Michigan Page1

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Lien for taxes: Family transactions: Tenancy by the entireties: Real property: Transfer of interest to spouse. --

The IRS has released guidance on collection efforts with respect to property held by a married couple in a tenancy by the entirety in circumstances where only one of the spouses is liable for outstanding tax liabilities. These guidelines have been issued in light of the ruling in S.L. Craft, SCt, 2002-1 USTC ¶50,361, that a federal tax lien arising under Code Sec. 6321 on all property and rights to property of a delinquent taxpayer attaches to the taxpayer's rights in entireties property, even though state (Michigan) law insulates such property from creditors' claims against only one spouse. The IRS has set forth the general principles on which it will rely in addressing issues raised as a result of the Craft ruling. Also, it has provided nine questions and answers illustrating how it will apply Craft.

PURPOSE

This notice provides guidance on collection from property held in a tenancy by the entirety, where only one spouse (referred to here as the taxpayer) is liable for the outstanding taxes, in light of the Supreme Court decision in United States v. Craft, 535 U.S. 274 (2002).



BACKGROUND

On April 17, 2002, the Supreme Court issued its decision in United States v. Craft, 535 U.S. 274 (2002), and held that the federal tax lien that arises under section 6321 of the Internal Revenue Code on "all property and rights to property" of a delinquent taxpayer attaches to the rights of the taxpayer in property held as a tenancy by the entirety (entireties property), even though local Michigan law insulates entireties property from the claims of creditors of only one spouse. The Court stated that while state law determines what rights a taxpayer has in property, federal law determines whether the state-defined rights are "property" or "rights to property " for purposes of section 6321. The Court's decision in Craft has consequences in the approximately twenty-six jurisdictions that recognize tenancy by the entirety as a form of property ownership.

While state law governing property ownership varies by jurisdiction, there are a number of principles generally applicable to a tenancy by the entirety. Tenancy by the entirety is a form of property ownership, including personal property in some jurisdictions, available only to a husband and wife as a marital unit. A key feature of the tenancy is the right of survivorship-the surviving spouse becomes the fee simple owner of the property upon the death of the other spouse. The tenancy also is terminated by the transfer of the property or upon the spouses' divorce.

Entireties property is subject to the claims of the joint creditors of the spouses. However, the majority of jurisdictions that recognize tenancy by the entirety, so-called full bar jurisdictions, completely prohibit creditors from attaching entireties property to satisfy the debts of only one spouse. The state law rationale is that a spouse individually has no interest in the property; rather, the property is held by the marital unit. The other jurisdictions that recognize tenancy by the entirety, so-called modified or partial bar jurisdictions, permit creditors to attach one spouse's interest in entireties property for the debts of only that spouse, subject to the rights of the non-liable spouse.

Issues related to entireties property can arise in a number of areas, including enforcing collection through admin istrative and judicial means, evaluating offers in compromise and proposed installment agreements, valuing the Service's secured claim in bankruptcy, applications for discharge and subordination, and determining the nature of the Service's rights vis-a-vis a transferee in a transfer in which the federal tax lien has not been discharged.



OVERVIEW

The Service will rely on a number of general principles in addressing issues raised as a result of the Court's decision in Craft :

(1) Under section 6321, the federal tax lien attaches to all the property and rights to property of the taxpayer. The Court's decision confirms that, for purposes of section 6321, a taxpayer's property and rights to property have always included any rights that taxpayer may have in entireties property under state law. The Court's decision, therefore, does not represent new law and does not affect other law applicable to federal tax liens and federal tax collection. For example, the Craft decision does not change any limitation on the ability of the Service to rescind an accepted offer in compromise or terminate an accepted installment agreement.

 

(2) As a matter of admin istrative policy, the Service will, under certain circumstances, not apply Craft, with respect to certain interests created before Craft, to the detriment of third parties who may have reasonably relied on the belief that state law prevents the attachment of the federal tax lien.

 

(3) The admin istrative sale of entireties property subject to the federal tax lien presents practical problems that limit the usefulness of the Service's seizure and sale procedures. Levying on cash and cash equivalents held as entireties property is considerably less problematic and will be used by the Service in appropriate cases.

 

(4) Because of the potential adverse consequences to the non-liable spouse of the taxpayer, the use of lien foreclosure for entireties property subject to the federal tax lien will be determined on a case-by-case basis.

 

(5) As a general rule, the value of the taxpayer's interest in entireties property will be deemed to be one-half.

 

(6) Where there has been a sale or other transfer of entireties property subject to the federal tax lien that does not provide for the discharge of the lien, whether the transfer is to the non-liable spouse or a third party, the lien thereafter encumbers a one-half interest in the property held by the transferee.

QUESTIONS AND ANSWERS

The following questions and answers illustrate how the Service will apply Craft. The first two Q&As address the application of Craft with respect to interests in entireties property acquired before the date of the decision, while the remaining questions and answers address its application with respect to interests acquired after the date of the decision.

Q1. If the Service has filed a notice of federal tax lien with respect to the taxpayer before Craft and an interest in entireties property was later acquired by a purchaser, holder of a security interest, a mechanic's lienor, or a judgment lien creditor within the meaning of section 6323, then will the Service assert lien priority over the subsequently acquired interest? What if the entireties property was transferred, before Craft, to the non-taxpayer spouse in a divorce? Does the result differ if, before Craft, the transfer was to a donee, such as a family trust? Do the results differ depending on whether the jurisdiction at issue is one that recognizes tenancy by the entirety and completely prohibits the attachment of entireties property for separate debts of one spouse ( i.e., a full bar jurisdiction) or one that permits attachment to entireties property in connection with the separate debts of one spouse ( i.e., a modified or partial bar jurisdiction)?

A1. Application of Section 6323. Section 6323 provides that "[t]he lien imposed by section 6321 shall not be valid as against any purchaser, holder of a security interest, mechanic's lienor, or judgment lien creditor until notice thereof which meets the requirements of subsection (f) has been filed by the Secretary." Section 6323(a). The rule of Craft, with respect to entireties property, applies to federal tax liens regardless of when they arose. A federal tax lien, therefore, has priority over any interest of a purchaser, a holder of a security interest, a mechanic's lienor, or a judgment lien creditor ( i.e., the class of persons protected by section 6323(a)) if notice of the federal tax lien was filed before such other interest arose.

As a matter of admin istrative policy, the Service will not assert its federal tax lien rights where doing so may disturb the settled expectations of certain classes of persons who may have been under the belief that a federal tax lien arising from the liability of only one spouse does not attach to entireties property. Accordingly, with respect to entireties property located in full bar jurisdictions, the Service will not assert its federal tax lien priority over the interests of the class of persons protected under section 6323(a), if the section 6323(a) interests were created before Craft was decided. For example, if a purchaser acquired entireties property before Craft was decided and meets the definition of a purchaser under section 6323(h)(6), the Service will not assert lien priority even though a notice of federal tax lien had been filed prior to the purchase.

In contrast to full bar jurisdictions, there are no settled expectations in modified or partial bar jurisdictions, where a creditor is permitted to attach some or all of a debtor-spouse's interest in entireties property. For example, while Oklahoma law recognizes tenancy by the entireties as a form of property ownership, creditors collecting the debt of one spouse can force the sale of entireties property, severing the tenancy. In modified or partial bar jurisdictions, the Service will assert its lien priority against the class of persons protected under section 6323(a) regardless of when those persons may have acquired interests in entireties property, so long as those interests were acquired after a notice of federal tax lien had been filed.

Divorce. A spouse of the taxpayer who obtained entireties property in a divorce acquires the property subject to the federal tax lien. In the context of a divorce, a spouse is not in the class of persons protected by section 6323(a). Consequently, if the assessment giving rise to the federal tax lien under section 6321 had occurred prior to the divorce, then the lien also attached to the taxpayer's rights in the entireties property. As a general rule, if the transfer occurred before Craft, then the Service will treat the transfer as one for value and will not assert its lien against the property in the hands of the ex-spouse of the taxpayer. This will not apply if the Service determines that, notwithstanding the divorce, the transfer was fraudulent.

Donation. A donee who obtains entireties property acquires the property subject to the federal tax lien. As in the case of a transfer pursuant to a divorce, the donee is not in the class of persons protected by section 6323(a). Transfers to donees that occurred before Craft will be evaluated on a case-by-case basis to determine whether the equities favor or disfavor the Service asserting the federal tax lien against property held by a donee. There may be circumstances where, although the donee gave nothing of value in exchange for the property, it would be inequitable for the Service to assert the federal tax lien because of the donee's reliance on the mistaken view that the property was unencumbered. For example, if the transfer was of real property to which the donee has made substantial improvements, the equities may favor not asserting the federal tax lien (or agreeing to limit its reach by carving out the value of the improvements). On the other hand, the absence of such reliance may warrant assertion of the federal tax lien.

The identity of the donee is also a factor that will be considered by the Service. The federal tax lien is more appropriately not asserted where the donee is a disinterested person, having no relation to the taxpayer, than where the donee and taxpayer are closely related. For example, the Service may decide to assert the federal tax lien where the taxpayer transferred entireties property to a family trust, but may decide not to assert the lien where the taxpayer transferred entireties property to a charitable organization.

Q2. Does the Craft decision provide a basis for the Service to rescind offers in compromise, terminate installment agreements, or revoke certificates of discharge and subordination? Will the Service amend bankruptcy proofs of claim? Can the Service revisit a determination that an account is currently not collectible?

A2. The decision in Craft does not provide legal authority to rescind any accepted offer in compromise, terminate an installment agreement, or revoke any certificate of subordination or discharge.

With respect to bankruptcy proofs of claims, the Service has made an admin istrative decision not to routinely amend such proofs of claim to adjust the amount of the Government's secured claim to reflect the federal tax lien on the taxpayer's interest in entireties property. There may be circumstances, however, where the Service elects to amend the claim to assert the federal tax lien on entireties property, depending on the value of the property and the status of the bankruptcy case. The existence of entireties property will be considered in filing new proofs of claim and in future investigations related to determining whether there is any property subject to post-bankruptcy collection.

Finally, based on an evaluation of a taxpayer's interest in entireties property, the Service may revisit a prior determination that an account is currently not collectible.

Q3. If entireties property subject to the federal tax lien is sold or transferred after Craft and the Service does not discharge the lien, is the property subject to the federal tax lien in the hands of the transferee?

A3. A conveyance of entireties property terminates the entireties estate with respect to that property. Accordingly, after Craft, unless the Service discharges the property from the federal tax lien, the lien will encumber a one-half interest in the hands of the transferee, regardless of whether the transferee is a donee or gives value. As explained below, the Service generally will deem the value of the taxpayer's interest in entireties property to be one-half of the total value of the property.

Q4. Does the federal tax lien on entireties property survive the death of the taxpayer? What effect does the death of the non-taxpayer have on the federal tax lien?

A4. As is the case with joint tenancy with the right of survivorship, if a taxpayer's interest in entireties property is extinguished by operation of law at the death of the taxpayer, then there is no longer an interest of the taxpayer to which the federal tax lien attaches. When a taxpayer dies, the surviving non-liable spouse takes the property unencumbered by the federal tax lien.

When a non-liable spouse predeceases the taxpayer, the property ceases to be held in a tenancy by the entirety, the taxpayer takes the entire property in fee simple, and the federal tax lien attaches to the entire property.

The rule that the federal tax lien does not survive the death of the taxpayer does not apply if the entireties estate previously has been terminated. For example, if the property has been conveyed to a third party, the federal tax lien will be deemed to encumber a one-half interest in the hands of the transferee and will not be affected by the subsequent death of either spouse.

Q5. Does the federal tax lien remain on entireties property awarded to a non-liable spouse in a divorce decree?

A5. Entireties property subject to the federal tax lien and then transferred after Craft to a non-liable spouse pursuant to a divorce remains encumbered in the hands of the ex-spouse.

Q6. After a notice of federal tax lien is filed, the taxpayer and spouse jointly mortgage entireties property to a bank. What effect would the death of either spouse have on the respective rights of the Government and the bank? Where the property is transferred either to a third party or as a result of a divorce, does the federal tax lien have priority over the bank?

A6. Under section 6323, the federal tax lien has priority over the bank's interest with respect to the taxpayer's interest in the entireties property.

If the taxpayer survives the spouse, the federal tax lien will be a senior lien against the whole property. The taxpayer's interest in the entireties property to which the federal tax lien attaches includes the taxpayer's right of survivorship. With the death of the taxpayer's spouse, the taxpayer becomes the fee simple owner of the property, and the federal tax lien attaches to that interest in the property, which is senior to the bank's interest.

As discussed in Q&A 4, if the taxpayer predeceases the spouse and his or her interest is extinguished by operation of law, the federal tax lien will be extinguished. The mortgage lien becomes the first lien on the property.

Since a divorce or transfer to a third party terminates the entireties estate (and, with it, the spouses' rights of survivorship), if the property is transferred to a third-party or to either spouse as a result of a divorce, then the federal tax lien generally will have priority with respect to a one-half interest in the property over the bank's subsequent security interest.

Q7. Will the Service admin istratively seize and sell the taxpayer's interest in entireties property?

A7. The Service can admin istratively seize and sell a taxpayer's interest in real and personal property held in a tenancy by the entirety. Because of the nature of entireties property, it would be very difficult to gauge what market there would be for the taxpayer's interest in the property. The amount of any bid would in all likelihood be depressed to the extent that the prospective purchaser, given the rights of survivorship, would take the risk that the taxpayer may not outlive his or her spouse. In addition, a prospective purchaser would not know with any certainty if, how, and the extent to which the rights acquired in an admin istrative sale could be enforced. For example, rights acquired would include the right to use the property and the right to exclude others from the property. It is not clear how the rights of a prospective purchaser ultimately would be balanced with the co-existing rights of the spouse of the taxpayer. Therefore, the Service has determined that an admin istrative sale is not a preferable method of collection with respect to entireties property.

Levying on cash and cash equivalents held as entireties property does not present the same impediments as seizing and selling entireties property. For example, where the Service levies on a bank account that a taxpayer holds as entireties property and has the right to withdraw the funds in the account, the bank is obligated to turn over the funds in response to the levy. While the taxpayer's spouse, as the other account holder, may have an admin istrative or judicial claim under sections 6343(b) or 7426, respectively, see United States v. National Bank of Commerce, 472 U.S. 713 (1985), the amount realizable by the Service is not, at the outset, depressed as it is in the case of admin istrative sales.

Q8. Will the Service foreclose the federal tax lien against entireties property?

A8. The Service will foreclose the federal tax lien against entireties property in appropriate cases. While in an admin istrative sale the Service can sell only the taxpayer's interest in entireties property ( i.e., not the entire property itself), in a foreclosure action, pursuant to section 7403, the district court has discretion to order the sale of the entire property, even where a non-liable spouse has a protected interest in the property. See United States v. Rodgers, 461 U.S. 677 (1983) (principle applied with respect to the sale of homestead property). If the court orders the sale of the property, then the non-liable spouse must be compensated for his or her interest: section 7403 requires "a distribution of the proceeds of such sale according to the findings of the court in respect to the interests of the parties and the United States ." Section 7403(c).

Q9. How is the Government's federal tax lien interest in entireties property valued for the purposes of discharge and subordination under section 6325? After private foreclosure on entireties property, what is the value of the Government's interest in proceeds left after the satisfaction of senior liens? How is entireties property valued for bankruptcy purposes? How is entireties property valued in offers in compromise?

A9. Discharge and Subordination. Under section 6325(b)(2)(A), the Service may issue a certificate of discharge of property subject to a federal tax lien upon payment of an amount not less than the value of the Government's interest in that property to be discharged. If a taxpayer applies for a certificate of discharge when entireties property is to be sold by the taxpayer and the taxpayer's spouse, then the taxpayer generally must pay the Service one-half the proceeds of the sale in partial satisfaction of the liability secured by the federal tax lien.

Foreclosing mortgagees with interests that are senior to the federal tax lien often seek a certificate of discharge, rather than joining the United States in a judicial proceeding. By obtaining a discharge of the mortgaged property, the mortgagee eliminates the Service's right under section 7425(d) to redeem the property from the purchaser after the foreclosure sale. As in the case of a taxpayer who seeks a certificate of discharge of the entireties property, the Service generally will determine the value of the Government's interest to be one-half the value of the property, which is determined for this purpose by first taking into account the amount of senior liens.

Under 6325(b)(4), an owner of property subject to a tax lien (for example, a subsequent purchaser), other than the taxpayer whose liability gave rise to the lien, may seek a certificate of discharge by making a deposit or posting a bond equal to the value of the interest of the Government in the property. In connection with an application for discharge of former entireties property under section 6325(b)(4), the Service generally will determine the value of the Government's interest to be one-half the value of the property.

In light of the Craft decision, taxpayers and taxpayers' spouses will seek subordination of the federal tax lien in connection with refinancing mortgages on entireties property. If the requested subordination is for the purpose of securing a loan to refinance a senior lien, the Service will apply section 6325(d)(2). The Service will generally issue a certificate of subordination if the terms of the refinance loan, as compared to the terms of the loan secured by the senior lien, ultimately will enhance the taxpayer's equity or facilitate the collection of the tax from other property or income of the taxpayer.

If a taxpayer and a taxpayer's spouse seek a certificate of subordination for the purpose of obtaining cash or paying other debts not secured by a senior lien on the property (for example, in the case of a home equity loan), the Service will apply section 6325(d)(1). The Service generally will treat the value of the taxpayer's interest as one-half of the value of the entireties property. The Service would issue a certificate of subordination upon payment of one-half the amount of the lien or interest to which the federal tax lien will be subordinated.

Private Foreclosure. Where a senior creditor is foreclosing a mortgage or other lien on the property, the Service generally will determine the value of the taxpayer's interest to be one-half of the excess of the value of the property over the amount of the senior lien.

Bankruptcy. In bankruptcy cases, the Service, in determining the value of its secured claim, generally will value the debtor's interest in entireties property to be one-half of the total value of the property.

Offers in Compromise. Procedures for valuing entireties property for offer in compromise purposes are set forth in the Offer in Compromise Handbook, IRM 5.8.5.3.11.

The principal author of this notice is Deborah Grogan of the Office of Associate Chief Counsel (Procedure and Administration). For further information regarding this notice, contact Ms. Grogan at (202) 622-3610 (not a toll-free call).

 

 

 

Elbert L. Hatchett and Laurestine Hatchett, Plaintiffs-Appellees v. United States of America , Defendant-Appellant.

U.S. Court of Appeals, 6th Circuit; 00-1645, 330 F3d 875, June 4, 2003 .

Reversing and remanding a DC Mich. decision, 2000-1 USTC ¶50,455.

[ Code Secs. 6323 and 7426]

Liens: Tenancy by the entirety: Real property: New rule of law, retroactive application: Seizure and sale. --

A federal tax lien could attach to properties held by an attorney and his wife in tenancies by the entirety. The Supreme Court's decision in S.L. Craft (SCt, 2002-1 USTC ¶50,361), which established a new rule of law that included entireties property in the definition of "property and rights to property" to which a lien could attach, could be applied retroactively because the attorney's case was pending on direct review when the Craft decision was rendered. Further, the government had the right to seize and sell the properties because they could not be divided and to collect a portion of the sale proceeds. In order to determine the exact value of the government's interest in the properties, on remand, the government was entitled to present its nominee and lien-tracing theories.

[ Code Sec. 7402]

Liens: Real property: Seizure and sale: Wrongful levy action: Government defenses. --

The government had the right to present three alternative theories of defense to a wrongful levy action in making its case for retaining a higher percentage of the proceeds from the sale of the levied property. The government had standing to assert a fraudulent conveyance theory. The doctrine of res judicata did not prevent the government from presenting that theory because there had been no prior final judgment on the merits regarding that claim. Finally, presentation of the theory was not barred by laches under the general rule that the government is exempt from the doctrine of laches.

Rob ert N. Bassel, for plaintiffs-appellees, Joan I. Oppenheimer, David English Carmack, Department of Justice, for appellant.

Before: Siler, Daughtrey and Cole, Circuit Judges.

OPINION

COLE, Circuit Judge: Defendant-Appellant United States appeals the judgment entered by the United States District Court for the Eastern District of Michigan in favor of Plaintiffs-Appellees Elbert L. Hatchett and his wife Laurestine Hatchett. In an attempt to collect a portion of the more than $8,000,000 owed by Elbert in unpaid taxes, the United States commenced admin istrative levy proceedings by filing levies and notices of sale for four parcels of real property, and a levy for the seizure of mortgage payments due to the Hatchetts on a fifth parcel. In order to stop the proceedings, the Hatchetts brought a wrongful levy action against the United States claiming that the levies were wrongful because they were against properties held by the Hatchetts as tenants by the entirety. The district court, relying on a decision of this Court, Craft v. United States [ 98-1 USTC ¶50,305], 140 F.3d 638 (6th Cir. 1998) agreed with the Hatchetts and found that the levies were wrongful. The United States primarily argues that this Court's decision in Craft was wrong as matter of law and that the levies may attach to property held as a tenancy by the entirety. The United States also argues that the levies were not wrongful under three other legal theories: (1) a fraudulent conveyance theory, in which the Government claims that Elbert used his individual funds to purchase and enhance property that was titled as a tenancy by the entirety; (2) a nominee theory, in which the Government claims that other individuals are holding the entireties properties as Elbert's nominees; and (3) a lien tracing theory, in which the Government claims that since it has a lien on Elbert's money, it is entitled to place a lien on the properties improved or purchased with that money.

After notice of appeal had been filed and the case had been set for oral argument, the Supreme Court granted certiorari on Craft and agreed with the Government's position that federal tax liens may attach to property held by a delinquent taxpayer as a tenancy by the entirety. Because the Supreme Court has answered the question of whether the Government may levy against real property held as a tenancy by the entirety, we REVERSE the decision of the district court and REMAND for entry of judgment consistent with current Supreme Court precedent. Furthermore, we REVERSE and REMAND the district court's refusal to allow the Government to amend its complaint and to assert its claim of fraudulent conveyance; we REVERSE and REMAND the district court's grant of summary judgment for the Hatchetts on the Government's nominee and lien tracing theories.

I. BACKGROUND

This case began more than twenty-five years ago when Elbert, a prominent Detroit trial attorney, decided to forego payment of federal and state income taxes. In 1989, Elbert was convicted by a jury of four misdemeanor counts of willful failure to pay federal income taxes. United States v. Hatchett [ 90-2 USTC ¶50,566], 918 F.2d 631, 633 (6th Cir. 1990). He was sentenced to three consecutive one-year sentences, placed on five years' probation, fined $100,000 and ordered to pay "all back taxes" as a condition of probation. Id. We affirmed that sentence, and Elbert spent three years in prison. Id. at 644.

The Internal Revenue Service ("IRS") made an assessment on October 24, 1994 that Hatchett owed more than $6.6 million in federal income taxes and penalties for the tax years 1975 to 1991. As of March 25, 1998 , Elbert's tax liabilities totaled more than $8.6 million.

In an attempt to collect the delinquent taxes, the IRS levied against four parcels of real estate owned by the Hatchetts and one series of mortgage payments owed to the Hatchetts on a fifth parcel pursuant to 26 U.S.C. §6331 (2002). The Hatchetts received a Tax Levy, dated October 24, 1994 , and four Notices of Seizure, dated October 25, 1994 . Two of the properties are owned jointly by the Hatchetts as tenants by the entirety: (1) their primary residence ("West Hickory"); and (2) a property operated as a car wash (" South Saginaw "). Two properties are held individually by Laurestine: (1) a property occupied by Elbert's mother (" Franklin Boulevard "); and (2) a property in Bloomfield Township . The IRS scheduled a public auction to sell the real properties on November 30, 1994 .

On January 24, 1995 , the IRS levied mortgage payments due to the Hatchetts from a property previously owned by the Hatchetts and used for horsebreeding and entertaining clients ("Cyclone"). The Cyclone property was sold to a husband and wife, Ernest and Hermetha Blythe Ann Jarrett, in 1991. The Hatchetts took back a mortgage of $80,000 on the Cyclone property, to be paid in semiannual installments of $6,000 on interest and principal, beginning February 19, 1992 and continuing until August 19, 2001 .

At the time the IRS issued the four levies in 1994, the Hatchetts held title to the West Hickory and South Saginaw properties as tenants by the entirety. Laurestine has held individual title to the Franklin Boulevard property since 1994, but it was held by the Hatchetts as tenants by the entirety when the federal tax lien first attached in 1978. The Hatchetts held the Cyclone property as tenants by the entirety until it was conveyed by warranty deed to the Jarretts on August 19, 1991 .

On November 21, 1994 , the Hatchetts commenced a wrongful levy action in the district court pursuant to 26 U.S.C. §7426 (2002) to enjoin the tax sale of the four parcels of real estate and the seizure of the mortgage payments due. The district court entered two stipulated orders, on December 7, 1994 and June 23, 1995 , enjoining the IRS from conducting the public auction or levying on the pending mortgage payments until the propriety of the levies was determined. On June 25, 1996, Magistrate Judge Donald A. Scheer issued two orders, consistent with his bench rulings: (1) an order granting the Hatchetts' Petition to Quash the Government's request for a number of documents from 1972 to the present; and (2) an order granting the Government's motion to amend its answer to the Hatchetts' complaint and assert fraudulent conveyance as an affirmative defense. The district court issued a Memorandum Opinion and Order on February 28, 1997 , reversing the two orders of the magistrate judge.

On March 31, 2000 , the district court entered a judgment deciding the cross-motions for summary judgment filed by the Hatchetts and the Government. The court granted the Hatchetts' summary judgment motion and denied the Government's motion with respect to the West Hickory, Franklin Boulevard, South Saginaw , and Cyclone properties; the court granted the Government's summary judgment motion and denied the Hatchetts' motion with respect to the Bloomfield Township property. In its decision to grant the Hatchetts summary judgment, the district court relied on our decision in Craft v. United States [ 98-1 USTC ¶50,305], 140 F.3d 638 (6th Cir. 1998) ("Craft I") and held that the Government was not entitled to levy property held in tenancies by the entirety. This timely appeal followed on June 1, 2000 .

II. DISCUSSION

A. Standard of Review

This Court reviews the district court's summary judgment decision de novo. See Watkins v. Battle Creek , 273 F.3d 682, 685 (6th Cir. 2001). Summary judgment should be granted when "the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to a judgment as a matter of law." Fed.R.Civ.P. 56(c). Summary judgment is appropriate if a party who has the burden of proof at trial fails to make a showing sufficient to establish the existence of an element that is essential to that party's case. See Celotex Corp. v. Catrett, 477 U.S. 317, 322 (1986). In deciding a motion for summary judgment, the court must view the factual evidence and draw all reasonable inferences in favor of the nonmoving party. Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 587 (1986). The nonmoving party must set forth specific facts showing that there is a genuine issue for trial. A genuine issue for trial exists "if the evidence is such that a reasonable jury could return a verdict for the nonmoving party." Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248 (1986).

B. Applicability of United States v. Craft

On March 16, 2001 , this Court issued an opinion on the appeal from its remand of Craft I and again held that the Government was unable to levy property held as a tenancy by the entirety. Craft v. United States [ 2000-2 USTC ¶50,860], 233 F.3d 358 (2001) ("Craft II"). However, in 2002 the Supreme Court granted certiorari on Craft II and reversed the decision of this Court. The Supreme Court held that property titled as a tenancy by the entirety could be levied by the Government. United States v. Craft [ 2002-1 USTC ¶50,361], 122 S.Ct. 1414, 1420 (2002) ("Craft").

Sandra Craft was the wife of a delinquent taxpayer, Don, and she and her husband owned property as tenants by the entirety under Michigan law. Craft I [ 98-1 USTC ¶50,305], 140 F.3d at 639. In 1988, the IRS filed a notice of federal tax lien under 26 U.S.C. §6321 (2002) on all of Don's property, including the entireties property, due to a liability of $482,446.73 in unpaid taxes. Id. After the lien was filed, the Crafts transferred the entireties property to Sandra by way of a quitclaim deed, in exchange for $1.00. Id. When Sandra attempted to sell the property in 1992, the federal lien was discovered. Id. at 640. The IRS agreed to release the lien on the property and allow the sale to go forward conditioned on Sandra's placing half the proceeds of the sale into an escrow account until a court decided the nature and extent of the Government's interest in the property. Id. In 1993, Sandra brought an action in the district court to quiet title to the proceeds being held in the escrow account. Id.

In the district court, the Government maintained that the lien attached to the property despite the fact that the Crafts held it as tenants by the entirety. Id. The district court rejected that argument and instead held that the tenancy by the entirety was terminated when the Crafts executed the quitclaim deed. Id. The court concluded that each spouse momentarily held a one-half interest in the property and that the tax lien attached to Don's interest for that brief moment. Id.

On appeal, we rejected the notion that Don held a transitory one-half interest in the property when the property was conveyed to Sandra. Relying principally on our decisions in Cole v. Cardoza [ 71-1 USTC ¶15,986], 441 F.2d 1337 (6th Cir. 1971) and United States v. Certain Real Property Located at 2525 Leroy Lane, 972 F.2d 136 (6th Cir. 1992), we held that under Michigan law, a spouse does not possess a separate interest in the entireties property and therefore, the tax lien could not attach to the entireties property. Id. at 643-44. On remand, the district court conducted a bench trial and held that Don had committed fraud by making several mortgage payments on the property while claiming to be insolvent. Craft II [ 2000-2 USTC ¶50,860], 233 F.3d at 363. Both parties appealed the decision, with the Government again claiming that its lien attached to the taxpayer's interest in the entireties property, and the case was heard by this Court for a second time. Applying the doctrines of the law of the case and the law of the circuit, we held that the panel's decision in Craft I must stand and that the federal tax lien did not attach to the entireties property. Id. at 369.

The Supreme Court granted certiorari to "consider the Government's claim that respondent's husband had a separate interest in the entireties property to which the federal tax lien attached." Craft [ 2002-1 USTC ¶50,361], 122 S.Ct. at 1420. In a six to three decision, the Supreme Court reversed and remanded the decision of this Court. The Supreme Court began its analysis by using the common idiom of a "bundle of sticks" to describe property interests. Id. It described the relationship between state and federal law in the following terms: "State law determines only which sticks are in a person's bundle. Whether those sticks qualify as 'property' for purposes of the federal tax lien statute is a question of federal law." Id. The Court held that "despite the [state law fiction that a tenant by the entirety has no separate interest in entireties property] each tenant possesses individual rights in the estate sufficient to constitute 'property' or 'rights to property' for the purposes of the lien ...." Id. at 1419. The Court examined the individual rights created under Michigan law with respect to entireties property and concluded that those rights included:

[T]he right to use the property, the right to exclude third parties from it, the right to a share of income produced from it, the right of survivorship, the right to become a tenant in common with equal shares upon divorce, the right to sell the property with the respondent's consent and to receive half the proceeds from such a sale, the right to place an encumbrance on the property with the respondent's consent, and the right to block respondent from selling or encumbering the property unilaterally.

Id. at 1422. The Court also noted that the most essential property rights granted by Michigan --the rights to use the property, to receive income produced by it, and to exclude others from it --alone constituted rights sufficient to subject a delinquent taxpayer's interest in an entireties property to a federal tax lien. Id. at 1423.

Emphasizing that the "interpretation of 26 U.S.C. §6321 is a federal question," the Supreme Court reasoned that "if neither [the husband nor the wife] had a property interest in the entireties property, who did? This result not only seems absurd, but would also allow spouses to shield their property from federal taxation by classifying it as entireties property, facilitating abuse of the federal tax system." Id. at 1424, 1425.

With this decision, the Supreme Court unequivocally stated that the language in §6321 allowing the Government to place a lien upon "all property and rights to property, whether real or personal," included the right to place federal tax liens on properties held as tenancies by the entirety. Furthermore, the inclusion of entireties property in the definition of "all property and rights to property" in §6321 is directly applicable to §6331(a), which allows for the Government to collect unpaid taxes by admin istrative levy of "all property and rights to property ... belonging to such person or on which there is a lien ...." The scope of the federal tax lien and the scope of the levy are identical and interests subject to a federal lien are also subject to an admin istrative levy. Accordingly, the Government in this case is able to levy against and seize the West Hickory, Franklin Road , and South Saginaw properties, as well as the Cyclone mortgage payments, all held by the Hatchetts as tenants by the entirety.



C. Retroactive Application of United States v. Craft

The Hatchetts argue that even if Craft is applicable, it should not be applied retroactively. As support for this argument, the Hatchetts offer Chevron Oil Co. v. Huson, 404 U.S. 97 (1971), which announced that a three-prong balancing test should be used in deciding whether a new principle of law should be applied retroactively. The Hatchetts argue that under the Chevron Oil balancing test, retroactive application of Craft would have "far-reaching untoward effects upon many, including tax professionals and the title industry." Additionally, citing to one of the dissents in Craft, the Hatchetts argue that there has been a general reliance in this country, including within the IRS, on the fact that the Government is unable to levy against property held as a tenancy by the entirety. These arguments are based on an incorrect understanding of current Supreme Court precedent.

In Harper v. Virginia Department of Taxation, 509 U.S. 86 (1993), the Supreme Court held that its decision in Davis v. Michigan Department of Treasury [ 89-2 USTC ¶9456], 489 U.S. 803 (1989), applied retroactively to retired federal employees seeking refunds for taxes imposed on their federal retirement benefits by the state of Virginia. 509 U.S. at 89-90. The Court abandoned the balancing test articulated in Chevron Oil, developing a new standard for determining retroactivity in civil cases:

[O]ur decision today makes it clear that "the Chevron Oil test cannot determine the choice of law by relying on the equities of the particular case" and that the federal law applicable to a particular case does not turn on "whether [litigants] actually relied on [an] old rule [or] how they would suffer from retroactive application" of a new one.

Id. at 95 n.9 (quoting James B. Beam Distilling Co. v. Georgia, 501 U.S. 529, 543 (1991) (Souter, J.)); see also In re Federated Dep't Stores, Inc., 44 F.3d 1310, 1317 (6th Cir. 1995) (recognizing that Chevron Oil has been overruled by Harper). The Court in Harper held:

When this Court applies a rule of federal law to the parties before it, that rule is the controlling interpretation of federal law and must be given full retroactive effect in all cases still open on direct review and as to all events, regardless of whether such events predate or postdate our announcement of the rule.

509 U.S. at 97; see also United States v. Real Prop. Located at 1184 Drycreek Rd. , Granville, Oh. 43023, 174 F.3d 720, 727 (6th Cir. 1999) (noting that Harper mandates the application of a new Supreme Court case decided while the present case was on direct appeal). Moreover, the Court in Harper invoked the Supremacy Clause and rejected Virginia 's argument that states have the ability to limit the retroactive operation of federal law. 509 U.S. at 100 ("Whatever freedom state courts may enjoy to limit the retroactive operation of their own interpretations of state law[,] ... cannot extend to their interpretations of federal law.") (citations omitted); see also Drye v. United States [ 99-2 USTC ¶51,006; 99-2 USTC ¶60,363], 528 U.S. 49, 57 (1999) ("[F]ederal, not state [law] control[s] the ultimate issue whether a taxpayer has a beneficial interest in any property subject to levy for unpaid federal taxes."); United States v. Rodgers [ 83-1 USTC ¶9374], 461 U.S. 677, 678-79 (1983) (holding that the Supremacy Clause allows the Government to "sweep aside state-created exemptions" to the collection of federal taxes and apply federal law).

The Supreme Court detailed the process for consideration of retroactivity in Reynoldsville Casket Co. v. Hyde, 514 U.S. 749 (1995), stating that:

[W]hen (1) the Court decides a case and applies the (new) legal rule of that case to the parties before it, then (2) it and other courts must treat that same (new) legal rule as "retroactive," applying it, for example, to all pending cases, whether or not those cases involve predecision events.

514 U.S. at 752.

Applying Reynoldsville Casket, we find that first, Craft announces a new rule of federal law. Several federal and state courts, including our Court, as well as the IRS, had assumed that entireties property was excluded from the definition of "all property and rights to property" as defined by the tax code. See, e.g., Craft [ 2002-1 USTC ¶50,361], 122 S.Ct. at 1431-32 (Thomas, J., dissenting) (listing cases). Therefore, the result in Craft is that a new rule of federal law was announced. Also, the Court applied the rule in Craft to the parties before it. In holding that the Government was authorized to attach liens to entireties property, the Court remanded the decision in Craft to this Court to determine the exact valuation of the taxpayer's interest in the entireties property and the amount owing to the Government. Id. at 1426. Second, the present case was pending on direct review when the Supreme Court's decision in Craft was rendered. Indeed, the Government's primary argument to this Court on appeal depended on the outcome of Craft II, which was pending review in our Court at the time the Government's appeal was filed, and any subsequent review by the Supreme Court. Accordingly, Craft applies retroactively to this case.



D. Right of the Government to Sell the Levied Property

The Hatchetts argue in the alternative that, even if the Government may levy the entireties property, the result in Craft does not compel the Government to sell the property. They briefly analogize their situation to that of a partnership, stating that "while the Government's lien can attach to an individual partner's interest in a partnership, it does not attach to the partnership assets, and the Government cannot sell those partnership assets." Citing to Drye, the Hatchetts also assert that the Government may levy merely on Elbert's "right of use and right of exclusion, subject to his wife's right of use and exclusion." These arguments are wholly without merit.

First, the majority in Craft specifically rejected the argument advanced in the dissents by Justices Scalia and Thomas that "the conclusion that the husband possessed an interest in the entireties property to which the federal tax lien could attach is in conflict with the rules of tax liens relating to partnership property." Craft [ 2002-1 USTC ¶50,361], 122 S.Ct. at 1424. The Court stated that "[t]here is, however, a difference between the treatment of entireties property and partnership assets." Id. Accordingly, the Hatchetts' attempt to equate entireties property to partnership assets is an argument that already was considered and rejected by the Supreme Court.

Second, applying Craft to this case leads to the rule that, pursuant to § 6331, the Government may levy upon property held by a delinquent taxpayer as a tenancy by the entirety. Section 6331(b) specifically states that:

(b) Seizure and sale of property.- The term "levy" as used in this title includes the power of distraint and seizure by any means. Except as otherwise provided in subsection (e), a levy shall extend only to property possessed and obligations existing at the time thereof. In any case in which the Secretary may levy upon property or rights to property, he may seize and sell such property or rights to property (whether real or personal, tangible or intangible).

(emphasis added). Furthermore, § 6331(1) states that "[f]or proceedings applicable to sale of seized property, see section 6335." Title 26 U.S.C. § 6335(c) (2002) states that "[i]f any property liable to levy is not divisible, so as to enable the Secretary by sale of a part thereof to raise the whole amount of tax and expenses, the whole of such property shall be sold." (emphasis added).

The language of the statutes is clear. The power to levy includes the power to seize and sell these properties as prescribed by § 6335; property that cannot be divided in order to satisfy the whole of taxes and expenses shall be sold in its entirety. Craft allows the Government to levy upon the West Hickory, Franklin Boulevard , and South Saginaw properties held by the Hatchetts as tenants by the entirety. In 1998, the taxable value of these properties was estimated as follows: (1) West Hickory at $544,400, (2) Franklin Boulevard at $19,720; and (3) South Saginaw at $60,480. Elbert's outstanding tax indebtedness in excess of $8,000,000 far exceeds the value of his interests in the entireties properties. Accordingly, the Government is entitled to sell the whole of the properties and collect a portion of the proceeds pursuant to §6335(c).

The Hatchetts, relying on the Supreme Court's decision in Rodgers, also argue that even if the Government is entitled to sell the entireties property, we should remand the case to the district court for consideration by that court of whether the sale should be allowed to go forward. The Hatchetts' reliance on Rodgers is misplaced. The Court in Rodgers decided that a Texas homestead law did not prevent the Government from forcing the sale of a family house to satisfy tax indebtedness. [ 83-1 USTC ¶9374], 461 U.S. at 680. The Government chose to pursue the taxpayer in Rodgers under 26 U.S.C. §7403 (2002), which authorizes the Government to pursue a taxpayer by filing a civil action in a district court for the payment of delinquent taxes. In a proceeding under §7403, the district court adjudicates all the matters involved, makes a final determination of the claims, and decrees a sale of the property if the Government's claim is established. §7403 (c). In explaining that a court in a §7403 proceeding is charged with exercising its discretion regarding the sale of levied property, the Court in Rodgers held that several factors should be considered by the district court in deciding whether to authorize the forced sale. [ 83-1 USTC ¶9374], 461 U.S. at 710-11.

As the Court explained in Rodgers, a §7403 proceeding is wholly different from an " admin istrative levy under 26 U.S.C. §6331." [ 83-1 USTC ¶9374], 461 U.S. at 682. An action under §6331, the Court noted, is "unlike the procedure described in §7403, [and] does not require any judicial intervention, and it is up to the taxpayer ... to go to court if he claims that the assessed amount is not legally owing." Id. at 682-83. The action in this case is an admin istrative levy pursuant to §6331 and therefore Rodgers has absolutely no application here. Accordingly, under Craft the Government is able to sell the Hatchetts' entireties properties and collect the mortgage payments.



E. The Government's Alternative Theories

The Government argues that the district court erred in refusing to allow it to present three alternative theories of defense to the Hatchetts' wrongful levy action. The Government argues that if there is sufficient evidence to support these three theories, it would be allowed to retain a higher percentage of the proceeds from the sale of the entireties property.



1. Fraudulent conveyance theory

In 1996, pursuant to Federal Rule of Civil Procedure 15(a), the Government filed a motion to amend its answer to the Hatchetts' wrongful levy complaint in order to assert the affirmative defense of fraudulent conveyance. Under this theory, the Government argued that Elbert, while insolvent, used his individual funds to purchase and enhance property that he placed in entireties ownership in order to prevent his creditors from attaching it. A magistrate judge issued an order granting the Government's motion to amend its answer. However, in a February 28, 1997 Memorandum and Opinion, the district court reversed the order of the magistrate judge and refused to allow the Government to present its theory of fraudulent conveyance. The district court also ruled on the Hatchetts' Motion to Strike Fraudulent Conveyance Defense and for Summary Judgment and granted the Motion to Strike and the Motion for Summary Judgment as to the fraudulent conveyance issue. The court discussed three reasons for its holding: (1) the Government lacked standing to bring the theory; (2) introduction of the theory was barred by res judicata; and (3) introduction of the theory was barred by laches.

We review a denial of a motion to amend the pleadings for abuse of discretion. Fisher v. Rob erts, 125 F.3d 974, 977-78 (6th Cir. 1997); LRL Props. v. Portage Metro Hous. Auth., 55 F.3d 1097, 1104 (6th Cir. 1995). However, if the court denies the motion on grounds that the motion would be futile, the denial is reviewed de novo. Parry v. Mohawk Motors of Mich., Inc., 236 F.3d 299, 306 (6th Cir. 2000); LRL Props., 55 F.3d at 1104; see also Dubuc v. Green Oak Township , 312 F.3d 736, 743-44 (6th Cir. 2002). Because the district court's disposition of this issue is equivalent to a denial based on futility, we review the decision de novo. We disagree with all three of the reasons set forth by the district court and remand with instructions to grant the Government's motion to amend its answer.



a. Standing

The district court, relying in part on Nat'l Tax Credit Partners, L.P. v. Havlik, 20 F.3d 705, 708-09 (7th Cir. 1994), held that the Government lacked standing to assert the fraudulent conveyance defense. The court held that the bankruptcy trustee, appointed in September, 1990, had the exclusive authority to pursue a claim of fraudulent conveyance under 11 U.S.C. §548 (2002) of the Bankruptcy Code. We disagree.

In September, 1992, the bankruptcy trustee filed a complaint against Elbert based upon a theory of fraudulent conveyance. However, on February 25, 1993 , the trustee filed a motion to abandon its fraudulent conveyance action after determining that the liens filed in favor of the IRS and the State of Michigan exceeded the Hatchett's equity in the properties at issue. The trustee determined that because no funds would be available from the liquidation of properties for unsecured creditors, he should abandon the claim. In March, 1993 the trustee's fraudulent conveyance action was officially abandoned and the matter was settled in the Bankruptcy Court in April, 1993.

Section 548 of the Bankruptcy Code provides

(a)(1) The trustee may avoid any transfer of an interest of the debtor in property, or any obligation incurred by the debtor, that was made or incurred on or within one year before the date of the filing of the petition, if the debtor voluntarily or involuntarily --

(A) made such transfer or incurred such obligation with actual intent to hinder, delay, or defraud any entity to which the debtor was or became, on or after the date that such transfer was made or such obligation was incurred, indebted ...

11 U.S.C. §548 (a) (1993). Though the trustee has the exclusive right to bring an action for fraudulent conveyance during the pendency of the bankruptcy proceedings, the Bankruptcy Code does not extinguish the right of the Government to bring a state law action for fraudulent conveyance after the debtor receives a discharge in bankruptcy. In Havlik, the Seventh Circuit held that the right to recoup a fraudulent conveyance is exclusive to the trustee, and specifically noted that this right only attached "once a bankruptcy is under way." 20 F.3d at 709. The court said nothing about the right of individual creditors to pursue state law claims for fraudulent conveyance once the bankruptcy was discharged. In Klingman v. Levinson [ 97-1 USTC ¶50,441], 114 F.3d 620, 629 (7th Cir. 1997), the court held that bankruptcy proceedings only have the effect of imposing a temporary stay of a fraudulent conveyance action by the Government. The court in Klingman held that once the bankruptcy court issued findings on the matter, the Government could proceed on a state law fraudulent conveyance action in the district court. See also Nat'l Am. Ins. Co. v. Ruppert Landscaping Co., Inc., 187 F.3d 439, 441 (4th Cir. 1999) (noting that an individual creditor can pursue fraudulent conveyance claims only after such a claim has been abandoned by the trustee); Kathy B. Enter., Inc. v. United States [ 86-1 USTC ¶9153], 779 F.2d 1413, 1415 (9th Cir. 1986) (holding that once the bankruptcy proceedings are over, the IRS is able to pursue a collection action because such an action would not interfere with rights of other creditors); Fed. Deposit Ins. Corp. v. Davis 733 F.2d 1083, 1085 (4th Cir. 1984) ("Once a bankruptcy case has been closed, creditors having unavoided liens on fraudulently conveyed property can pursue their state law remedies independently of the trustee in bankruptcy."). Accordingly, because the bankruptcy proceedings are over, the Government has standing to assert its fraudulent conveyance theory.



b. Res judicata

The district court also held that the Government's fraudulent conveyance claim was barred by the doctrine of res judicata. With a cursory explanation, the district court held that the Bankruptcy Court's approval of a settlement regarding the fraudulent conveyance issue bars any further litigation on the matter. We disagree. A claim in a second action is barred under the doctrine res judicata if: (1) the first action resulted in a final judgment on the merits; (2) both actions are between the same parties; (3) the issue in the second action should have been litigated in the first action; and (4) the claim is identical in both actions. Wilkins v. Jakeway, 183 F.3d 528, 532 (6th Cir. 1999). The action at issue here does not even meet the first requirement of the doctrine of res judicata. The bankruptcy trustee abandoned any action to recover the properties based on a theory of fraudulent conveyance. Accordingly, there was no final judgment on the merits regarding the issue of fraudulent conveyance and the doctrine of res judicata does not apply.



c. Laches

Finally, the district court held that the Government's fraudulent conveyance defense was barred by laches. In its summary disposition of the issue, the district court relied on S.E.R., Jobs for Progress, Inc. v. United States, 759 F.2d 1 (Fed. Cir. 1985) and 11 U.S.C. §546 (2002). This reliance was misplaced. It is well established that the Government generally is exempt from the consequences of its laches. See United States v. Summerlin [ 40-2 USTC ¶9633], 310 U.S. 414, 416 (1940) ("It is well settled that the United States is not bound by state statutes of limitation or subject to the defense of laches in enforcing its rights."); Guar. Trust Co. v. United States, 304 U.S. 126, 132 (1938) (noting the continuing vitality of the rule that the sovereign is exempt from its own laches); United States v. Peoples Household Furnishing, Inc., 75 F.3d 252, 254 (6th Cir. 1996) ("The ancient rule ... 'that the sovereign is exempt from the consequences of its laches, and from the operation of statutes of limitations' - has enjoyed continuing vitality for centuries.") (citation omitted); United v. Weintraub [ 80-1 USTC ¶9172], 613 F.2d 612, 618 (6th Cir. 1979) ("The principle [that the Government is exempt for the consequences of its own laches] is well established in this country."). However, the Government may be subject to laches in certain types of action. See S.E.R., 759 F.2d at 6-7. The court in S.E.R. merely held that the doctrine of laches may be applicable against the Government in the limited exception of contract cases, saying nothing regarding any other type of action involving the Government. Id. at 8. Accordingly, there is no precedent holding that the Government is subject to its own laches in tax collection actions.

Under §546, a fraudulent conveyance action must be commenced within two years of the appointment of the Chapter 7 trustee. Because the bankruptcy trustee was appointed on September 10, 1990 , the court reasoned that the Government's fraudulent conveyance action is untimely. However, the statute of limitations in §546 applies only to actions by trustees. See Weintraub [ 80-1 USTC ¶9172], 613 F.2d at 618 ("While the general rule ... is that the sovereign is exempt from the operation of statutes of limitations, an exception to that general rule exists when the sovereign (through the legislature) expressly imposes a limitation period upon itself."). As we have discussed, this state law action by the Government for fraudulent conveyance commenced after the discharge of the bankruptcy and has nothing to do with the rights of the trustee. Accordingly, the statute of limitation set forth in §546 is irrelevant to the Government's action and the general rule that the Government is exempt from the doctrine of laches applies in the instant case.

Furthermore, we reverse the district court's decision to grant the Hatchett's Motion to Strike Fraudulent Conveyance Defense. We review the grant of a motion to strike a pleading for abuse of discretion. See, e.g., Fisher, 125 F.3d at 977-78 (6th Cir. 1997); LRL Prop., 55 F.3d at 1104. For the reasons stated above, we find that the district court abused its discretion in granting the Hatchett's motion to strike.



2. Nominee and lien tracing theories

The Government also wanted to argue at the trial level that its levies were proper under both a nominee theory and a lien tracing theory, and sought to introduce evidence in support of these theories. Under the nominee theory, the Government argues that other individuals are holding three properties and rights to the mortgage payments as nominees of Elbert. The Government argues that Elbert shielded the properties and payments from his tax liabilities with these title arrangements. Under the lien tracing theory, the Government argues that since it had a lien on Elbert's money, it is entitled to place a lien on the properties improved or purchased with that money.

In a March 31, 2000 Order Denying Defendants' Motion for Recusal and Granting in Part and Denying in Part Cross-Motions for Summary Judgment, Hatchetts v. Internal Revenue Serv. [ 2000-1 USTC ¶50,455], 126 F.Supp.2d 1038 (E.D. Mich. 2000), the district court ruled that the Government's nominee and lien tracing theories were unpersuasive. The court based its decision on the fact that, under Craft I, we held that taxpayers did not hold any separate interest in property held as a tenancy by the entirety to which a lien can attach.

This Court reviews the district court's summary judgment decision de novo. See Watkins, 273 F.3d at 685. In light of the Supreme Court decision in Craft, both theories are relevant in determining the Government's interest in the entireties properties and mortgage payments at issue. Accordingly, the Government is entitled to present its nominee and lien tracing theories on remand in order to determine the exact value of the Government's interests.

III. CONCLUSION

For the reasons stated, we REVERSE the decision of the district court granting Appellees' motion for summary judgment, and REMAND to the district court for further proceedings in accordance with this opinion. Furthermore, we REVERSE and REMAND the district court's denial of the Government's Motion to Amend its answer to include a fraudulent conveyance defense, and we REVERSE and REMAND the district court's grant of summary judgment for the Hatchetts on the Government's nominee and lien tracing theories.

 

[94-1 USTC ¶50,169] First of America Bank--West Michigan, Plaintiff v. William J. Alt, M.D., Lind Alt, Harbor Laboratory, Inc., United States of America, and Cote La Mer, Inc., Defendant

U.S. District Court, West. Dist. Mich. , So. Div., 1:91-CV-1020, 12/22/93

[Code Secs. 6323 , 6501 and 6502 ]

Tax liens: Assessments: Statute of limitations: Standing to challenge.--A bank lacked standing to challenge the validity of an IRS tax lien against a condominium owned by delinquent taxpayer individuals who had obtained a mortgage on the property from the bank on the grounds that the two underlying assessments were not filed within three years of the date on which their return was filed. The three-year limitations period for assessing tax protects taxpayers only, not third parties. Furthermore, since the assessments were assumed valid due to the bank's lack of standing, the IRS's lien attached for ten years under the applicable limitations period for collecting tax.

[Code Sec. 6321 ]

Lien for taxes: Validity of lien: Transfer to related entity.--The transfer of a condominium by delinquent taxpayers to a related corporation did not defeat an IRS tax lien that was filed against the individuals only. Although the deed was executed before the IRS filed its lien, it was not recorded until afterward.

[Code Sec. 6323 ]

Lien for taxes: Validity of lien: Conflicts of law.--An IRS tax lien had priority over a bank's unrecorded mortgage even though under state ( Michigan ) law it would not have had priority if the IRS was on notice of the bank's lien. Notice of a prior unrecorded interest is irrelevant to determining lien priority under the Code. The priority of IRS liens is determined under federal law, not state law.

[Code Sec. 6323 ]

Lien for taxes: Validity of lien: Estoppel against IRS: Equitable principles.--The IRS was not estopped from claiming an interest in mortgaged real estate even though it waited almost 10 years to begin legal proceedings or to enforce its lien. Despite the fact that the lender would not have made the loan had it known of the IRS's assessment, the IRS had committed no affirmative action that misled the bank or induced it to make the loan. Furthermore, the IRS was not required under equitable principles to apply seized assets to the earliest tax liability.

[Tax Court Rule 37 ]

Suits by nontaxpayers: Default judgment: Attorney fees: Interrogatories, failure to reply.--A lender was not entitled to a default judgment against the IRS in a case involving the priority of liens since the IRS complied with discovery orders. The lender may have been entitled to attorney fees since the IRS had not answered all interrogatories fully and correctly. This issue was referred to a magistrate judge for further consideration.

Alvin D. Treado, Culver, Lague & McNally, 600 Terrace Plaza, Muskegon , Mich. 49443 , for plaintiff. Michael H. Dettmer, United States Attorney, Michael L. Shiparski, Assistant United States Attorney, 110 Michigan Ave., Grand Rapids, Mich. 49503, Alexandra E. Nicholaides, John A. Linquist, Department of Justice, Washington, D.C. 20530, for defendant (IRS). Floyd H. Farmer, 102 S. Buchanan St. , Spring Lake , Mich. 49456, for defendant (Cote La Mer, Inc.). Cote La Mer, Inc., 4739 Poinsettia, Grand Rapids, Mich. 49508, pro se. Michael H. Dettmer, United States Attorney, Michael L. Shiparski, Assistant United States Attorney, 110 Michigan Ave., Grand Rapids, Mich. 49503, Alexandra E. Nicholaides, John A. Linquist, Department of Justice, Washington, D.C. 20530, for defendant (USA).

MEMORANDUM OPINION

MCKEAGUE, District Judge:

This is a civil action brought by plaintiff First of America Bank-- West Michigan ("FOA" or "Bank") to foreclose its mortgage on certain real property previously owned by William and Rosalinda ("Lind") Alt, and to determine the priority of its lien. The subject property is a condominium located in Cote La Mer, a subdivision in Ottawa County , Michigan . The property was recently sold by judicial sale, yielding net proceeds of $79,710.45. Those proceeds have been placed in escrow with the Court.

The United States contends that its tax lien against Lind Alt has priority over plaintiff's claimed mortgage interest in the property pursuant to the Internal Revenue Code, 26 U.S.C. §6323 . Both parties are now before the Court on contesting motions for summary judgment.

FACTS

Lind Alt purchased the disputed Cote La Mer property on December 30, 1971 . On April 16, 1982 , Lind and William Alt filed their 1981 tax return with the Internal Revenue Service ("IRS"). A few months later, on October 11, 1982 , the IRS made an assessment against the Alts for their unpaid taxes from 1981. On June 27, 1984 , the Alts borrowed $501,000 from FOA in the form of a commercial loan, securing the loan with a mortgage on the condominium and two other pieces of property located in Muskegon County . The Bank recorded the mortgages by filing in Muskegon County , but not in Ottawa County where the Cote La Mer condo is located.

On or before April 15, 1985 , the government contends that it issued a statutory notice of deficiency for the Alts' unpaid 1981 taxes. ¹ Later in April of that year, the Alts commenced a Tax Court proceeding relating to their 1981 return. On May 27, 1986 , the Tax Court entered a judgment against the Alts for taxes due in the sum of $83,655.40, plus negligence penalties. A few days later, on June 2, 1986 , Lind Alt transferred the condominium to a corporation called Harbor Laboratory, Inc. ("Harbor Lab"), by quitclaim deed. Although the facts are unclear, Harbor Lab is apparently owned by Lind Alt. The deed was recorded on August 1, 1986 , in Ottawa County . The IRS later found Harbor Lab to be a nominee or alter ego of the Alts. On June 13, 1986 , the IRS made another assessment against the Alts, this time pursuant to the Tax Court's ruling in May.

On November 3, 1986 , the IRS filed a tax lien against Lind and William Alt, but not Harbor Lab, in Ottawa County . The tax lien was for $178,280.87, for the tax period ending December 31, 1981 . This lien initially referenced the assessment of October 11, 1982 . On April 28, 1987 , however, the IRS filed an amended tax lien, changing the assessment date to June 13, 1986 , the date of the assessment which followed the Tax Court's ruling.

In August of 1987, the IRS sold other property of the Alts, realizing net proceeds of $94,770.80. These proceeds were applied against the Alts' 1981 tax liability.

By letter dated December 31, 1987 , FOA requested proof of fire insurance for the Cote La Mer property from the Alts. Lind Alt responded that the loan had been paid in full. Subsequent negotiations between the Alts and the Bank ensued, whereby FOA agreed to refinance the Alts' loan on March 8, 1988 , secured by the same property, including the condominium. This time, however, the mortgage was recorded in Ottawa County on April 28, 1988 . On June 12, 1991 , the IRS filed a notice of Federal Tax Lien against Harbor Lab in Ottawa County .

Throughout early 1991, FOA requested that the Alts obtain fire insurance on the Cote La Mer property. Effective June 26, 1991 , the Bank independently obtained its own insurance coverage for the condo. A few months later, on November 1, 1991 , FOA filed the present foreclosure action in Ottawa County Circuit Court. On November 12, 1991 , the IRS filed further liens against the Alts' property for tax years subsequent to 1981.

The IRS contends that Lind Alt owes the United States $188,794.83 as of August 1, 1993 , on the 1981 tax liability. At the judicial sale of the Cote La Mer condo, the property grossed approximately $91,500. After payment of back taxes on the property, U.S. Marshal fees, dues owed to the condominium association, and utility costs incurred by the association in maintaining the property, $79,710.45 remained. This sum was escrowed with the Court, pending disposition of this matter.

In October of 1992, FOA served its first set of interrogatories and document production requests in this case on the IRS. The IRS objected to most of these requests and inquiries. On January 25, 1993 , Magistrate Judge Scoville granted the Bank's motion to compel discovery, and the IRS was ordered to furnish FOA with supplemental answers. In its subsequent answers, the IRS indicated that it was appropriate for it to file a notice of deficiency for the tax year 1981 in the spring of 1986, as the Alts misrepresented their 1981 income by over 25%, giving the IRS a six-year statute of limitations. These subsequent answers proved inadequate to FOA, however, and on March 31, 1993 , Judge Scoville issued another order compelling the IRS to comply with discovery requests. In this set of answers, the IRS no longer claimed that the Alts had misrepresented their income by over 25%. Rather, the IRS claimed that notice of deficiency had issued on or before April 15, 1985 , pulling it within the three-year statute of limitations applicable in most situations. The IRS also revealed for the first time that the Alts had filed a Tax Court petition in 1985.

DISCUSSION

Both FOA and the United States are now before this Court on cross-motions for summary judgment. The briefs in this case present a myriad of issues for resolution. First and foremost, is the question, "Who has priority in the property?" Although it appears the IRS does, FOA challenges the priority of the federal tax lien on several grounds. The second issue is whether the equitable doctrines of laches or estoppel apply in this case. The third issue concerns whether the doctrine of marshalling may be applied to the IRS. The fourth question presented by the briefs asks whether FOA is entitled to discovery sanctions due to IRS actions (or nonactions) in the course of this litigation. The final issue presented for resolution is whether FOA is entitled to reimbursement for the insurance it obtained on the Cote La Mer property. Applying the standards for summary judgment, the Court will examine each of these issues in turn.

Summary judgment is appropriate when the record reveals that there are no issues as to any material fact in dispute and the moving party is entitled to judgment as a matter of law. Fed. R. Civ. P. 56(c); Sims v. Memphis Processors, Inc., 926 F.2d 524, 526 (6th Cir. 1991) (citing Celotex Corp. v. Catrett, 477 U.S. 317, 322-23 (1986), and Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248 (1986)). The standard for determining whether summary judgment is appropriate is "whether the evidence presents a sufficient disagreement to require submission to a jury or whether it is so one-sided that one party must prevail as a matter of law." Booker v. Brown & Williamson Tobacco Co., 879 F.2d 1304, 1310 (6th Cir. 1989) (quoting Anderson , 477 U.S. at 251-52). "By its very terms, this standard provides that the mere existence of some alleged factual dispute between the parties will not defeat an otherwise properly supported motion for summary judgment; the requirement is that there be no genuine issue of material fact." Anderson, 477 U.S. at 247-48 (emphasis in original).

The moving party bears the burden of clearly and convincingly demonstrating the absence of any genuine issues of material facts. Sims, 926 F.2d at 526. The court must consider all pleadings, depositions, affidavits, and admissions on file and draw all justifiable inferences in favor of the party opposing the motion. See Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574 (1986). If the moving party carries this burden, the nonmoving party must present significant probative evidence showing that genuine, material factual disputes remain to defeat summary judgment. Sims, 926 F.2d at 526. The court'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. Id. The court must make purely legal judgments that go to the nature and sufficiency of the complaint as well as the evidence put forward to support it. Val-Land Farms, Inc. v. Third Nat'l Bank, 937 F.2d 1110, 1113 (6th Cir. 1991). Applying these principles to the present case, this memorandum concludes that FOA's motion for summary judgment shall be denied. The government's motion shall be granted.

I. Priority of Lien

The first question presented for resolution in this matter is whose interest in the Cote La Mer property has priority. FOA contends that its mortgage on the condominium has priority, while the United States claims that the federal tax lien prevails. This is a question of both federal and state law.

In Michigan , interests in real property are recorded with the register of deeds in the county where the property is located. All recorded liens, rights, and interests in property take priority over subsequent owners and encumbrances. M.C.L.A. §565.25. Where an individual fails to record a lien or interest in property, that interest is void as against any subsequent interest holder who purchased the interest in good faith for valuable consideration. M.C.L.A. §565.29. A person takes in "good faith" if he or she takes without notice of the prior unrecorded interest. Michigan Nat'l Bank & Trust Co. v. Morran, 194 Mich. App. 407, 410 (1992). Thus, Michigan has adopted what is frequently known as a "race-notice" statute: the first interest holder to record takes priority, unless that individual has notice of a prior unrecorded interest.

The Internal Revenue Code alters the scheme of priorities under Michigan law. Under 26 U.S.C. §6321 , a lien on an individual's property arises when the individual is liable to pay a tax, but neglects or refuses to pay the tax after notice of the liability is given. However, "[t]he lien imposed by section 6321 shall not be valid against any . . . holder of a security interest . . . until notice thereof which meets the requirements of [26 U.S.C. §6323(f) ] has been filed." 26 U.S.C. §6323(a) . Section 6323(f) requires that notice of a lien on real property be filed according to the laws of the state where the property is located. Accordingly, the tax lien has priority if it was recorded first with the register of deeds in the county where the property is situated.

On November 3, 1986 , the IRS filed a tax lien against Lind and William Alt in Ottawa County , Michigan , the location of the Cote La Mer property. The Bank had recorded its mortgage on the property in Muskegon County in 1984, but did not file in Ottawa County until April of 1988. A cursory review of the facts thus suggests that the IRS has priority in the condominium. FOA disputes this conclusion, however, on four separate grounds. First, FOA challenges the validity of the IRS assessment against the Alts, which gave rise to the lien. Second, FOA contends that the statute of limitations on the collection of taxes has expired. Third, the Bank argues that the lien did not attach to the Cote La Mer condominium, as that property had been transferred to Harbor Lab on June 2, 1986 . Finally, FOA maintains that a genuine issue of material fact remains as to whether the IRS had notice of the Bank's prior unrecorded interest in the property. Such notice is relevant, the Bank contends, to determining the priority of the tax lien.

a. Validity of the IRS Assessment

FOA challenges the validity of the government's tax lien, claiming that the assessments pursuant to which the liens were filed were untimely and not preceded by notices of deficiency. Under 26 U.S.C. §6501(a) , taxes must be assessed within three years of the date on which the return was filed. In this case, two assessments were made for the Alts' 1981 taxes: one on October 11, 1982 , and the other on June 13, 1986 .

The first assessment clearly falls within the statutory three-year period. The second assessment, however, falls well outside this time frame. Supplemental assessments are permitted by the Internal Revenue Code, but they too must fall within the three-year period of limitations. See 26 U.S.C. §6204(a) ; Brockhurst, Inc. v. United States [91-1 USTC ¶50,217 ], 931 F.2d 554, 557 (9th Cir. 1991). FOA also contends that the government failed to provide the Alts with notice of deficiency for the June 1986 assessment. Initially, the IRS contended that notice was served sometime in the spring of 1986; later the government alleged that notice was issued before April 15, 1985 , pulling it within the three-year statute of limitations. The government has no evidence to support these assertions, however. ²

The IRS does not appear to argue that the June 13, 1986 , assessment fell inside the statutory time frame, or that it can prove that notice was sent prior to April 15, 1985 . Rather, the government contends that the Bank lacks standing to challenge the assessment. Under 28 U.S.C. §2410(a), sovereign immunity of the government is waived, permitting a party to sue the United States to foreclose a mortgage on property upon which the government has a lien. This is essentially a suit to "quiet title." However, the courts have construed §2410 to permit only challenges to the procedural regularity of the lien, not the underlying tax liability or merits of the assessment. Pollack v. United States [87-2 USTC ¶9463 ], 819 F.2d 144, 145 (6th Cir. 1987). FOA contends that it asserts merely procedural defects in the assessment, and not the underlying tax. The IRS counters that a challenge to the notice is a challenge to the very merits of the assessment.

The case law provides little guidance on the resolution of this issue. In Guthrie v. Sawyer [92-2 USTC ¶50,391 ], 970 F.2d 733, 737 (10th Cir. 1992), the Tenth Circuit held that a taxpayer could not raise a procedural defect in the issuance of a deficiency notice in a quiet title action because the purpose of the notice requirement was to allow the taxpayer to challenge the amount of the assessment in Tax Court. The challenge thus went to the underlying tax liability itself. However, the taxpayer was found to be entitled to relief under another statute, and the Court held that the failure of the IRS to send a notice of assessment could be challenged under §2410. Other cases suggest that all taxpayer challenges to notice, be it notice of deficiency or assessment, do qualify as claims of procedural irregularities. In an unpublished decision, the Sixth Circuit permitted a taxpayer to challenge notice under §2410, although it ultimately ruled against him on the merits. See Williams v. United States, No. 89-5740, 1990 W.L. 47555 (6th Cir. 1990); see also Gentry v. United States [91-2 USTC ¶50,374 ], No. CIV-1-89-337, 1991 W.L. 191246 (E.D. Tenn. 1991) (citing Williams). Thus, it would appear that in this Circuit, a taxpayer may challenge the validity of the assessment and the resulting lien by asserting that no deficiency notice was issued. A taxpayer challenge to the assessment on the grounds that it fell outside the statutory period similarly appears to constitute a procedural challenge.

The result may differ, however, where the individual claiming procedural irregularities which render the lien invalid is not a taxpayer, but a third party. In its brief, FOA cites only one case from 1965 to support its contention that third parties may challenge the validity of IRS liens on procedural grounds. See Falik v. United States [65-1 USTC ¶9295 ], 343 F.2d 38 (2d Cir. 1965). That case, however, made only a passing reference to the issue. Furthermore, McEndree v. Wilson , 774 F.Supp. 1292 (D. Colo. 1991), cited by the Bank during oral argument, is inapposite. Although McEndree addressed third-party standing under §2410, that case did not involve a procedural challenge to the validity of an IRS lien as the plaintiff conceded the validity of the assessments. Id. at 1296. Rather, the plaintiff merely sought to assert the priority of its lien over the federal tax lien. In the present case, no one disputes that FOA may attempt to argue that its mortgage takes priority over the federal lien. There is no authority, however, which permits the Bank, as a third party, to argue that the lien is procedurally invalid. As the procedural provisions of the Internal Revenue Code appear to exist to protect the taxpayer only, not third parties, FOA lacks standing to challenge the procedural regularity of the lien. This challenge to the IRS' priority must fail.

b. Collection of Taxes

FOA claims that any interest that the government had in the property has expired, as the IRS had only six years from the date of assessment to collect the tax owed pursuant to 26 U.S.C. §6502(a)(1) . Because the first assessment issued on October 11, 1982 , the government's lien only attached until 1988, the Bank argues.

The government notes, however, that §6502(a)(1) was amended effective November 5, 1990 , to give the IRS a ten-year collections period. This ten-year period applies even to taxes assessed before the effective date, if the previous six-year period had not yet expired as of November 5, 1990 . Although counting from the 1982 assessment, the six-year time frame expired in 1988, the six-year period had not expired by November 1990, if we count from the June 13, 1986 assessment. The government would have ten years in which to act. Thus, if the 1986 assessment is the proper trigger for the collections period, then the IRS has until June of 1996 to collect the Alts' unpaid taxes.

Due to the conclusion of the preceding section that FOA does not have standing to challenge the validity of the assessment, the Court assumes that the 1986 assessment is valid. Accordingly, the period of time in which the IRS may collect on the deficiency has not expired. This challenge by FOA also fails.

c. Lien as Against Property of Harbor Lab

FOA next argues that the federal tax lien did not attach to the Cote La Mer property as that property was transferred to Harbor Lab by quitclaim deed on June 2, 1986 . Because the lien recorded in Ottawa County only referenced the property of the Alts, it did not attach to the condominium owned by Harbor Lab, the Bank contends. The IRS did not file a lien against Harbor Lab in Ottawa County until June of 1991, after FOA had perfected its interest.

The IRS claims that the transfer to Harbor Lab is ineffective to defeat the tax lien as the deed was recorded after the assessment of the tax liability. The Supreme Court has ruled that "[t]he transfer of property subsequent to the attachment of the lien does not affect the lien." United States v. Bess [58-2 USTC ¶9595 ], 357 U.S. 51, 57 (1958). Although the transfer occurred on June 2, 1986 , the deed was not recorded in Ottawa County until August 1st, well after the June 13th assessment. Furthermore, the IRS had made a previous assessment in October of 1982. In these circumstances, the Alts should not be given the power to defeat the federal tax lien through a quitclaim transfer. The lien did attach to the Cote La Mer property. The Bank's third challenge to the priority of the government's lien is without merit.

d. IRS' Notice of Prior Unrecorded Interest

FOA also contends that the federal tax lien should not take priority as the government was on notice of the prior unrecorded interest held by the Bank. Under Michigan law, a lienholder has priority if he or she recorded first and had no notice of a prior unrecorded interest. The IRS argues that notice of the mortgage is irrelevant, as priority determinations are controlled by federal, not state, law.

Section 6323 of the Internal Revenue Code dictates that a federal tax lien has priority if it has been properly recorded under state law. 26 U.S.C. §6326(a) , (f). The Code imposes no notice requirement. State law appears to matter only to the extent it directs the government where to file the tax lien. Moreover, any notice requirement would render litigation over competing liens highly complex. If federal tax liens were forced to yield every time a governmental department had notice of a prior unrecorded interest, the tax lien system would be hampered. The government does not elect to extend credit based upon the security available, but is an involuntary creditor. Accordingly, the Court finds that notice of a prior unrecorded interest is irrelevant to determining lien priority under the Internal Revenue Code.

As the preceding discussion indicates, the federal tax lien does take priority over the Bank's mortgage on the Cote La Mer property. Summary judgment on this question shall issue for the government.

II. Doctrines of Laches and Estoppel

The second issue raised in the briefs concerns the applicability of the equitable doctrines of laches and estoppel. In its brief, FOA contends that pursuant to the doctrine of laches, the Bank's interest in the Cote La Mer property should be given priority over the government's tax lien. FOA notes that the Alts owed their 1981 taxes for almost ten years before the IRS instituted any legal proceedings or made any effort to enforce the lien on the condominium. Had the Bank been on notice earlier of the IRS' interest, FOA argues, it would not have gone ahead with the initial loan in 1984 or the refinancing agreement in 1988. Further, the issue is only now before this Court because the Bank forced a sale of the disputed property and filed the present action. Given these circumstances, FOA contends, equity demands that the Bank's mortgage prevail over the federal tax lien.

As the government notes, however, the doctrine of laches may not be invoked against the United States when it seeks to enforce its rights. See United States v. Weintraub [80-1 USTC ¶9172 ], 613 F.2d 612, 618 (6th Cir. 1979). This well-established principle is "based upon the important public policy of preserving public rights and revenues from the negligence of public officers." Id. During oral argument, the Bank conceded that the doctrine of laches does not apply in this case.

Alternatively, FOA argues that the IRS should be estopped from claiming an interest in the property. But again, estoppel may not be invoked against the government, unless it is based upon an allegation of affirmative misconduct. See Federal Crop Ins. Corp. v. Merrill, 332 U.S. 380, 385, 68 S.Ct. 1, 3 (1947); Giles v. Carlin, 641 F.Supp. 629, 635 (E.D. Mich. 1986) (long-standing tradition that "estoppel may not be invoked against the government"); Tonkonogy v. United States [76-1 USTC ¶9447 ], 417 F.Supp. 78, 79 (S.D.N.Y. 1976) (estoppel may be invoked only where allegation of affirmative misconduct). The only "affirmative" action which the Bank alleges, however, occurred during the discovery phase of this litigation. Such conduct has no bearing on the real issue in this case: Whose interest in the property should prevail? Estoppel would only apply if FOA demonstrated that the government had taken an affirmative step which caused the Bank to loan money to the Alts in exchange for a mortgage in the Cote La Mer property or to refinance the loan later. No such allegation has been made. Discovery conduct is simply irrelevant to the estoppel question.

The equitable doctrines of laches and estoppel may not be invoked in these circumstances against the government. Accordingly, there is no dispute here meriting a trial. The IRS' motion for summary judgment shall be granted as to these issues.

III. Doctrine of Marshalling

FOA next contends in its brief that the IRS should be required to marshall the assets from previously seized property. Essentially, the Bank wants this Court to order the IRS to apply all previously seized assets to the 1981 tax liability, as that is the earliest tax deficiency. FOA argues that the government is refusing to do so, applying the assets to deficiencies in later years, in order to protect its interest in the Cote La Mer property.

Under §5374.2(d) of the Internal Revenue Manual, agents of the IRS are required to apply all proceeds from the sale of seized property toward the satisfaction of the earliest tax liability. The provision clearly requires the government to marshall assets. However, as the government notes, the Manual was developed solely to guide the internal admin istration of the IRS, and confers no legal rights on taxpayers or third parties. See United States v. Will [82-1 USTC ¶9216 ], 671 F.2d 963, 967 (6th Cir. 1982). Furthermore, there exists no "right of marshalling" against the United States . United States v. Eshelman [87-2 USTC ¶9419 ], 663 F.Supp. 285 (D. Del. 1987). A junior lienholder cannot compel the IRS to marshall its liens. In re Ackerman [70-1 USTC ¶9343 ], 424 F.2d 1148 (9th Cir. 1970); United States v. Herman [63-1 USTC ¶9135 ], 310 F.2d 846, 848 (2d Cir. 1962).

During oral argument, FOA conceded that the doctrine of marshalling is not applicable. Rather, the Bank requested that the Court invoke its "equitable powers" to require the IRS to apply the seized assets to the earliest tax liability. FOA provided the Court with no reason why it should exercise its powers in this fashion, however. Accordingly, the Court finds that the government shall prevail on this issue.

IV. Discovery Sanctions

The fourth issue raised in the briefs focuses on whether FOA is entitled to a default or attorney fees as a sanction against the government. Under Fed. R. Civ. P. 37(b)(2)(C), the Court may render a default against a party who fails to obey an order to provide or permit discovery. Alternatively, the Court may require a party against whom a discovery order is issued to pay the reasonable expenses, including attorney fees, of the party who sought the order. Fed. R. Civ. P. 37(a)(4). FOA claims entitlement to these sanctions due to the various discovery battles it has had with the IRS.

FOA served its first set of interrogatories and document requests on the IRS in October of 1992. The IRS refused to respond to fifteen of the 21 interrogatories and seven of the eight document requests on grounds of relevance. Magistrate Judge Scoville issued an order on January 25, 1993 , compelling the government to furnish supplemental answers. In the first set of supplemental answers which followed, the IRS claimed that the Alts had underreported their income from 1981 by more than 25%, and that a notice of deficiency had issued in the spring of 1986. Because the Alts had misrepresented their income by more than 25%, the government had six years from April 16, 1992 , the date of the 1981 filing, to issue notice, and thus the notice was timely. On March 31, 1993 , Judge Scoville issued another discovery order, requiring the IRS to provide details on the 25% claim. In its second set of supplemental answers, produced in response to the March discovery order, the government stated that it did not contend that the Alts had underreported their 1981 income by more than 25%. Instead, the IRS contended that notice had issued before April 15, 1985 , pulling it within the normal three-year period of limitations. The government also mentioned for the first time the Alts 1985-86 Tax Court proceeding.

FOA contends that these responses by the IRS constitute dilatory and obstructionist conduct, entitling the Bank to default under Rule 37. Default is an extreme sanction, and appears wholly unwarranted in this case. The evidence indicates that the IRS has complied with the discovery orders. The government explains its contradictory responses to FOA's interrogatories by stating that the file on the Alts was temporarily misplaced, resulting in incorrect information for a period of time. This contention is supported by the affidavit of attorney Alexandra Nicholaides.

Attorney fees and costs incurred in seeking the two discovery orders from Judge Scoville, however, may be warranted in this case. It does appear that the government refused to answer several requests and provided FOA with information that it did not fully verify. The Bank requests fees and costs in the amount of $5,916.34. This matter shall be referred to Magistrate Judge Scoville for further resolution.

V. Reimbursement for Insurance Coverage

The final issue presented in this case concerns the fire insurance coverage obtained by FOA on the Cote La Mer property. After the Alts neglected to obtain coverage on the condominium in 1991 as requested by the Bank, FOA independently obtained an insurance policy. FOA now seeks to recover the $717.18 in premiums it paid from the proceeds now in escrow with the Court. The IRS refuses to permit the Bank to recover these costs, claiming that the insurance policy was for the benefit of FOA alone, and not all creditors.

Neither party cites any law in support of their respective positions. It appears the government should prevail on this issue, as the policy never became the property of the taxpayer, and thus the tax lien never attached. Accordingly, if the property had been destroyed, only the Bank would have been entitled to the insurance proceeds. Thus, FOA is not entitled to reimbursement for the insurance costs. Summary judgment shall attach for the government.

CONCLUSION

In sum, FOA's motion for summary judgment shall be denied while the government's motion shall be granted. FOA's request for attorney fees and costs incurred in seeking the January 25, 1993 , and March 31, 1993 , discovery orders shall be referred to Magistrate Judge Joseph G. Scoville for disposition.

IT IS SO ORDERED.

¹ Previously, the government contended that the notice of deficiency was issued in the spring of 1986.

² The government does note that a Tax Court proceeding was commenced by the Alts in April of 1985, suggesting that notice was received prior to that petition. "The notice of deficiency is . . . the 'ticket' into the Tax Court that allows a taxpayer to challenge the tax assessment before paying it." Guthrie v. Sawyer [92-2 USTC ¶50,391 ], 970 F.2d 733, 735 (10th Cir. 1992). It thus seems likely that notice was received sometime in April of 1985 or before.

 

 

[88-1 USTC ¶9300] United States of America , Plaintiff v. Palmer-Smith Company, Defendant

U.S. District Court, East. Dist. Mich. , So. Div., Civ. 84-CV-73718-DT, 5/29/87, 679 FSupp 641

[Code Secs. 6321 and 6323 --Result unchanged by the Tax Reform Act of 1986 ]

Liens: Property subject to lien: Property rights of unrelated parties: State law.--Government tax liens for unpaid withholding taxes owed by a subcontractor never attached to funds withheld by a contractor from the subcontractor due to a breach of contract. The subcontractor did not have a property interest in funds retained by the contractor under one subcontract which were used to offset damages that arose from the breach of a second subcontract. In addition, under Michigan law, since there was an express contract, which covered the relationship between the contractor and subcontractor and explicitly made payment subject to "authorized deductions", the subcontractor did not have a right in quantum meruit for payment on work it had completed.

Carolyn Bell Harbin, Assistant United States Attorney, Detroit, Mich. 48226, Richard Todd Luoma, Department of Justice, Washington, D.C. 20530, for plaintiff. Raymond J. Sterling, Driggers, Schultz, Herbst & Paterson, P.C., 888 W. Big Beaver Rd., Troy, Mich. 48084, for defendant.

MEMORANDUM OPINION AND ORDER

COOK, JR., District Judge:

On August 9, 1984 , the United States brought suit against the Defendant, Palmer-Smith Company, for its failure to honor an Internal Revenue Service levy. In August of 1986, the Court allowed the Government to amend its Complaint and add a second cause of action (to wit, foreclosure of federal tax liens).

The issues were joined on September 23, 1986 when Palmer-Smith filed its answer. Shortly thereafter, both parties filed motions for summary judgment. Oral arguments were conducted on April 3, 1987 . The motion was taken under advisement because of the need for additional briefing. The matter is now before this Court for resolution.

I

Palmer-Smith is a Melvindale, Michigan general contract company which works within the commercial, industrial, and institutional construction industry. Kropf Mechanical Contractors, Inc. was utilized by Palmer-Smith as a subcontractor to perform mechanical work at the Epcot Center in Lake Buena Vista , Florida .

Palmer-Smith and Kropf entered into two subcontracts ¹ for mechanical work. During the existence of the two subcontracts, the Secretary of the Treasury made assessments against Kropf for unpaid withheld income and Federal Insurance Contributions Act (FICA) taxes which totalled $2,379,787.58. ² From 1982 to 1983, the Government filed a series of notices of federal tax lien regarding these liabilities.

Subsequent to the completion of the work on subcontract 8105-13, Palmer-Smith terminated the mechanical work on subcontract 8107-18 on March 9, 1983 . Palmer-Smith did so because it concluded that Kropf could not, and did not, fully perform its contractual obligation under this second subcontract. Palmer-Smith justified its decision on the basis of a provision within the second subcontract which allowed for the termination of the agreement at any time when Palmer-Smith believed that Kropf could not complete its obligations under Article 6 of the General Terms and Conditions of Subcontract 8107-18. ³

In defense against the claims of the Government, Palmer-Smith asserts that Kropf's failure caused it to hire other subcontractors to do the same work which resulted in an economic loss of $624,085. In an effort to recover a portion of its loss on the second subcontract, Palmer-Smith set off the sum of $95,850 against the balance due Kropf under the first subcontract 8105-13 on March 12, 1983 . This setoff was explicitly executed pursuant to Article 3, Paragraph E of the General Terms and Conditions of Subcontract 8105-13.

On March 16, 1983 , the Internal Revenue Service (IRS) served a notice of levy on Palmer-Smith with respect to the federal tax liabilities of Kropf. Approximately two weeks later ( March 30, 1983 ), the IRS served a final demand on Palmer-Smith regarding the notice of levy.

II

The principal statutory provisions in this cause are 26 U.S.C. §6321 and 6322 . 26 U.S.C. §6321 essentially provides that if a taxpayer neglects or refuses to pay a tax after a demand has been made upon him, the amount "shall be a lien in favor of the United States upon all property and rights to property, whether real or personal, belonging to such person." ⁴ 26 U.S.C. §6322 simply determines that a lien, which was imposed under 26 U.S.C. §6321 , arises at the time when the assessment is made.

The central question in this case is whether Palmer-Smith possessed any property in which Kropf had a right. According to the Sixth Circuit Court of Appeals, in United States v. Bank of Celina [83-2 USTC ¶9688 ], 721 F.2d 163, 169 (6th Cir. 1983), "state law controls the issue of whether property exists to which a tax lien may attach in the first instance." Kropf's right to payment (if any) is based upon its contractual relationship with Palmer-Smith. Thus, state contract law principles are determinative of any of Kropf's possible property rights that it may have possessed in the contested funds. The Government bears the burden of showing that Palmer-Smith had possession of the property of Kropf. Hall v. United States [66-2 USTC ¶9643 ], 258 F. Supp. 173, 174 (D. Miss. 1966).

Two provisions of the first subcontract (8105-13) are particularly important to the parties. Article 3(c) of the Subcontract General Terms and Conditions specifies:

(c) The final balance due the Subcontractor shall be payable thirty days, or such other period specified in the [contract documents,] after completion and acceptance of all the work required by the [contract documents] and of approval of the final estimate and receipt of final payment from the Owner; provided, however, that such final balance shall not be paid in any event until the Subcontractor has proved to the satisfaction of the Company that all labor, materials, equipment and services or any other obligation for which he is responsible, used in performance of or connected with this Subcontract, have been paid for in full, that there are no liens or claims, present or contingent, against the work, the Company or the Owner; and that the work has received the approval of the Architect Engineer and the Owner; provided, further that the final balance due shall be reduced by the amount of any backcharges or other amounts withheld under any provision of this Subcontract; provided, further, that in the event the Subcontractor shall engage in any bankruptcy, insolvency, or arrangement proceeding, voluntary or involuntary, the Company may withhold the final balance, or any other payments, until expiration of the period of any guarantees required of the Subcontractor and Company may use and apply out of such final balance the amount necessary to satisfy any claims or costs arising out of such guarantees. The Subcontractor shall have no property interest in, or right to, such payment, nor any other payment hereunder until received by him.

(Emphasis added). On its face, this last sentence, which has been underlined, appears to indicate that Kropf had no claim to the monies that are held by Palmer-Smith.

Article 3(e) of Subcontract 8105-13 reads:

(e) The Company may withhold any or all amounts otherwise due under this Subcontract at any time the Company shall deem it necessary to protect itself against claims, damages, losses or expenses from any of the following causes defective work not remedied: claims filed, or reasonably anticipated, against the Company, the Owner or the real estate and/or improvements involved in the work, failure by the Subcontractor to promptly pay without reasonable justification the labor, material, equipment, services and subcontractors used in the performance of the work; reasonable doubt that the work can be completed for the unpaid balance of the contract sum, or within the period called for by any schedule of progress; failure to perform the work in strict compliance with the Subcontract in a manner acceptable to the Architect/Engineer, the Owner and the Company, damages to, or claims by or against the Company (whether presently determined or reasonably anticipated) in any way arising out of this or any other Subcontract agreement between the company and the Subcontractor, or out of any act or omission by the Subcontractor causing damage to the Company, and the Company may apply any such amounts so withheld to the satisfaction of any such claims, damages, losses or expenses, and any such amounts so applied shall be deemed payments made on the contract price, and, provided, further, that Subcontractor shall have no property interest in, or right to, such amounts so withheld.

(Emphasis added). The affidavit of Rob ert Birdsall, controller of Palmer-Smith, indicates that the $95,850.00 at issue was withheld pursuant to this subcontract provision shortly after Kropf's mechanical work activity had been terminated.

In its Motion for Summary Judgment, Palmer-Smith initially argues that the primary rule of construction under Michigan contract law is to determine the intent of the contracting parties. Amoco Oil Company v. Kraft, 89 Mich. App. 270, 273 (1979). Clear and unambiguous language should be given its plain meaning. Geerdes v. St. Paul Insurance Co., 128 Mich. App. 730, 733-34 (1983). Palmer-Smith asserts that an application of these rules to the subcontracts shows that Kropf never had a property interest in the amount withheld.

Moreover, Palmer-Smith notes that Article 3(e) within the two subcontracts provide that the "Subcontractor shall have no property interest in, or right to, such amounts so withheld." Palmer-Smith also relies upon Article 3(c) within the two subcontracts which read:

The Subcontractor shall have no property interest in, or right to, such payment, nor any other payment hereunder until received by him.

Palmer-Smith next argues that when the Government has a federal tax lien, it is deemed to stand in the taxpayer's shoes and can only recover what the taxpayer could get in a direct action against Palmer-Smith. United States v. Varani [86-1 USTC ¶9191 ], 780 F.2d 1296, 1304 (6th Cir. 1986). Palmer-Smith then concludes:

If Kropf sued Defendant to recover the withheld $95,850.00 on subcontract 8105-13, under Michigan contract law, Defendant would first be entitled to deduct its entire $624,085.00 loss from subcontract 8107-18. Since the loss on subcontract 8107-18 greatly exceeded the withheld amount on subcontract 8105-13, Kropf would recover zero in a direct action. In short, under Michigan contract law, Defendant did not hold any of Kropf's property or rights to property subject to attachment.

Defendant's Brief at 5-6.

In their Supplemental Brief, Defendant asserts that this case is virtually identical to Atlantic Refining Co. v. Continental Casualty Co. [60-1 USTC ¶9413 ], 183 F. Supp. 478 (W.D. Pa. 1960), where the court sought to determine whether a construction contractor had a property interest in "retainage" that had been held by a building owner pursuant to a construction contract. The court held that the contractor, who (a) failed to pay the laborers, (b) breached his contractual obligations to the owner, and (c) authorized the owner to withhold the consideration, was without any right to the money that had been retained and withheld by the treasurer. Since the court concluded that the contractor had no property right to those monies which had been withheld by the owner, it was determined that the Government lien never attached on the owner.

Although there are similarities between Atlantic Refining and the instant cause, there are significant dissimilarities. Here, there is evidence to suggest that (1) Kropf fully performed all of its obligations under the first subcontract, and (2) the monies, which were ostensibly earned by Kropf under the first subcontract, were retained by Palmer-Smith to pay for those damages which arose from the breach of the second subcontract. The Government asserts that Palmer-Smith has created a situation whereby it is simply using a sophisticated "collection device" to set off the debt on the second subcontract against the monies owed to Kropf under the first subcontract. Thus, according to the Government, its lien follows along with any transfers of Kropf's property. United States v. Bank of Celina [83-2 USTC ¶9688 ], 721 F.2d 163, 169 (6th Cir. 1983). Moreover, the Government argues that Article 3(c) does not mean what it says, in that a literal interpretation of the provision would render the contract without consideration because Kropf could never enforce its right to be paid. Even assuming that the Government is correct in asserting that the last sentence of Article 3(c) must essentially be nullified, this Court believes that the Government's liens did not attach. ⁵

The Government submits that the controlling contract provision is actually Paragraph 4 of the contract which says that Palmer-Smith:

agrees to pay subcontractor (the taxpayer) for the satisfactory performance of this subcontract the firm lump sum amount of: ONE MILLION, THREE HUNDRED EIGHTY THOUSAND AND 00/100 DOLLARS subject to written authorized additions or deductions from such amount.

The Government says this provision makes clear that Kropf had a property interest in the funds from the first subcontract on the basis of its satisfactory performance of that subcontract.

Notwithstanding this contention, Paragraph 4 of the subcontract does not simply say that Kropf is entitled to this money upon satisfactory performance. It says that payment is "subject to written authorized additions or deductions from such amount." Palmer-Smith's Exhibit D consists of the written change in Kropf's subcontract which embodies the deduction of the $95,850. Thus, the key paragraph, which has been relied upon by the Government, actually makes clear that Kropf had no right to the contested money until such deductions or additions were made.

The Government asserts that Exhibit D is not a proper authorization form because it was unsigned by Kropf. Although the Government is correct in noting that the authorization form was not signed by Kropf, there is no evidence of any requirement that Kropf approved the withholding of the funds. In fact, the withholding was done pursuant to Article 3(e) which specifically says that "[t]he Company may withhold . . ." and makes no mention of a requirement that Kropf must execute the document (i.e., authorization form). It would be anomalous if a clause, which was designed for Palmer-Smith's protection from potentially detrimental actions of Kropf, was dependent on Kropf's approval. In addition, the Government has no standing to object to the method of withholding since it was not a party to the contract.

Assuming that Kropf did satisfactorily perform its obligation under the first subcontract, ⁶ and ignoring Article 3(c), the provision which has been relied upon by the Government makes clear that any right to payment of Kropf is conditional or "subject to" other deductions. At best, Kropf had a potential right to payment at a later date after all of the proper and necessary deductions under Article 3(e) were made. Since Kropf had no property interest, the Government has no lien at the present time. Paragraph 4 is also significant because it shows that Kropf did not even have a property interest before Palmer-Smith formally withheld the money.

Although the contract clauses at issue here are not a part of a typical agreement, they still allow money to be retained by Palmer-Smith for certain purposes. There is no reason why the money, which has been retained pursuant to one subcontract, cannot be set off against debts of another subcontract when there is a contractual provision allowing such an action. Thus, this is not simply a kind of set off for collection purposes, as alleged by the Government. Instead, Palmer-Smith never owed the money to Kropf because its contract clearly allowed it to deduct the funds from the first subcontract.

In United States v. Bess [58-2 USTC ¶9595 ], 357 U.S. 51 (1958), Justice Brennan said of a federal tax lien that:

It would be anomolous to view as "property" subject to lien proceeds never within the insured's reach to enjoy . . .

Id. at 55-56. He, therefore, concluded that the Government had no right to those insurance proceeds which could not have been obtained until the beneficiary's death. Here, the Government seeks funds that were never within Kropf's reach because they were always "subject to" reasonable deductions.

Palmer-Smith is correct when it asserts that this case is similar to Pittsburgh National Bank v. United States [81-2 USTC ¶9626 ], 657 F.2d 36 (3d Cir. 1981), in which the court held that a government lien did not attach when the bank exercised its set off right prior to the placement of the lien. This case is even stronger than Pittsburgh , in which the depositor had some right to control the funds prior to the set off. Here, Paragraph 4 and other provisions within the subcontracts make clear that Kropf was never entitled to control this balance. The fact that the disputed fund was deducted from a balance does not mean that Kropf was entitled to receive the funds. The deduction only meant that the fund consisted of money which may be owed to Kropf at a later date. The case of United States v. Bank of Celina [83-2 USTC ¶9688 ], 721 F.2d 163 (6th Cir. 1983) is distinguishable because the bank had maintained the property of the depositor subject to his right of withdrawal when the lien was filed. Here, Palmer-Smith never possessed Kropf's property.

Finally, the Government argues that, at a minimum, Kropf had a right in quantum meruit for payment on the work that it had completed. This position is incorrect, in that Michigan law forbids a quantum meruit recovery where an express contract already covers the subject matter. See Boughton v. Boughton's Estate, 111 Mich. 27-28 (1896); Superior Ambulance Service v. Lincoln Park, 19 Mich. App. 655, 663 (1969) ("there can be no recovery in quantum meruit upon an implied contract where an alleged express contract, in substance, covers the same subject matter"). Here, the express contract explicitly made payment subject to "authorized deductions." Kropf had no matured right to quantum meruit recovery because any such right was contingent on the deductions. The Government concedes that there is an express contract which covers the relationship between Palmer-Smith and the taxpayer. Hence, the quantum meruit argument must be rejected. The Government liens never attached.

Accordingly, Palmer-Smith is clearly entitled to judgment as a matter of law for the reasons which have been set forth in this Opinion.

IT IS SO ORDERED.

JUDGMENT

On this date, the Court entered a Memorandum Opinion and Order which concluded that the Government's Motion for Summary Judgment should be denied, and the Defendant's Motion for Summary Judgment should be granted.

Accordingly, a judgment shall be entered in favor of the Defendant, Palmer-Smith Company, and against the Plaintiff, United States of America .

                 Date of

  Taxable    Assessment and                             Unpaid           Date Notice

Period Ended Notice & Demand Amount of Assessment Assessed Balance * of Tax Lien Filed **

   9/30/81       12/21/81       $83,086.09(T)

                                 11,433.84(P)       $   131,827.10           
6/7/82

                                 37,307.17(I)

  12/31/81        3/30/82       474,044.11(T)

                                 21,863.66(P)           576,498.79          
7/28/82

                                 80,591.02(I)

   3/31/82        6/28/82       543,139.58(T)

                                 50,181.94(P)           679,049.24           
9/7/82

                                 85,727.72(I)

   6/30/82        9/27/82       207,659.42(T)

                                 8,815.48(P)            246,115.85         
12/10/82

                                 29,640.95(I)

   9/30/82       12/20/82       683,907.98(T)

                                 23,886.29(P)           746,296.60          
3/16/83

                                 38,502.33(I)

                                                  ------------------

                                 TOTAL:             $ 2,379,787.58

 

 *  Plus accrued interest and penalties as allowed by law.

    Notice of Federal Tax Liens filed with the Register of Deeds, Wayne

**  

County
, 
Michigan

.

(T) Denotes tax assessed.

(P) Denotes penalty assessed.

(I) Denotes interest assessed.

 

¹ Subcontract 8105-13, which was signed on November 30, 1981 , required Kropf to perform mechanical work for a lump sum amount of $1,380,000.00. Defendant's Exhibit B. Subcontract 8107-18, which was executed on January 4, 1982 , obliged Kropf to do additional mechanical work for a lump sum amount of $3,222,200.00. Defendant's Exhibit C. Both contracts were identical except for amounts and descriptions of the construction work to be performed by Kropf.

² Footnote 2 chart may be found at the end of the case.

³ Article 6 reads:

The subcontractor shall do the work with promptness and diligence in strict compliance with this Subcontract and pursuant to any directions of the Company or its Superintendent. If, in the opinion of the Company, the Subcontractor shall fail to perform the work in strict compliance with this Subcontract, or in any manner breach this Subcontract or engage in any bankruptcy, insolvency or arrangement proceeding, whether voluntary or involuntary, or upon cancellation for any reason of the Company's contract, or upon the occurrence of any disaster, act of any governmental body or other event, occurrence, or condition beyond the control of the Company, making, or tending to make performance of the work impractical or impossible, then the Company may, without relinquishing any other remedies it may have:

(a) Take over and enter on and perform, correct, repair or redo the work or hire others to do so, and to use in connection therewith all tools, machinery, equipment, materials, and subcontracts of the Subcontractor; and, to continue such performance for so long as it may deem necessary, and to charge to the Subcontractor all expense and damages the Company may incur in connection with the performance, correction, repair or redoing by it of such work or the work of other subcontractors which has been injured or altered by such performance, correction, repair or redoing of the work, even though the same may exceed the Subcontract amount, or

(b) Terminate and cancel the Subcontract by written notice to the Subcontractor, and it is agreed that in the event of such a cancellation and termination, that the Subcontractor shall receive as full payment for the portion of the work completely performed in full compliance with this Subcontract, as determined by the Company, the progress payments actually paid to the Subcontractor at the date of termination plus that percentage of the progress accrued payments retained by the Company less the amount of damages, as determined by the Company, of any nature arising out of or connected with a breach of this Subcontract.

⁴ 26 U.S.C. §6321 reads:

If any person is liable to pay any tax neglects or refuses to pay the same after demand, the amount (including any interest, additional amount, addition to tax, or assessable penalty, together with any costs that may accrue in addition thereto) shall be a lien in favor of the United States upon all property and rights to property, whether real or personal, belonging to such person.

⁵ The court notes that where possible, courts are to construe a contract so as not to nullify a clause. See e.g. Domes v. Holland , 147 Mich. App. 550, 558 (1985); DeBoer v. Geib, 255 Mich. 542, 544 (1931). Thus, there is a strong presumption against the Government's interpretation which essentially results in the neutralizing of the last sentence of Article 3(c). As a result, this sentence can be seen at a minimum as expressing the parties' intentions that Palmer-Smith maintain the sole interest in the retained fund until all the time periods and obligations which were outlined in Article 3(c) were satisfied. Only then was Kropf entitled to payment. Given this intention, Kropf never had a right to the fund. Thus, the Government lien did not attach. However, this Court believes that Palmer-Smith should prevail even if the Government's view of Article 3(c) is adopted.

⁶ Palmer-Smith has not conceded that it would have paid the disputed amount to Kropf but for this one deduction. The parties agree that Michigan contract law applies in this case. However, the result would be no different under Florida law.

 

 

[71-1 USTC ¶9351]In the Matter of Rob ert Couturier, Bankrupt

U. S. District Court, West. Dist. Mich. , So. Div., No. 33,925 B, 4/23/71

[Code Secs. 6323 and 6331--Result unchanged by '69 Tax Reform Act]

Tax liens: Priority: Garnishment liens: Administration expenses.--A Federal tax lien had priority over garnishment liens issued by a state court. The Federal lien was recorded after the date of the garnishment but prior to the date when the garnishors obtained judgment. Moreover, by filing the lien and serving the notice of levy on the bankrupt's debtor prior to bankruptcy, the Government took possession of the account receivable, so its claim was not subordinated to payment by the trustee of admin istration expenses and wage claims.

Rosemary Scott, Building & Loan Bldg., Grand Rapids , Mich. , for trustee. John Milanowski, United States District Attorney, Grand Rapids, Mich., for U. S. Henry Blakely, 404 McKay Tower, Grand Rapids, Mich., for bankrupt.

Opinion re Summary Jurisdiction of Bankruptcy Court Priority of Federal Tax Lien, Garnishment Liens and Claim of Trustee to Account

Receivable

BENSON, Referee:

The trustee has filed a petition for the turnover of $925.00 owed to the bankrupt by Tassell Industries, Inc. and also claimed by the United States of America for the Internal Revenue Service. After some difficulty the following facts were stipulated or appears from the record in this proceeding:

April 2, 1970 Internal Revenue Service filed Tax Lien Notice with Kent County Register of Deeds.

June 12, 1970 Bankrupt's work for Tassell Industries, Inc. was completed giving rise to an undisputed account receivable for $925.00 in favor of the bankrupt.

June 18, 1970 Writ of Garnishment issued by a State Court served upon Tassell Industries, Inc. in behalf of Rocks Ready Mix, one of the creditors of the bankrupt.

June 22, 1970 Notice of Levy by Internal Revenue Service for $5,449.00 was served upon Tassell Industries, Inc.

June 24, 1970 Writ of Garnishment issued by a State Court served upon Tassell Industries, Inc. in behalf of Simmons Roofing Co. a creditor of the bankrupt.

June 29, 1970 The bankrupt filed his voluntary petition in bankruptcy.

July 17, 1970 Tassell Industries, Inc. filed its disclosure as garnishment defendant in the State Court proceedings commenced by Rocks Ready Mix and Simmons Roofing Company.

Tassell Industries, Inc. admit owing $925.00 but has not paid anyone because of the conflicting claims to said account receivable.

The claims of Rocks Ready Mix and Simmons Roofing Company were not reduced to judgment in the State Court Proceedings and their attorney concedes that the garnishment liens were invalid as to the trustee.

The Internal Revenue Service contends that this Court does not have jurisdiction to decide the controversy because the account receivable was not in the possession and control of the bankrupt at the time of the filing of the petition in bankruptcy.

The First Meeting of Creditors was held July 23, 1970 and the time for filing claims expired January 23, 1971 . No claim of the United States was filed until January 29, 1971 at which time this Court received such claim #18 for $6,162.27 with a transmittal letter stating that the proof of claim had previously been sent to Detroit in Eastern District of Michigan, Southern Division, in error.

Tassell Industries, Inc., the bankrupt's obligor, has made no objection to this Court's jurisdiction and has consented to this Court's jurisdiction by stating that it will pay the person determined to be the owner of the account receivable so that it would only have to pay the claim once.

Courts Determination of Facts and Law

Who had possession or control of the $925.00 account receivable owed by Tassell Industries, Inc. at the data of bankruptcy on June 29, 1970 ?

[Jurisdiction]

If the bankrupt had possession or control of such account receivable at that time, or if the parties consent to jurisdiction, the Bankruptcy Court has jurisdiction to determine the issues raised here, Thompson v. Magnolia Petroleum Company, 309 U. S. 478 at p. 481, Industries, Inc. at the date of bankruptcy jurisdiction to adjudicate controversies over which they have actual or constructive possession. And the test of this jurisdiction is not title in but possession of the bankrupt at the time of the filing of the petition in bankrupt."

The filing of a proof of claim constitutes a consent to the Bankruptcy Courts summary jurisdiction to determine the validity of the claim and all defenses thereto. Katchen v. Landy, 382 U. S. 323 (1966).

The fact that the claim itself is tardily filed and only payable under Section 57n out of surplus funds remaining after payment of timely filed claims does not change the effect of the filing of the claim as a consent to jurisdiction.

The proof of claim must be received by the Bankruptcy Court within the six months period for filing claims. In Re Beatie, 102 FS. 107 (W. D. Mich. 1951).

On the basis of the record and Katchen v. Landy (supra), the Bankruptcy Court has the right to determine the controversy and the priorities of the claimants in the bankruptcy proceedings.

Tassell Industries, Inc., the bankrupt's oligor, is not an adverse claimant and consents to this Court's jurisdiction to determine the controversy. The account is not in dispute and Tassell Industries, Inc. holds the account receivable for the bankrupt and the bankrupt's trustee subject to any valid liens thereon.

[The Law]

The United States of America cites the following statutes in support of its position concerning the perfection of its tax lien prior to bankruptcy.

Internal Revenue Code of 1954

"Section 6321 (26 U. S. C. §6321)--LIEN FOR TAXES. If any person liable to pay any tax neglects or refuses to pay the same after demand, the amount (including any interest, additional amount, addition to tax or assessable penalty, together with any costs that may accrue in addition thereto) shall be a lien in favor of the United States upon all property and rights to property, whether real or personal, belonging to such person.

"Section 6322 (26 U. S. C. §6322)--PERIOD OF LIEN. Unless another date is specifically fixed by law, the lien imposed by section 6321 shall arise at the time the assessment is made and shall continue until the liability for the amount so assessed (or a judgment against the taxpayer arising out of such liability) is satisfied or becomes unenforceable by reason of lapse of time.

"Section 6323 (26 U. S. C. §6323)--VALIDITY AND PRIORITY AGAINST CERTAIN PERSONS. (a) Purchasers, Holders of Security Interests, Mechanic's Lienors, and Judgment Lien Creditors. The lien imposed by section 6321 shall not be valid as against any purchaser, holder of a security interest, mechanic's lienor, or judgment lien creditor until notice thereof which meets the requirements of subsection (f) has been filed by the Secretary or his delegate.

* * *

"(f) Place for Filing Notice; Form.--

"(1) Place for Filing.--The notice referred to in subsection (a) shall be filed--

"(A) Under State Laws.--

* * *

"(ii) Personal Property.--In the case of personal property, whether tangible or intangible in one office within the State (or the county, or other governmental subdivision), as designated by the laws of such State, in which the property subject to the lien is situated; or * * *

"Section 6331 (26 U. S. C. §6331)--LEVY AND DISTRAINT. (a) Authority of Secretary or Delegate.--If any person liable to pay any tax neglects or refuses to pay the same within 10 days after notice and demand, it shall be lawful for the Secretary or his delegate to collect such tax (and such further sum as shall be sufficient to cover the expenses of the levy) by levy upon all property and rights to property (except such property as is exempt under section 6334) belonging to such person or on which there is a lien provided in this chapter for the payment of such tax. * * *

"(b) Seizure and Sale of Property.--The term 'levy' as used in this title includes the power of distraint and seizure by any means. A levy shall extend only to property possessed and obligations existing at the time thereof. In any case in which the Secretary or his delegate may levy upon property or rights to property, he may seize and sell such property or rights to property (whether real or personal, tangible or intangible).

Bankruptcy Act"

"Section 67(a) 5(b) (11 U. S. C. §107) The provisions of section 60 (11 U. S. C. 96) of this Act to the contrary notwithstanding and except as otherwise provided in subdivision c of this section, * * * statutory liens for taxes and debts owing to the United States * * * may be valid against the trustee, even though arising or perfected while the debtor is insolvent and within four months prior to the filing of the petition initiating a proceeding under this Act by or against him.

"c. (1) The following liens shall be invalid against the trustee:

"(A) every statutory lien which first becomes effective upon the insolvency of the debtor, or upon distribution or liquidation of his property, or upon execution against his property levied at the instance of one other than the lienor;

"(B) every statutory lien which is not perfected or enforceable at the date of bankruptcy against one acquiring the rights of a bona fide purchaser from the debtor on that date, whether or not such purchaser exists: * * *

* * *

"(3) Every tax lien on personal property not accompanied by possession shall be postponed in payment to the debts specified in clauses (1) and (2) of subdivision a of section 64 of this Act. * * *

Michigan Statutes Annotated"

"Section 7.753 (12) Notices of liens; place for recording and filing. (a) * * *

"(b) Notices of liens upon personal property, whether tangible or intangible, for taxes payable to the United States and certificates and notices affecting the liens shall be filed as follows:

"(1) If the person against whose interest the tax lien applies is a corporation or a partnership whose principal executive office is in this state, as these entities are defined in the internal revenue laws of the United States, in the office of the secretary of state.

"(2) In all other cases in the office of the register of deeds of the county where the taxpayer resides at the time of filing of the notice of lien."

Under Section 67(a)(5)(b) supra, the four months period preceding bankruptcy and the insolvency of the debtor are not relevant issues in this case.

Although the Stipulation of Facts recognizes that the garnishment liens are invalid as to the trustee it is urged in behalf of the trustee that the trustee has a claim to the account receivable superior to the claim of the United States .

[Priority Over Garnishment Lien]

United States v. Liverpool et al. [55-1 USTC ¶9136] 348 U. S. 215 (1955), determined that tax liens of the United States were entitled to priority over a Texas garnishment lien where federal tax liens were recorded after the date of the garnishment lien but prior to the date when the garnishment obtained judgment.

To some effect see U. S. v. Acri [55-1 USTC ¶9138] 348 U. S. 211 and U. S. v. Security Trust Co. [50-2 USTC ¶9492] 340 U. S. 47.

The trustee contends that as the above cases were prior to the 1966 amendment to Section 67 of the Bankruptcy Act. While the basis for the trustee's position is not clear, this Court assumes that the trustee contends that because a garnishment lien is an inchoate lien from the date of service of the garnishment writ and despite the admission that such garnishment liens are invalid as to the trustee, that the garnishment liens so invalidated by the trustee should be preserved for the benefit of the estate under Section 67c(2) providing:

"The Court may, on due notice, order any of the aforesaid liens invalidated against the trustee to be preserved for the benefit of the estate and in that event the lien shall pass to the trustee. A lien not preserved for the benefit of the estate, but invalidated against the trustee, shall be invalid as against all liens indefeasible in bankruptcy, so as to have the effect of promoting liens indefeasible in bankruptcy which would otherwise be subordinate to such invalid lien, . . .."

[Priority Over Trustee]

The garnishment liens are invalid as to the trustee, no action has been taken to preserve such liens for the estate and the trustee's contention is that the government's lien is not an indefeasible lien is not justified under the facts and law of this case.

Where notice of tax lien is filed as required by law and notice of levy is served upon a debtor of the bankrupt prior to bankruptcy, the account receivable is in "possession" of the government so as to prevent trustee from subordination of government's tax lien claim to admin istration expenses and wage claims as permitted by Section 67a 3.

In re San Fernando Valley Restaurants, Inc. [65-1 USTC ¶9138] 236 F. Supp. 777.

U. S. v. Eiland [55-1 USTC ¶9487] 223 F. 2d 118.

Freeman v. Mayer [58-1 USTC ¶9351] 253 F. ,2d 295. F. 2d 295. 300 F. 2d 843.

Division of Labor Law Enforcement v. U. S. [62-1 USTC ¶9389] 301 F. 2d 82.

The government on the facts and law in this case had "possession" of the $925.00 account receivable held by Tassell Industries, Inc. prior to bankruptcy and while this Court has the right to determine such controversy because of the consent thereto resuling from its filing a proof of claim, the trustee has no right to such account receivable and the tax claim is not subordinated to payment of admin istration expenses and wage claims.

The Court Makes the Following Conclusions of Law

1. This Bankruptcy Court has jurisdiction to determine the controversy as to the ownership of the $925.00 account receivable owed by Tassell Industries, Inc. to the bankrupt.

2. Rocks Ready Mix and Simmons Roofing Company have no valid claim to the $925.00 account receivable owed by Tassell Industries, Inc. to the bankrupt, Rob ert Couturier.

3. The United States of America had possession of the $925.00 account receivable owed by Tassell Industries, Inc. to Rob ert Couturier, prior to the commencement of these bankruptcy proceedings, the trustee is not entitled to receive said account receivable and the United States of America's right to receive such account receivable is not subject to subordination to payment of bankruptcy admin istration expenses and wage claims.

4. The claim #18 for $6,162.27 of the United States of America filed with this Court on January 29, 1971 is a tardy claim and is disallowed as a timely filed claim and may be paid by the trustee only after timely filed claims have been paid in full.

5. Tassell Industries, Inc. may pay to the United States of America the sum it owes to Rob ert Couturier, in fulfillment and release of any liability to this estate, its trustee, Rocks Ready Mix, Inc. and Simmons Roofing Company.

An Order may be entered pursuant to this opinion.

 

 

[66-1 USTC ¶9106]W. Biddle Walker d.b.a. W. Biddle Walker Co., Plaintiff-Appellant, Paramount Engineering Company, a Michigan Corporation, Garnishee Defendant-Appellee, and The United States of America , Party Defendant-Appellee

(CA-6), U. S. Court of Appeals, 6th Circuit, No. 16033, 353 F2d 445, 12/2/65, Affirming an unreported District Court decision

[1954 Code Sec. 6323]

Lien for taxes: Garnishment: Property.--The garnishment by a creditor of a taxpayer against a debtor of the taxpayer was inferior to the Government's tax lien since the amount of the debt garnished was not determined until after the tax lien had been filed.

Allan Neef, Darden, Neef & Heitsch, 3066 Penobscot Bldg., Detroit, Mich., for plaintiff-appellant. Howell Van Auken, Donald J. Miller, Lucking, Van Auken & Miller, 1603 Ford Bldg., Detroit, Mich., for garnishee defendant-appellee. Marco S. Sonnenschein, Louis F. Oberdorfer, Assistant Attorney General, Lee A. Jackson, Joseph Kovner, Department of Justice, Washington, D. C. 20530, Lawrence Gubow, United States Attorney, John Shepherd, Assistant United States Attorney, 803 Federal Bldg., Detroit, Mich., for defendant-appellee.

Before WEICK, Chief Judge, MILLER, ^* Circuit Judge, and MCALLISTER, Senior Circuit Judge.

WEICK, Chief Judge:

This case involves questions of priority of federal income tax liens over a state garnishment lien. The facts were stipulated in the District Court. A motion for summary judgment in favor of the United States was granted, from which this appeal was taken.

The claim of appellant, W. Biddle Walker, against Navratil Construction Co. was for money due and owing on an open account for building materials sold and delivered. Navratil had contracted with appellee, Paramount Engineering Co., to construct a building for Paramount . Construction was started under the contract. On March 9, 1961 Walker instituted action in the Wayne County Circuit Court, Michigan, against Navratil for the amount due on the open account, and on May 26, 1961 caused a writ of garnishment to be served on Paramount to subject the money which he asserted was owed to Navratil under the construction contract, to the payment of his claim. Paramount filed disclosures indicating that it was indebted to Navratil for the construction work, but that the amount was not definitely fixed and determined, and further that Navratil had not furnished a sworn statement required under Michigan Mechanics Lien Law stating the name and number of subcontractors and the amount due each. The record discloses that Navratil discontinued the work and never completed the contract.

Prior to the suit and garnishment, namely, on July 1, 1960 , the Government assessed a $17,075.50 tax deficiency against Navratil for 1959 income taxes. Notice of the tax lien for this deficiency was filed and recorded with the Register of Deeds of Wayne County, Michigan, on December 30, 1960 . On June 2, 1961 judgment was entered in the Wayne County Circuit Court in favor of Walker against Navratil for $21,982.07.

Thereafter, on June 23, 1961 , the Government assessed a $1,491.34 tax deficiency against Navratil for 1960 income taxes, and filed a second lien for the 1959 tax deficiency of $17,075.50 in Oakland County , Michigan on July 7, 1961 . Liens for the 1960 tax deficiency were filed in Oakland and Wayne Counties on September 11 and September 12, 1961 , respectively.

Some time between October 9, 1961 and November 6, 1961 Paramount and Navratil agreed on $22,939.33 as the unpaid balance due for work performed under the construction contract. After receiving notice of the tax levy against Navratil and demand for payment, Paramount on November 6, 1961 paid $19,869.89 jointly to Navratil and the United States in satisfaction of existing income tax assessments, which money went into the United States Treasury.

On September 13, 1962 appellant moved for judgment in the Michigan Circuit Court against Paramount as garnishee, and on October 11, 1962 the United States was interpleaded. The United States removed the case to the United States District Court, which decided that both tax liens were superior to the garnishment.

We will first take up the tax lien arising from the assessment for 1959 income taxes which appellant contends is inferior to his lien. Under section 6323 of the Internal Revenue Code of 1954 a federal tax lien is not valid as against a judgment creditor until notice of such lien is filed in the "office designated by the law of the State or Territory in which the property subject to the lien is situated . . ." 26 U. S. C. §6323. Navratil resided in Wayne County, Michigan, and Paramount in Oakland County .

[Situs of Debt]

Appellant claims that the filing of the tax lien in Wayne County prior to appellant's garnishment and judgment did not give it priority since it was filed in the wrong county. Appellant's position is that the situs of the debt under Michigan law is Oakland County where Paramount resided.

Appellant further contends that the federal courts must look to the state law to determine the situs of a debt. As pointed out in United States v. Webster Record Corp. [62-2 USTC ¶9670], 208 F. Supp. 412 (S. D. N. Y. 1962), federal law determines the situs of property for purposes of section 6323. This is necessarily so because questions which bear on the enforcement of federal tax liens are determined by federal law. United States v. Pioneer American Insur. Co. [63-2 USTC ¶9532], 374 U. S. 84 (1963).

Webster Record involved bank deposits located in a bank in New York and owned by a depositor residing in Massachusetts . The tax lien was filed in Massachusetts . The court rejected the judgment creditor's claim that under state law the situs of a debt was the location of the bank, and held that the general federal rule was that the situs of intangible property was the domicile of the owner. See e.g., Grand Prairie State Bank v. United States [53-2 USTC ¶9481], 206 F. 2d 217 (5th Cir. 1953); United States v. Ullman [60-1 USTC ¶9143], 179 F. Supp. 373 (E. D. Pa. 1959); 9 Mertens, Law of Federal Income Taxation, §54.42 (1965 Supp.). Since a bank deposit is no more than a debtor-creditor relationship that case is factually similar to the instant case. The proper place for filing the tax lien was the county wherein Navratil resided, which was done here. The result would be the same under Michigan law. In re Rapoport's Estate, 317 Mich. 291, 26 N. W. 2d 777 (1947); In re Dodge Brothers, 241 Mich. 665, 217 N. W. 777 (1928).

Appellant next contends that Paramount was liable to it for wrongfully paying $19,869.89 to Navratil and the United States jointly, as Paramount had been served with a writ of garnishment and could pay out only under court direction. Although a garnishee who pays the indebtedness to the principal debtor or a third person does so at his own risk, he is liable only for payment after service of garnishment where the garnishor has acquired a right to the indebtedness by his garnishment. See generally, 38 C. J. S. "Garnishment" §186(a) (1943), and cases cited therein.

In addition, although he does so at his own risk, a garnishee may discharge prior liens on the garnished property, especially where it is necessary to protect himself. See 6 Am. Jur. 2d "Attachment and Garnishment" §515 (1963), and cases cited.

Here Paramount paid the debt to Navratil and the United States jointly in order for Navratil to satisfy his tax debt. Liability does not attach where the garnishee pays the debt to discharge a lien superior to the garnishment lien. United Collieries Inc. v. Martin, 248 Ky. 808, 60 S. W. 2d 125 (1933). See also 89 A. L. R. 971 discussing Martin and other cases. Not only did Paramount pay to a superior lien, but appellant had no right to the money paid, as its garnishment was inferior to the Government's tax lien.

[Second Tax Lien]

This brings us to consideration of the tax lien filed for the 1960 income taxes. Although the Government's lien was not filed until September 11, 1961 in Oakland County and September 12, 1961 in Wayne County, which was subsequent to the appellant's garnishment and judgment, the District Court found that the garnishment lien was not effective under Michigan law because nothing was due on the construction contract until completion of the building, and further, because Navratil had not furnished the sworn statement required under Michigan law.

Appellant contends that the garnishment lien was effective because the sums earned on the executed portion of the contract were subject to the garnishment even though performance of the entire contract was not completed, and because failure to furnish the sworn statement did not affect the fact of indebtedness, but only the time of payment.

Section 6321 of the Internal Revenue Code of 1954 provides for a general lien in favor of the Government for failure to pay income taxes. 26 U. S. C. §6321. As before stated, although the lien arises upon assessment of the taxes, it is not good against a judgment creditor until notice of the lien has been filed in the appropriate state office. 26 U. S. C. §§ 6322, 6323. The priority of a federal tax lien over a state created lien is governed by the rule, "the first in time is the first in right." United States v. New Britain [54-1 USTC ¶9191], 347 U. S. 81, 85-86 (1954). However, before the state created lien can even begin the race to file it must be so far specific and perfected that it constitutes a choate lien. United States v. Pioneer American Insur. Co. [63-2 USTC ¶9532], 374 U. S. 84 (1963).

This is to be determined by federal law and although a state determination of a lien is subject to re-examination by the federal courts, a state determination that a lien is not choate is all but conclusive. United States v. Security Trust & Savings Bank [50-2 USTC ¶9492], 340 U. S. 47 (1950).

The Supreme Court has laid down the test to determine the choateness of a state created lien. That test is whether the lien is so far perfected in the sense that nothing more need be done to make it enforceable when the identity of the lienor, the property subject to the lien, and the amount of the lien are all established. United States v. City of New Britain, supra. The facts in this case must be examined under this test.

Clearly the identity of the lienor and the amount of the lien were established prior to the filing of the 1960 tax lien. The property subject to the lien was the debt owed by Paramount to Navratil. However, at the date of the filing of the tax lien, September 11, 1961 in Oakland County and September 12, 1961 in Wayne County , the amount of the debt was not established. The construction contract was not completed. The debt was not fixed until the agreement between Paramount and Navratil established it at $22,939.33, which was some time after the tax lien was filed, between October 9, 1961 and November 6, 1961 . Thus, under federal law the garnishment lien was not choate at the time the tax lien for the 1960 assessment was filed.

[Effect of State Law]

Further, under Michigan law the garnishment lien would not be treated as effective at the date the tax lien was filed. The leading Michigan case is Webber v. Bolte, 51 Mich. 113, 16 N. W. 257 (1883). There the principal debtor contracted with the defendant to construct a church building under a contract that provided for payments to be made as the work progressed, and the balance to be paid after completion. Several payments were made to the principal debtor and at the time of the garnishment nothing was due on the contract. The plaintiff-creditor claimed that he was entitled to anything that might subsequently become due for the work done under the contract under the Michigan statute making the garnishee "liable on any contingent right or claim." The court denied the garnishment, stating that if anything had been due at the time the writ was served the plaintiff was entitled to it.