G. Ruggerio, Plaintiff v.
United States of America
, No. Div.; CIV. WDQ-04-639,
January 31, 2005
Secs. 6321 and 6323]
Lien for taxes: Third-party purchaser: State law: Equitable
purchased by a third party was not subject to federal tax liens because,
under state (
) 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,
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.
Suits by nontaxpayers: Quiet title: Sovereign immunity of the
: Waiver. --
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.
QUARLES, JR., District Judge: For the reasons discussed in the
accompanying Memorandum Opinion, it is this 31st day of January 2005,
1. the Plaintiff's motion for summary judgment BE, and HEREBY IS,
2. the Clerk shall enter judgment for the Plaintiff;
3. the Defendant's motion for summary judgment BE, and HEREBY IS,
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.
OPINION AND ORDER
Citing 28 U.S.C. §1340, Russell G. Ruggerio brought an action against
United States of America
to quiet title. Pending are Ruggerio's motion for summary judgment and
' cross motion for summary judgment. For the following reasons,
Ruggerio's motion for summary judgment will be granted, and the
' cross motion for summary judgment will be denied.
January 14, 2003
, Ruggerio and Rocky A. Kimbrew entered into a contract of sale for real
(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.
A. Motion for Summary Judgment
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
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."
at 248. Thus, "the judge must ask ... whether a fair-minded jury
could return a verdict for the [nonmoving party] on the evidence
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
574, 587 (1986), but the opponent must produce evidence upon which a
reasonable fact finder could rely. Celotex Corp. v. Catrett, 477
317 (1986). The mere existence of a "scintilla" of evidence is
not sufficient to preclude summary judgment. Anderson, 477
Waiver of Sovereign Immunity
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
v. Mitchell, 463
206, 212 (1983)). A waiver of the traditional sovereign immunity cannot
be implied but must be unequivocally expressed. United States v.
392, 399 (1976) ( quoting
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
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.
Whether Ruggerio's property is subject to the tax liens
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).
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.
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
contends that the liens attached to the Property because the liens had
priority over Ruggerio's interests under 26 U.S.C. §6323.
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.
For the reasons discussed above, Ruggerio's motion for summary judgment
will be granted and the
' cross motion for summary judgment will be denied.
United States of America
, Appellant v. Fidelity & Deposit Company of Maryland et al.,
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
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
, because when the tax liens were filed taxpayer had already parted with
all his interest in the property and the
was therefore an unsecured creditor when the bonding company acquired
its lien. The bona fide mortgagee also took precedence over the
, 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
priority over a claim secured by a lien.
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.
and RUSSELL, Circuit Judges, and DAWKINS, District Judge.
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
, 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
, 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
was dismissed as a party defendant without prejudice. Thereafter, the
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
. 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.
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.
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
The right of
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.
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."
It is plain
from the language of the statute that the tax liens of the
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
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
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
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
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
154, 114 So. 871, 873, the Supreme Court of Mississippi in construing
Section 1327, supra, said:
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."
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
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
. 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.
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.
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
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.
Claims of U. 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
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)
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."
reasons stated the judgment 11
of the District Court is
Code, Annotated (1942 ed.) Volume 1, Sec. 1327.
26 U. S. C. 1946 ed., Sec. 3670.
Martin v. Tillman, 70
Lewis Williamson, Sheriff v. Wilkerson, 81
Meyers v. American Oil Company, 192
180, 186, 187, 5 So. 2d 218.
Barwick v. Mayse & Sons, 74
415, 21 So. 238.
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
The lien of Fidelity & Deposit Company of
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
See footnote 7.
31 U. S. C. 1946 ed. Sec. 191.
The District Court's opinion is reported asFidelity & Deposit
v. Lovell, 108 Fed. Supp. 360 [52-2 USTC ¶9550].
¶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
S. District Court,
, 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
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]
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.
Perkins III, 1409 Merchantile Trust Bldg.,
, for plaintiff. Thomas J. Kenney, United States Attorney,
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.
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
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).
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
must prevail in its cross claim against the taxpayer and in its
third-party action against Eklof.
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
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
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
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.
became indebted to the
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
January 3, 1962
, the assets of the taxpayer on the
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
January 24, 1962
, submitted the amount of $718.43 as fair rental value. This amount was
paid by the
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.
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.
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.
claim that they informed the District Director that they would hold the
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
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.
plaintiffs' second argument is that the facts substantiate the existence
of an implied contract to pay the rent for the period in issue.
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.
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
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.]
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
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
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.
therefore finds an intent on the part of both parties to obligate
themselves, and a contractual relationship, implied in fact, between
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):
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
argues that no taking of property existed here and that no demand was
made upon it to release the premises. The
at page 748, 67
at page 1385, said:
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
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.
has filed a third-party claim against Eklof, seeking indemnity, should
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.
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.
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
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
on this matter and the opinion does not concern itself with the
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:
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
509, 512-13, 80
1277, 1280, 4 L. Ed. 2d 1365, 1368 (1960).
also United States v. Bess [58-2 USTC ¶9595], 357
51, 55, 78 S. Ct. 1054, 1057, 2 L. Ed. 2d 1135, 1141 (1958) and Morgan
v. Comm'r Int. Rev., 309
78, 82, 60 S. Ct. 424, 426, 84 L. Ed. 585, 589 (1940).
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:
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
167, 172, 169 A. 2d 389 (1960).
Judge Prescott of the same court had reason to say:
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.
519, 525, 147 A. 2d 749 (1959).
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.
v. Celebrity Lounge, Inc.
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.
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
Orders may be
"(a) The district courts shall have original jurisdiction,
concurrent with the Court of Claims, of:
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."
26 C. F. R. §301.6341-1 "Expenses of levy and sale.
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.
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:
of levy and sale. First, against the expenses of the proceedings
under this subchapter; * * *."