Maryland

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Russell G. Ruggerio, Plaintiff v. United States of America , Defendant.

U.S. District Court, Dist. Md. , No. Div.; CIV. WDQ-04-639, January 31, 2005 .

[ Code Secs. 6321 and 6323]

Lien for taxes: Third-party purchaser: State law: Equitable conversion. --

Real property purchased by a third party was not subject to federal tax liens because, under state ( Maryland ) law, the liens attached only to sale proceeds and not the property. After the purchaser and the seller entered into a contract for the sale of the property, but before settlement, the government filed tax liens against the seller. The government claimed that the tax liens had priority over the third-party purchaser's interests under Code Sec. 6323. However, Maryland recognizes the doctrine of equitable conversion, under which, upon execution of a contract of sale, the purchaser becomes the equitable owner of the property and the seller's property interests are limited to the sales proceeds. Thus, the liens attached only to the sales proceeds and not to the property itself.

.

[ Code Sec. 7402]

Suits by nontaxpayers: Quiet title: Sovereign immunity of the U.S. : Waiver. --

A federal district court rejected the government's motion to dismiss, for lack of jurisdiction, a quiet title action filed by a third-party purchaser of real property on which tax liens had allegedly been placed. The government claimed that it had not waived its sovereign immunity because the purchaser brought the action under a general jurisdictional statute (28 USC 1340), which does not constitute a waiver of sovereign immunity, but failed to plead the Quiet Title Act (28 USC 2410), under which sovereign immunity is waived. Nevertheless, the court had jurisdiction because the complaint complied with the requirements for bringing a quiet title action in that it included the name and address of the delinquent taxpayer (the seller) and identified both the IRS office that filed the lien notice and the date and place of filing.

.

ORDER

QUARLES, JR., District Judge: For the reasons discussed in the accompanying Memorandum Opinion, it is this 31st day of January 2005, ordered that:

1. the Plaintiff's motion for summary judgment BE, and HEREBY IS, GRANTED;

2. the Clerk shall enter judgment for the Plaintiff;

3. the Defendant's motion for summary judgment BE, and HEREBY IS, DENIED;

4. the case BE, and HEREBY IS, CLOSED; and

5. the Clerk of the Court shall send copies of this Memorandum Opinion and Order to counsel for the parties.

MEMORANDUM OPINION AND ORDER

Citing 28 U.S.C. §1340, Russell G. Ruggerio brought an action against the United States of America to quiet title. Pending are Ruggerio's motion for summary judgment and the United States ' cross motion for summary judgment. For the following reasons, Ruggerio's motion for summary judgment will be granted, and the United States ' cross motion for summary judgment will be denied.

I. BACKGROUND

On January 14, 2003 , Ruggerio and Rocky A. Kimbrew entered into a contract of sale for real property in Ocean City , Maryland (the "Property"). On April 7, 2003 , the day before settlement, the Department of Treasury filed two federal tax liens against Kimbrew. On January 27, 2004 , the Department of Treasury informed Ruggerio that in satisfaction of Kimbrew's liens the Property would be seized. Ruggerio alleges that these liens are neither valid nor enforceable. On March 24, 2004 , Ruggerio filed this action.

II. LEGAL DISCUSSION

A. Motion for Summary Judgment

1. Standard of Review

Summary judgment is appropriate when there is no genuine issue of any material fact, and the moving party is entitled to judgment as a matter of law. In Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 249 (1986), the Supreme Court explained that, in considering a motion for summary judgment, "the judge's function is not ... to weigh the evidence and determine the truth of the matter but to determine whether there is a genuine issue for trial." A dispute about a material fact is genuine "if the evidence is such that a reasonable jury could return a verdict for the nonmoving party." Id. at 248. Thus, "the judge must ask ... whether a fair-minded jury could return a verdict for the [nonmoving party] on the evidence presented." Id. at 252.

The court must view the facts and the reasonable inferences drawn therefrom "in the light most favorable to the party opposing the motion," Matsushita Electric Industrial Company v. Zenith Radio Corp., 475 U.S. 574, 587 (1986), but the opponent must produce evidence upon which a reasonable fact finder could rely. Celotex Corp. v. Catrett, 477 U.S. 317 (1986). The mere existence of a "scintilla" of evidence is not sufficient to preclude summary judgment. Anderson, 477 U.S. at 252.

2. Waiver of Sovereign Immunity

The United States may not be sued without its consent; consent is a prerequisite for jurisdiction. Randall v. United States of America, 95 F.3d 339, 345 (4 ^th Cir. 1996) ( quoting United States v. Mitchell, 463 U.S. 206, 212 (1983)). A waiver of the traditional sovereign immunity cannot be implied but must be unequivocally expressed. United States v. Testan, 424 U.S. 392, 399 (1976) ( quoting United States v. King [ 69-1 USTC ¶9410], 395 U.S. 1, 4 (1969)). Title 28 of the U.S. Code, §2410(a) waives the Government's sovereign immunity in quiet title actions. The United States contends that this Court lacks jurisdiction because Ruggerio failed to plead waiver of sovereign immunity.

Ruggerio brings this action solely under 28 U.S.C. §1340, a general jurisdictional statute which is not a waiver of sovereign immunity. See Randall, 95 F.3d at 345. Although Ruggerio failed to plead 28 U.S.C. §2410(a), the Court has examined the complaint and determined that the allegations support jurisdiction. See Randall, 95 F.3d at 345 ("all pleadings shall be construed as to do substantial justice"). In quiet title actions, the complaint must include the name and address of the delinquent taxpayer, the identity of the internal revenue office filing the lien notice and the date and place of filing. See 28 U.S.C. §2410 (b). As Ruggerio has complied with these requirements, the Court has jurisdiction.

3. Whether Ruggerio's property is subject to the tax liens

The United States may impose a lien upon a delinquent tax payer's real or personal property. See 26 U.S.C. §6321. State law controls in determining the nature of the legal interest which the taxpayer had in the property. United States v. National Bank of Commerce [ 85-2 USTC ¶9482], 472 U.S. 713, 722 (1985). Maryland recognizes the doctrine of equitable conversion. Upon execution of a contract of sale, the purchaser becomes the equitable owner of the property and the seller retains bare legal title. See Watson v. Watson, 304 Md. 48, 60 (1985). Thereafter, the seller's property interests are limited to the proceeds of the sale. See id.

When the Defendant filed the tax liens, Kimbrew's interest in the Property was limited to his anticipated proceeds from the sale. The tax liens did not attach to the Property but rather to Kimbrew's interest in the proceeds of the sale. See SMS Associates v. Clay, 868 F.Supp. 337, 344 (D. D.C. 1994). The United States contends that the liens attached to the Property because the liens had priority over Ruggerio's interests under 26 U.S.C. §6323. Section 6323 governs the validity and priority of liens imposed against a taxpayer's property. See 26 U.S.C. §6323. This section merely established the priority of the Government's liens against the sale proceeds. See National Bank of Commerce [ 85-2 USTC ¶9482], 472 U.S. at 722 ("revenue statutes do not create property rights but merely attaches federally defined consequences to rights created under state law"). Accordingly, the plaintiff's motion for summary judgment will be granted.

III. CONCLUSION

For the reasons discussed above, Ruggerio's motion for summary judgment will be granted and the United States ' cross motion for summary judgment will be denied.

 

[54-2 USTC ¶9486] United States of America , Appellant v. Fidelity & Deposit Company of Maryland et al., Appellee

(CA-5), In the United States Court of Appeals for the Fifth Circuit, No. 14604, 214 F2d 565, July 6, 1954

Appeal from the United States District Court for the Southern District of Mississippi.

Lien for taxes: Property conveyed in fraud of creditors.--In a suit by a bonding company to set aside a conveyance from the taxpayer to his wife as being in fraud of creditors, the United States intervened and asserted priority for tax liens which arose and were recorded subsequent to the conveyance. After the conveyance and before the suit, the wife had mortgaged the property. The court held that the lien of the bonding company, acquired under state law when it filed suit, was superior to that of the United States , because when the tax liens were filed taxpayer had already parted with all his interest in the property and the United States was therefore an unsecured creditor when the bonding company acquired its lien. The bona fide mortgagee also took precedence over the United States , since the mortgage was executed when the wife had title and before the conveyance to her was set aside as fraudulent. Sec. 3466 of the Revised Statutes cannot be applied to give an unsecured claim of the United States priority over a claim secured by a lien.

Carolyn R. Just and Ellis N. Slack, Special Assistants to Attorney General, and H. Brian Holland, Assistant Attorney General, all of Washington, D. C., and Jesse W. Shanks, Assistant United States Attorney, Jackson, Miss., for appellant. William E. Suddath, Jr., James L. Spencer, W. H. Watkins, Sr., and Forrest B. Jackson, all of Jackson, Miss., for appellee.

Before BORAH, and RUSSELL, Circuit Judges, and DAWKINS, District Judge.

BORAH, Circuit Judge:

Fidelity & Deposit Company of Maryland, hereinafter called the bonding company, brought this action in the United States District Court for the Southern District of Mississippi against E. E. Lovell and Mrs. Lavinia B. Lovell, his wife, seeking a judgment against Lovell, a contractor whom it had bonded, and seeking to set aside a deed (for his one-half interest in the homestead) from Lovell to his wife, dated November 19, 1948. Also named as a defendant was H. V. Watkins, trustee for the Deposit Guaranty Bank & Trust Company of Jackson , Mississippi , to which on February 10, 1950 , the Lovells had mortgaged the homestead under deed of trust. By subsequent amendments to the complaint, first the Collector of Internal Revenue, and then in his stead the United States , was made a defendant. The complaint as amended broadened the original demands of plaintiff, and in a corresponding prayer for relief the court was additionally asked to set aside a transfer by Lovell to his wife of certain shares of stock in the Flowood Corporation and to grant unto plaintiff a personal judgment against Mrs. Lovell for the value of the stock if she had disposed of the same as well as for all sums of money transferred to, given to, or deposited by Lovell for the benefit of his wife. Subsequently, and upon motion of the plaintiff, the United States was dismissed as a party defendant without prejudice. Thereafter, the United States was permitted to intervene and file an answer and cross-claim, wherein it asserted that its tax liens against Lovell were prior and superior to any lien asserted by plaintiff, the trustee and the bank. It also alleged that the conveyance from Lovell to his wife of November 19, 1948 , was made without consideration, was fraudulent as to creditors and should be subjected to the payment of the claim for unpaid taxes owing to the United States . The Deposit Guaranty Bank & Trust Company thereupon intervened to protect its claim to certain shares of Flowood Corporation stock pledged on the personal note of Mrs. Lovell.

[District Court's Judgment]

Issue was joined and the cause came on for trial [52-2 USTC ¶9550]. At its end and after considering the evidence, the District Court found and held in substance the following: (1) that the conveyance by E. E. Lovell to his wife of his undivided one-half interest in the homestead was fraudulently made as to the Fidelity & Deposit Company of Maryland and the United States of America as creditors of E. E. Lovell, and that the same should be set aside and said property sold subject to the payment of his debts; (2) that the Deposit Guaranty Bank & Trust Company, as trustee for R. V. Powers Foundation, had a good and valid deed of trust on the homestead of E. E. Lovell and his wife to secure an indebtedness of $4,000 still owed to it; that, subject to such indebtedness, the bonding company, as institutor of this suit, has (exclusive of the homestead exemption) the right to priority of payment from the proceeds of E. E. Lovell's one-half interest which had been fraudulently conveyed; and that as to the homestead exemption, the first three thousand dollars which was not subject to execution to satisfy the bonding company's judgment, the United States was entitled to be first paid; (3) that the conveyance by E. E. Lovell to his wife of one hundred shares of Flowood stock was fraudulently made as to the creditors of E. E. Lovell, and should be set aside, and said property should be subjected to the payment of his debts; that there was owing to the Deposit Guaranty Bank & Trust Company the sum of $1,150, secured by a pledge of said stock, and that subject to such secured indebtedness the bonding company, as institutor of this suit, has the right of priority of payment from the proceeds of the stock; (4) that E. E. Lovell fraudulently transferred to his wife various sums of money aggregating $5,000, which transfers should be set aside in favor of the bonding company, as creditor of E. E. Lovell; and (5) that E. E. Lovell was indebted to the bonding company in the sum of $43,219.83, for which amount it entered judgment in favor of the bonding company; and that E. E. Lovell was indebted to the United States for unpaid taxes, as claimed, in the amount of $8,955.12 together with interest and the court entered judgment in favor of the United States for the full amount.

From that part of the judgment awarding priority in payment out of the property involved to the bonding company over the debts due the United States for unpaid taxes, and from that part of the judgment holding the debt of $4,000 due Deposit Guaranty Bank & Trust Company, secured by deed of trust dated February 10, 1950, is entitled to priority in payment over tax claims of the United States secured by liens which had arisen and been duly recorded prior to execution of the deed of trust, the United States has appealed.

[Tax Liens v. Lien of Bonding Co.]

The first of three questions presented on this appeal is whether the District Court erred in holding that the lien of the bonding company under the laws of the State of Mississippi is superior to tax liens of the United States which arose and were duly recorded prior to the institution of the suit on which the lien of the bonding company was based. Insisting that this question must be answered in the affirmative the Government argues that the federal tax liens here involved arose and were duly recorded before the bonding company acquired its lien under Mississippi law ¹ as institutor of this suit. That while the tax liens of the United States arose and were recorded after E. E. Lovell had fraudulently conveyed to his wife the property here involved, the Government, although it did not then have a statutory lien for its taxes, was as much a creditor of E. E. Lovell as was the bonding company at the time the conveyances were made and thus clearly is within the protection of Section 265 of the Mississippi Code. Under that section the fraudulent conveyances were "clearly and utterly void" as to creditors and there is no authority either in the Mississippi Code or in the decisions of the Mississippi Supreme Court to prevent the federal tax liens from attaching to the property thus transferred at the time the liens arose. In any event and regardless of whether the fraudulent transfers here involved be considered "clearly and utterly void" as declared by the statute, or merely voidable at the option of creditors as held by the court below, any rights of the bonding company were wholly derivative, and since the tax liens of the United States attached also to any after acquired property they attached to any property or rights to property derived through the taxpayer after the liens arose. Finally it is argued that there is no provision of federal law which would warrant recognizing the lien of the bonding company as superior to the tax liens of the United States .

The right of the United States priority of payment of debts due it does not stand on any sovereign prerogative, but is exclusively founded upon the actual provisions of its statutes. Appellant concedes that the bonding company upon the filing of its bill on September 20, 1950 , acquired a lien under Section 127 of the Mississippi Code against the property fraudulently transferred by the taxpayer to his wife. However, and by virtue of Section 3670 of the Internal Revenue Code, ² it insists that the tax liens of the United States which arose and had been duly recorded prior to the filing of the bill were superior in right to the lien of the bonding company.

Section 3670 provides in pertinent part as follows: "If any person liable to pay any tax neglects or refuses to pay the same on demand, the amount * * * shall be a lien in favor of the United States upon all property and rights of property, whether real or personal, belonging to such person." (Italics supplied.) Section 3671 of the Internal Revenue Code provides that the lien under Section 3670 "shall arise at the time the assessment list was received by the collector and shall continue until the liability for such amount is satisfied or becomes unenforceable by reason of lapse of time."

[ Mississippi Law]

It is plain from the language of the statute that the tax liens of the United States attached to all property and rights to property of the taxpayer at the time the several assessment lists were received by the Collector of Internal Revenue. It is equally plain, and the Government readily concedes the fact, that the federal tax liens arose and were recorded long after the taxpayer had conveyed to his wife the property here involved. It thus affirmatively appears that the taxpayer had parted with all right, title and interest to the property in question before the tax liens of the United States arose. ³ Under Mississippi law, Lovell not only had no interest in the land from and after the execution of the deed to his wife but he had no reversionary ⁴ interest of any kind therein and he was estopped ⁵ to assert or acquire any such interest. Under Section 265 of the Mississippi Code it has consistently been held that a fraudulent conveyance is void "only" against creditors but valid as between the grantor and grantee. Or, as the Supreme Court of Mississippi said ⁶ in quoting approvingly from a Massachusetts case it "is good between the parties and void against creditors only, or to speak accurately, is voidable by creditors at their election."

When the tax liens were filed Lovell had parted with all interest in the property which he had conveyed to his wife and he never thereafter acquired any interest therein. Indeed the statute prohibited him from doing so. Consequently appellant did not then acquire a lien on property in which the taxpayer had no interest but only acquired a right to set aside the conveyance from Lovell to his wife as a fraudulent conveyance. Its position was that of an ordinary creditor seeking to recover an unsecured claim. It was an unsecured creditor just as appellee was when it filed its original bill of complaint on September 20, 1950 .

Appellee filed its bill to subject the property involved to the payment of its debt more than a year before the court permitted appellant to intervene in that proceeding and assert a lien upon the property and also the rights of a creditor. And by virtue of Section 1327 of the Mississippi Code ⁷ appellee obtained a lien upon the property as of the date of the filing of the bill which would antedate and take preference over the counterclaim filed by the appellant. In Kline v. Sims, 149 Miss. 154, 114 So. 871, 873, the Supreme Court of Mississippi in construing Section 1327, supra, said:

"We think the creditor who proceeds under this statute is entitled to the benefit of his diligence, and that, under the language of the statute, he has a lien upon the property sold on this sequestration. He is not required to bring suit on behalf of all the creditors, but may sue for his own demand and get the benefit of his diligence. Creditors who will not act, or who are not diligent in asserting their demands, are not entitled to participate equally with the man who is diligent, and who has incurred the risk and expense of proceeding to attack a fraudulent conveyance. If other creditors intervene in the suit, they may, by so doing, take their places in line with creditors according to the date of their proceedings, but they are not entitled to share in the proceeds of the first creditor's diligence and activities, and such creditor is entitled to have his claim first paid. If other creditors desire, they may attack, or sue out writs of sequestration, or take any other appropriate action; but they must do so at their own risk, and they are not entitled to participate in the activities and diligence of the creditor who first takes action."

[Priority of Mortgage]

Appellant's second point relates to the claimed error on the part of the District Court in holding that the debt due the Deposit Guaranty Bank & Trust Company, secured by a deed of trust on the real property here involved, is entitled to a priority of payment out of proceeds from the sale of the property over those taxes due the United States secured by tax liens which arose and had been recorded prior to execution of the deed of trust to the bank. ⁸

During the year 1947 E. E. Lovell and his wife acquired the property in question at a cost of $14,525, of which $6,525 was paid in cash and the unpaid balance of $8,000 was secured by a deed of trust on the property in favor of the First (Capital) National Bank of Jackson , Mississippi . After Lovell had encountered financial difficulties and after he had conveyed his one-half interest in the property to his wife it became necessary because of a threatened foreclosure of the deed of trust to refinance this obligation which by that time had been reduced to approximately $6,000. Accordingly, on February 10, 1950 , Lovell and his wife executed a new deed of trust on the property in favor of the Deposit Guaranty Bank & Trust Company in the amount of $6,000 and this instrument was recorded on February 13, 1950 . The proceeds of the new loan, at least in material part, were used to pay off the previous deed of trust to First National Bank.

In the meantime, and prior to the execution of the deed of trust to Deposit Guaranty Bank & Trust Company, the Collector had on March 28, 1949, filed notice of lien convering assessments of withholding tax and Federal Insurance Contributions Act taxes, together with penalties and interest thereon, for the second, third, and fourth quarters of 1948 in the aggregate amount of $5,823.67; and had, on April 28, 1949, filed notice of lien covering the original assessment of Federal Employment Tax Act, penalty and interest for 1948 in the amount of $235.95. At the time this action was brought the Lovells were indebted to the Deposit Guaranty Bank & Trust Company in the amount of $4,000 together with interest thereon at the rate of 51/% per annum from the tenth day of February 1952 until paid.

The record standing thus, the district judge, without passing upon or deciding the relative rights of the Deposit Guaranty Bank & Trust Company under its deed of trust and of the United States under its prior recorded tax liens, held that "the Deposit Guaranty Bank, so far as the lien on this property is concerned * * * was subrogated to the First National, and succeeded to its rights; and the Deposit Guaranty Bank and Trust Company (as Trustee for R. V. Powers Foundation) has against said property a good and valid lien, which comes ahead of the claims of all of the other parties litigant."

We think the court erred in applying the doctrine of subrogation but nevertheless reached the right conclusion in holding that the mortgage of Deposit Guaranty Bank & Trust Company was superior to the liens for taxes. The Deposit Guaranty Bank did not acquire nor did it in any manner succeed to the rights of First National Bank under the 1947 deed of trust to it. On the contrary, the Deposit Guaranty Bank entered into a new and separate loan agreement with Lovell and his wife and it took a new trust deed in its favor as security for repayment of its loan. The lien of First National was paid off and discharged, it was not transferred, and the Deposit Guaranty Bank did not thereby succeed to the lien rights of First National. However, there is and can be no doubt that the bank did acquire a good and valid mortgage lien of its own upon property the title to which was vested in Mrs. Lovell at the time she executed the deed of trust. Prior to the time of the institution of suit by the Fidelity & Deposit Company of Maryland there was no record or actual suggestion to the Deposit Guaranty Bank and Trust Company that the conveyance from Lovell to his wife was fraudulent. The Deposit Guaranty Bank was a bona fide mortgagee of Mr. Lovell because it was without notice, either actual or constructive, of the fraudulent nature of the conveyance by which she secured her title. We conceive the Mississippi law ⁹ to be that a bona fide purchaser or mortgagee from a grantee who secures title by a conveyance which is afterwards set aside because in fraud of creditors is not charged with the fraud of an antecedent grantor in the chain of title. Until the fraud is established and the instrument set aside a lien recorded against such antecedent grantor in title is not notice to the subsequent bona fide purchaser. Consequently, the mortgage of the bank was superior to the liens for taxes.

[Unsecured Claims of U. S.]

Appellant's third and final point that the District Court erred in holding that the United States is not entitled under Section 3466 of the Revised Statutes ¹⁰ to priority in payment of its taxes out of the proceeds of the property her involved is not well taken and hardly merits discussion. Our recent opinion in U. S. v. Atlantic Municipal Corporation, 212 Fed. (2d) 709, (decided May 11, 1954 [54-1 USTC ¶9392]) is dispositive of this issue. There, in speaking of Section 3466 we said: "This statute applies only as against unsecured debts, that is, debts not secured by a specific and perfected lien. It has never been, we think it will never be, applied as it is sought to be applied here, to accord payment to a debt due the United States in preference to a claim secured by a lien which is prior in time and superior in law to the lien of the United States securing the debt for which preferential payment is sought."

For the reasons stated the judgment ¹¹ of the District Court is

AFFIRMED.

¹ Mississippi Code, Annotated (1942 ed.) Volume 1, Sec. 1327.

² 26 U. S. C. 1946 ed., Sec. 3670.

³ Martin v. Tillman, 70 Miss. 614.

⁴ Lewis Williamson, Sheriff v. Wilkerson, 81 Miss. 503.

⁵ Meyers v. American Oil Company, 192 Miss. 180, 186, 187, 5 So. 2d 218.

⁶ Barwick v. Mayse & Sons, 74 Miss. 415, 21 So. 238.

⁷ Mississippi Code, Annotated (1942 ed.) Vol. 2, Sec. 1327 provides in part: "Creditors may attack fraudulent conveyances, etc.--The said court shall have jurisdiction of bills exhibited by creditors * * * to set aside fraudulent conveyances of property, * * *. Upon such a bill a writ of sequestration or injunction, or both, may be issued * * *. The creditor in such case shall have a lien upon the property described therein from the filing of his bill, except as against bona fide purchasers before the service of process upon the defendant in such bill."

⁸ The lien of Fidelity & Deposit Company of Maryland arose on September 20, 1950 , with the filing of its complaint in the state court action, which was subsequent to the execution of the deed of trust to Deposit Guaranty Bank & Trust Company on February 10, 1950 .

⁹ See footnote 7.

¹⁰ 31 U. S. C. 1946 ed. Sec. 191.

¹¹ The District Court's opinion is reported asFidelity & Deposit Company of Maryland v. Lovell, 108 Fed. Supp. 360 [52-2 USTC ¶9550].

 

 

[64-1 USTC ¶9375]Maryland National Bank and Francis D. Murnaghan, Jr., Trustees under Deed of Trust from George R. Eisenhauer and Dorothy E. Eisenhauer v. United States of America, Irving Machiz, District Director of Internal Revenue and Celebrity Lounge, Inc. United States of America, Cross-Plaintiff v. Celebrity Lounge, Inc., Cross-Defendant United States of America, Defendant and Third-Party Plaintiff v. Eklof & Company, Inc., Third-Party Defendant

U. S. District Court, Dist. Md. , No. 13747. Civil Action, 227 FSupp 504, 3/18/64

[1954 Code Secs. 6341 and 6342]

Levy on property located on rented premises: Landlord' right to recover for use of premises.--Where a levy for taxes was made on property located on rented premises, and the landlord did not agree to store the property rent free pending sale under levy, there was a contract implied in fact that the Government would pay a reasonable charge for storage. Furthermore, the landlord had a right under the Fifth Amendment to be compensated for the use of his property.

[1954 Code Sec. 6323]

Lien for taxes: Attachment of lien to prepaid rental payment: Property rights: Construction of state law.--Under Maryland law a prepaid rental payment becomes the property of the landlord at the time it is tendered and not on the date of default by the taxpayer. Since the prepaid rental payment occurred before the tax assessment levied against the delinquent taxpayer-tenant, the prepaid rental payment had passed to the landlord and was no longer the taxpayer-tenant's property subject to levy.

[1954 Code Sec. 7401]

Collection of tax: Cross claim by Government: No defense to claim.--In a suit by a landlord for rental on premises where a delinquent-taxpayer's property was stored pending sale under levy, the Government's cross claim against the delinquent taxpayer for unpaid withholding taxes plus unassessed interest was sustained since the taxpayer presented no defense to the claim.

[1954 Code Sec. 6335]

Sale of seized property: Property located on rented premises: Purchaser's liability.--The Government was found liable for rental on the premises where seized property was located. Since the purchaser admitted to liability for rental incurred between the term the bid was accepted and the property was released in accordance with Reg. §301.6335(7), the action was settled as a matter of course.

Thomas P. Perkins III, 1409 Merchantile Trust Bldg., Baltimore , Md. , for plaintiff. Thomas J. Kenney, United States Attorney, Rob ert W. Kernan, Assistant United States Attorney, Baltimore, Md., John F. Beggan, Department of Justice, Washington, D. C. 20530, for U. S. John E. Sibrea, Equitable Bldg., Baltimore, Md., for third-party defendant.

NORTHROP, District Judge:

This action was instituted by the plaintiffs, Maryland National Bank and Francis D. Murnaghan, Jr., trustees under a deed of trust from George R. Eisenhauer and Dorothy E. Eisenhaurer, to recover for rentals allegedly due the plaintiffs from the United States . The United States has filed: a counterclaim against the plaintiffs; a cross claim against Celebrity Lounge, Inc. (hereafter referred to as the taxpayer); and a third-party complaint against Eklof and Company, Inc. (hereafter referred to as Eklof).

After hearing argument of counsel and after consideration of the applicable authorities, this court finds that the plaintiffs should prevail in the original cause of action for unpaid rent, and should likewise prevail in the counterclaim brought against it by the United States . The United States must prevail in its cross claim against the taxpayer and in its third-party action against Eklof.

Facts

By lease dated December 8, 1955 , between plaintiffs, as lessors, and Cy Bloom, Margaret Tkac and Benjamin Bart, on behalf of the taxpayer, as lessee, plaintiffs leased to the taxpayer for five years, a portion of the premises known as 19-21 East North Avenue , Baltimore , Maryland .

The lease contained a clause whereby the taxpayer covenanted and agreed to pay the plaintiffs the sum of $3,450.00 representing rental under the Lease Agreement for the months of October, November, and December, 1960. Shortly after execution of the lease, the $3,450.00 was paid to the plaintiffs.

In March of 1960, some nine months before the expiration of the original lease, a Lease Extension Agreement was executed by which the covenants and conditions of the original lease were extended for an additional term to expire on March 31, 1965 . The $3,450.00 paid in regard to the original lease was applied as a prepayment of rent for the months of January, February, and March, 1965, under the Lease Extension Agreement.

The taxpayer became indebted to the United States for excise, withholding and FICA taxes for the various quarters from 1956 to 1959 in the total amount of $27,787.60 plus interest. The taxes involved were assessed on September 19, 1957 , and notice of a tax lien was filed on March 7, 1960 . On January 3, 1962 , the assets of the taxpayer on the North Avenue premises were seized by the Internal Revenue Service. The premises were padlocked and notices of the government seizure placed on the outside of the building. Additional notice of the seizure was duly mailed to the taxpayer and notice of a tax deficiency sale was duly published.

By letter of January 12, 1962 , the plaintiffs, in response to a request by Salvatore A. Mancini, Senior Revenue Officer for the Maryland District, Internal Revenue Service, for a quotation of rent for the premises for the period January 3, 1962 , to January 24, 1962 , submitted the amount of $718.43 as fair rental value. This amount was paid by the United States .

Sealed bids for the personal property of the taxpayer were opened on January 24, 1962 . Eklof, the successful bidder, in accordance with the terms of the sales contract, made a down payment on the purchase price, the government to retain possession of the property until the settlement date, when the remainder of the purchase price would be paid. On February 8, 1962 , the balance due from Eklof was paid and the government released the property and abandoned the premises.

Original Action

Invoking the court's jurisdiction under the Tucker Act [Title 28, United States Code, Section 1346(a)(2)], ¹ the plaintiffs claim that the United States is obligated to them for the fair rental value of the premises for the period January 24, 1962, through February 8, 1962.

The plaintiffs claim alternatively that they should succeed on the basis of express contract, implied contract or a taking of property without due process of law, in violation of the fifth amendment to the Constitution.

Plaintiffs claim that they informed the District Director that they would hold the United States accountable for any rent for the premises which accrued while the government occupied them. The plaintiffs argue that this statement, coupled with the action of the United States in retaining control of the premises formed an express unilateral contract. The evidence does not, as a whole, substantiate the existence of an acceptance by the government of this offer. It is unnecessary to consider the question of existence of an express contract any further, since the court finds plaintiffs' other arguments more persuasive and compelling in their own right.

The plaintiffs' second argument is that the facts substantiate the existence of an implied contract to pay the rent for the period in issue.

It is necessary, for Tucker Act jurisdiction to apply to implied contracts, that the contract be implied in fact rather than be quasi contract or contract implied in law. United States v. Minnesota Mut. Inv. Co., 271 U. S. 212, 46 S. Ct. 501, 70 L. Ed. 911 (1926); Merritt v. United States, 267 U. S. 338, 45 S. Ct. 278, 69 L. Ed. 643 (1925); Baltimore and Ohio R. Co. v. United States, 261 U. S. 592, 43 S. Ct. 425, 67 L. Ed. 816 (1923); Alliance Assurance Co., Ltd. v. United States, 252 F. 2d 529 (2 Cir. 1958); Baltimore Mail S. S. Co. v. United States, 76 F. 2d 582 (4 Cir.), cert. denied, 296 U. S. 595, 56 S. Ct. 111, 80 L. Ed. 421 (1935). The distinction between these two concepts is accurately set forth as follows:

"The expression 'implied contract' has given rise to great confusion in the law * * *. Some of these rights [enforced by contractual actions], however, were created, not by any promise or mutual assent of the parties, but were imposed by law on the defendant irrespective of, and sometimes in violation of, his intention. Such obligations were called implied contracts. Another name is that now generally in use of 'quasi contracts'. This expression makes clear that the obligations in question are not true contracts, and it also avoids confusion with another class of obligations which have also been called implied contracts. This latter class consists of obligations arising from mutual agreement and intent to promise but where the agreement and promise have not been expressed in words. Such transactions are true contracts and have sometimes been called contracts implied in fact." 1 Williston, Contracts, §3 (3d Ed. 1957) [Footnotes omitted.]

The principal question then is whether the parties intended to obligate themselves. If this was not the case any contract would have to be implied in law.

It is clear from the evidence that the plaintiffs did not dispute the government's seizure of the premises. But, they did make it known that they would look to the United States for any unpaid rent which accrued while the property was under government control. The intent on the part of the plaintiffs to obligate the premises and to place an obligation on the government is clear. The government, on the other hand, disavows that it intended to obligate itself for the rent. Rather, it says that it made it known to the plaintiffs that the successful bidder on the personal property of the taxpayer was, pursuant to the regulations [26 C. F. R. §301.6335(7) (1961)], liable for the expenses incurred in keeping the property, between the time of the acceptance of the bid and final settlement. The above regulation applies to the relationship between the government and the successful bidder. It does not give a contractual right to the property owner to proceed against the successful bidder.

The intent of the government to obligate itself may be implied from other provisions of the regulations. ² Feldwin Realty Co. v. United States [59-1 USTC ¶9213], 169 F. Supp. 73 (D. N. J. 1959) commented upon in 9 Mertens, Law of Federal Income Taxation, §49.191 (1963 Supp.). These regulations provide that the United States shall pay for the expenses of the levy from the proceeds of the sale. Certainly, rentals for storage space for property seized is a bona fide expense of the levy.

The court therefore finds an intent on the part of both parties to obligate themselves, and a contractual relationship, implied in fact, between them.

It is apparent that even had the argument of implied-in-fact contract failed, a further ground for recovery under the Tucker Act, namely a taking of property without due process of law in violation of the fifth amendment to the Constitution, avails itself to the plaintiffs. As was said by Mr. Justice Frankfurter in United States v. Dickinson, 331 U. S. 745, 748, 67 S. Ct. 1382, 1384, 91 L. Ed. 1789, 1793 (1947):

"But whether the theory of these suits be that there was a taking under the Fifth Amendment, and that therefore the Tucker Act may be invoked because it is a claim founded upon the Constitution, or that there was an implied promise by the Government to pay for it, is immaterial. In either event, the claim traces back to the prohibition of the Fifth Amendment, 'nor shall private property be taken for public use, without just compensation.'"

The United States argues that no taking of property existed here and that no demand was made upon it to release the premises. The Dickinson case, 331 U. S. at page 748, 67 S. Ct. at page 1385, said:

"Property is taken in the constitutional sense when inroads are made upon the owner's use of it to an extent that, as between private parties, a servitude has been acquired either by agreement or in course of time."

The government put its lock on the premises and placed notices on the outer walls telling of the seizure. These facts convince the court that a taking took place [see Feldwin Realty Co. v. United States, supra, p. 77], notwithstanding the lack of demand by the plaintiffs to vacate or the possibility that the government would have vacated upon request.

United States v. Eklof

The United States has filed a third-party claim against Eklof, seeking indemnity, should the United States be found liable to the plaintiffs for rental of the premises. The plaintiffs having prevailed, and Eklof having admitted liability, the third-party action can be settled as a matter of course. Should Eklof not have admitted liability, 26 C. F. R. §301.6335(7) (1961) specifically sets forth the liability of the successful bidder for expenses incurred by the United States in protecting the property purchased between the time the bid is accepted and the property is released to the successful bidder.

Counterclaim by the United States

The United States seeks to recover the $3,450.00 paid to the plaintiffs by the taxpayer. It is conceded by the government that the $3,450.00 was prepaid rent on the last three months of the original lease period and later on the last three months of the lease extension period, and not a security deposit.

The government argues that the federal tax lien attached to the property of the taxpayer, including the prepaid rent held by the plaintiffs prior to the time ownership of the fund vested in the plaintiffs, and, therefore, the United States is entitled to the fund. The federal tax liens arose at the time of the assessment against the taxpayer in September, 1959, and attached by operation of law to all property of the taxpayer held by it at that time, 26 U. S. C. A. §6322 (1955). The decisive question is whether at the time of the assessment the prepaid rent was the property of the taxpayer-tenant or the plaintiff-landlord.

It is the government's position that the prepaid rent could have become the property of the plaintiffs either when the period to which the rent was applicable came about, or when the lease was terminated due to the default of the tenant. It relies on Sline Properties, Inc. v. Colvin, 190 F. 2d 401 (4 Cir. 1951) and a Connecticut case set forth therein. It follows, claims the government, that since the assessment predated both these events, the $3,450.00 remained the property of the taxpayer and thereby accrues to the government, by default. This reasoning is not persuasive. The Sline case was decided prior to definitive decisions by the Court of Appeals of Maryland on this matter and the opinion does not concern itself with the Maryland cases which are apposite today.

It has long been settled by the United States Supreme Court that the federal courts must look to the state law, wherein the property of the taxpayer is located, to determine whether or not a taxpayer has any property or rights to property under the state law. The Court said:

"The threshold question in this case, as in all cases where the Federal Government asserts its tax lien, is whether and to what extent the taxpayer had 'property' or 'rights to property' to which the tax lien could attach. In answering that question, both federal and state courts must look to state law, for it has long been the rule that 'in the application of a federal revenue act, state law controls in determining the nature of the legal interest which the taxpayer had in the property * * * sought to be reached by the statute'." Aquilino v. United States [60-2 USTC ¶9538], 363 U. S. 509, 512-13, 80 S. Ct. 1277, 1280, 4 L. Ed. 2d 1365, 1368 (1960).

See also United States v. Bess [58-2 USTC ¶9595], 357 U. S. 51, 55, 78 S. Ct. 1054, 1057, 2 L. Ed. 2d 1135, 1141 (1958) and Morgan v. Comm'r Int. Rev., 309 U. S. 78, 82, 60 S. Ct. 424, 426, 84 L. Ed. 585, 589 (1940).

The Maryland cases, decided since the Sline decision state unequivocally that a prepaid rental payment becomes the property of the landlord at the time it is paid. The Maryland Court of Appeals has said:

"When the sum of $7,500 was delivered by the lessee into the hands of the lessors, the transfer of ownership thereof was, we think, an accomplished and completed act * * * and nothing further was necessary to perfect the transfer of said money * * *. This being so, it seems obvious that 'no subsequent lien' could be obtained by judicial proceedings against the debtor that would 'become superior to the rights of the transferee'." Cohen, Tr., of Bloom v. Billig, 225 Md. 167, 172, 169 A. 2d 389 (1960).

Earlier, Judge Prescott of the same court had reason to say:

"Accordingly, the rent herein involved, although paid for a portion of the term four and one-half years in the future, was accrued, and became the property of the landlords, on the day it was paid." Lochner, R'cur v. Martin, 218 Md. 519, 525, 147 A. 2d 749 (1959).

Therefore, this court finds that the prepaid rental payment became the property of the plaintiffs at the time it was tendered, and not on the date of default by the taxpayer. Since the payment of the $3,450.00 occurred before the tax assessment levied against the taxpayer, the $3,450.00 had passed to the plaintiffs, and was no longer the taxpayer's property subject to levy by the government.

United States v. Celebrity Lounge, Inc.

The United States has filed a cross claim against the taxpayer for unpaid taxes in the amount of $17,239.99 plus unassessed interest as provided by law. The taxpayer has chosen not to present a defense to this claim, and, accordingly, a default judgment will be entered.

* * *

The facts herein stated and the conclusions of law herein expressed shall be considered the findings of fact and conclusions of law required by Rule 52, F. R. Civ. P., 28 U. S. C. A.

Orders may be entered accordingly.

¹ "(a) The district courts shall have original jurisdiction, concurrent with the Court of Claims, of:

* * *

"(2) Any other civil action or claim against the United States, not exceeding $10,000 in amount, founded either upon the Constitution, or any Act of Congress, or any regulation of an executive department, or upon any express or implied contract with the United States, or for liquidated or unliquidated damages in cases not sounding in tort."

² 26 C. F. R. §301.6341-1 "Expenses of levy and sale.

"The district director shall determine the expenses to be allowed in all cases of levy and sale. Such expenses shall include the expenses of protection and preservation of the property during the period subsequent to the levy, as well as the actual expenses incurred in connection with the sale thereof."

26 C. F. R. §301.6342 "Statutory provisions; application of proceeds of levy.

"(a) Collection of liability. Any money realized by proceedings under this subchapter (whether by seizure, by surrender under section 6332, or by sale of seized property) shall be applied as follows:

"(1) Expense of levy and sale. First, against the expenses of the proceedings under this subchapter; * * *."