellees, the United States , 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 Alabama law the property interest held by each taxpayer was an equitable right of redemption. In Alabama , 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 ( Ala. 1979); Jones v. Butler , 237 So. 2d 460, 462 ( Ala. 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 following:

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.

Appellee's 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 ( Tenn. 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 lien.

* * *

The foreclosure sale was precisely the kind of non-judicial sale contemplated by 26 U. S. 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.

Gilliland, ¶9322 at 86,840.

The contention 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 Alabama 's statutory redemption provisions have no application to this case.

IV. Conclusion

The judgment 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.

REVERSED and REMANDED.

^* Honorable Eugene A. Wright, U. S. Circuit Judge for the Ninth Circuit, sitting by designation.

¹ 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.

In Mid-State 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.

² In Southern Bank, the taxpayer was assessed $19,025.61. In Mid-State, the taxpayers were assessed $8,580.18.

³ 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 United States if the United States consents to the sale of such property free of such lien or title." 26 U. S. C. §7425(c)(2).

⁴ 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.

⁵ The first sale was held on December 30, 1981 . The second sale was held November 30, 1982 . Id. at 112.

⁶ See Ala. Code §6-5-230 to 6-5-246 (1977).

⁷ 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.

⁸ The statute provides:

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.

26 U. S. C. §6321 (emphasis added).

⁹ See infra at §III C.

¹⁰ 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.

¹¹ 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. at 1209.

¹² 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 United States subsequently filed a notice of federal tax liens against the taxpayer. The mortgagee, without providing notice pursuant to 26 U. S. C. §7425, conducted a nonjudicial foreclosure sale. The mortgagee purchased the property at the sale.

The district court found that the tax liens attached to the real property in issue. It concluded that because the United States 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. at 88,065.

Neither appellee attempts to distinguish Myers, by which we are bound, nor Little, by which we are not bound, but which we find persuasive.

¹³ 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 Alabama '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 Sale 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 (1979).

 

 

[82-1 USTC ¶9277]Maurice J. Zink, Plaintiff v. United States of America , Defendant

U. S. District Court, So. Dist. Tex. , Houston 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.

Clayton A. 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, Dallas , Texas 75242 , for defendant.

Findings of Fact

BLACK, District Judge:

1. On May 24, 1975 , the plaintiff sold two parcels of real property in Washington County , Texas , to Fred M. Crawford, Jr., which property is described as follows:

FIRST TRACT: All that tract or parcel of land situated in Washington County , Texas , 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:

BEGINNING at 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.

THENCE with 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.

THENCE with 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.

THENCE with 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.

THENCE with 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 Texas to Howard H. Peacock, dated September 2, 1962 , and recorded in Volume 243, page 300, Deed Records of Washington County, Texas.

SECOND 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:

BEGINNING at 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 tract.

THENCE with 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.

THENCE with 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.

THENCE with 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.

The property described above is hereinafter referred to as "Real Property."

2. The 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.

3. On 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.

4. On 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 .

5. On 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 quarter ended December 31, 1976 .

6. On 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 quarters ended March 31, 1977 and June 30, 1977 .

7. On 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 1976.

8. On 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 quarters ended September 30, 1977 and 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
:                     1,289.01

Attorney's fees incurred in connection

with foreclosure:                                     2,713.14

Trustee's fees incurred in connection

with foreclosure:                                     1,492.23

Filing fees incurred in connection

with foreclosure:                                        10.00

Total:                                              $31,346.80

 

12. Neither 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.

14. On 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 above.

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.

Conclusions of Law

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.).

2. Section 6321 of the Internal Revenue Code of 1954 provides that there shall be a lien in favor of the United States 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 United States ' tax lien arose and when that lien was filed for record on September 7, 1977 .

5. Section 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.

6. Section 6331 of the Internal Revenue Code of 1954 provides as follows:

SEC. 6331. LEVY AND DISTRAINT.

(a) 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. * * *

(b) 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

case (for 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 Revenue Service, June 6, 1978 .

8. In light of the foregoing, the United States was entitled to levy on and sell the subject property even when the title was held by Maurice J. Zink.

It is, therefore, the opinion of this Court that the plaintiff's Complaint is dismissed with prejudice, each party to bear its own costs.

Judgment

This action 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.

ORDERED, 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 this action.

 

[82-1 USTC ¶9212] United States of America , Plaintiff v. Augustin Romero Fernandez, Augustin O'Neil Perez, and Miriam Romeras Casterro, Defendants

U. 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 United States 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.

Gary H. 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 defendants.

Opinion and Order

PEREZ-GIMENEZ, District Judge:

This action 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.

Jurisdiction of this Court is based on 28 U. S. 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 judgment on 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.

Whenever a 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:

"The fact 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."

Upon examining 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:

Findings of Fact

1. Augustín 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 Madrigal, Ponce , Puerto Rico , 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.

3. The 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.

5. Augustín 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 U. S. C. 6321 and attached to all the property and rights to property of the taxpayer.

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 of the Commonwealth of Puerto Rico 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.

8. The 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 plaintiff's motion.

9. In its decree dated 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.

11. The United States 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 United States having been served process in Civil No. CS78-1414, nor has the Attorney General of the United States 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.

12. On January 31, 1979 , at 10:45 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 motion.

13. On February 1, 1979 , the plaintiff, Federal National Mortgage Association, moved that the proceeds from the sale be paid over. See Exhibit I attached to plaintiff's motion.

14. On February 8, 1979 , the State Court granted the motion described in paragraph 13 above. See Exhibit J attached to plaintiff's motion.

15. On February 22, 1979 , the purchaser moved to have the State Court cancel the liens in favor of the Commonwealth of Puerto Rico and the United States since neither was present at the sale to protect their interest. See Exhibit K attached to plaintiff's motion.

16. On February 22, 1979 , the State Court granted the motion mentioned in paragraph 15 above. See Exhibit L attached to plaintiff's motion.

17. On March 14, 1979 , the Federal National Mortgage Association also moved through its lawyers to cancel the liens held by the United States and the Commonwealth of Puerto Rico . See Exhibit M attached to plaintiff's motion.

18. On March 17, 1979 , the State Court granted the motion named in paragraph 17 above. See Exhibit N attached to plaintiff's motion.

19. On December 19, 1980 , the United States filed the present suit.

Conclusions of Law

The issue 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 the United States is not made a party to the suit requesting the sale. Under 28 U. S. C. 2410, Congress consented to the joinder of the United States 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 stated:

"Although 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 (Vol. 3)."

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 is. ⁴ 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:

`What may accurately be denominated as a judicial sale is not very well settled' but a judicial sale must have certain basic ingredients. City of New Castle v. Whaley's Heirs, 102 Pa. 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 Pa. 519, 523, 76 A 2d 194, 196 (1950)".

Puerto Rico's 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 proceeding".

In this case we are convinced that the foreclosure sale was a judicial sale since the law in Puerto Rico 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.

WHEREFORE, 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 ORDERED.

¹ Wright and Miller, Federal Practice and Procedure, Civil Section 2720.

² Section 2410(b) in its pertinent part provides:

"In 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 Columbia."

³ 26 U. S. C. 7425(a) states in pertinent part:

"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--

(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, . . ."

⁴ S. Rep. No. 1708, 89th Cong., 2d Sess. (1966), 1966 U. S. Code Cong. & Admin. News, pp. 3722, 3748-9.

⁵ 32 L. P. R. A. 1141.

⁶ 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.

 

 

[80-1 USTC ¶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

U. S. District Court, East. Dist. Mo. , 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 US 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.

Joseph B. Moore, Assistant United States Attorney, St. Louis , Mo. 63101 , for plaintiff. Austin Parham, Wasinger and Parham, 2801 St. Mary's Ave., Hannibal , Mo. 63401 , for defendants.

Memorandum

FILIPPINE, District Judge:

This matter is before the Court for a decision on the merits on the stipulated record filed by the parties in lieu of trial.

Plaintiff brought this action pursuant to 26 U. S. C. §§ 7402, 7403(b), and 28 U. S. C. §§ 1340 and 1345 to reduce tax claims of the United States to judgment and to foreclose a federal tax lien. The action was brought in two claims by the United States , 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.

Defendant Weakley did not answer and was apparently in default. On March 29, 1978 , on the application of the United States , the Clerk of this Court entered a default judgment against her in the amount of $4,713.52.

Defendants 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 $5,121.01.

The United States 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).

The property in question in this action is a parcel of real property in Hannibal , Missouri described as follows:

Lot (15) fifteen in Oakview Subdivision, First Addition, in the City of Hannibal, County of Marion, Missouri and known as 23 Pauline Drive, Hannibal, Missouri 63401.

The tax 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 United States 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 Lot 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 property in Marion County , and created liens in favor of the judgment creditors on all the Weakley real estate in Marion County 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 Lot 15 and, on May 6, 1972, sold it at an execution sale to defendants Keith and Charlotte Schoonover.

The United States was not given notice of the Sheriffs sale of Lot 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 it.

The Schoonovers argue that the sale by which they bought Lot 15 was by virtue of a lien which is senior to that of the United States . 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 United States 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 Missouri 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 in Missouri ", 44 Mo. 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 existence until March 31, 1972 , after that of the United States , which was filed on March 23, 1972 .

Additionally, the United States argues that its lien on the Weakley property could not have been discharged by the sale of Lot 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).

Therefore, by 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.

The 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 Marion County 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 the 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 or 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 action.

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 pay the United States by virtue of the lien. The Schoonovers concede that there is no authority in Missouri 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 Missouri 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 Schoonovers.

The Court adopts the foregoing as its findings of fact and conclusion of law in accordance with Fed. R. Civ. P. 52.

Accordingly, judgment will be entered in favor of the United States and against the Schoonovers, and the Schoonovers' cross-claim against defendant Weakley will be dismissed without prejudice.

 

 

[73-1 USTC ¶9238]United States of America , 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

U. 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, Houston , Tex. , for Mr. & Mrs. Claude T. Allen, Mitchell M. Bailey, 345 Park Ave. , New York , N. Y., for I. Von Cseh, for defendants.

Memorandum Opinion and Order

SEAL, District Judge:

The Government 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.

[Facts]

On 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. Dist. Tex. ). 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 fifty dollars.

The painting 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 Antwerp 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 England who knighted him.

Neither the 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 the United States may have the sale set aside.

[Government Theories]

The Government 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 ( Tex. 1921); Hidalgo County Water 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 sheriff's sale.

The first 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. Tompkins, 304 U. S. 64 (1938), Texas 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 ( Tex. 1909), or "both irregularity calculated to affect the sale and a gross inadequacy of price." Tex. 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.

While the 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 Tex. 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.

This case 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.

[Issue of Claimed Irregularity]

The 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 United States 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 ( U. S. 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 ).

[Issue of Inadequate Price]

The Government 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.

[Purchaser]

The 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 the United States are rejected and judgment will be entered for the defendant Claude T. Allen that the United States 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.

Clerk will enter this Memorandum Opinion and provide counsel with true copies.

¹ §7425. Discharge of liens

(a) Judicial 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.

These provisions became effective November 2, 1966 , and applied to all titles or liens of the United States regardless of when they arose.

 

[57-1 USTC ¶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, Edward Rob bins, Sr., and the State of New Jersey, Defendants-Respondents and the United States of America, Defendant-Appellant

Supreme 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.

John J. 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.

BURLING, Judge:

The First National Bank and Trust Company, Woodbury , New Jersey , 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 priority: Rob 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).

Thereafter and prior to the foreclosure sale, Atco National Bank purchased the first mortgage of the First National, and itself prosecuted the foreclosure. Sale 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.

On April 20, 1956 , the United States 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 United States in view of this exercise of its right of redemption. The motion was denied after hearing before Judge Goldmann, 41 N. J. Super. 151 ( Ch. 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 United States 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 United States in any action brought to quiet title or to foreclose a mortgage or other lien on real or personal property on which the United States has or claims a mortgage or other lien. Gerth v. United States , 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 ( Ch. 1946) (the latter two cases involved the substantially similar antecedent of section 2410 (28 U. S. C. A. secs. 901-905 (1940 ed.)).

Of significance here is subsection (c) of section 2410:

"(c) 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 United States 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 United States , shall be made subject to and without disturbing the lien of the United States , unless the United States 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 United States , the United States 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 admin istration of the laws in respect of which the claim of the United States arises." (Italics supplied.)

(The United States did not seek "affirmative relief" in the instant case)

The United States , 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.

The trial 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."

The United States argues that the trial court erred in interpreting "redeem" according to New Jersey 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, 34 [345] U. S. 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).

Initially it 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. New Britain , 347 U. S. 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. United States , 111 Fed. Supp. 585 (D. C. R. I. 1953) [53-1 USTC ¶9323].

Secondly, 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. 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, 312 U. S. 399, 402, 85 L. ed. 913, 916 (1941) [41-1 USTC ¶10,027].

Thirdly, the 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 ( Ch. 1924), and the statutory right, which does not arise until the sale takes place. See Eiceman v. Finch, 79 Ind. 511 (Sup. Ct. 1881); Spurgin v. Adamson, 62 Iowa 661, 18 N. W. 293 (Sup. Ct. 1884); 3 Wiltsie on Mortgage Foreclosure, par. 1060 (5th ed.). No right of redemption exists in New Jersey 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 Foreclosure Sale --The Uniform Mortgage Act, 23 Mich. 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:

"Without pretending to have examined all the redemption statutes with the minuteness they deserve, I venture the following analysis of their scheme.

"All 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 authority or admin istrative interpretation by the Commissioner of Internal Revenue to support the defendant's position would not seem to be without reason.

Section 2410 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 the United States 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:

"8. 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 holder, the United States shall have a year in which to redeem. That does away with any necessity for a delay of sale. In many States of the Union 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 United States , the rights of the United States never are barred by foreclosure decree." 74th Cong. Record, Part 6, p. 6208.

It is 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 United States 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 United States , 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 United States 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.

We conclude 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. United States , 110 Fed. Supp. 563 (D. C. M. D. Pa. 1953).

The trial court by its order has discharged the lien of the United States upon the property involved because the sum tendered in exercise of the right was insufficient. Cf. Keiler v. Bunn, 84 N. J. Eq. 519 ( Ch. 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.

 

 

[56-2 USTC ¶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

U. S. District Court, East. Dist. Pa., Civil Action No. 19260, 143 FSupp 590, 8/30/56

[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 United States 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 the United States 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 latter's ownership.

James N. Rob ertson, Media , Pa. for plaintiff. W. Wilson White, United States Attorney, and Alan J. Swotes, Assistant United States Attorney, Philadelphia, Pa., for the United States.

Opinion

CLARY, District Judge:

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 .

This action 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 follows:

[Unrecorded Realty Sale ]

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 County Commissioners .

[Federal Tax Lien Filed]

On October 19, 1949 the 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.

[Recorded Realty Sale ]

Approximately 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 Orphans Court of Delaware County vested in his widow, Jennie Reiter, plaintiff herein.

It is the contention of the plaintiff that the lien of the United States 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 U. S. 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.

Sections 3670 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, approved August 16, 1954 , and read as follows:

"§3670. Property subject to lien.

"If any 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 such person."

"§3672(a). Invalidity of lien without notice.

"Such lien shall not be valid as against any mortgagee, pledgee, purchaser, or judgment creditor until notice thereof has been filed by the collector * * *

"(1) Under State or Territorial laws.

"In 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; * * *"

While the 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.

[State Recording Laws]

The laws of Pennsylvania 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:

"All 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. . . ."

As 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:

"The 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 Pennsylvania under the facts of this case it would destroy the primary purpose of the recording statutes of Pennsylvania . An unrecorded deed in the Commonwealth of Pennsylvania 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 Pennsylvania 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 Co. , 9 Fed. (2d) 683 (D. C. Ga. 1925) [1926 CCH ¶7050]; United States v. Maniaci, supra.

[Lien 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 Pennsylvania 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.

An appropriate decree in favor of the plaintiff may be submitted.