Res Judicata Page2

---

 

[67-2 USTC ¶9602] United States of America , Plaintiff v. Max B. Cohen, et al., Defendants

U. S. District Court, So. Dist. Fla., No. 66-1496-Civ.-CF, 271 FSupp 709, 7/13/67

[1954 Code Sec. 6323, prior to amendment by P. L. 89-719]

Lien for taxes: Priority: Property subject to lien: Equitable interest in mortgage: Marshaling of assets.--Under Florida law an equitable interest in a mortgage is intangible personal property, subject to a tax lien. Since the government's lien on the personalty was properly filed in the county of taxpayer's residence, its lien was prior to the claim of a subsequent judgment creditor and its later interest as a purchaser. The Court also refused to subject the government to a requirement that it marshal assets in favor of the junior lienor.

[1954 Code Sec. 6323]

Lien for taxes: Collateral estoppel: Final judgment in creditor's suit: Petition for intervention.--Neither the denial of the government's petition for intervention nor the final judgment in a Florida county circuit court creditor's suit estopped the government from pursuing its claim for unpaid taxes because the government was not a party to that law suit nor was it privy to any party to the lawsuit.

[1954 Code Sec. 6321]

Lien for taxes: Defenses against lien: Release of lien.--The defense of a release of the government's tax lien was not allowed where the government effectively denied any release of the lien and the moving party submitted nothing in support of its defense.

Harry Shapiro, Department of Justice, Washington , D. C. 20530, Lavinia L. Redd, Assistant U. S. Attorney, Main Post Office Bldg., Miami , Fla. , for plaintiff. Levine & Freedman, 725 E. Kennedy Blvd., Tampa, Fla., Bernard Wieder, 407 Lincoln Rd., Miami Beach, Fla., W. Max Smiley, P. O. Box 527, Bradenton, Fla., Jack G. Goldberg, 295 Academy St., Jersey City, N. J., Corneal B. Myers, 130 Central Ave., Lake Wales, Fla., Rob ert Manuel, 620 Shoreham Bldg., Washington, D. C., Theodore R. Nelson, 605 Lincoln Rd., Miami Beach, Fla., W. A. Gllen, P. O. Box 1438, Tampa, Fla., Philena Cohen, 711 Hillcrest Drive, Harbor Hills, Bradenton, Fla., Elwyn Middleton & Annie Middleton, 250 Beach, Fla., W. Max Smiley, P. O. Box 527,

Order

FULTON, District Judge:

THIS CAUSE came on to be heard before the Court upon the Government's Motion for Partial Summary Judgment on the issue of priority of liens as between the Government and the Defendant, Fontainebleau . The Court has heard argument of counsel, has carefully studied the memoranda of law and pleadings filed herein, as well as the affidavit submitted by the Government in support of said motion, and is otherwise fully advised in the premises.

By virtue of a contract of purchase and sale between defendant Middleton as Trustee and defendant Myers dated September, 1962, and the consummation of that transaction, defendant Cohen, the taxpayer herein, has owned a beneficial interest in a mortgage indebtedness owed by defendant Myers to defendant Middleton as Trustee. Middleton, a resident of Palm Beach County , Florida , holds this indebtedness for the benefit of Cohen and others. The mortgage covers property situate in Citrus and Levy counties, and it is Cohen's interest in this indebtedness upon which the Government now claims and seeks foreclosure of its tax lien.

As Judge Gewin of the Court of Appeals for the Fifth Circuit observed when confronted with a similar problem,

This is a case in which the Government is diligently pursuing the taxpayer in an effort to satisfy tax liens for delinquent taxes, penalties and interest; but in doing so, it is challenged by others who claim to be innocent bystanders, admitting the right of the Government to collect, but contending that they are being seriously injured by the procedure, and that their property rights are being jeopardized to satisfy tax liens against another. The case is drawn down to the narrow margin that sometimes arises between the rights of the Government to have its taxes paid and its liens satisfied, and the rights of individuals who do not owe the tax but who claim they are injured by the efforts of the Government to collect. Folsom v. United States [62-2 USTC ¶9648], 306 F. 2d 361 (5th Cir. 1962.)

The facts which gave rise to this controversy are not disputed. According to Cohen's uncontroverted affidavit, from September, 1963 to December, 1964, he was a domiciliary and resident of Manatee County , Florida , and from December, 1964 to October, 1965, he was a domiciliary and resident of Dade County , Florida . He has never resided in Citrus, Levy or Palm Beach counties, Florida .

Inasmuch as the chronology of the accrual and recording of the Government and Fontainebleau liens are the crux of this litigation, these undisputed facts are probably most clearly set forth in time-line fashion.

May 12, 1961 --District Director of the Internal Revenue Service made an assessment of income tax liability of defendant, Max Cohen, in the amount of $83,639.48, of which a balance remains due of $39,415.40.

September 7, 1961 --District Director caused notice of tax lien, based on the first assessment, to be filed with the Clerk of the Manatee County Circuit Court.

September 8, 1961 --District Director caused notice of tax lien based on the first assessment to be filed with the Clerk of the Dade County Circuit Court.

July 14, 1963 --District Director of the Internal Revenue Service made a second assessment of income tax liability of defendant, Max Cohen, in the amount of $257,732.38.

September 5, 1963 --District Director caused notice of tax lien based on the second assessment to be filed with the Clerk of the Manatee County Circuit Court. Notice of tax lien based on both assessments was filed with the Clerk of the Citrus County Circuit Court.

October 23, 1963 --District Director caused notice of tax lien based on both assessments to be filed with the Clerk of the Hillsborough County Circuit Court.

October 24, 1963 --District Director caused notice of tax lien based on the second assessment to be filed with the Clerk of the Dade County Circuit Court.

October 30, 1963 --District Director caused notice of tax lien based on both assessments to be filed with the Clerk of the Levy County Circuit Court.

April 20, 1965 --The Defendant Fontainebleau Hotel Corp. obtained a personal judgment against the defendant taxpayer Max Cohen in the Dade County Circuit Court.

April 22, 1965 --Fontainebleau Hotel Corp. recorded that judgment in Citrus County .

July 26, 1965 --Execution having been returned nolla bona, Fontainebleau Hotel Corp. filed a complaint in the nature of a creditors bill in the Citrus County Circuit Court, seeking to reach Cohen's beneficial interest in the Myers-Middleton mortgage.

November 17, 1965 --The Citrus County Circuit Court issued a temporary stay order, enjoining Cohen from encumbering or transferring any funds held by Middleton as trustee for Cohen's benefit.

December 17, 1965 --District Director caused notice of tax liens based on both assessments to be filed with the Clerk of the Palm Beach County Circuit Court.

May 18, 1966 --The Fontainebleau Hotel Corp. obtained a final decree in its Citrus County creditors suit, which decree declared Fontainebleau 's lien on Cohen's equity in the mortgage indebtedness. Cohen's interest was ordered to be sold by a special master.

Thereafter, but prior to the sale of Cohen's interest in the mortgage indebtedness, the Government attempted to intervene in the Citrus County Circuit Court proceedings. The intervention was strenuously and successfully opposed by Fontainebleau, on the grounds that (1) the Fontainebleau's final decree in the creditors suit in no way affected the Government's rights because the Government could maintain a separate and independent suit to test the priority of its claim as against Fontainebleau, (2) intervention after the final decree was not timely, and (3) the proposed intervention was not subordinate to and in recognition of the propriety of the main proceedings, as required by the Florida Rules of Civil Procedure.

Cohen's beneficial interest in said mortgage was sold at public outcry, pursuant to the Citrus County Circuit Court final decree. For the price of $50,000, Fontainebleau purchased Cohen's interest in the mortgage, the purchase price being applied towards satisfaction of Fontainebleau 's judgment against Cohen.

After being thwarted in its Citrus County attempt to reach Cohen's interest in said mortgage, the Government filed its complaint herein. Plaintiff now seeks a judgment against Cohen in the amount of the two unpaid assessments, foreclosure of its tax liens on Cohen's equitable interest in the mortgage, sale of that interest, and if appropriate, a deficiency judgment against Cohen for the balance.

The taxpayer in his answer admits his indebtedness to the Government and not only asserts that the tax liens are prior to any other liens claimed by defendants to this cause, but joins in the Government's prayer for relief. Fontainebleau raises the following defenses to foreclosure of the Government's lien:

1. Priority of Fontainebleau 's lien or interest as purchaser.

2. Estoppel by judgment, arising by virtue of the Government's failure to appeal the denial of its petition for intervention and the final judgment in the Citrus County creditors suit.

3. Release of its claim of lien by the Government.

By way of counterclaim, Fontainebleau asks this Court to marshal all of Cohen's assets subject to the Government's tax lien in accordance with equity and good conscience.

I. The Government's Lien

26 U. S. C. §6321 creates a lien in favor of the Government on "all property and rights to property, whether real or personal" belonging to a taxpayer who, after demand, neglects or refuses to pay his income tax. Whether the taxpayer has an interest in property to which a lien can attach is a matter of state law. United States v. Bess [58-2 USTC ¶9595], 78 S. Ct. 1054 (1958). That the Government has made demand, and Cohen has neglected or refused to pay his income tax is uncontroverted.

In the instant case, the Government seeks to levy upon its tax lien imposed on the taxpayer-Cohen's interest in said mortgage indebtedness. Florida law determines whether this interest in "property" or a "right to property" within the meaning of §6321, and under Florida law, an equitable interest in a mortgage is intangible personal property, which may be reached by a creditor. Evins v. Gainesville National Bank, 85 So. 659 ( Fla. 1920); Ratliff v. Nowery, 136 So. 895 ( Fla. 1931); Thalheimer Bros. v. Tischler, 55 Fla. 796, 46 So. 514 ( Fla. 1908). Thus it may be subject to a tax lien.

II. Priority as Between the Government and Fontainebleau

The tax lien created by §6321 arises automatically upon the ripening of the taxpayer's tax liability and attaches to all property and rights to property then owned and subsequently acquired by the taxpayer. Once the tax lien has attached to the taxpayer's property or rights to property, Federal law determines the priority of competing liens asserted to that interest. Aquilino v. United States [60-2 USTC ¶9538], 363 U. S. 509 (1960). However, in order to enforce its lien as against certain persons designated in the statute, the Government must first give notice of its lien.

Thus under §6323, the lien created by §6321 shall not be valid as against any purchaser or judgment creditor until proper notice is filed by the Secretary of the Treasury or his delegate. Before §6323 was amended in November, 1966, it had been held that a "judgment creditor" for purposes of that statute had to be a judgment lien creditor, for until the state-created lien became choate in the Federal sense, it had no protection against a recorded tax lien. Fore v. United States [65-1 USTC ¶9101], 339 F. 2d 70 (5th Cir. 1964). This requirement has been confirmed and made statutory by the 1966 amendment, which imposes upon the Government the duty of giving notice as against judgment lien creditors in order to enforce its tax lien. So, §6323 protects a creditor against a tax lien only when the creditor's judgment becomes a specific lien against the property to which the tax lien has attached.

The notice required by §6323 is to be filed under state laws in the office in the state, county, or other governmental subdivision in which the property subject to the lien is situated, designated by the laws of that state. §28.20, Florida Statutes, designates the office of the clerk of the circuit court for the filing of federal tax liens.

The 1966 amendment to §6323 specifies that real property is deemed to be situated at its physical location, and personal property, whether tangible or intangible, is deemed to be situated at the residence of the taxpayer at the time the notice of lien is filed. The taxpayer is the person whose tax liability is the basis for the lien and against whose property the lien is imposed, in this case being the defendant Max Cohen. The committee report concerning this amendment indicates that the provision was designed to clarify already existing law. Most courts had already held that the filing of a tax lien imposed on the taxpayer's personal property was valid when filed at the taxpayer's domicile.

§114 of Public Law 87-719 provides that this amendment shall apply after the date of enactment (November 2, 1966), regardless of when a lien of the United States arose or when the lien or interest of any other person was acquired. However, the amendment shall not apply in any case in which its application would impair a priority enjoyed by a person other than the United States holding a lien or interest prior to the date of enactment. As will be seen, application of §6323 both before and after the amendment yields the same result in this case.

Applying §6323 as amended in November, 1966, the situs of Cohen's beneficial interest in this mortgage, which is intangible personal property, is his residence at the time the notice of lien was filed. The uncontroverted affidavit of defendant Cohen states that he was a resident of Manatee County on September 5, 1963 , when notice of tax lien based on the second assessment was filed with the Clerk of the Manatee County Circuit Court. Notice of lien based on the first assessment had previously been filed in that county. Thus, the Government's lien based upon both assessments attached to this property on September 5, 1963 , prior to Fontainebleau 's obtaining its judgment against Cohen. Thus, the Government's lien, based on both assessments, is prior to any interest the Fontainebleau may have in said property. Although Cohen later moved his residence from Manatee, a lien once properly filed remains valid against judgment creditors and purchasers even if the taxpayer later severs all connection with his former residence. §6323(f)(2)(B); Grand Prairie State Bank v. United States [53-2 USTC ¶9481], 206 F. 2d 217 (5th Cir. 1963).

Even applying the former §6323 and case law thereunder, the result is still the same. Case law had established that the situs of intangible personal property was the domicile of its owner. See Campbell v. Bagley [60-1 USTC ¶9340], 276 F. 2d 28 (5th Cir. 1960); United States v. Goldberg [66-2 USTC ¶9523], 362 F. 2d 575 (3rd Cir. 1966); and cases cited therein. Under Florida law, a mortgage is a specific lien on property and thus is a chose in action, Evins v. Gainesville National Bank, 85 So. 659 ( Fla. 1920); Ratliff v. Nowery, 136 So. 895 ( Fla. 1931) which is intangible personal property, Vogel v. New York Life Insurance Co., 55 F. 2d 205 (5th Cir. 1932). The same holds true of an equitable interest in a mortgage. Thus, under the former §6323 the notice required of the Government still had to be filed in the county in which Cohen was domiciled, again being Manatee County in 1963.

It is the taxpayer, Cohen's domicile which is critical in this case, for it is Cohen's equitable interest in the mortgage which is sought to be subjected to the Government's lien here, and to which Fontainebleau claims a prior right, and not the Trustee's legal interest in said mortgage. The domicile of the Trustee-holder of legal title to the mortgage indebtedness is irrelevant for this purpose of determining whether Cohen's beneficial interest is to be subject to the Government's lien.

So under either the former §6323 or the November, 1966 amendment, the Government's lien based on the second assessment is still prior to Fontainebleau 's interest as a judgment lien creditor and its later interest as a purchaser.

Even assuming Fontainebleau 's premise that the Government had to record its lien on Cohen's beneficial interest in said mortgage in Palm Beach County , where the Trustee resides, Fontainebleau must still be subordinated to the Government lien.

Until Fontainebleau obtained its judgment against Cohen, it could not assert any priority as against the Government. Even though as a judgment creditor it had an immediate lien on Cohen's real property located in Florida, §55.08, Florida Statutes, it had to take further steps to establish a lien on Cohen's intangible personal property, by bringing an equitable action in the nature of a creditors bill and obtaining a decree therein.

Although §6323 before amendment imposed the notice requirement upon the Government as against a taxpayer's "judgment creditors," the courts had interpreted that language to mean "judgment lien creditors." Determination of whether a creditor attains this status is reached first by reference to state law to ascertain the effect of the judgment as a lien on the taxpayer's property, and then by reference to federal standards to ascertain whether the state-created lien is "choate," specific and perfected for purposes of §6323. United States v. Equitable Life Assurance Society [66-1 USTC ¶9444], 384 U. S. 323 (1966); United States v. Pioneer American Insurance Co. [63-2 USTC ¶9532], 83 S. Ct. 1651 (1964); 9 Mertens §54.42 at pg. 105 and cases cited therein.

The leading case, which led to amendment of the statute to recite the "judgment lien creditor" requirement is Fore v. United States [65-1 USTC ¶9101], 339 F. 2d 70 (5th Cir. 1964). Fore had obtained a Texas judgment, which under Texas law entitled him to a lien on the debtor's Texas real estate but not to a lien on the debtor's personalty located in Texas . Inasmuch as under Texas law, Fore had no possessory lien, attachment lien or execution lien on the debtor's personalty, his lien was not choate in the Federal sense.

Similarly, under Florida law, Fontainebleau 's judgment on the note constitutes a lien against Cohen's realty located in Florida . However, a judgment at law is not a lien on land to which the judgment debtor has no legal title. Equitable interests in property are ordinarily not subject to levy and sale under writ of execution in Florida ; they must either be reached by supplemental proceedings or by creditors suit. Huttig v. Hoffman, 9 So. 2d 506 ( Fla. 1942). Furthermore, a mortgage on real estate, being a contract lien on the land, is not subject to levy and sale under writ of execution, and must likewise be reached by supplemental proceedings or by creditor's suit. Evins v. Gainesville National Bank, 85 So. 659 ( Fla. 1920); Ratliff v. Nowery, 136 So. 895 ( Fla. 1931). Under Federal concepts a lien is not perfected if its existence, amount or enforcement is contingent upon the outcome of a suit. United States v. Acri [55-1 USTC ¶9138], 348 U. S. 211; United States v. Security Trust and Savings Bank [50-2 USTC ¶9492], 71 S. Ct. 111 (1950).

State-created liens are perfected or choate for priority purposes when the identity of the lienor, the property subject to the lien, and the amount of the lien are established. United States v. Pioneer American Insurance Co. [63-2 USTC ¶9532], 83 S. Ct. 1651 (1964); Regulations §301.6323(1)(a)(2). Whether Fontainebleau 's judgment on the note against Cohen constituted a lien on his beneficial interest in said mortgage was not determined under state law until Fontainebleau obtained its decree in its Citrus County creditors suit. It was only when that decree was entered that the property subject to Fontainebleau's judgment lien was determined, and thus it was only when that decree was entered that Fontainebleau's judgment became choate in the Federal sense and Fontainebleau became a judgment lien creditor for purposes of §6323. This was on May 18, 1966 and the Government had previously recorded its notice in Palm Beach County on December 17, 1965 .

Subject to the §6323 notice requirement, the transfer of property subject to a tax lien subsequent to the attachment of that lien does not affect the tax lien, for it is the very nature and essence of a lien that no matter into whose hands the property goes, it passes cum onere. United States v. Bess [58-2 USTC ¶9595], 78 S. Ct. 1054 (1958). Michigan v. United States [43-1 USTC ¶9225], 63 S. Ct. 302 (1943). The taxpayer's lien liability is based upon the Government's claim on the property of the taxpayer until the tax debt is discharged and the property passes into the hands of a subsequent party subject to the lien regardless of the transferee's status as a creditor or purchaser. Exhaustion of remedies against the taxpayer and the taxpayer's insolvency or solvency are irrelevant in a proceeding to enforce a Government tax lien. United States v. Hoper [57-1 USTC ¶9508], 242 F. 2d 468 (7th Cir. 1957). So the transfer of Cohen's equitable interest in said mortgage to Fontainebleau by judicial sale after the tax lien based on the second assessment attached thereto did not affect the already established priority of the federal tax lien.

The United States may be named a party in a state mortgage or lien foreclosure suit. However, if the Government is not made a party to a suit concerning property which is subject to an income tax lien, then

. . . a sale to satisfy a lien inferior to one of the United States shall be made subject to and without disturbing the lien of the United States, unless the United States consents that the property may be sold free of its lien and the proceed divided as the parties may be entitled. 28 U. S. C. §2410.

In the instant case, the Government gave no such consent to the sale following Fontainebleau 's suit in the Citrus County Circuit Court, so that the sale was subject to the Government's lien.

III. Marshaling Assets

By way of counterclaim, Fontainebleau has asked the Court to marshal Cohen's other assets and use Cohen's other assets to satisfy the Government's tax lien, leaving Cohen's interest in the Myers-Middleton mortgage to the Fontainebleau .

The equitable doctrine of marshaling rests on the principle that a creditor having two funds to satisfy his debt, may not by his application of them to his demand, defeat another creditor who may resort to only one of the funds. Meyer v. United States [64-1 USTC ¶9111], 375 U. S. 233 (1963).

In United States v. Pollack, a New York District Court did use a marshaling type approach where two sources existed for satisfaction of a tax lien and a junior creditor had resort to only one of those sources. The Court stayed the lien foreclosure proceedings directed at the assets which was subject to the lien of the junior creditor pending the outcome of other Government lien foreclosure proceedings directed at the taxpayer's other assets.

The Supreme Court has not yet been faced with a case in which marshaling was sought against the federal government in an income tax case, although it was asked by the Government to apply the doctrine in Meyer v. United States, supra.

In Meyer, the Government had sought to impose and foreclose a tax lien upon the proceeds of life insurance policies which insured the life of the taxpayer. A bank had a senior lien on the entire proceeds of the policies, while the Government's tax lien attached only to the cash surrender value of the policies, subject to the bank's claim. The Government invoked the doctrine of marshaling assets, asking the Court to satisfy the tax lien from the cash surrender value and the bank's claim from the remainder of the proceeds.

After citing lower court cases holding that the doctrine will not be applied where state-created exemptions would thereby be destroyed or where one of the funds is exempt under state law, the Supreme Court adopted the state rules and refused to extend the doctrine to this situation. New York has a statute exempting insurance benefits of a widow from the claim of her husband's creditors, so that the proceeds other than the cash surrender value were not subject to the tax lien. The Supreme Court refused to enlarge the statutory lien by application of the doctrine of marshaling assets.

Lower federal courts have been confronted with situations where creditors of the taxpayer have invoked the doctrine, and have reached varying results. The Second Circuit has refused to subject the Government to a requirement that it marshal assets in favor of junior lienors because "this would create an extreme burden on collection of revenue, unauthorized by statute." United States v. Herman [63-1 USTC ¶9135], 310 F. 2d 846 (2nd Cir. 1962).

The Eighth Circuit adopted a similar position in United States v. Stutsman County Implement Co. [60-1 USTC ¶9224], 274 F. 2d 733 (8th Cir. 1960). It did not find in any of the cases cited by the creditor-appellee a holding that the Court may discharge a valid tax lien imposed by the statute merely because it appears to the Court that the existence of the lien bears harshly on those who have dealt with the taxpayer in disregard of the lien.

A district court, interpreted a Supreme Court per curiam reversal as disallowing the doctrine of marshaling assets, and therefore refused to apply it upon remand of the case. United States v. Wintner [64-1 USTC ¶9168], 84 S. Ct. 451 (1964); on remand [65-2 USTC ¶9642], 247 F. Supp. 47 ( Ohio 1964). Mertens has also noted that the Government is not required to seek its taxes from any particular source. 9 Mertens §54.52 at p. 161.

Refusal to apply the doctrine is based upon construction of the tax lien statutes in the following manner. The statute creates the tax lien and prescribes its duration. After the notice has been duly given, the power of the Court to determine the rights of the parties in respect to the lien is limited by statute. There is no statutory authority conferred on the Court to discharge or terminate the lien already attached to specific property without satisfaction of the tax or exhaustion of the property. The Court's usual equity powers are said to be limited by the special statutory provisions of §6325 regarding discharge of tax liens, which provisions make no mention of discharge by marshaling other assets of the taxpayer. That rationale is analogous to a similar refusal to apply the doctrine in levy situations.

This Court finds the line of cases refusing to apply the doctrine of marshaling assets to be more convincing. This is especially so in view of the equities appearing in the instant case.

Before it obtained the final judgment in its creditor's suit, Fontainebleau stood as any other judgment creditor and could attempt to execute on or reach any of Cohen's assets not exempt by state statute just as it now wants the Government to do. It chose to reach for the beneficial interest which is the subject of this lawsuit. In so doing, it chose not to join the Government as a party defendant, as it could have under 26 U. S. C. §2410. If Fontainebleau had joined the Government as a defendant in its suit, this controversy would have been dsposed of without further adieu.

When the Government attempted to intervene in the creditor's suit, Fontainebleau , through its attorney, stated to that Court:

We did not adjudicate the Government's rights and no effort to adjudicate the Government's rights was made and the final decree in no way affects the Government's rights. They have lost nothing by the sale we are going to make and I see that they have no standing in this Court, even if there has been a final decree which forecloses them out . . ..

It again reiterated this position in its Memorandum Reply herein filed on March 2, 1967 , in response to Cohen's Motion to Dismiss Fontainebleau's Counterclaim. It states that the State Court denied the Government's petition to intervene on two theories:

1. The United States claimed to have a first lien in its petition to intervene on the equity created by the Middleton agreement. If this were true, the State Court felt that the foreclosure by the Fontainebleau Hotel would not affect the Government.

2. If the Government's lien was inferior and it had not been made a party to the foreclosure proceedings, it was still free to maintain a suit to test the priority of its claim and that of the Fontainebleau Hotel by an independent proceeding.

However, now Fontainebleau attempts to use its judgment and purchase obtained on the above representation to take a contradictory position. In effect it is asking this Court to consider the Citrus County proceedings as going to the merits of the Government's claim. Furthermore, as a general creditor of Cohen, Fontainebleau may still try to reach Cohen's other assets, just as may the Government. Thus there is no reason to apply the quitable doctrine of marshaling assets, for Fontainebleau is not a creditor who has resort to only one of the funds available for satisfaction of the Government's claim--it can resort to the same funds which the Government may attempt to reach. By reason of the foregoing, this Court will not require the Government to satisfy its tax lien from other assets the taxpayer may own.

IV. Estoppel of Judgment

Finally, Fontainebleau contends that the Government is estopped to bring this action by virtue of the final judgment and denial of its petition for intervention in the creditor's suit, which the Government has failed to appeal.

In order for an estoppel by judgment to arise, there must be a final judgment or decree rendered on the merits, which will be conclusive of the rights, questions and facts, the determination of which was necessary to the judgment rendered. A judgment or decree rendered on any grounds which do not involve the merits of the action may not be used as the basis for the operation of this doctrine. Armstrong v. Manatee County , 49 Fla. 273, 37 So. 938 ( Fla. 1905); Tilton v. Horton, 103 Fla. 497, 137 So. 801 ( Fla. 1931); Universal Construction Co. v. Ft. Lauderdale , 68 So. 2d 366 ( Fla. 1953).

As Fontainebleau itself admitted and even argued as a basis for denial of leave to intervene, the Citrus County Circuit Court's denial of the Government's petition was not an adjudication of the merits of its claim.

The final judgment rendered by the Citrus County Circuit Court cannot estop the Government to pursue its claim because the Government was not a party to that lawsuit nor is it privy to any party to the lawsuit.

As Fontainebleau contended in the argument on the Government's petition, a mortgagee is not bound by any judgment or decree rendered in a suit to which it was not made a party, where its interest antedates the action. Logan v. Stieff, 36 Fla. 473, 18 So. 767; Stokely v. Conner, 80 Fla. 89, 85 So. 678.

If the Government had been permitted to intervene, it would have been bound, but even the right to intervene does not subject one to the doctrine of estoppel by judgment. Merriman v. Lewis, 141 Fla. 832, 194 So. 349 ( Fla. 1940). Thus, no estoppel arises by virtue of either the denial of the Government's petition or the final judgment in the Citrus County creditor's suit.

V. Release

Although defendant Fontainebleau has alleged the defense of a release of the Government's lien in its answer, it has not submitted anything in support thereof in response to the Government's Motion for Summary Judgment. When such a motion is made and supported, an adverse party may not rest upon the mere allegations or denials of his pleading, but his response, by affidavits or as otherwise provided in Rule 56, must set forth specific facts showing that there is a genuine issue for trial. Rule 56(e), Federal Rules of Civil Procedure. The Government has effectively denied any release of this lien by affidavit of the District Director of the Internal Revenue Service at Jacksonville , and Fontainebleau has failed to meet its burden. It cannot under the rules rest on its naked allegation to attempt to create a fact issue.

THEREUPON, there being no genuine issue of any material fact, it is ORDERED and ADJUDGED as follows:

The Government's Motion for Summary Judgment be and the same is hereby granted. However, this judgment is limited to a determination that the Government's tax lien on Cohen's beneficial interest in the Myers-Middleton mortgage is prior to the Fontainebleau 's claim as Cohen's creditor and purchaser of said property.

 

 

[85-1 USTC ¶9119]United States of America, Plaintiff-Appellant v. Stephen Winterburn, aka Steven H. Winterburn; Linda Winterburn; Rob ert O. Middleton; and Carol A. Middleton, Defendants, and Roger Allard and Adele Allard, Defendants-Appellees

(CA-9), U. S. Court of Appeals, 9th Circuit, No. 83-3875, 749 F2d 1283, 12/17/84, Reversing the unreported decision of the district court

[Code Secs. 6323(a) and 7425]

Lien for taxes: Validity: Conflicts of law: Discharge of certificate of release or nonattachment: Extinguishment.--The district court erred by characterizing the sellers' state action as a confirmation of the sellers' rights under a real estate sales contract rather than an action to quiet title under Washington law, because the contract sellers did not declare a forfeiture upon the contract buyer's delinquency, which would have extinguished the tax liens, but instead they elected to have a Washington court restore them to possession and terminate the contract buyer's right of redemption and his equitable interest in the property. Moreover, because the contract sellers failed to name the U. S. as a party to their quiet title action, the tax liens placed on the property to permit recovery of taxes from the recalcitrant contract buyer, was unaffected by the Washington court's judgment. In addition, the government fulfilled its requirement to file a notice of its lien in the office of the proper county within which the property was located, and although under Washington law actual notice of a lien must be given to the contract seller, notice of a federal tax lien need not be filed in accordance with the laws of the state where the property is located, except those pertaining to the place of filing.

John A. Dudeck, Department of Justice, Washington , D. C. 20530, for plaintiff-appellant. Rob ert B. Leslie, Quigley, Hatch, Loveridge & Leslie, 2920 Seattle First National Bank Building, Seattle, Wash. 98154, for defendants-appellees.

Before WRIGHT, SNEED, and ALARCON, Circuit Judges.

Opinion

ALARCON, Circuit Judge:

The government appeals from the order of the district court denying the motion of the United States for summary judgment to foreclose federal tax liens against the interest of Stephen and Linda Winterburn in real property located in Whatcom County , Washington .

We must determine whether the judgment of a Washington state court terminating the Winterburns' rights under a real estate sales contract was rendered in a quiet title action. Because we conclude that this proceeding was a quiet title action under Washington law, the district court's order dismissing the action must be reversed because the United States was not joined in the Washington state proceedings.

I

PERTINENT FACTS. The facts underlying the United States ' claim against the defendants are not in dispute. On February 24, 1975 , Rob ert and Carol Middleton entered into a real estate sales contract for the sale of real estate in Whatcom County , Washington , to Stephen Winterburn for a total price of $12,000. The contract provided for the payment of $125 plus interest in consecutive monthly installments. Winterburn was entitled to possession of the property so long as he fulfilled the terms of the contract. Upon full payment of the purchase price, Winterburn would receive a statutory warranty deed. If Winterburn failed to make any payment, the sellers could "elect to declare the purchaser's rights terminated." In the event of a declaration of forfeiture, all payments and improvements made upon the property would be forfeited.

Winterburn failed to pay the installments for May, June and July 1975. On July 15, 1975 , the Middletons sent Winterburn notice of their intention to declare a forfeiture. A notice of forfeiture was sent on August 21, 1975 . Winterburn remained in possession. On August 27, 1975 , a $500 payment was made to the bank collection account. Thereafter, the Winterburns made each monthly payment through February, 1976. No payments were made until June, 1976. A second notice of intention to declare a forfeiture was mailed to the Winterburns on May 20, 1976 . On June 24, 1976 , a payment of $500 was credited to the bank collection account. The Winterburns made the payments due from July through October, 1976. No payments were made from November to May, 1977. A third notice of intention to declare a forfeiture was mailed on May 11, 1977 . On June 15, 1977 , the Winterburns made a payment of $875. No further payments were made by the Winterburns.

Meanwhile, on September 16, 1975 the Internal Revenue Service filed a notice of tax lien against Stephen Winterburn in the amount of $10,637.49 in the proper office in Whatcom County , Washington . On March 19, 1976 , the Internal Revenue Service filed a second tax lien in the amount of $3,123.35 in the appropriate office in the county where the property was located. The liens covered any property or right to ownership by Stephen Winterburn in the property which is the subject of the land sales contract. Winterburn failed to pay any of the federal taxes.

On January 24, 1978 , the sellers, Rob ert O. and Carol A. Middleton, filed an action designated simply as a "Complaint" against Stephen Winterburn in the Superior Court of Whatcom County, Washington. The Middletons , after alleging that no payment had been made since June 15, 1977, prayed for (1) an adjudication terminating all of Winterburn's rights under the contract, (2) forfeiture of the payments previously made as liquidated damages, and (3) an order giving the Middletons the right to reenter and take possession of the property. The United States was not joined as a party nor served with notice of the action. A default judgment was entered against Stphen Winterburn on May 17, 1978 , granting the relief requested by the Middletons . On September 15, 1978 , the Middletons sold the property to Roger and Adele Allard for $27,500.

On July 16, 1981 , the United States brought this action against the Winterburns, the Middletons , and the Allards to reduce to judgment the Winterburns' outstanding tax liabilities and to foreclose the tax liens against the real property in question in this matter.

A default was entered against the Winterburns and the Middletons . The United States moved for summary judgment. The Allards moved to dismiss the action contending that "the forfeiture was accomplished by Notice; the subsequent possessory action (quiet title) was not the forfeiture event but an action to recover possession."

On April 13, 1983 , the district court granted the government's motion for a summary judgment against Winterburn. The government's motion for summary judgment to foreclose the tax liens was denied. The Allards' motion to dismiss the complaint was granted.

II

DISCUSSION. The government argues that the district court erred by characterizing the Middletons ' state action as a confirmation of the sellers' rights under the real estate sales contract rather than as an action to quiet title. We agree.

We begin our analysis by discussing the pertinent federal statutes. ¹

To permit recovery of taxes from a recalcitrant taxpayer, Congress has provided that:

If any person liable to pay any tax neglects or refuses to pay the same after demand, 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.

26 U. S. C. §6321.

In order to prevent the extinguishment of its tax liens by a transfer or forfeiture of interest of a taxpayer in real property, Congress enacted section 7425 of title 26 of the United States Code, 26 U. S. C. §7425. Section 7425(a) provides that a federal tax lien is not affected by a civil action described in subsection (a) of section 2410 of title 28 of the United States Code if the United States was not joined as a party provided that "notice of such lien has been filed in the place provided by law for such filing at the time such action or suit is commenced." 26 U. S. C. §7425(a)(1).

In section 2410(a) of title 28 of the United States Code, 28 U. S. C. §2410(a), Congress has authorized the naming of the United States as a party to an action to quiet title upon real property on which the United States claims a lien.

No issue has been raised concerning the existence of the tax liens prior to the time the Middletons filed their action in the Superior Court of Whatcom County , or that notice of the government's lien was filed in the proper place in accord with applicable Washington law.

The Allards contend that the government failed to file the liens pursuant to the requirements of the state of Washington . We disagree. The government was required to file a notice of its liens in the place for filing such notice under state laws. 26 U. S. C. §6323. That requirement was fulfilled. The Allards contend, nevertheless, that under Washington law actual notice of a lien must be given to the contract seller. The state of Washington does not require that actual notice of a federal tax lien be given to the seller. Washington law expressly provides that notices of federal tax liens may be filed in the office of the county auditor of any county within which the property is located. Wash. Rev. Code §60.68.010 (1983). Here, notice of the tax lien was filed in the office of the Whatcom County Auditor. Accordingly, the requirements of section 6323(a) were met. Notice of a federal tax lien need not be filed in accordance with the laws of the state where the property is located, except those pertaining to the place of filing. See United States v. Union Central Life Insurance Co. [62-1 USTC ¶9103], 368 U. S. 291, 296 (1961) (notice is sufficient if given in the form used by the government without regard to the general requirements for recording under the laws of a particular state or territory).

The government having filed proper notices of tax liens, our task is to determine whether the action filed by the Middletons was a quiet title action. If so, the tax liens were not extinguished by the state court's judgment because the government was not named as a party to that action. In deciding the nature of the Middletons ' state court action, we must look to Washington law. See United States v. Bosnan, 363 U. S. 237, 241 (1960) (state law should be adopted as federal law governing divestiture of tax liens); see also Runkel v. United States [76-1 USTC ¶9152], 527 F. 2d 914, 916 (9th Cir. 1975) (rights in property to which tax liens may attach are created under state law).

Under Washington law, where the buyer fails to make a payment as required by the land sales contract the vendor has a choice of remedies. Where time has been made the essence of the contract, he may terminate the contract or declare a forfeiture without resort to judicial proceedings for confirmation. Dill v. Zielke, 26 Wash. 2d 246, 252, 173 P. 2d 977, 979-80 (1946); Sofie v. Kane, 32 Wash. App. 889, 893, 650 P. 2d 1124, 1127 (1982). Where the vendor has granted indulgences by permitting payments after they were due without protest, strict performance is waived and a forfeiture cannot be declared without notice of the intention to do so and a reasonable time for the vendee to perform. Ryker v. Stidham, 17 Wash. App. 83, 87, 561 P. 2d 1103, 1105 (1977). If the vendor declares a forfeiture, there is no requirement that he seek judicial confirmation of the forfeiture. Sofie v. Kane, 32 Wash. App. at 893-94, 650 P. 2d at 1127. "Upon a valid declaration of forfeiture, the vendee must relinquish possession of the property." Sofie v. Kane, 32 Wash. App. at 893, 650 P. 2d at 1127 citing Suess v. Heale, 68 Wash. 2d 962, 966, 416 P. 2d 458, 461 (1966). In the event that the vendee does not relinquish possession, "the vendor can bring a suit to quiet title and regain possession." Id. A lawsuit to quiet title may also be necessary after a declaration of forfeiture "to obtain marketable title." Sofie v. Kane, 32 Wash. App. at 893, 650 P. 2d at 1127.

In the instant matter, the Middletons did not declare a forfeiture. Instead, the Midletons alleged in their complaint that the filing of the action was necessary to regain possession and to terminate Winterburn's rights under the real estate sales contract because:

[T]he defendant has heretofore been delinquent on payments and on three different occasions Notice of Intention to Terminate the Contract have been sent to him and that it would be unreasonable and burdensome to require the plaintiffs to continue to send notices of forfeiture thereby incurring legal expense.

Thus, rather than declare a forfeiture, the Middletons elected to have the court restore them to possession and terminate Winterburn's right of redemption and his equitable interest in the property. Eckley v. Bonded Adjustment Co., 30 Wash. 2d 96, 106, 190 P. 2d 718, 722-23 (1948). Under Washington law, a vendee has a real property interest in the land which is subject to a federal tax lien. Runkel v. United States , 527 F. 2d at 916. Under Washington law "a declaration of forfeiture under an executory real estate sales contract is effective to extinguish liens upon the buyer's interest in the contract unless the seller had actual notice of the liens." Runkel v. United States , 527 F. 2d at 917. The Middletons had no notice of the government's tax liens on Winterburn's equitable interest in the property. Thus, had the Middletons elected to declare a forfeiture, the tax liens would have been extinguished. Instead, the Middletons sought the assistance of the court in regaining possession and in terminating the Winterburns' equitable interest in the land. Under Washington law, the relief they sought is referred to as a quiet title action, Sofie v. Kane, 32 Wash. App. at 893, 650 P. 2d at 1127. As noted above, the Allards, in their motion to dismiss this action referred to the Middletons ' law suit as a possessory/quiet title action.

The Allards argue in their brief before this court, however, that a judicial proceeding to enforce a contractual right to regain possession is "a possessory action." The Allards would apparently limit a quiet title action to a proceeding in which the plaintiff seeks a decree confirming his title. No citation is given for this proposition. This narrow interpretation of the term "quiet title action" is inconsistent with the Washington law discussed above. The argument also ignores the fact that the action brought by the Middletons also sought a termination of Winterburn's rights under the real estate contract.

Because the Middletons failed to name the United States as a party to their quiet title action under section 7425(a), the tax lien was unaffected by the Washington court's judgment. The district court erred as a matter of law in concluding that the Middleton's action was not a quiet title action.

The judgment dismissing this action is REVERSED.

¹ The issues presented in this matter require an interpretation of federal statutes and the law of the State of Washington concerning actions to quiet title or to foreclose a lien. Such questions are reviewable de novo. United States v. McConney, 728 F. 2d 1195 (9th Cir. 1984), appeal docketed, No. 83-1884 ( May 17, 1984 ).

 

 

[73-1 USTC ¶9240] United States of America , Plaintiff-Appellant v. Henry E. Perry et al., Defendants-Appellees

(CA-5), U. S. Court of Appeals, 5th Circuit, No. 72-2143, 473 F2d 643, 1/8/73, Aff'g unreported District Court decision

[Code Sec. 6321 and 28 U. S. C. §2410]

Tax liens: Foreclosure of: Fraudulent conveyance: Quiet title action: Res judicata.--The government was barred from maintaining this action to foreclose a tax lien and to set aside an allegedly fraudulent transfer of the property because it did not intervene in a 1969 state court action brought by the transferee to quiet title to the property. The lien had been filed and the government knew of the alleged fraudulent conveyance at the time the state action was brought. Moreover, the 1969 complaint gave a sufficient description of the lien and was not defective merely because it failed to state that the government might claim a fraudulent conveyance.

One concurrence.

Wayman G. Sherrer, United States Attorney, William D. Mallard, Jr., Assistant United States Attorney, Birmingham, Ala., John M. Dowd, Ann E. Belanger, Meyer Rothwacks, Scott P. Crampton, Assistant Attorney General, Department of Justice, Washington , D. C. 20530, for plaintiff-appellant. J. Gilmer Blackburn, P. O. Box 757, Decatur, Ala., Rob ert Straub, P. O. Box 327, Decatur, Ala., William B. Eyster, P. O. Box 1145, Decatur, Ala., for defendants-appellees.

Before BROWN, Chief Judge, THORNBERRY and MORGAN, Circuit Judges.

MORGAN, Circuit Judge:

The Internal Revenue Service brought this action against the appellees to set aside the transfer of certain real property as fraudulent against the government and to impress and foreclose an equitable lien on the property. The District Court for the Northern District of Alabama dismissed the government's claim as barred by an earlier state court quiet title action under principles of res judicata. From that adverse decision, the Internal Revenue Service appeals.

[Facts]

I. Appellees-taxpayers, Henry and Annie Mae Perry, were charged by the government with failure to pay a total of approximately $84,000 in federal income tax for various years from 1959 to 1965. At the times that these liabilities accrued, Henry and Annie Mae Perry owned the piece of real property which was subject of the conveyance that the IRS now asserts to be fraudulent. In January, 1967, taxpayers Henry and Annie Mae entered a contract to transfer this real estate to Perrylanes, Inc., a corporation whose sole stockholders were the children of Henry and Annie Mae, in exchange for assumption of outstanding mortgages. When the actual deed delivery came on March 11, 1967 , however, the property was transferred by warranty deed to the Perry children jointly, rather than to the corporation.

Between November, 1967, and March, 1968, the IRS assessed deficiencies against the Perrys totaling $84,617.83. Notice of liens were filed by the government in the appropriate county offices on March 15 and June 11, 1968, pursuant to 26 U. S. C. §6322.

In September, 1969, the corporation, Perrylanes, Inc., commenced a suit in the circuit court of Morgan County, Alabama, to reform the deed to show Perrylanes, not the children, as grantee, and to quiet title. Named defendants were the Perry children, the parties holding mortgages on the property, and the United States government. The United States was properly served with process, both in Alabama and in Washington , as required by federal law. The filed tax liens claimed by the United States were specifically set out in the complaint. The United States failed to make any appearance in this state court action ¹ and never requested, as was its right, that the action be removed to federal district court. On September 15, 1970 , a decree pro confesso was entered against the government, ostensibly freeing the property of all government claims.

On April 7, 1971 , the IRS commenced this action to declare the transfer to Perrylanes to be fraudulent against the government and void. The district court held that action was barred by res judicata.

[Knowledge of Conveyance]

II. In this appeal, the government alleges two grounds for reversal which are very closely connected. Both arguments rest on the acceptance of the government's view of the nature and origin of the lien it now seeks to enforce. The first argument is substantive. The second is procedural and highly technical.

The government argues that the notice of liens filed March and June, 1968, were against the taxpayers and not the property, and so at the time of the judgment of the Morgan County court the government had no claim on the property. The government maintains that these recorded liens are not the subject of the instant fraudulent conveyance action. Rather, the government asserts that the lien involved herein is a totally new equitable lien which did not, and indeed could not, come into existence until the instant suit was brought in 1971.

At the outset, it is necessary to understand the basis for the original suit to quiet title. Congress has expressly granted to appropriate state and federal courts the power to entertain suits of this type in 28 U. S. C. §2410. ² One of the purposes of this statute was "to provide a method to clear real estate titles of questionable or valueless liens." ³ It was in response to the recognized need for a way to force disputes over government tax liens to resolution, rather than leaving the United States in complete control of the timing. It is against this background that the effect of the quiet title proceeding attacked herein must be resolved.

Both the Alabama courts and this court construing Alabama law have recognized that quiet title actions in Alabama are designed to end all doubts about title to land as far as all persons given notice of the suit are concerned. The Alabama Supreme Court has stated:

The primary purpose of . . . [the quiet title action] is to enable a party who is in peaceable possession of land, and who, for this reason, cannot maintain an action at law, to compel a party who claims a right, title, or interest in the land, or who is ever reputed to so claim, to come into a court of equity and propound and show the nature, character, and kind of his title, claim, and demand, and to have it determined, and to have the court to decree and adjudge whether it is good or bad. Wylie v. Lewis, 263 Ala. 522, 83 So. 2d 346, 347 (1955).

This court has recently recognized this as Alabama law:

By the Alabama statutes which control quieting title and determination of claims to land, the Circuit Court decrees ". . . clear up all doubts or disputes concerning [the land]." Anderson v. Moorer, 372 F. 2d 747, 751 (5th Cir. 1967).

Thus it is clear that quiet title actions are intended to be as final and reliable as possible.

The government now takes the position that while quiet title suits may be designed to settle all claims, the government's instant claim was not in existence at the time of the quiet title suit and that the government was not bound to litigate it. We reject this position in order to preserve the integrity of the quiet title action and to give full effect to what Congress must have intended in 28 U. S. C. §2410.

There can be no doubt that the government was fully aware of these transactions in 1969 when the quiet title suit was brought. The Service had been feuding with the Perrys, both in court and out, for several years. The question is whether the government, a creditor of those who transferred land, is required to come in and assert any claim of fraudulent conveyance in any action brought by a third-party transferee to quiet title to the land. In the instant case, where all the necessary facts are known to the government at the time of the quiet title action, we find that it was obligated to assert its claim of a fraudulent conveyance at that time and failure to do so subjects the government to res judicata.

Under Alabama law, as this court has recognized, all matters are to be settled in quiet title actions, including matters available for presentation but not presented:

. . . the Alabama state courts would not allow relitigation either of issues raised in the prior suits or of issues which could have been raised in those suits. By the Alabama statutes which control quieting title and determination of claims to land, the Circuit Court decrees ". . . clear up all doubts or disputes concerning [the land]." Alabama Code, Title 7, §§ 1109, 1116 (Recomp. 1958). [emphasis added] Warrior River Coal & Land Co. v. Alabama State Land Co., 1907, 154 Ala. 135, 45 So. 53. See Cheney v. Nathan, 1896, 110 Ala. 254, 20 So. 99. The decrees are also ". . . binding and conclusive upon all the parties . . ." in the suit. Alabama Code, Title 7, §1112, 1126 (Recomp. 1958).

The Alabama Supreme Court has, further, embraced for all cases (not merely for quiet title actions) the federal rule that ". . . res judicata must be pleaded as a bar, not only as respects matters actually presented to sustain or defeat the right asserted in the earlier proceeding, 'but also as respects any other available matter which might have been presented to that end.'" 25 So. 2d 515.

Plaintiff has asserted no legal basis for lifting the bar of res judicata. That bar is neither sinister nor harsh; often it is salutary and, occasionally, merciful. Anderson v. Moorer, 372 F. 2d 747, 751-52 (5th Cir. 1967).

Here it is very clear that any claim of the United States would go to the heart of a quiet title action. The claim of fraudulent conveyance, known and available to the government at the time of the quiet title suit, would be of prime importance in achieving the end for which the quiet title suit exists.

We note that in other cases where, under similar facts, the government has been joined in a quiet title action, the Service has been quick to come in and assert its fraudulent conveyance claim. In Zeddies v. United States, 7th Cir., 1966, [66-1 USTC ¶9273] 357 F. 2d 897, the taxpayer had conveyed property to his daughter prior to the recording by the government of liens against the taxpayer. After the daughter brought a state court quiet title action, the government both filed an action alleging a fraudulent conveyance in federal court and had the state action removed. These cases were consolidated in federal court. In Smith v. United States, 6th Cir., 1958, [58-1 USTC ¶9424] 254 F. 2d 865, the taxpayer husband conveyed property to his wife two years before a tax lien was filed. The United States filed an action to perfect its lien against the wife in district court. Prior to this filing, however, the wife had instituted quiet title proceedings in state court. The Court of Appeals held that the government, by not seeking removal, had chosen to litigate the matter in state court and that the district court action should be stayed pending resolution in the state courts. These cases suggest to this court that the quiet title action indeed covers the resolution of fraudulent conveyance claims and that the government has seemingly recognized this principle by asserting its fraud claims in those cases. ⁴

Therefore, it appears to this court that the government has no viable argument that res judicata is improper because the issues involved in quiet title and fraudulent conveyances are so different. It seems to us that the quiet title action is an overall umbrella type proceeding which includes, as a constituent part necessary to preserve the integrity of the quiet title action, the resolution of available fraudulent conveyance claims.

[Adequacy of Notice]

The government's highly technical second claim is an assertion that the earlier proceeding cannot bind it because notice of the lien claimed was not alleged with specificity as required by 28 U. S. C. §2410(b). ⁵ In the quiet title suit, plaintiff Perrylanes set out the name of the taxpayers, the land involved, the identity of the local IRS office handling the Perry's problems and the location and page of the lien notices which had been filed by the government. In short, the plaintiff gave just about all the information which it could. The government maintains that to comply with the statute, the plaintiff in a quiet title suit, to avoid a later fraudulent conveyance action by the government, would have to allege that the United States might claim the transaction was fraudulent and specifically give notice, not just as to the land, transaction, and taxpayers, but also hypothesize what the government might later wish to assert. The government admits that this would never be done if it is indeed possible to describe the contingency. Furthermore, the government argues that even if such an allegation were made, it would seek dismissal on that issue arguing that there could never be a fraudulent conveyance issue until the government filed such a suit at its own pleasure. In short, the government says that there is no way for any party by any action to avoid the possibility that the government will later bring suit claiming a fraudulent conveyance. We do not feel that this position should be sustained. To allow this interpretation to be given the statute would infringe the intent of Congress and prohibit full usage of a valuable tool--the quiet title action--for conclusively settling all claims to land.

The specificity provisions are in the statute to ensure that the government is given full notice of what claims the parties are talking about and what land and parties are involved. Here the taxpayers whose problems gave rise to the assessments were identified, the fact of a transaction involving a specific piece of land and the identity of the transferee were disclosed. The government had specific notice to come in and litigate about this piece of property. There could be no mistake about the material issues; there was no bad faith or attempt to "fool" the government. Congress wanted to ensure that "hidden" liens were not removed without notice to the government; it never indicated that the government could not be required to litigate all claims growing out of the specific liens, property, and taxpayers clearly identified to the Service.

Congress sought to provide, through the basic enactment of §2410, a method to force the government to litigate tax liens to enable persons, both taxpayers and third parties, to clear title and have uncertainty conclusively removed so they could take certain actions without fear of later challenge. To allow the government to always hold back one possible defect will never fulfill the goal of conclusively settling these disputes. ⁶ It is well known that the admin istration process, even in the IRS, is often slow and unresponsive. To offset this and to prevent the obvious harm which can come from admin istrative harassment, Congress provided a method to settle the issue.

We do not feel that any undue burden is put on the government by requiring it to assert any fraudulent conveyance claim in a quiet title action. First, it is given notice that a transfer has occurred, the terms of the transfer, the identities of the parties involved and the nature of the tax difficulties involved. The government has an absolute right of removal to federal court. The complaint itself and the information it contains is enough to give the IRS ample information for deciding whether a fraudulent conveyance claim may lie. The values sought to be established in the quiet title action sufficiently outweigh any admin istrative convenience since in reality the only chance of harm to the government comes from negligence or inattention on the government's part. The notice given herein was all that realistically could be given and was, under the circumstances, sufficient to comply with statutory requirements.

Furthermore, our reading of 28 U. S. C. §2410 does not lead us to believe that Congress intended the IRS to escape an adjudication which would be an adequate bar to a private litigant. Here, as we have already discussed, we feel the courts of Alabama would find a creditor with knowledge and notice equal to that of the government in this case to be barred from relitigating this title in a future suit. The IRS knew all aspects of this transaction at all material times and were of necessity given notice by the elements in the quiet title complaint. The government now raises for the first time, in this appeal, that sufficient notice was not given. For the reasons stated, we choose to reject the highly technical argument of the government and opt for preserving the integrity of the quiet title action as a method specifically provided by Congress for forcing these matters to a speedy and just conclusion.

We therefore hold that the fraudulent conveyance action was barred by res judicata and the decision of the district court is

AFFIRMED.

¹ The government expressed its reasons for not entering the quiet title action to the district court at the trial of this instant action in November, 1971, as shown by the district court's opinion. The attorneys for the government informed the district court that they had intended to file an answer in the quiet title suit but that through neglect or pure oversight on their part no appearance was ever made.

² (a) Under the conditions prescribed in this section and section 1444 of this title for the protection of the United States , the United States may be named a party in any civil action or suit in any district court, or in any State court having jurisdiction of the subject matter--

(1) to quiet title to,

(2) to foreclose a mortgage or other lien upon,

(3) to petition,

(4) to condemn, or

(5) of interpleader or in the nature of interpleader with respect to, real or personal property on which the United States has or claims a mortgage or other lien.

³ H. R. Rep. No. 1191, 77th Cong., 1st Sess. (1941); S. Rep. No. 1646, 77th Cong., 2nd Sess. (1942); See Quinn v. Hook [64-2 USC ¶9609], 231 F. Supp. 718 (E. D. Pa., 1964); See also, United States v. Brosnan [60-2 USTC ¶9516], 363 U. S. 237, 242-250 (19--).

⁴ This conclusion as to the government's usual practice is reinforced by the government attorney's statement to the district court. See footnote 1 supra.

⁵ (b) The complaint or pleading shall set forth with particularity the nature of the interest or lien of the United States . In actions or suits involving liens arising under the internal revenue laws, the complaint or pleading shall include the name and address of the taxpayer whose liability created the lien and, if a notice of the tax lien was filed, the identity of the internal revenue office which filed the notice, and the date and place such notice of lien was filed. In actions in the State courts service upon the United States shall be made by serving the process of the court with a copy of the complaint upon the United States attorney for the district in which the action is brought or upon an assistant United States attorney or clerical employee designated by the United States attorney in writing filed with the clerk of the court in which the action is brought and by sending copies of the process and complaint, by registered mail, or by certified mail, to the Attorney General of the United States at Washington, District of Columbia. In such actions the United States may appear and answer, plead or demur within sixty days after such service or such further time as the court may allow.

⁶ We note that the government argues that no real harm to the integrity of the quiet title action can come in these cases since it concedes that any bona fide purchaser taking from the one who obtains the bill to quiet title before the government files a fraudulent conveyance action will be protected. This overlooks the very real possibility that the transferee who seeks a bill to quiet title may be doing so as a prelude to making substantial investment and/or improvements in the property in reliance on that bill. Once such a party had made substantial investments he might be tempted to settle even an essentially groundless fraudulent conveyance claim to protect a far greater investment.

Furthermore, allowing the government to stand on the sidelines and wait, in a sense does nothing more than create the possibility of further litigation, for even where the one obtaining the bill to quiet title has sold the property, in addition to the question of a possible fraudulent conveyance, the government might see fit to litigate whether the second sale was to a bona fide purchaser. It seems far better, when the government knows full well of all claims it might have, to require it to litigate these claims in the quiet title action and thus try to nip these later problems in the bud.

Concurring Opinion

BROWN, Chief Judge, Specially Concurring:

I concur fully in the decision and opinion of the Court. I add this only to clear up to the reader what might otherwise be a mystery: Why did this happen? Was the Government deliberately declining to participate in the Alabama quiet title action because of any genuine belief that §2410 did not cover its potential claim? The answer is a plain no.

Indeed the only difficulty in this case is trying to articulate the Government's thesis. The fact is, as the arguments revealed, this is a plain case of gross, glaring neglect in which the Attorney General's Office and that of the local United States Attorney's Office to each of whom the appropriate citations were twice sent, simply sat by and did nothing.

The Government does a disservice to the laudable Congressional concept expressed in §2410 by seeking a Judicial pardon on these dubious grounds for neglect of a kind for which they neither offer or can find an excuse.

 

 

[62-2 USTC ¶9554]Jane I. Hartman, Appellant v. Fred J. Lauchli, Trustee of Hartman Corporation of America , Appellee

(CA-8), U. S. Court of Appeals, 8th Circuit, No. 16,929, 304 F2d 431, 6/20/62, Affirming an unreported District Court decision

[1954 Code Secs. 6323 and 6871]

Tax claims in bankruptcy: Trustee's action against bankrupt: Finality of judgment.--Since Federal Rules of Civil Procedure are not substitutes for direct appeals from judgments, Rule 60(b) of the Federal Rules of Civil Procedure was not a proper means of seeking vacation of a judgment against transferees of a bankrupt corporation. The judgment had been affirmed by this court and the transferees were without further redress.

William J. Becker, 7811 Carondelet Ave., Clayton 5, Mo. (William J. Becker, 7811 Carondelet Ave., Clayton 5, Mo., on brief), for appellant. Kenneth Teasdale, Charles E. Dapron, Armstrong, Teasdale, Roos, Kramer & Vaughan, 506 Olive St., St. Louis, Mo., for appellee.

Before SANBORN, BLACKMUN and RIDGE, Circuit Judges.

SANBORN, Circuit Judge:

Jane I. Hartman, one of the defendants in the District Court in the action of Fred J. Lauchli, Trustee of Hartman Corporation of America (a corporation), Bankrupt, v. Milton D. Hartman, et al., has appealed from an order filed October 6, 1951, denying the defendants' motion of July 21, 1958, under Rule 60(b) of the Federal Rules of Civil Procedure, to vacate the final judgment entered against the defendants on Count VII of the Complaint.

The factual background of this controversy between the Trustee in Bankruptcy of the Hartman Corporation and the Hartmans has been stated in great detail in the opinion of this Court in Hartman v. Lauchli [57-1 USTC ¶9571], 238 F. 2d 881, and will not be repeated.

Lauchli, Trustee, on December 20, 1948 , brought an action against the Hartmans in the District Court to recover monies alleged to have been transferred to them by the bankrupt corporation in fraud of its creditors. Counts VI and VII of the Complaint in the Trustee's action were claims for monies diverted from the bankrupt, without consideration and in fraud of its creditors, to the members of an allegedly fictitious Hartman family partnership known as American Electrical Products Company. The District Court, after a trial, entered a judgment in favor of the Trustee upon the claim stated in Count VI, for $421,469.21 ($307,641.76 plus interest), because of monies diverted to the defendants between September 2, 1943, and February 5, 1945. The court entered judgment in favor of the Trustee upon Count VII, for $150,372.97 ($109,761.29 plus interest), because of monies diverted to the defendants between February 2, 1945 , and January 31, 1946 . On appeal, this Court affirmed the judgment of the District Court as to Court VII, holding that the Government was an existing creditor of the Hartman Corporation between February 2, 1945 , and January 13, 1946 . The judgment on Count VI was reversed and the "cause as to Count 6" was "remanded for a new trial." This because the bankrupt had not been shown to have had any creditors during the period September 1, 1943 , to July 15, 1944 .

It is the judgment on Count VII, which was affirmed by this Court on appeal and which the Supreme Court declined to review on certiorari (353 U. S. 965), that the defendants asked the District Court to vacate.

There can be no question that the affirmance by this Court of the judgment of the District Court on Count VII conclusively and finally established (after the Supreme Court had denied certiorari) that the United States during the period referred to in that Count was, by virtue of matured tax claims against the bankrupt, a creditor with a provable debt, and that the diversion of funds by the bankrupt was in fraud of creditors and recoverable by the Trustee.

The appellant contends that the ruling that the United States was a creditor was erroneous. But if that were so, what of it? The District Court and this Court unquestionably had jurisdiction to decide that issue. They decided it. Jurisdiction to decide is jurisdiction to make wrong, as well as right, decisions. ¹

Rule 60(b) was not intended as a substitute for a direct appeal from an erroneous judgment. The fact that a judgment is erroneous does not constitute a ground for relief under that Rule. ²

What we have said is not to be construed as any indication that we think the decision with respect to Count VII was in fact erroneous. The District Court obviously did not err in denying the motion of the defendants to vacate and set aside the final judgment in this case. Moreover, after this Court had affirmed the judgment of the District Court on Count VII, that court, without the consent of this Court, could not have disturbed the judgment. ³ The motion to vacate might well have been denied on the authority of Thornton v. Carter, 8 Cir., 109 F. 2d 316.

The order appealed from is affirmed.

¹ Fauntleroy v. Lumm, 210 U. S. 230, 234-235, 237; Burnet v. Desmornes, 226 U. S. 145, 147; Lamar v. United States, 240 U. S. 60, 64-65; Pope v. United States, 323 U. S. 1, 14.

² Home Indemnity Co. of New York v. O'Brien, 6 Cir., 112 F. 2d 387; Berryhill v. United States, 6 Cir., 199 F. 2d 217, 219; Elgin Nat. Watch Co. v. Barrett, 5 Cir., 213 F. 2d 776, 779-780; Collins v. City of Wichita, Kansas, 10 Cir., 254 F. 2d 837, 839; United States v. Failla, D. C. N. J., 164 F. Supp. 307, 312-313; Ackermann v. United States, 340 U. S. 193, 197-198.

³ Tribble v. Bruin, 4 Cir., 279 F. 2d 424, 427; Price v. United States, D. C. E. D. Va., 195 F. Supp. 203; 7 Moore's Federal Practice (2d Ed.) 339-341; Butcher & Sherrerd v. Welsh, 3 Cir., 206 F. 2d 259, 261-262.

 

 

[58-1 USTC ¶9424]J. Rob ert D. Smith and Betty Newland Smith, Appellants v. United States of America , Appellee

(CA-6), U. S. Court of Appeals, 6th Circuit, No. 13309, 254 F2d 865, 4/9/58 , Vacating and remanding District Court, 57-1 USTC ¶9224, 146 Fed. Supp. 104

[1939 Code Sec. 3672--similar to 1954 Code Sec. 6323; 1939 Code Sec. 3678--same as 1954 Code Sec. 7403]

Liens for taxes: Filing of notice: Prior state court action to quiet title: Exclusive jurisdiction.--Where taxpayer's wife brought action in a state court to quiet title to real property which taxpayer had conveyed to her prior to the Government's filing of notice of tax lien and the Government subsequently failed to remove the state-court action to a federal court, the state court retained exclusive jurisdiction to determine whether taxpayer's wife was in fact a "purchaser" against whom the lien would be invalid. Consequently, the Federal District Court erred when it held in a later foreclosure action against the real property that the tax lien was a valid first lien and that the property could be sold in satisfaction of it. Accordingly, a stay of proceedings by the Federal District Court as to both the taxpayer and his wife was to be continued in force pending determination of the state court action.

Rob ert P. Goldman, Cincinnati, Ohio (Harry Stickney, Leonard S. Meranus, Paxton & Seasongood, Cincinnati, Ohio, were with him on brief), for appellants. S. Dee Hanson, Washington, D. C. (Charles K. Rice, Lee A. Jackson, A. F. Prescott, George F. Lynch, Washington, D. C., Sumner Canary, Clarence M Condon, Cleveland, Ohio, were with him on brief), for appellee.

Before SIMONS, Chief Judge, MILLER, Circuit Judge, and MATHES, District Judge.

MATHES, District Judge:

Appellants, husband and wife, appeal from a judgment of the District Court decreeing foreclosure of appellee's tax lien on real property situate in Erie County, Ohio, claimed by reason of assessments for appellant J. Rob ert D. Smith's 1942 and 1943 income taxes.

The land involved had been acquired by appellant Rob ert Smith, through inheritance upon the death of his mother, after the assessment lists had been received by the Collector [Int. Rev. Code of 1939 §3671], and was conveyed by warranty deed for allegedly valuable consideration to appellant Betty Smith some two years prior to the filing of the Collector's notice of tax lien with the Recorder of Erie County [id. §§ 3670, 3672], although this deed was not recorded until after recordation of the Collector's notice.

It appears from the record that shortly after commencement of the lien-foreclosure action in the District Court [Int. Rev. Code of 1939 §3678; 28 U. S. C. §1345] [57-1 USTC ¶9224], appellants as defendants moved to stay the proceedings upon the grounds: that appellant Betty Smith as plaintiff had previously commenced in the Court of Common Pleas of Erie County, Ohio, an action to quiet title and for other equitable relief "with respect to the same property and involving the same federal tax lien"; that the United States was made a party defendant and served with process in this previously filed state-court action [28 U. S. C. §2410], but made no effort to remove the state-court case to the District Court [id. §1444]; and that appellants would be subjected to undue harassment unless the federal-court action might be stayed pending determination of the state-court action to quiet title as against the identical tax lien.

The United States did not oppose the motion to stay proceedings, and the District Court granted the motion. Shortly thereafter the Government filed a "motion to place cause on active list and require defendants to answer complaint."

The District Court's memorandum directing that this motion be granted "insofar as the defendant J. Rob ert D. Smith is concerned" stated that there was "no reason at this stage of the proceedings . . . to require the defendant Betty Newland Smith to meet the issue involving her deed of conveyance in this Court at this time." Thereupon the District Court ordered that the lien-foreclosure action "be placed on the active list insofar as the defendant J. Rob ert D. Smith is concerned, and that said defendant answer the complaint filed in this cause."

In due course appellant Rob ert Smith filed his answer to the lien-foreclosure complaint. The case was then submitted to the District Court for decision upon a stipulated statement of facts, and the District Court's memorandum of decision awarding judgment in favor of the Government states that the case was so submitted along with the complaint, "the answer of defendant J. Rob ert D. Smith . . . and the briefs of plaintiff and the defendant J. Rob ert D. Smith."

However the finding of fact, conclusions of law, and judgment treat the case as if defendant Betty Smith, too, had appeared and litigated the lien-foreclosure action along with her husband. Apparently because all counsel overlooked it, no mention is made of the fact that appellant Betty Smith had never been called upon even to answer the Government's complaint, or indeed of the fact that as to her all proceedings in the federal-court action remained--and for all that appears still remain--stayed by the earlier order of the District Court.

As Mr. Chief Justice Hughes observed for the Court in United States v. Bank of New York & Trust Co., 296 U. S. 463 (1936): "The principle, applicable to both federal and state courts, that the court first assuming jurisdiction over property may maintain and exercise that jurisdiction to the exclusion of the other, is not restricted to cases where property has been actually seized under judicial process before a second suit is instituted. It applies as well . . . in suits of a similar nature, where, to give effect to its jurisdiction, the court must control the property. . . . If the two suits are in rem or quasi in rem, so that the court must have possession or control of the res in order to proceed with the cause and to grant the relief sought, the jurisdiction of one court must of necessity yield to that of the other." [296 U. S. at 477.]

The settled rule which has risen on the foundation of this principle is that whichever court, state or federal, first obtains constructive possession of property in the exercise of its jurisdiction, is entitled to retain control of that property without interference from the other. [Harkin v. Brundage, 276 U. S. 36, 43 (1928); Farmers' Loan & Trust Co. v. Lake Street Elevated R. R., 177 U. S. 51, 61 (1900); Hagan v. Lucas, 35 U. S. (10 Pet.) 400, 103 (1836).]

In Dennison Brick Co. v. Chicago Trust Co., 286 Fed. 818 (6th Cir., 1923), upon applying the rule just stated in a situation closely analogous to that presented in the case at bar, this Court declared: "Our conclusion that the state court had exclusive jurisdiction to determine the validity of the . . . [lien] renders a discussion of the merits of the controversy not only unnecessary, but improper." [286 Fed. at 822; see also: First Nat'l. Bank v. Charles Broadway Rouss, Inc., 61 Fed. (2d) 489, 492 (5th Cir. 1932), cert. denied, 287 U. S. 670 (1933); Davis v. Mabee, 32 Fed. (2d) 502, 504 (6th Cir.), cert. denied, 280 U. S. 580 (1929); cf. Great North Woods Club v. Raymond, 54 Fed. (2d) 1017 (6th Cir. 1931).]

Here the judgment of the District Court, in addition to decreeing that the tax claims against appellant Rob ert Smith constitute a valid lien against the real property which is the subject of the earlier state court quiet-title action, also decrees that the tax lien is a first lien on that real property, and orders the property "be sold by the U. S. Marshal at public auction. . . ."

To paraphrase what this Court said in the Dennison Brick case, supra: The State court has undoubted jurisdiction to quiet title to the land in question, and to declare appellee's tax lien void if appellant Betty Smith was a "purchaser" within §3672 of the Internal Revenue Code of 1939 [28 U. S. C. §2410]; and the State court has equally undoubted jurisdiction in the same quiet-title action to subject the land to payment of the tax lien, if found valid, by foreclosure and sale [id. §2410(c)].

Since the State court has prior jurisdiction over the real property against which the tax lien is asserted, and the Government appears to have elected, by eschewing removal [28 U. S. C. §§ 1444, 2410], to litigate the matter in the State court, the District Court in the first instance properly stayed further proceedings, and such a stay as to both defendants Smith should be continued in force pending determination of the prior state-court action.

Accordingly the findings of fact, conclusions of law and judgment of the District Court are vacated, and the cause remanded for further proceedings not inconsistent with this opinion.

 

 

[94-1 USTC ¶50,287] William C. Blankstyn, Plaintiff v. United States of America , Defendant

U.S. District Court, Dist. Ariz., CIV. 91-0452 PHX CAM, 5/13/94

[Code Secs. 6103 and 7431 ]

Return information: Wrongful disclosure: Notice of levy: Employer.--An employee was not entitled to damages for wrongful disclosure of return information arising from the IRS's serving of a notice of levy on the wages of the employee with his employer and the recording of a notice of tax lien. The disclosure of return information was authorized, and it was necessary for the collection of taxes.

[Code Sec. 6323 ]

Tax lien: Res judicata.--An individual was not entitled to relitigate, in an action to quiet title to property, the same claim concerning the validity of a tax lien that was already denied by the bankruptcy court in the same district for which a separate appeal was pending.

ORDER

MUECKE, District Judge:

Having considered the pleadings filed concerning defendant's motion for summary judgment, the Court concludes as follows:

FACTS

Plaintiff filed this action seeking to enjoin the Internal Revenue Service ("IRS") from levying his wages and seeking damages for wrongful disclosure of return information. Defendant's Statement of Facts ("DSOF"), 1. Plaintiff alleged that he never received a notice of deficiency for tax year 1985, and that the assessment was not properly made and recorded. Id. Plaintiff alleged that the IRS's collection of taxes assessed for 1985 was unlawful. Id. Plaintiff also alleged that because the assessment was improper, the IRS's disclosure of return information in connection with the wage levy violated 26 U.S.C. §7431 . ¹ Id. Plaintiff sought damages for wrongful disclosure of return information. Id.

After this Court denied a permanent injunction pursuant to 26 U.S.C. §7421 (the "Anti-Injunction Act"), and dismissed the lawsuit, plaintiff appealed. DSOF, 2-3. The Ninth Circuit affirmed this Court's denial of the injunction, and remanded only the wrongful disclosure issue for this Court to determine whether an assessment was made against plaintiff for 1985. Id. If an assessment was made against plaintiff, any disclosure of return information would be authorized pursuant to 26 U.S.C. §6103(k)(6) . DSOF, 3.

On November 23, 1993 , this Court granted defendant's motion for partial summary judgment. Defendant had established that valid assessments in the amount of $18,772.41 and a lien fee of $6.00 were made against plaintiff in 1985. Defendant also established that the required notices were properly mailed. The Ninth Circuit had already determined that the notices were properly mailed.

Prior to the ruling on the motion for summary judgment, construed as a motion for partial summary judgment, plaintiff filed an amended complaint adding two new causes of action for (1) quiet title to his property and (2) seeking damages pursuant to 26 U.S.C. §7431 for wrongful disclosure of return information arising from the IRS's serving a Notice of Levy on his employer and recording a Notice of Federal Tax Lien with respect to his unpaid 1985 federal tax liability.

STANDARD OF REVIEW

Summary judgment may be granted if the movant shows that "there is no genuine issue as to any material fact and that the moving party is entitled to judgment as a matter of law." Rule 56(c), Federal Rules of Civil Procedure.

The disputed fact(s) must be material. Id. Substantive law determines which facts are material. "Only disputes over facts that might affect the outcome of the suit under the governing law will properly preclude the entry of summary judgment." Anderson v. Liberty Lobby, 477 U.S. 242, 249, 106 S.Ct. 2505, 2510, 91 L.Ed.2d 202 (1986).

The dispute must also be genuine. A dispute about a material fact is genuine if "the evidence is such that a reasonable jury could return a verdict for the nonmoving party." Liberty Lobby, 477 U.S. at 249, 106 S.Ct. at 2510. There is no issue for trial unless there is sufficient evidence favoring the nonmoving party. If the evidence is merely colorable or is not significantly probative, summary judgment may be granted. Liberty Lobby, 477 U.S. at 249-50, 106 S.Ct. at 2510-11. In a civil case, the question is:

whether a fair-minded jury could return a verdict for the plaintiff on the evidence presented. The mere existence of a scintilla of evidence in support of the plaintiff's position will be insufficient; there must be evidence on which the jury could reasonably find for the plaintiff.

Liberty Lobby, 477 U.S. at 252, 106 S.Ct. at 2512.

The moving party who has the burden of proof on the issue at trial must establish all of the essential elements of the claim or defense for the court to find that the moving party is entitled to judgment as a matter of law. Fontenot v. Upjohn, 780 F2d 1190, 1194 (5th Cir. 1986); Calderone v. United State, 799 F2d 254, 259 (6th Cir. 1986). However, the moving party need not disprove matters on which the opponent has the burden of proof at trial. Celotex Corp. v. Catrett, 477 U.S. 317, 322 106 S.Ct. 2548, 2552, 91 L.Ed.2d 265 (1986). Thus, summary judgment is proper if the nonmoving party fails to make a showing sufficient to establish the existence of an essential element of his case on which he will bear the burden of proof at trial. Id.

DISCUSSION

Defendant argues that summary judgment is proper because (1) plaintiff's quiet title claim is barred by the doctrine of res judicata because the same claim has already been denied by the Bankruptcy Court for this district and (2) because plaintiff is not entitled to damages pursuant to 26 U.S.C. §7431 as a result of the IRS's serving a Notice of Levy on his employer and recording a Notice of Federal Tax Lien with respect to his unpaid 1985 federal tax liability.

(1) Whether plaintiff's quiet title claim is barred by the doctrine of res judicata because the same claim has already been denied by the Bankruptcy Court for this district.

Defendant argues that the doctrine of res judicata applies to the quiet title claim because the Bankruptcy Court already has determined the validity of the IRS tax lien with respect to the plaintiff's unpaid federal tax liability for 1985 and rendered a final judgment on the merits with respect to that cause of action.

Plaintiff argues that the doctrine of res judicata does not apply because the bankruptcy decision is on appeal in the United States District Court for the District of Arizona. See CIV 93-2062-PHX-RCB. Plaintiff argues that, if this Court considered the arguments and the authority submitted in the bankruptcy appeal, this Court would conclude that the appeal has merit, and that the matter will be remanded to bankruptcy court for further proceedings. According to plaintiff, if the matter is remanded, then the doctrine of res judicata would not apply.

This Court is not the appellate court in the bankruptcy matter. This Court has no authority to second guess the outcome of the appeal. At this point in time, the Bankruptcy Court decision is valid. Therefore, defendant's argument has merit, and plaintiff's quiet title action is barred by the doctrine of res judicata.

(2) Whether plaintiff is entitled to damages pursuant to 26 U.S.C. §7431 as a result of the IRS's serving a Notice of Levy on his employer and recording a Notice of Federal Tax Lien with respect to his unpaid 1985 federal tax liability.

Defendant argues that plaintiff is not entitled to damages pursuant to 26 U.S.C. §7431 for improper disclosure of tax return information. 26 U.S.C. §6103 provides that income tax returns and return information are confidential. Maisano v. United States [90-2 USTC ¶50,399 ], 908 F.2d 408, 410 (9th Cir. 1990). However, 26 U.S.C. §6103 also authorizes the IRS to disclose "return information to the extent that such disclosure is necessary in obtaining . . . the correct determination of tax, liability for tax, or the amount to be collected or with respect to the enforcement of any other provision of the [Code]." 26 U.S.C. §6103(k)(6) . Also, Treasury Regulations specifically authorize disclosure of tax return information "to apply the provisions of the Code relating to the establishment of liens against [the taxpayer's] assets, or [a] levy on . . . the assets to satisfy any [outstanding] liability." Treas. Reg. Section 301.6103(k)(6)-1(b)(6) .

In this lawsuit, the Ninth Circuit has determined that any disclosure of return information arising from the IRS' serving a Notice of Levy on the plaintiff's employer was authorized pursuant to 26 U.S.C. §6103(k)(6) because such disclosure "was necessary for the collection of a tax liability" provided that the IRS made an assessment against the plaintiff with respect to 1985. This Court has determined that the IRS made an assessment against the plaintiff with respect to 1985. In another lawsuit, the Ninth Circuit has determined that the disclosures resulting from filing liens and serving levies "do not violate section 6103(a) prohibition against unauthorized disclosure of federal tax return information." Maisano v. United States [90-2 USTC ¶50,399 ], 908 F.2d at 410.

The same conclusion must be reached with respect to the IRS's recording its Notice of Federal Tax Lien as such action is also necessary for the collection of tax liability. Any disclosure of return information arising from the IRS's serving a Notice of Levy on the plaintiff's employer and recording a Notice of Federal Tax Lien with respect to his unpaid 1985 federal tax liability is authorized by section 6103(k)(6) .

Plaintiff argues that the defendant did not provide plaintiff a copy of the record of assessment upon a request under the Freedom of Information Act ("FOIA"), and therefore, he is entitled to relief under 28 U.S.C. §2410. In response to the FOIA request, the IRS stated that it did not keep copies of the Notices, but the Individual Master File ("IMF") "Specific Transcript" for 1985 shows the date in which the Notice was scheduled to be sent. Thus, plaintiff argues that defendant has not met its burden of which that the plaintiff was provided a copy of the record of assessment.

The Court finds no merit to plaintiff's arguments. It has already been determined that the proper notices were mailed. ² This Court found that an valid assessment for 1985 was made against plaintiff. Therefore, any disclosure of return information was authorized because it was necessary for the collection of a tax liability and did not amount to wrongful disclosure. Finding that there are no issues of material fact, the Court concludes that as a matter of law summary judgment on this claim is proper.

Based on the foregoing, IT IS ORDERED THAT:

(1) Defendant's motion for summary judgment (Doc. #54) IS GRANTED.

(2) The Clerk of the Court shall terminate this matter.

¹ Section 7431 provides a taxpayer a civil cause of action for damages for the intentional or negligent disclosure of confidential return information by officers or employees of the Untied [sic] States. See Maisano v. United Sates [90-2 ustc ¶50,399 ], [sic] 908 F.2d 408, 410 (9th Cir. 1990). However, the IRS is authorized to disclose return information if necessary for the collection of a tax liability. 26 U.S.C §6103(k)(6) .

² A notice of deficiency can be valid if it is mailed to the taxpayer's last known address, even if it is never received by the taxpayer. Williams v. Commissioner [91-2 USTC ¶50,317 ], 935 F.2d 1066, 1067 (9th Cir. 1991).

 

 

[58-1 USTC ¶9442]Rickoon Real Estate v. Two Boro Dress, Inc.

N. Y. Supreme Court, Spec. Term, Pt. 1, Kings Cty., No. 5283-1956, 171 NYS2d 19, 11/29/57

Priority of liens: Federal tax liens v. municipal liens: Res judicata.--Since the New York Civil Practice Act makes the payment of city taxes, assessments and water rates an expense of sale in foreclosing a mortgage, the Federal Government's lien for taxes is not entitled to priority over such payment. Furthermore, the Government, having taken no appeal from either the original or amended judgments of foreclosure and sale, was barred from again raising the issue of priority of liens in the present hearing on the motion for an order confirming the referee's report of sale, by the doctrine of res judicata.

Eliott L. Biskind, 160 Broadway, New York , N. Y., for plaintiffs. George L. Bourney, 51 Chambers St., New York 7, N. Y., Leonard P. Moore, United States Attorney, 271 Washington St., Brooklyn 1, N. Y., for defendants.

BROWN, Judge:

In this foreclosure action plaintiffs move for an order confirming the referee's report of sale and directing the referee to pay to plaintiffs the sum of $3,285.95 now held by the referee as part of the proceeds of the sale and also for the payment to plaintiffs of the sum of $629.62 from the receiver's funds, this latter sum being the amount of plaintiffs' deficiency over and above the said $3,285.95. Defendant United States of America cross-moves for an order directing the referee to correct his report in conformity with its objections and to pay to it the said sum of $3,285.95. A request is also made by the referee for an additional allowance in the sum of $500 for additional services performed in this matter. From the filed papers it appears that pursuant to a judgment of foreclosure and sale entered on October 19, 1956 , the referee sold the foreclosed premises to one Slavit for the sum of $13,500. The judgment of foreclosure and sale did not provide that the purchaser be allowed a credit for the payment of any real estate taxes, assessments and water rates but rather that the referee was to make such payment. The terms of sale, however, provided for such credit. The purchaser paid the real estate taxes, etc., in the sum of $3,285.95 and received a credit toward the purchase price for such payment. On January 21, 1957 , title was closed and a deed delivered to the purchaser. By order dated February 20, 1957 , the judgment of foreclosure and sale was amended nunc pro tunc to conform to the terms of sale relating to the payment of taxes. This order further provided that the issue of the federal tax liens was to be passed upon on the motion to confirm the referee's report of sale. Upon appeal the order was affirmed by the Appellate Division (N. Y. L. J., April 30, 1957, p. 9, col. 2). The defendant United States of America served and filed objections to the referee's report of sale in allowing priority to the City of New York for its real estate taxes, assessments and water rates as against liens relating to unpaid social security assessments levied by the United States against the owner of the foreclosed premises. The referee, after deducting from the purchase price of $13,500 the aforementioned credit of $3,285.95, received the balance of $10,214.05 in cash. After deducting from that $400 for his fee as referee and $14.85 for revenue stamps on the deed, he had a balance of $9,799.20. Thereafter pursuant to an order of the court dated June 27, 1957 , the referee paid to the plaintiffs from this amount the sum of $6,473.32 and paid to himself $39.93 as disbursements, leaving a balance of $3,285.95, the amount in dispute. This is claimed by the United States Government as surplus. A further sum of $1,263.17, the balance of the receiver's account, was also placed on deposit to the credit of the action. The basic issue involved is whether the $3,285.95 is to be deemed an expense of sale as provided by sections 1082 and 1087 of the Civil Practice Act or surplus upon which the federal liens attached because of their priority in time as against the liens of the City of New York . The liens in question being statutory, the pertinent sections of the statutes involved reveal the following: Title 26, U. S. C. A., section 6321, provides that unpaid federal taxes are a lien in favor of the United States Government from the date of the assessment and remain so until they are paid or become unenforcible by reason of the lapse of time (Title 26, U. S. C. A., sec. 6322) except as against mortgagees, pledgees, purchasers and judgment creditors, in which cases the federal lien must first be filed (Title 26, U. S. C. A., sec. 6323). The New York City Charter, chapter 7, section 172, provides that real estate taxes shall become liens when they become due and payable and shall remain so until paid. The semi-annual installments of city taxes become due and payable on October 1 and April 1 of each year.

It is undisputed that the defendant United States of America having appeared in this action and the court having obtained jurisdiction of such defendant, the judgment of foreclosure and sale foreclosed any liens or claims against the property and such liens attached to the surplus money, if any, realized on the sale of the premises.

[Government's Contentions]

Defendant United States of America contends that the money paid to the City of New York for its taxes, etc., was out of surplus, and that therefore the City of New York was given an unlawful priority over its liens. As its authority defendant cites United States v. City of New Britain (347 U. S. 81 [54-1 USTC ¶9191]). In that case the court held that where tax liens are concerned the rule of "first in time, first in right" must be applied and that a prior lien gives a prior claim which is entitled to prior satisfaction out of the property it binds unless the lien be intrinsically defective. The Connecticut statutes which were reviewed by the Supreme Court provided that real estate tax liens "shall take precedence of all transfers and incumbrances" in any manner affecting the property subject to the lien. The funds available in the City of New Britain case were insufficient to pay all claimants in full, and the Superior Court of Connecticut directed that the expenses, the city liens, the mortgages, the judgment lien and United States lien be paid in that order. The United States appealed from the judgment in so far as it gave the statutory liens of the city priority over those of the United States but did not contest the state court's direction that the expenses of sale and the mortgagee's judgment be paid in full and given priority over its liens. The United States Supreme Court apparently recognized that expenses of the sale are to be paid along with the mortgage and restricted the payment of the government's tax liens to funds in excess of the amount needed to pay the mortgage which amount would, of necessity, include expenses and costs of the sale. The Connecticut statute did not, as does our Civil Practice Act, make the payment of city taxes an "expenses of the sale." Section 1087 of the Civil Practice Act provides: "Where a judgment rendered in an action to foreclose a mortgage on real property directs a sale of the real property, the officer making the sale must pay out of the proceeds, unless the judgment otherwise directs, all taxes, assessments and water rates which are liens upon the property sold * * *. The sums necessary to make those payments and redemptions are deemed expenses of the sale within the meaning of that expression as used in any provision of this article * * *." Section 1082 of the Civil Practice Act provides that "In an action to foreclose a mortgage upon real property, if the plaintiff becomes entitled to final judgment, it must direct the sale of the property mortgaged or such part thereof as is sufficient to discharge the mortgage debt, the expenses of sale and the costs of the action * * *."

The contention that the term "expenses of sale" relates to taxes, etc., has been sustained by our courts (Termansen v. Matthews, 49 App. Div., 163; Wesselman v. Engel Co., 309 N. Y. 27).

It is undisputed that under section 6323, title 26, United States Code Annotated, and also under the authority of the City of New Britain case (supra), the mortgagees herein were definitely entitled to priority over the United States Government and were entitled to be made whole.

[Effect of Foreclosure Judgment]

The judgment of foreclosure and sale directed the sale of the mortgaged property, or such part thereof "as is sufficient to discharge the mortgage debt; the expenses of the sale, and the costs of this action." Payment of these items from the proceeds of the sale had priority. Anything left over was "surplus" to be deposited in the designated bank by the referee for disbursement in the prescribed manner (secs. 1082 and 1087, Civil Practice Act, supra). As heretofore indicated, section 1087 directs the officer making the sale to pay out of the proceeds all taxes, assessments and water rates. The language used is "must pay out." The referee is obliged to make such payments unless the order otherwise directs. The fact that the terms of sale provided that the purchaser pay the taxes, etc., and receive credit for such payment, varied neither the substance of the sections nor their purpose of protecting the purchaser at the sale and enabling him to obtain clear title (Wesselman v. Engel Co., supra). The judgment as amended nunc pro tunc, correcting the variance between the terms of sale and the original order, conforms to the language of section 1087, C. P. A. The term "expenses of sale" cannot be read so as to include taxes only when they are paid by the referee. One must look to substance rather than form (York Mortgage Corp'n v. Clotar Construction Corp'n, 254 N. Y., 128; J. Radley Metzger Co., Inc., v. Fay et al., 4 App. Div., 2d, 436). It would be incongruous to hold that those sums are expenses of the sale when the referee pays them and not expenses of the sale when the purchaser pays them pursuant to an order of the court and in compliance with the sections of the Civil Practice Act.

The taxes, etc., being expenses of sale as provided by the sections of the Civil Practice Act, no surplus came into existence upon which the federal liens could attach.

To sustain the contention of the United States Government would jeopardize the entire mortgage market, both present and future. Mortgagees would hesitate to advance funds needed in such business transactions in the fear that on a foreclosure they would not be made whole.

[Res Judicata]

Furthermore, it would appear that the United States Government is barred from raising the present issue. It is well settled law that the principle of "res judicata" operates to conclude by the judgment all the parties thereto and their privies with respect to any and all matters in issue or necessarily involved in the plaintiffs' cause of action, as well as all matters of defense which were or might have been litigated therein where the court had jurisdiction of the subject matter and the parties. The defendant United States of America voluntarily and according to the statutes duly enacted by the Congress of the United States of America submitted to the jurisdiction of this court. By so doing, it became bound by all the terms of the judgment. The judgment was conclusive as between the plaintiffs and all of the defendants (Field v. Chronik, 190 App. Div., 501; King v. Franmore Equity Corp'n, 260 App. Div., 303). The validity or legality of a provision in a judgment in foreclosure not raised by a party to the suit by timely motion or timely appeal cannot be raised collaterally where the court rendering the judgment had general jurisdiction of the parties and subject matter of the action (Matter of Estate of Stilwell, 139 N. Y., 337). No appeal was taken by the defendant United States of America from the original judgment of foreclosure and sale, nor did it perfect its appeal from the amended judgment, having apparently abandoned such appeal. Under the circumstances, the final judgment of foreclosure and sale as amended, not having been appealed from and no timely application to modify or vacate same having been made, the judgment is conclusive and res judicata as to all issues determined by it.

Accordingly, the motion of the plaintiffs is granted not only to confirm the referee's report of sale and to direct the referee to pay the plaintiffs the sum of $3,285.95 but also directing the payment to the plaintiffs of the sum of $629.62 from the receiver's funds now subject to the order of the court, in payment of the deficiency. The balance of the receiver's funds amounting to $633.55, being surplus, is directed to be paid to the defendant United States of America . The cross-motion by such defendant is otherwise denied.

The request for an additional allowance for the referee is also denied because this court in a similar application previously made by the referee denied such request (Beckinella, J., N. Y. L. J., June 24, 1957, p. 8, col. 1). No additional facts have been submitted warranting any change in such determination.

Settle order on notice.

 

 

[35-1 USTC ¶9274]United States of America, Complainant-Appellant, v. Guaranty Trust Company of New York, and George J. Baumann, Trustees under the Last Will and Testament of Henry Rosenberg, deceased, and Jerome Rosenberg, beneficiary under the Last Will and Testament of Henry Rosenberg, deceased, Defendants-Appellees

(CA-2), United States Circuit Court of Appeals for the Second Circuit, 76 F2d 747, Decided April 1, 1935

Appeal from United States District Court for the Southern District of New York.Where the Government had appeared in the Surrogates' Court and asked that the income payable to the beneficiary of a trust be applied in satisfaction of tax liens, and had been denied relief, the question is res judicata in the present suit. The court takes the position that it can not consider whether the State court was right in determining that the lien claimed by the United States was precluded by an exemption granted under the New York law. Affirming District Court decision.

Martin Conboy, United States Attorney, for complainant-appellant; Martin Conboy and David W. Wainhouse, Counsel. Nathan Lieberman, Solicitor and counsel for Jerome Rosenberg, defendant-appellee.

Before MANTON, SWAN, and AUGUSTUS N. HAND, Circuit Judges.

AUGUSTUS N. HAND, Circuit Judge:

One Henry Baumann left a will admitted to probate in the Surrogates' Court of New York County, on March 17, 1923 , under which the testator created three equal trusts in his residuary estate.

The principal of one of them was devised and bequeathed by the testator to Guaranty Trust Company of New York and George J. Baumann as trustees "to invest, reinvest and keep same invested, to collect the interest, rents, issues and profits thereof, and to pay the net income thereof to my son Jerome Rosenberg during his lifetime, in quarterly instalments, if possible." There was an executory devise of the principal of the trust conditioned upon the death of the life beneficiary. The annual income payable to Jerome Rosenberg from the trust amounted to about $3,000. Judgments against him were entered in the New York Courts amounting to about $30,000 and a receiver was appointed in supplementary proceedings in the City Court of the City of New York on behalf of one of the judgment-creditors on April 24, 1930, and the receivership order was subsequently extended so as to include other judgment-creditors. Rosenberg was indebted to the United States for unpaid income taxes and penalties embracing the years 1920, 1923, 1924, 1925, 1926, 1927 and 1928 in more than the sum of $12,000. Lien notices covering these taxes were filed pursuant to statute in the office of the Clerk of the United States District Court and with the Register of New York County, but no part of the taxes was paid.

In May, 1934, the trustees refused to turn over to Rosenberg certain of the income of the trust which they held to his credit; whereupon he applied to the Surrogates' Court , New York County, for an adjudication of his rights and prayed that the trustees be ordered to pay the income to himself. The motion papers in that application were served upon the attorneys for the receiver in supplementary proceedings, but not upon the United States of America , or its attorney. Nevertheless the Government appeared on the return day by an Assistant United States Attorney, filed affidavits and briefs in opposition to the application of Rosenberg, and in the papers which it submitted requested the Surrogate to decree that the income from the trust be used to pay the taxes due the United States for which lien notices had been filed, and prayed that the trustees be directed to turn over the same to it.

Under these circumstances Surrogate Foley filed an opinion in which he held that the income of the trust was under the New York law not alienable by the beneficiary and could not be reached by judgment creditors except as to 10% thereof through a special garnishee execution under Section 684 of the New York Civil Practice Act, or by a suit in equity to impound the surplus income. He held that in view of the statutory exemption under the state law neither by means of a judgment, nor by the assertion of a tax lien could the United States obtain relief. An order was entered in the Surrogates' Court in conformity with Judge Foley's opinion directing the payment of 90% of the income of the trust held by the trustee to Jerome Rosenberg and 10% to the receiver.

After the foregoing disposition of the matter, the United States filed a bill in the District Court for the Southern District of New York setting forth that Jerome Rosenberg was indebted on account of the income taxes above mentioned; that notices of lien had been filed pursuant to statute, and that no part of the tax had been paid. The bill prayed that the trustees be enjoined by a temporary restraining order, preliminary injunction and final decree from paying any part of the income of the trust except to the United States, and that Rosenberg likewise be enjoined from executing the order entered in the Surrogates' Court directing payment to him of the income of the trust and that the trustees be ordered to pay the same to the United States in discharge of its liens.

Upon the filing of the bill, the United States Attorney moved on affidavits for a preliminary injunction in conformity therewith which was opposed by the attorney for Jerome Rosenberg in an affidavit setting forth the opinion and order of the Surrogate and stating that the United States Attorney represented the Government on the hearing of the motion in the Surrogates' Court. The motion for a preliminary injunction was followed by a cross motion on behalf of Rosenberg asking that the bill of complaint be dismissed. This cross motion was upon an affidavit of Rosenberg 's attorney and one by himself. He swore that:

"The United States Government was not served with any citation but voluntarily appeared on the return of that application by one of the Assistant United States Attorneys, and after oral argument, submitted affidavits and briefs in opposition to deponent's motion and requested that the Trustees be directed to pay the said fund to the United States Government for taxes due it from deponent.

"Mr. Surrogate Foley granted deponent's motion and held that the United States Government is not entitled to any part of the income from the trust fund, as appears from a lengthy opinion of the Surrogate, a copy of which opinion is annexed hereto.

"Thereafter, and on September 1, 1934 , an order was entered in the Surrogates' Court directing the Trustees to pay the income to deponent."

Wainhouse, the Assistant United States Attorney in charge of the matter, filed an affidavit in opposition to the cross motion, in which he stated that:

"The presence of an Assistant United States Attorney to draw to the Surrogate's attention the existence of a United States lien against the income of a trust fund under the jurisdiction of the Court is not an appearance within the meaning of Sections 41 and 63 of the Surrogate's Court Act. The affidavit and the memorandum of law were presented to the Surrogate by the Assistant United States Attorney in accordance with a practice usually followed in cases where the United States has a property interest in a controversy before the State Courts."

It is to be noted that there was no claim that the United States appeared specially in the proceeding. Judge Foley's order recited that he heard "Martin Conboy, Esq., (Nicholas Atlas, of counsel) in opposition" to the application of Rosenberg for payment of the income, and it was stated on behalf of the Government at the time of argument that an appeal had been taken from the order of Surrogate Foley and that his order had been affirmed. We must, therefore, assume that the Government appeared in the Surrogates' Court, asked that the income claimed by Rosenberg be applied in satisfaction of tax liens which it had sought to impose, and was denied relief. Under such circumstances it is not open to us to consider whether the State Courts were right in determining that the lien claimed by the United States was precluded by an exemption granted under the New York law. This question was carefully considered by one of the most learned and experienced judges of the State of New York and is res judicata as to the question raised in the present suit unless finally reversed on appeal. The Government argues that the issues in the two proceedings were different. We can discover no basis for a distinction. The District Court was, therefore, right in denying the motion for a preliminary injunction.

It was suggested on the argument that whatever be the merits of the case the bill should not have been dismissed because the proceedings in the Surrogates' Court were not set forth on the face of the bill. But they were set forth in the affidavits upon the motion to dismiss and we do not understand that the complainant's version of what occurred is disputed or that the general appearance of the United States Attorney and his attempt to have the income of the trust applied to the satisfaction of the taxes due from Rosenberg are denied. In such circumstances, with the defense of res judicata established on the undisputed facts, it would have been folly to prolong the litigation and the District Judge properly dismissed the bill. Mast, Foos & Co. v. Stover Mfg Co., 177 U. S. 485, 495.

The order is affirmed.