Summary Judgment Page1

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[2000-1 USTC ¶50,323] ContiMortgage Corp., Plaintiff v. United States of America, Gunther A. Schaaf, and Sandra Ondov Schaaf, Defendants

U.S. District Court, Dist. Minn., Civ. 98-1389 (DWF/AJB), 3/2/2000

[Code Secs. 6321 , 6323 and 7402 ]

Summary judgment: Lien for taxes: Security interest: Priority against third parties: Mortgage guarantor: Purchaser: Equitable subrogation: Issues of fact: Knowledge of tax lien.--A mortgage assignee's suit seeking a determination regarding the priority of adverse claims to real property and a declaration that its mortgage was superior to a previously recorded federal tax lien could not be resolved on the parties' motions for summary judgment. An unresolved factual issue existed as to whether the mortgage assignor had committed an excusable mistake of fact when it failed to discover the existence of the lien before issuing the mortgage. If the mistake were excusable, the doctrine of equitable subrogation would allow the assignee to assume the same priority position as the holders of the previous encumbrances on the property, and its claim would be superior to that of the IRS.

[Code Sec. 7402 ]

Summary judgment: Security interest: Priority against third parties: Jurisdiction: Quiet title action.--A mortgage assignee qualified as a real party in interest in its suit seeking a determination regarding the priority of adverse claims to real property, and the federal district court had jurisdiction over its action to quiet title to the real property. The government's contention that the assignee was not a proper party in interest because the company that provided a title insurance policy bore the risk of loss was rejected. The assignee, and not the title company, was the owner of the subject property.

Steven H. Bruns, Esther E. McGinnis, Peterson Fram & Bergman, 50 Fifth St. East, St. Paul, Minn. 55101, for plaintiff. Daniel R. Conrad, Department of Justice, Washington , D.C. 20530 , for defendants.

MEMORANDUM OPINION AND ORDER

Introduction

FRANK, District Judge:

Plaintiff ContiMortgage Corporation ("ContiMortgage") commenced the present suit under 28 U.S.C. §2410(a) to determine the priority of adverse claims to certain real property in Anoka County , Minnesota . ContiMortgage seeks a declaration that its mortgage is superior to Defendant United States ' previously recorded federal tax liens.

The matter is currently before the Court pursuant to the cross-motions of ContiMortgage and the United States for summary judgment. For the reasons stated, both motions are denied.

Background

The following facts are not in dispute.

In 1994, the subject property was owned by Defendants Gunther Schaaf and Sandra Ondov Schaaf (the "Schaafs"). During 1994 and 1995, the Schaafs engaged in improvements on their property, including an expansion of their house and other construction on the property. The Schaafs financed the new construction by obtaining a mortgage from Mercantile Mortgage, Inc. ("Mercantile").

Mercantile hired Strategic Mortgage Services ("SMS") to conduct the title work and perform the closing of the mortgage. SMS's abstractors and title examiners performed name searches and tract searches for the subject property on February 6, 1995 , April 24, 1995 , and May 2, 1995 .

On May 4, 1995 , the IRS filed a federal tax lien in the Anoka County Recorder's Office, in the amount of $441,489.38.

On May 9, 1995 , the Schaafs executed a $300,000 note in favor of Mercantile. The note was secured by a mortgage.

$168,747.72 of the $300,000.00 mortgage was paid to lien subcontractors who had worked on the subject property. $1,248.52 of the loan proceeds from Mercantile were applied to the Schaafs' outstanding real estate taxes. $65,943.46 of the loan proceeds were used to pay off a 1991 mortgage from Crosstown State Bank ("Crosstown").

On May 12, 1995 , Mercantile assigned its interest in the 1995 mortgage to Plaintiff ContiMortgage.

On May 19, 1995 , the mortgage was recorded in the Anoka County Recorder's Office.

In the summer of 1997, the Schaafs defaulted on their mortgage payments. ContiMortgage commenced mortgage foreclosure proceedings and the Schaafs failed to redeem within the mortgage redemption period. On October 6, 1998 , ContiMortgage purchased the subject property at a mortgage foreclosure sale held by the Anoka County Sheriff. The Schaafs' interest in the property terminated on April 6, 1999 , when the redemption period expired.

ContiMortgage commenced the present action on May 21, 1998 . ContiMortgage seeks a declaration that it is entitled to be equitably subrogated to the positions of the 1991 Crosstown mortgage and the mechanic lienholders, and that its mortgage is thus superior to the rights of the United States of America .

Discussion

A. Standard of Review

Summary judgment is proper if there is no genuine issue of material fact and the moving party is entitled to judgment as a matter of law. Fed.R.Civ.P.56(c). Enterprise Bank v. Magna Bank, 92 F.3d 743, 747 (8th Cir. 1996). The court must view the evidence and the inferences which may be reasonably drawn from the evidence in the light most favorable to the nonmoving party. Enterprise Bank, 92 F.3d at 747. However, as the Supreme Court has stated, "summary judgment procedure is properly regarded not as a disfavored procedural shortcut, but rather as an integral part of the Federal Rules as a whole, which are designed to 'secure the just, speedy, and inexpensive determination of every action.' " Fed. R. Civ. P. 1. Celotex Corp. v. Catrett, 477 U.S. 317, 327, 106 S. Ct. 2548, 2555, 91 L. Ed. 2d 265 (1986).

The moving party bears the burden of showing that there is no genuine issue of material fact and that it is entitled to judgment as a matter of law. Enterprise Bank, 92 F.3d at 747. The nonmoving party must then demonstrate the existence of specific facts in the record which create a genuine issue for trial. Krenik v. County of Le Sueur , 47 F.3d 953, 957 (8th Cir. 1995). A party opposing a properly supported motion for summary judgment may not rest upon mere allegations or denials, but must set forth specific facts showing that there is a genuine issue for trial. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 256, 106 S. Ct. 2505, 2514, 91 L. Ed. 2d 202 (1986); Krenik, 47 F.3d at 957.

B. Subject Matter Jurisdiction

The United States argues that ContiMortgage is not a real party in interest in this case and that subject matter jurisdiction is therefore lacking.

Plaintiff ContiMortgage commenced this action under 28 U.S.C. §2410(a)(1), which provides in relevant part as follows:

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,

. . . .

real or personal property on which the United States has or claims a mortgage or other lien.

28 U.S.C.A. §2410(a).

The words "quiet title," as used in the section above, are not intended to refer to a suit to quiet title in the limited sense in which that term is sometimes used, but rather, the term comprehends a suit to remove a cloud upon the title of a plaintiff. Progressive Consumers Federal Credit Union v. United States [96-1 USTC ¶50,160], 79 F.3d 1228, 1231 (1st Cir. 1996), citing United States v. Coson [61-1 USTC ¶9219], 286 F.2d 453, 457 (9th Cir. 1961). Where a plaintiff does not challenge the merits of the tax assessment itself, section 2410(a) has been recognized as a vehicle for determining lien priority. Progressive Consumers [96-1 USTC ¶50,160], 79 F.3d at 1233-34. Thus, in Progressive Consumers, where, as in the present matter, the plaintiff sought a declaration of the priority of its mortgage over the government's tax lien, the First Circuit held that subject matter jurisdiction was properly exercised. Progressive Consumers [96-1 USTC ¶50,160], 79 F.3d at 1230-34.

The United States claims that ContiMortgage is not a proper party in interest because Fidelity National Title Insurance, which provided a title insurance policy in the present matter, bears the risk of loss. In support of its argument, the United States cited Commonwealth Land Title Ins. Co. v. United States, in which the title insurer brought an action against the United States to determine the validity of a tax lien. Commonwealth Land Title Ins. Co. v. United States , 759 F. Supp. 87 (D. Conn. 1991). The Court concluded that the title insurance company could not bring a claim under section 2410 because it was neither in possession of nor was the private owner of the property in question. Commonwealth, 759 F. Supp. at 93.

In the present matter, however, ContiMortgage, not a title company, is the plaintiff. ContiMortgage is the owner of the subject property and the assignee of the mortgage at issue. ContiMortgage is seeking to determine the priority position of its own mortgage. Therefore, the present matter is analogous to Progressive Mortgage, rather than Commonwealth.

As the Plaintiff in the present matter is seeking a declaration of the priority of its mortgage over the United States' tax lien, subject matter jurisdiction is proper pursuant to 28 U.S.C. §2410(a)(1). See Progressive Consumers [96-1 USTC ¶50,160], 79 F.3d at 1231.

C. Equitable Subrogation

The doctrine of equitable subrogation allows a person who pays off an encumbrance to assume the same priority position as the holder of the previous encumbrance. Mort v. United States [96-1 USTC ¶50,315], 86 F.3d 890, 893 (9th Cir. 1996). Although equitable subrogation (also called "legal subrogation") is a highly favored doctrine, it is not an absolute right, but rather, one that depends on the equities and attending facts and circumstances of each case. Universal Title Ins. Co. v. United States [92-1 USTC ¶50,106], 942 F.2d 1311, 1315 (8th Cir. 1991). In general, the equity of the party seeking subrogation must be clear and substantial, and superior to that of other claimants. Universal Title [92-1 USTC ¶50,106], 942 F.2d at 1315. Finally, subrogation cannot be invoked where it would work an injustice, violate sound public policy, or result in harm to innocent third parties. Universal Title [92-1 USTC ¶50,106], 942 F.2d at 1315.

Unlike the present matter, Universal Title again involved a title insurer who brought an action against the government regarding a prior tax lien on the subject property. In that case, the Eighth Circuit noted that an insurer has no right of subrogation as against a third party who has not caused the insured's loss. Universal Title [92-1 USTC ¶50,106], 942 F.2d at 1319. The Eighth Circuit finally concluded that the plaintiff was not entitled to be subrogated to the rights of the prior lienholders because it made no payment that would entitle it to subrogation, its failure to discover the federal tax lien was not an excusable mistake of fact, and its subrogation rights, if any, did not apply as against the government, which was not responsible for the loss. Universal Title [92-1 USTC ¶50,106], 942 F.2d at 1320.

The present matter, however, was not commenced by a title insurer. Rather, the facts of the present matter more closely resemble the case of Mort v. United States, in which assignees of a promissory note secured by a deed of trust sought a declaration that their deed of trust was superior to a federal tax lien. Mort v. United States [96-1 USTC ¶50,315], 86 F.3d 890 (9th Cir. 1996). As in the present matter, the plaintiffs in Mort acquired their interest after the IRS filed a tax lien on the property, but argued that they were entitled to be equitably subrogated to the priority position of the lender whose loan was paid off by their assignor. Mort [96-1 USTC ¶50,315], 86 F.3d at 891.

The Ninth Circuit stated that equitable subrogation is generally appropriate where (1) the subrogee made the payment to protect his or her own interest, (2) the subrogee did not act as a volunteer, (3) the subrogee was not primarily liable for the debt paid, (4) the subrogee paid off the entire encumbrance, and (5) subrogation would not work any injustice to the rights of the junior lienholder. Mort [96-1 USTC ¶50,315], 86 F.3d at 894.

A person who lends money to pay off an encumbrance on property and secures the loan with a deed of trust on that property is not a volunteer for purposes of equitable subrogation. Mort [96-1 USTC ¶50,315], 86 F.3d at 891. Therefore, to the extent that Mercantile loaned the Schaafs money to pay off lien subcontractors and the 1991 Crosstown mortgage, Mercantile was not a volunteer for purposes of equitable subrogation.

In the present matter, Mercantile assigned its interest to Plaintiff ContiMortgage. Similarly, in Mort, the plaintiff was actually an assignee of the party that had paid off the prior note. Mort [96-1 USTC ¶50,315], 86 F.3d at 894. The Ninth Circuit noted that the general rule is that, where a valid assignment of a mortgage has been consummated with proper consideration, the assignee is vested with all the powers and rights of the assignor. Mort [96-1 USTC ¶50,315], 86 F.3d at 894. The Ninth Circuit thus held that the plaintiff had assumed the assignor's rights to equitable subrogation. Mort [96-1 USTC ¶50,315], 86 F.3d at 894.

Finally, the Ninth Circuit held that application of the doctrine would not work an injustice to the rights of the government:

At the time the IRS filed its tax lien, the tax lien was subordinate to the Kern mortgage. If the Morts are equitably subrogated to the priority position of the Kern mortgage, the IRS will be in the same position it was in at the time the tax lien was filed. If equitable subrogation is denied, however, the government will receive a windfall, moving up to a better position than it originally had.

Mort [96-1 USTC ¶50,315], 86 F.3d at 895.

Similarly, in the present matter, at the time the IRS filed the tax lien, it was subordinate to the Crosstown mortgage and the rights of the lien subcontractors. ¹ If ContiMortgage is equitably subrogated to the priority position of the Crosstown mortgage and lien subcontractors, the United States will be in the same position it was in at the time the tax lien was filed. If equitable subrogation is denied, however, the government will receive a windfall, moving up to a better position than it originally had, thereby reaping the benefits of the loan that Mercantile issued to pay off the Crosstown mortgage and the lien subcontractors.

Finally, however, for the doctrine of equitable subrogation to apply, Minnesota law requires the presence of an "excusable mistake of fact" in the failure to learn of the prior encumbrance on the property. Universal Title [92-1 USTC ¶50,106], 942 F.2d at 1316. As stated by the Eighth Circuit, it has long been recognized that purchasers of real property are expected to consult available records in regard to contemplated real property transactions to minimize the effect of any uncertainty of representation between vendor and vendee concerning existing incumbrances of record. Universal Title [92-1 USTC ¶50,106], 942 F.2d at 1318.

In the present matter, the mortgage was obtained on May 9, 1995 . On that date, the Schaafs signed an affidavit stating that there were no tax liens filed against them. (Pl.'s Ex. J.) SMS conducted title searches on February 6, 1995 , April 24, 1995 , and May 2, 1995 . The federal tax lien was recorded on May 4, 1995 . ContiMortgage asserts that no search of the available records could have discovered the lien by May 9, 1995, due to the existence of a "gap period" in the county recorder's records, meaning the time interval between the day when the county recorder received a document for recording and the time when that document has been processed and is thus discoverable in the real property records. (Pl.'s Ex. L at pp. 5-7.)

However, at his deposition, Mr. Schaaf testified that he had informed Mercantile that he was in negotiations with the IRS, specifically, that he had outstanding federal tax liabilities that he was trying to resolve. (G. Schaaf Dep. at p. 21.)

Later in his deposition, Mr. Schaaf stated that, to the best of his recollection, he did not believe he had actually spoken to anyone from Mercantile. (G. Schaaf Dep. at pp. 38-40.) Rather, Mr. Schaaf believed that he had made the statements in question to the representatives who brokered the transaction between the Schaafs and Mercantile. (G. Schaaf Dep. at pp. 38-40.)

As the matter is before the Court pursuant to the parties' cross-motions for summary judgment, neither party is entitled to have this conflict in the record construed in its favor. Therefore, an issue of fact remains whether Mercantile committed an "excusable mistake of fact" in failing to discover the existence of the federal tax lien before issuing its mortgage to the Schaafs.

Conclusion

This case is distinguishable from the Eighth Circuit's decision in Universal Title. Plaintiff ContiMortgage is not a title insurer, but rather is the mortgage assignee seeking a declaration as to the priority of its mortgage. ContiMortgage is therefore a proper party in interest and the Court may exercise subject matter jurisdiction.

Under the doctrine of equitable subrogation, ContiMortgage would be allowed to assume the same priority position as the holders of the previous encumbrances, specifically Crosstown and the lien subcontractors. However, as the record contains an issue of material fact regarding whether the federal tax lien should properly have been discovered, and as the doctrine depends on the equities and attending facts and circumstances of each case, neither party is entitled to summary judgment.

It is the position of the Court that it is in the best interests of the parties to pursue a settlement at this time, in the context of the Court's decision.

For the reasons stated, IT IS HEREBY ORDERED:

1. The Plaintiff's motion for an order stating that the Plaintiff is entitled to be equitably subrogated to Crosstown's mortgage and the subcontractors' liens and stating that the Plaintiff's mortgage is superior to the United States ' tax liens and to dismiss the United States ' counterclaims (Doc. No. 22) is DENIED.

2. The United States ' motion for summary judgment (Doc. Nos. 28, 32) is DENIED.

¹ According to the applicable federal statute, state law determines when a subcontractor's lien arises:

The term "mechanic's lienor" means any person who under local law has a lien on real property ... for services, labor, or materials furnished in connection with the construction or improvement of such property. For purposes of the preceding sentence, a person has a lien on the earliest date such lien becomes valid under local law against subsequent purchasers without actual notice, but not before he begins to furnish the services, labor, or materials.

26 U.S.C.A. §6323(h)(2) (emphases added).

Accordingly, Minnesota law provides as follows:

All liens, as against the owner of the land, shall attach and take effect from the time the first item of material or labor is furnished upon the premises for the beginning of the improvement, and shall be preferred to any mortgage or other encumbrance not then of record, unless the lienholder had actual notice thereof. As against a bona fide purchaser, mortgagee, or encumbrancer without actual or record notice, no lien shall attach prior to the actual and visible beginning of the improvement on the ground....

Minn. Stat. §514.05, subd. 1.

Consequently, to the extent that material or labor was furnished and visible improvements were made on the property in question before the recording of the tax lien, the subcontractors' liens would have had priority over the federal tax lien.

 

 

[97-1 USTC ¶50,321] Amwest Surety Insurance Company, Plaintiff-Appellant v. United States of America , Defendant-Appellee

(CA-9), U.S. Court of Appeals, 9th Circuit, 95-56571, 3/17/97, Affirming an unreported District Court decision

[Code Secs. 6323 and 7426 ]

Validity of lien: Priority: Subrogation rights: Wrongful levy.--An IRS tax lien on a third party's property interest in contract proceeds was superior to an insurance company's rights, as subrogee, to the third party's interest in the property; therefore, the insurance company's wrongful levy claim was rejected. The subrogation rights matured after the tax lien attached to the property. Furthermore, the subrogation rights were not accorded superpriority status because they did not constitute security interests acquired by contract.

Stanley Haren, Hillery & Berger, 6320 Canoga Ave. , Woodland Hills , Calif. 91365 , for plaintiff-appellant. Gary R. Allen, Randolph L. Hutter, Carol A. Barthel, Peter Sklarew, Department of Justice, Washington, D.C. 20530, for defendant-appellee.

Before: FARRIS, KOZINSKI and NELSON, Circuit Judges.

è Caution: This court has designated this opinion as NOT FOR PUBLICATION. Consult the Rules of the Court before citing this case.ç

MEMORANDUM ^*

Amwest Surety Insurance Company appeals the district court's grant of summary judgment in favor of the government on Amwest's wrongful levy claim under 26 U.S.C. §7426. We review de novo, Bagdadi v. Nazar, 84 F.3d 1194, 1197 (9th Cir. 1994), and affirm.

Amwest does not contest that Counsel had a property interest in the contract proceeds to which a tax lien could attach. We reject Amwest's argument that this property interest was retroactively extinguished upon Counsel's later defaults. Amwest claims its own rights to the undisbursed proceeds through Counsel, either as assignee or subrogee. "Once a lien has attached to an interest in property, the lien cannot be extinguished . . . simply by a transfer or conveyance of the interest." United States v. Rodgers [83-1 USTC ¶9374], 461 U.S. 677, 691 n.16 (1983).

In the absence of a congressional rule to the contrary, the priority of a federal tax lien in relation to other liens and interests is determined under the federal common-law principle that "the first in time is the first in right." United States v. McDermott [93-1 USTC ¶50,164], 507 U.S. 447, 449 (1993). The federal liens attached upon assessment in 1993. 26 U.S.C. §6322. Amwest's right to be subrogated to Counsel's interest in the contract proceeds matured, for purposes of federal law, after Counsel's defaults in 1994. The federal liens were first in time. That Arnwest's equitable subrogation rights may relate back to the date of the suretyship agreement for purposes of state law is not relevant. See United States v. Security Trust and Savings Bank [50-2 USTC ¶9492], 340 U.S. 47, 50 (1950). Amwest has not demonstrated that it is otherwise subrogated to the rights of a person or entity whose rights are senior to the government's.

Amwest's equitable subrogation rights are not entitled to superpriority under 26 U.S.C. §6323(c) because its subrogation rights are not security interests acquired by contract. See 26 U.S.C. §6323(c) (granting superpriority to certain security interests); 26 U.S.C. §6323(h)(1) (defining security interest as an interest "acquired by contract").

AFFIRMED.

^* This disposition is not appropriate for publication and may not be cited to or by the courts of this circuit except as provided by 9th Cir. R. 36-3.

 

 

[95-1 USTC ¶50,140] Wiley P. Waldrep, Waldrep Dairy, Inc., and W&D Dairy, Inc., Plaintiffs v. Jewell Mae Detjen f/k/a Jewell Mae Bell and Roger Coleman, as Trustees, Beth W. Corporation, and United States of America, Defendants

U.S. District Court, So. Dist. Fla., 93-6858-CIV-ZLOCH, 12/1/94

[Code Sec. 6223 ]

Deficiencies: Collection: Lien against property: Validity and priority: Purchasers: Knowledge: Summary judgment.--A dairy company's motion for summary judgment against the IRS was denied because there was a genuine issue as to whether the company was a "purchaser" of certain real estate and whether it had sufficient knowledge of tax liens prior to obtaining a mortgage on the property by collateral assignment. Further, the IRS claimed that the amount paid by the company pursuant to the collateral assignment agreement was less than the fair market value of the property and, therefore, that the company did not purchase the property for fair and adequate consideration.

Russell A. White, Rogers, Morris & Ziegler, 1401 E. Broward Blvd., Ft. Lauderdale, Fla. 33301, for plaintiffs. Alvavrez L. LeCesne, Jr., Grisel Alonso, Department of Justice, Washington, D.C. 20530, for U.S.

ORDER

 

ZLOCH, District Judge:

THIS MATTER is before the Court upon Plaintiffs, Wiley P. Waldrep, Waldrep Dairy, Inc., and W & D Dairy, Inc.'s Motion For Summary Judgment (DE 17). The Court has considered the merits of said Motion, has reviewed the entire court file herein and is otherwise fully advised in the premises.

The Plaintiffs, Wiley P. Waldrep, Waldrep Dairy, Inc., and W & D Dairy, Inc.'s (collectively hereinafter "Waldrep") filed the instant action in state court to foreclose a Mortgage on real property, and to obtain a judgment on a Promissory Note secured by said Mortgage. The United States holds a tax lien on the real property which the Plaintiffs seek to foreclose. Pursuant to 28 U.S.C. Section 1444 , the United States removed the instant action to federal court.

The Court notes that Defendants Jewell Mae Detjen and Roger Coleman have not responded to the plaintiffs' Motion For Summary Judgment. The Court further notes that the Clerk of this Court entered a Default (DE 14) against the Defendant Beth W. Corporation on March 3, 1994. Therefore, the only argument which will be considered by the Court in opposition to the Motion For Summary Judgment will be that of Defendant United States.

FACTS

The following facts are undisputed. On or about March 19, 1987, Defendants Jewell Mae Detjen, Jeffrey H. Beck and Irwin A. Weiser, as Trustees under a Land Trust Agreement, purchased real estate in Broward County, Florida, from Defendant Beth W. Corporation. In exchange for said property, the Trustees executed and delivered a promissory Note and Mortgage to Beth W. Corporation, for the principal sum of $2,265,000.00.

The principal balance of said Note and Mortgage was due on March 19, 1990 . However, Defendants, Jewell Mae Detjen and Roger Coleman, as successor Trustees to Jewell Mae Detjen, Jeffrey H. Beck and Irwin A. Weiser, defaulted on the aforementioned Note and Mortgage by failing to pay the principal on or before March 19, 1990 . The subject real property was and is currently owned by Defendants, Jewell Mae Detjen and Roger Coleman, as Trustees under the Land Trust Agreement executed on March 19, 1987 .

On or about January 3, 1991 , Beth W. Corporation made a collateral assignment of said $2,265,000.00 Mortgage to Waldrep. In consideration for said collateral assignment, Beth W. Corporation executed three Promissory Notes in Waldrep's favor, for a total amount of $675,000.00.

SUMMARY JUDGMENT STANDARD

Under Rule 56(c), Fed. R. Civ. P., summary judgment is proper "if the pleadings, depositions, answers to interrogatories and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to a judgment as a matter of law." Fed. R. Civ. P. 56(c).

The party seeking summary judgment always bears the initial responsibility of informing the district court of the basis for its motion, and identifying those portions of the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, which it believes demonstrate the absence of a genuine issue of material fact.

To summarize, the moving party bears the initial burden to show the district court, by reference to materials on file, that there are no genuine issues of material fact that should be decided at trial. Only when that burden has been met does the burden shift to the non-moving party to demonstrate that there is indeed a material issue of fact that precludes summary judgment. Clark v. Coats & Clark, Inc., 929 F.2d 604, 608 (11th Cir. 1991).

The moving party is entitled to "judgment as a matter of law" when the non-moving party fails to make a sufficient showing of an essential element of the case to which the non-moving party has the burden of proof. Celotex Corp. v. Catrett, 477 U.S. 317 (1986); Everett v. Napper, 833 F.2d 1507 (11th Cir. 1987). The standard for granting summary judgment is the same as the standard for granting a directed verdict. Anderson v. Liberty Lobby, Inc., 477 U.S. 242 (1986). The Appellate Courts generally, therefore, will affirm the granting of summary judgment if on any part of the prima facie case there would be insufficient evidence to require submission of the case to a jury. Anderson, 477 U.S. at 252-256; Barnes v. Southwest Forest Industries, Inc., 814 F.2d 607 (11th Cir. 1987). The evidence of the non-movant is to be believed, however, and all justifiable inferences are to be drawn in his favor. Anderson, 477 U.S. at 255; Adickes v. S.H. Kress & Co., 398 U.S. 144 (1970); Barnes, 814 F.2d at 609; Borg-Warner Acceptance Corp. v. Davis , 804 F.2d 1580 (11th Cir. 1986).

ANALYSIS

Defendant United States claims to have a lien upon the subject property by virtue of purported taxable transfers made by the Decedent, Jewell E. Gray in 1987, in her capacity as a stockholder of the Beth W. Corporation. Said transfers allegedly resulted in gift and generation skipping tax liabilities as well as estate tax liabilities occasioned by her death. Plaintiffs assert that, as mortgage-holders to said property, the lien of their Mortgage is superior and paramount to any right, title or interest of the United States in and to said property.

The United States , however, disputes such a characterization of the plaintiffs' interest. The United States claims that the Plaintiffs were purchasers of the real property, and that pursuant to 26 U.S.C. Section 6323(h)(6) , the plaintiffs were required to purchase that property for fair and adequate consideration. Further, the United States asserts that the amount paid by Waldrep pursuant to the collateral assignment of the Mortgage by Beth W. Corporation did not constitute such fair and adequate consideration.

Further, according to the Internal Revenue Service, at the time the original Mortgage was entered into, on March 19, 1987 , the subject property allegedly had a fair market value of $5,277,840.00. The amount of consideration paid for the property, in 1987 amounted to $2,265,000.00. Consequently, the Internal Revenue Service maintains that on March 19, 1987, Jewell E. Gray, Deceased, and the Estate of Jewell E. Gray, Deceased, as a stockholder in the Beth W. Corporation, made a gift to the Trustees, Jewell Mae Detjen, Jeffrey H. Beck and Irwin A. Weiser, in an amount proportional to the Deceased's interest in the subject property. Nevertheless, no gift tax was paid upon the transfer of the real property. Consequently, on or about May 28, 1993 , the Internal Revenue Service determined that there was a gift tax deficiency from the year 1987 in the amount of $4,874,085.00, equalling Jewell E. Gray's proportionate interest in the subject property.

The Plaintiffs assert that they obtained their Mortgage on the subject property, without knowledge of the tax lien, and therefore, their interest is superior to that of the United States . The United States contends, however, that Plaintiffs did have knowledge of the tax lien at the time they received the property pursuant to the collateral assignment.

In light of the foregoing, the Court finds that there exist genuine issues of material fact, such as whether the Plaintiffs were "purchasers" of the subject property, and whether the Plaintiffs had sufficient knowledge of the tax liens prior to the collateral assignment of the Mortgage on January 3, 1991 . Therefore, the existence of such genuine issues of material fact precludes the entry of Summary Judgment as a matter of law.

Accordingly, after due consideration, it is

ORDERED AND ADJUDGED that the Plaintiffs, Wiley P. Waldrep, Waldrep Dairy, Inc., and W & D Dairy, Inc.'s Motion For Summary Judgment (DE 17) be and the same is hereby DENIED.

DONE AND ORDERED in Chambers at Fort Lauderdale , Broward County , Florida , this 1st day of December, 1994.

 

 

[91-2 USTC ¶50,492] Mel R. Eskanos and Rochelle Barkan, a partnership, d/b/a Eskanos & Co., Plaintiffs, and Elwood Henderson, d/b/a Henderson Auctioneer, Interpleader-Plaintiff v. Alpha 76, Inc., Mark R. Nigbur, Daniel Allen Nigbur and Daniel Alexander Nigbur, Defendants, and The United States of America, Defendant-Intervenor

U.S. District Court, Dist. Colo. , Civ. A. 87 N 435, 7/12/91 , 768 F.Supp. 759. Summary judgment denied government, 90-2 USTC ¶50,344 , 712 F.Supp. 819

[Code Sec. 6323 ]

Summary judgment: Liens: Priority.--The government was entitled, as a matter of law, to the proceeds from an auction of a tenant's property, as the landlords failed to establish that they had a super-priority security interest in the proceeds. The landlords failed to prove that the language in the unrecorded, unperfected lease created a security interest in the money; therefore, they could not rely on Code Sec. 6323(b)(1)(B) . Since the government recorded two out of five tax assessments against the tenant prior to the auction, these two liens received priority over the landlords' unsecured claims. Partial summary judgment was granted in favor of the government.

Mel R. Eskanos, pro se. William G. Pharo, Assistant United States Attorney, Denver, Colo. 80294, Karen Lynne Baker, Department of Justice, Washington , D.C. 20530 , for defendants.

MEMORANDUM OPINION AND ORDER

NOTTINGHAM , District Judge:

Defendant Alpha 76, Inc. is a failed business formerly run by the Nigburs, the other defendants. While it was in its death throes, Alpha agreed with plaintiffs, its landlords, to sell some of its personal property and apply the proceeds to arrearages in rental payments due under its lease with plaintiffs. Interpleader Plaintiff Elwood Henderson, an auctioneer, sold the property on April 27, 1985 , and had the net proceeds--some $4,693.56--in hand.

Before Henderson could do anything with the auction proceeds, the United States Internal Revenue Service served him with a notice of levy, demanding that he deliver the money to the IRS in partial satisfaction of Alpha's federal tax delinquencies. Faced with the conflicting demands of the landlords and the IRS, Henderson, after deducting $200.00 in attorney fees he incurred in dealing with the conflicting demands, delivered the balance of the money to the Colorado state court handling the litigation between plaintiffs and Alpha concerning Alpha's overdue rent payments. The IRS intervened and removed the case to this court. Through attrition, the lawsuit has narrowed to a contest between the landlords (who claim that Alpha owed them rent) and the IRS (which claims that Alpha owed it taxes) over the $4,493.56 in auction proceeds which has been deposited by this court's clerk into an interest-bearing account.

The matter is before the court on plaintiffs' motion for summary judgment, which was filed shortly after the court denied the Government's motion for summary judgment. See Eskanos v. Alpha 76, Inc. [90-2 USTC ¶50,344 ], 712 F.Supp. 819 (D.Colo.1989). The primary issue presented by both motions is whether, under the provisions of 26 U.S.C. §6323 (1988), plaintiffs' claim to the money now deposited in the registry of the court prevails over the Government's claim arising from federal tax liens. Plaintiffs rely specifically on section 6323(b)(1)(B) , arguing that this section applies because they hold a security interest in the money, having taken that security interest without actual notice or knowledge of the Government's liens. For reasons recited below, I deny plaintiffs' motion for summary judgment on the ground that plaintiffs do not have a security interest in the money and therefore cannot rely on section 6323(b)(1)(B) . I also reconsider the ruling denying the Government's motion for summary judgment and hold that the Government is entitled, as a matter of law, to satisfy any liens recorded before April 27, 1985 (the date Alpha's personal property was auctioned), out of the money on deposit with the court. As to tax liens recorded after April 27, 1985 , disputed questions of fact preclude entry of summary judgment for either party. A trial will be necessary to resolve the parties' rights in any money which may remain after the Government has satisfied its liens recorded before April 27, 1985 .

FACTS

Most of the pertinent facts are recited in Judge Carrigan's prior opinion for the court. See Eskanos [90-2 USTC ¶50,344 ], 712 F.Supp. at 820-21. Instead of repeating them here, I will simply underscore certain matters for clarity and provide additional detail which I regard as significant. Much of this detail has to do with the exact nature and status of the respective claims.

The Factual Basis for Plaintiffs' Claim

Plaintiffs owned a shopping center in El Paso County , Colorado . Alpha rented a store in the center to carry on its business of selling silk screen prints. The document defining plaintiffs' basic relationship with Alpha, their erstwhile tenant, is a five-page lease demising the real property on which the store sat. The lease requires monthly rental payments and outlines the landlords' remedies for the tenant's breach of the covenant to pay rent or any other covenant in the lease. The lease, however, does not mention tenant's personal property located on the premises or elsewhere, much less grant the landlords any interest in that property. The lease was not recorded with the Colorado Secretary of State or the El Paso County Clerk ad Recorder.

Alpha failed to pay all rent due under the lease. Its default commenced in March 1984 and continued through April 1985. On April 16, 1985 , plaintiffs demanded possession of the premises, and, on April 19, 1985 , Alpha surrendered physical possession of the premises. On May 17, 1985 , plaintiffs filed this lawsuit (in state court) to recover damages caused by Alpha's failure to pay rent and other breaches of the lease.

As matters were coming to a head during April of 1985, a sale of Alpha's personal property was arranged. As noted earlier, Elwood Henderson auctioned the property on April 27, 1985 , and received the money which is now in the court registry. The circumstances leading up to the auction are disputed. The Government asserts that Alpha initiated the auction and hired Henderson . Memorandum of Law in Support of United States' Motion for Summary Judgment at 4 (filed Sept. 11, 1987 ) (hereinafter cited as "Government's Brief"). Therefore, the Government implies, Henderson was acting at all times on behalf of Alpha, and plaintiffs never acquired any sort of interest in the personal property or the money netted by the sale. Plaintiffs, however, assert that they had an agreement with Alpha, pursuant to which they were permitted to take possession of Alpha's personal property and sell it in partial satisfaction of rent arrearages. According to plaintiffs, they took physical possession of the personal property on April 19, 1985 (the same day they got possession of the premises) and then arranged with Henderson to sell the property on April 27, 1985 . Plaintiff's [sic] Response in Opposition to United States ' Motion for Summary Judgment at 4-5 (filed Nov. 12, 1987 ). Both parties rest their positions on statements in their respective briefs and fail to offer evidence. To the extent that these disputed versions of events are material to any claim, then, the dispute will preclude summary judgment on that claim.

The Factual Basis for the Government's Claim

At about the same time it got behind in its rental payments, Alpha also failed to make its quarterly payments of federal withholding and unemployment taxes. As of April 27, 1985 , the date of the auction, the Government had made five separate assessments against Alpha, its taxpayer and plaintiffs' lessee. Ex. C and D to Declaration of Mark G. Fraase (filed Sept. 11, 1987 ). (In its brief, the Government claims there were six, Government's Brief at 4, but an assessment for $129.35 does not appear in the IRS Certificates of Assessments and Payments for Alpha; I therefore ignore the claim in the Government's Brief.) Two were made on May 21, 1984 ; three were made on January 25, 1985 . Only the first two of these assessments were recorded as of April 27, 1985 . Ex. E to Declaration of Mark G. Fraase. According to the recording document, they were filed with both the Colorado Secretary of State and the El Paso County, Colorado, Clerk and Recorder on October 3, 1984 . Id. The remaining three assessments were not recorded until May 8, 1985 . Id.

ANALYSIS

Landlords' Claim to Super-Priority Status Under Section 6323(b)(1)(B)

Plaintiffs argue that they have a "super-priority" security interest in the auction proceeds which, under 26 U.S.C. §6323(b)(1)(B) (1988), trumps all of the Government's tax liens, whenever they were recorded. Section 6323(b)(1)(B) protects a "holder of a security interest" in a "security" from both recorded and unrecorded federal tax liens, provided that the holder takes his interest without "actual notice or knowledge" of the federal tax liens. All of these quoted terms are defined in sections 6323(h) and 6323(i) . The term "security" is defined to include "money," as well as other documents more commonly regarded as "securities," such as bonds, debentures, notes, shares of stock etc. See 26 U.S.C. §6323(h)(4) (1988).

Plaintiffs' theory for applying section 6323(b)(1)(B) rests on the proposition that Alpha's agreement to relinquish possession of its personal property, to acquiesce in sale of the property, and to have the proceeds used in satisfaction of Alpha's rent arrearages effectively gave plaintiffs an interest in that property to secure payment of the arrearages. The security interest was perfected, according to plaintiffs, when they took possession of the property. When the property was sold, plaintiffs continue, that interest became a security interest in the "money" obtained. Thus, plaintiffs conclude, they have the type of "super-priority" security interest protected by section 6323(b)(1)(B) , if they took the interest without "actual notice or knowledge" of the Government's tax liens.

Plaintiffs claim that they lacked actual knowledge of the tax liens, and they have supported their claim with affidavits. The Government does not appear to contest this claim; at any rate, it has not met its burden to supply factual material suggesting that the claim is in dispute. See, e.g., Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 250, 106 S.Ct. 2505, 2510, 91 L.Ed.2d 202 (1986) (where moving party has carried the initial burden of production placed on it by rule 56, non-moving party must set forth specific facts showing a genuine issue for trial). I will therefore assume the claim to be true and proceed to consider whether plaintiffs have a "super-priority" interest in the auction proceeds and are entitled to summary judgment awarding the proceeds to them.

I have concluded that plaintiffs are not entitled to summary judgment on their "super-priority" claim, for two reasons. First, as I indicated earlier, plaintiffs' claim to any sort of an interest in Alpha's personal property or the proceeds thereof rests on factual assertions supported only by their briefs, not by evidence they have submitted. The Government disputes these factual assertions in its own brief. The burden of proving the existence of a security interest protected under section 6323(b)(1)(B) is on the party invoking the protection of that statute. Plaintiffs' failure to carry their evidentiary burden precludes summary judgment in their favor. See, e.g., Celotex Corp. v. Catrett, 477 U.S. 317, 324, 106 S.Ct. 2548, 2553, 91 L.Ed.2d 265 (1986).

Even if plaintiffs could prove the truth of their assertions about events leading up to the sale of the personal property, section 6323(b)(1)(B) cannot sensibly be applied to give plaintiffs "super-priority" in this situation. Even if one assumes (1) an agreement between plaintiffs and Alpha in April 1985 to secure rent arrearages by a pledge of Alpha's personal property and (2) perfection of plaintiffs' interest by possession, plaintiffs thereby acquired, at most, a perfected security interest in goods. See United States v. Hunt [75-1 USTC ¶9327 ], 513 F.2d 129, 133 (10th Cir.1975) (state law characterizes the nature of property right competing with federal tax lien); Colo.Rev.Stat. §4 -9-105(1)(h) (1973 & 1990 Cum.Supp.) (definition of "goods"). Plaintiffs promptly sold these goods at auction, effectively exercising remedies available to a secured party under the Uniform Commercial Code when a debtor is in default. See Colo.Rev.Stat. §4 -9-504 (1973) (secured party has right to sell collateral). When the goods were sold and the money collected, plaintiffs did not, contrary to their contention, retain a security interest which somehow attached to the money; rather, their security interest in the goods was discharged and the money was taken in satisfaction of that security interest. See Colo.Rev.Stat. §4 -9-504(4) (1973) (disposition of collateral "discharges the security interest under which it is made"). To put the matter in terms of the controlling definition of a "security interest" in section 6323(h)(1) , plaintiffs did not acquire their interest in the money proceeds of the auction "for the purpose of securing payment or performance of an obligation," 26 U.S.C. §6323(h)(1) (1988); they acquired that interest in satisfaction of the obligation. Since they did not have a "security interest" in the money, they are not entitled to the "super-priority" status conferred by section 6323(b)(1)(B) .

Landlords' Claims to Priority Status Under Section 6323(a)

Although I do not think plaintiffs' claim to "super-priority" status under section 6323(b)(1)(B) can possibly enable them to defeat any of the Government's tax liens on any state of facts which they could prove in this case, there remains a question concerning the parties' relative priority under section 6323(a) . Section 6323(a) applies to holders of security interests in all types of property belonging to a taxpayer, not just in "securities" and other types of property covered by section 6323(b) . Section 6323(a) , however, provides less protection to the security interests which it covers: whereas a security interest in property covered by section 6323(b) defeats recorded and unrecorded tax liens, a security interest in property covered by section 6323(a) defeats only unrecorded liens. Part of the basis for the Government's motion for summary judgment, which was denied by the court's prior opinion in this case, was the argument that plaintiffs have no "security interest" which would have priority under section 6323(a) . Having reviewed the matter and concluded that the Government was partly right (although not for the reasons it advances), I have decided to reconsider parts of the prior opinion.

Plaintiffs argue that the lease between them and Alpha was intended to give them a security interest in Alpha's personal property on the premises. They point to a lease provision requiring Alpha to insure "all the building contents" and to the fact that plaintiffs were named as additional insureds under the policy insuring the contents. This is insufficient to create a "security interest" as that term is defined in section 6323(h)(1) . I agree with Judge Carrigan (Eskanos [90-2 USTC ¶50,344 ], 712 F.Supp. at 823) that, at least with respect to the lessee's personal property which was sold to produce the money in dispute here, the lease gives plaintiffs no "security interest," because the lease was not recorded anywhere, remained unperfected, and was therefore not "protected under local law against a subsequent judgment lien arising out of an unsecured obligation." 26 U.S.C. §6323(h)(1) (1988). See also Colo.Rev.Stat. §4 -9-301(1)(2) (1973 & 1990 Cum.Supp.) (unperfected security interest loses to hypothetical lien creditor). Moreover, I have reviewed the lease and found that it does not mention the lessee's personal property, much less describe the property. It is thus insufficient to create a security interest in that property, notwithstanding plaintiffs' contention that it was the parties' unexpressed intention to do so. Colo.Rev.Stat. §4 -9-203(1)(b) (1973 & 1990 Cum.Supp.) (security interest not enforceable unless debtor [lessee here] signed a security agreement which contains a "description of the collateral").

Until Alpha agreed in April of 1985 to relinquish possession of the personal property and permit it to be sold in partial satisfaction of rent arrearages, then, plaintiffs were nothing more than unsecured creditors of Alpha. It is clear that the two tax assessments which were properly recorded on October 3, 1984 , are prior to plaintiffs' unsecured claims, since such recorded liens defeat even perfected security interests. 26 U.S.C. §§6323(a) , 6323(h)(1) (1988). The Government is thus entitled, as a matter of law, to judgment satisfying the remaining amounts of these two liens out of the money in the registry of the court.

The situation is different with respect to the tax liens which were unrecorded as of April 27, 1985 , the date of the auction. Those liens may be defeated by a "purchaser" of the goods or by the "holder of a security interest" in the goods, the terms "security interest" and "purchaser" having been defined in section 6323(h)(1) . As I have indicated, the question of how the events immediately preceding the sale are to be characterized in a disputed issue which I cannot resolve as a matter of law on the record before me. Viewing the facts in a light most favorable to plaintiffs, they may have a security interest (perfected by possession) which would be entitled to priority over the Government's unrecorded liens. If money remains in the court's registry after the Government's two recorded liens are paid, resolution of the parties' rights in the remaining money will need to await trial or further proceedings in the case.

On the basis of the foregoing, it is

ORDERED as follows:

1. Plaintiffs' motion for summary judgment is denied.

2. The Government's motion for summary judgment is granted, in part. The Government will have judgment awarding it such part of the money in the registry of the court as will satisfy the current balance on the two assessments made on May 21, 1984 , and recorded on October 3, 1984 .

3. To assist the clerk in calculating amounts due under the preceding paragraph, the Government will, within 15 days of the date of this order, submit a certificate of assessments and payment or similar evidence establishing the balance of the two assessments made on May 21, 1984 . If plaintiffs object to the Government's submission, they will file a response within 11 days after the Government's material is served.

4. Except as provided in paragraph 2, the Government's summary judgment motion is denied.

 

 

[74-2 USTC ¶9526] United States of America , Appellant, Cross-Appellee v. Joseph C. Eaves, Mary Marie Eaves, and Gulf Coast Investment Corporation, Appellees, Cross-Appellants

(CA-10), U. S. Court of Appeals, 10th Circuit, Nos. 73-1911-12, 499 F2d 869, 6/19/74, Aff'g District Court, 73-1 USTC ¶9431

[Code Secs. 6323 and 7403]

Tax liens: Action to enforce: Sale of property held in joint tenancy.--Under Code Sec. 7403 the lower court did not abuse its discretion in confining the sale to the taxpayer-husband's undivided one-half interest in property held in joint tenancy with his wife. The lower court in its sound discretion could have ordered the outright sale of the jointly held property or it could have refused to foreclose on the lien altogether. Further, the taxpayer-wife was not entitled to a lien in her favor for claimed mortgage payments made by her after a 1964 fraudulent conveyance since the evidence showed only that since 1964 she had the task of making the monthly payments but did not disclose the source of the funds for such payments.

Libero Marinelli, Jr., Scott P. Crampton, Assistant Attorney General, Meyer Rothwacks, Michael L. Paup, Department of Justice, Washington, D. C. 20530, Victor R. Ortega, United States Attorney, Mark C. Meiering, Assistant United States Attorney, Albuquerque, N. Mex., for appellant, cross-appellee. Kendall O. Schlenker, Schlenker, Parker, Payne & Wellborn, 925 Public Service Bldg., P. O. Box 925, Midtown Office, 425 Citizens Bank Bldg., Albuquerque, N. Mex., for appellees, cross-appellants.

Before HILL, SETH, and DOYLES, Circuit Judges.

SETH, Circuit Judge:

This is an appeal and cross-appeal from the judgment of the district court [73-1 USTC ¶9431] ordering the sale of Joseph C. Eaves' undivided one-half interest as joint tenant in property which has been the residence of him and his wife, Mary Marie Eaves. The sale was ordered pursuant to 26 U. S. C. §7403 to satisfy a now undisputed tax lien amounting to $128,118.68 against the property of Joseph C. Eaves. It has been resolved that the tax liabilities are those of Mr. Eaves alone, and for which his wife is in no way responsible. The United States contends on the appeal that the district court should have ordered the sale of the entire property with Mrs. Eaves to receive the value of her one-half interest from the proceeds. Mr. and Mrs. Eaves assert that Mrs. Eaves is entitled to a prior lien for payments which she made on the mortgage following a 1964 conveyance by which she purportedly gained absolute title to the property.

The material facts are largely undisputed. Mr. and Mrs. Eaves purchased the residence in 1962 for $48,000, taking title as joint tenants. The parties now agree that title is held on joint tenancy rather than by the community. By the terms of the purchase, Mr. and Mrs. Eaves were to make a downpayment of $10,000 with a like payment due in two years. They also agreed to assume the seller's mortgage held by the codefendant, Gulf Coast Investment Corporation. On October 12, 1964 , by which time Mr. Eaves had become legally insolvent and his tax difficulties had become apparent, a conveyance was effected without consideration whereby Mr. and Mrs. Eaves deeded title to the residence to a trustee who then deeded it back to Mrs. Eaves as the sole owner. The district court determined the conveyance to be in fraud of the rights of the United States under New Mexico Stat. Ann. §50-14-4, and set it aside. That action is not challenged on appeal. Since the 1964 conveyance Mrs. Eaves has apparently made the mortgage payments.

The district court's findings and conclusions as to the amount of the deficiency, the form of ownership of the residence, the priority of the mortgage held by Gulf Coast Investment Corporation, and the invalidity of the 1964 conveyance are not disputed. We are asked only to determine whether the court should have ordered the sale of the entire property rather than of Mr. Eaves' undivided one-half; also whether a prior lien in Mrs. Eaves should have been decreed for the mortgage payments made after the 1964 conveyance.

26 U. S. C. §7403(a) allows the Attorney General to file a civil action to enforce a tax lien in favor of the United States, and to subject "any property, of whatever nature, of the delinquent, or in which he has any right, title, or interest, to the payment of such tax or liability." (Emphasis added.) Subsection (c) of that section then provides that after adjudicating the merits of the claim the district court "may decree a sale of such property, by the proper officer of the court, and a distribution of the proceeds of such sale according to the findings of the court in respect to the interests of the parties and of the United States." (Emphasis added.)

The United States contends that while the court has some discretion under the statute to order or deny a foreclosure sale, if a sale is ordered it must be of the entire property and not simply the interest of the taxpayer. Although other Circuits have considered the meaning of section 7403 in somewhat related circumstances, we know of none which has confronted it in precisely the situation with which we are faced.

The Fifth Circuit evidently had the first opportunity to consider whether section 7403 enables the United States to force the sale of property to which the taxpayer does not hold absolute title. In Folsom v. United States [62-2 USTC ¶9648], 306 F. 2d 361 (5th Cir.), that court held that the United States could not compel the outright sale of real estate in which the taxpayer held only an undivided one-sixth interest. While noting that the United States could "obtain the last vestige of title and every right which such taxpayer owns," the court observed that the law does not authorize it to force a sale "of the property of other joint owners, deny them the right to seek a partition in kind, and to tax them with the costs incurred by the Government in pursuing the delinquent taxpayer."

Since the Folsom decision, other Circuits have considered the limits of the power conferred by section 7403 and have uniformly rejected the Fifth Circuit's position. The first such case and the one after which subsequent decisions have been patterned is United States v. Trilling [64-1 USTC ¶9292], 328 F. 2d 699 (7th Cir.). In that case the Seventh Circuit held that section 7403 authorized the forced sale of property, an interest in which the taxpayer held in joint tenancy, and also the assessment of the costs and expenses of sale according to the respective interests of the owners. Trilling has since been followed by the Fourth Circuit in Washington v. United States [68-2 USTC ¶15,864], 402 F. 2d 3 (4th Cir.) (wife's inchoate dower interest); the Ninth Circuit in United States v. Overman [70-1 USTC ¶9342], 424 F. 2d 1142 (9th Cir.) (community property); and the Second Circuit in United States v. Kocher [72-2 USTC ¶9730], 468 F. 2d 503 (2d Cir.) (tenancy in common). Later developments in the Fifth Circuit cast some doubt on the continued validity of Folsom in that Circuit as well. See Broday v. United States [72-1 USTC ¶9269], 455 F. 2d 1097 (5th Cir.), holding that despite a Texas statute exempting community property from antenuptial debts, a lien would attach to the wife's interest in a community checking account for a tax deficiency assessed prior to her marriage.

To the extent necessary in this case we adopt the construction of section 7403 developed in United States v. Trilling, supra. However, in so doing we note that those cases dealt with the limit of authority conferred by section 7403. The issue before us is whether, acknowledging that the district court had authority to order the sale of Mrs. Eaves' interest in the residence, it was compelled by the statute to exercise the full measure of its authority. We do not believe it was.

Section 7403 has traditionally been interpreted as conferring flexibility and broad discretion upon the courts in fashioning a remedy thereunder. As the use of the term "may" in subsection (c) implies, this discretion and flexibility extends to the decision whether or not to order foreclosure once the validity of the lien has been established. United States v. Hershberger [73-1 USTC ¶9289], 475 F. 2d 677 (10th Cir.); United States v. Boyd [57-2 USTC ¶9791], 246 F. 2d 477 (5th Cir.). It has been said that Congress intended the court to "function with the full traditional flexibility of the Chancellor." United States v. Boyd [57-2 USTC ¶9791], 246 F. 2d 477 (5th Cir.); United States v. Overman, [70-1 USTC ¶9342], 424 F. 2d 1142 (9th Cir.). In many respects we feel the equitable considerations inherent in this case parallel those present in United States v. Hershberger, supra. In that case we held, party in deference to the laws of Kansas, that a wife's undivided one-half interest in the homestead was immune from a foreclosure sale to satisfy a tax deficiency owed by the husband, and that so long as the wife continued to occupy the property as her home, the immunity extended even to foreclosure on the lien against the husband's undivided one-half interest.

In sum, despite the protestations of the United States , we do not believe that section 7403 makes foreclosure an "all or nothing" proposition. We believe it to be well established that the district court in its sound discretion could have ordered the outright sale of the Eaves' residence, but we express no opinion as to the division of costs. Likewise it could have refused to foreclose on the lien altogether. Instead it chose a course bracketed by these two alternatives. Given the flexibility conferred on it by section 7403 we do not believe the court abused its discretion in confining the sale to Mr. Eaves' undivided one-half interest. The trial court must direct and gear the remedies to the factual situation and legal relationships or interest in the property to best accomplish the statutory aims and the rights and equities of the owners.

Turning to the question of the mortgage payments made by Mrs. Eaves after the 1964 conveyance, we can find no basis in the record for a lien in her favor or any other form of special recognition. Mrs. Eaves' testimony shows only that since 1964 she had performed the task of making the monthly payment, but it does not disclose the source of the funds. The refusal to decree such a lien was justified.

The judgment is Affirmed.

 

 

[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.