Deutsche Bank National Trust C v. IRS

Filing 920100114

UNPUBLISHED UNITED STATES COURT OF APPEALS FOR THE FOURTH CIRCUIT

No. 08-2259

DEUTSCHE BANK NATIONAL TRUST COMPANY, as trustee for First Franklin Mortgage Loan Trust 2006-FF3, Plaintiff - Appellant, v. INTERNAL REVENUE SERVICE, Defendant ­ Appellee, and BABAK A. BATMANGHELIDJ; LEILY BATMANGHELIDJ; DANIEL BRIAN COSTELLO, Trustee, C/O Lawrence E. Fischer, Esq.; EDWARD D HUBACHER, Trustee, C/O Lawrence E. Fischer, Esq.; WATKINS MOTOR LINES, INCORPORATED, C/O Douglas J. Glenn; KFH INVESTMENTS, LLC, C/O Wayne F. Cyron; ALL PERSONS CLAIMING AN OWNERSHIP INTEREST IN OR LIEN UPON THAT CERTAIN PARCEL OF REAL PROPERTY LOCATED AT 9121 MILL POND VALLEY DRIVE MCLEAN, VA 22102, Defendants.

Appeal from the United States District Court for the Eastern District of Virginia, at Alexandria. James C. Cacheris, Senior District Judge. (1:07-cv-00683-JCC-JFA)

Argued:

October 28, 2009

Decided:

January 14, 2010

Before MICHAEL, Circuit Judge, HAMILTON, Senior Circuit Judge, and Jane R. ROTH, Senior Circuit Judge of the United States Court of Appeals for the Third Circuit, sitting by designation.

Affirmed by unpublished per curiam opinion.

ARGUED: David H. Cox, JACKSON & CAMPBELL, PC, Washington, D.C., for Appellant. Regina Sherry Moriarty, UNITED STATES DEPARTMENT OF JUSTICE, Washington, D.C., for Appellee. ON BRIEF: Eileen M. O'Brien, JACKSON & CAMPBELL, PC, Washington, D.C., for Appellant. John A. DiCicco, Acting Assistant Attorney General, Thomas J. Clark, UNITED STATES DEPARTMENT OF JUSTICE, Washington, D.C.; Dana J. Boente, Acting United States Attorney, Alexandria, Virginia, for Appellee.

Unpublished opinions are not binding precedent in this circuit.

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PER CURIAM: This appeal concerns the Virginia doctrine of

equitable subrogation.

A somewhat obscure rule of equity, the

doctrine ensures that a creditor obtains a first-priority lien on its debtor's property when it issues a loan based on a good faith belief that it will have such a lien. In this action

NationPoint, a division of National City Bank of Indiana, made a loan to Babak Batmanghelidj based on such a good faith belief. Appellant Deutsche Bank National Trust Company (DB) later

acquired this loan from NationPoint.

When DB discovered that

the Internal Revenue Service (IRS) possessed senior tax liens on Mr. Batmanghelidj's property, it brought this suit for equitable subrogation. appeals. The district court dismissed the suit, and DB now

Because the IRS would be unfairly prejudiced by DB's

subrogation, and because the doctrine cannot be applied when such prejudice would result, we affirm.

I. DB alleges the following facts in its complaint. November $990,000. Mr. 8, 2005, NationPoint loaned Babak On

Batmanghelidj

On the same day, to provide security for the loan, wife, deed, Leily to her S. Batmanghelidj, at 9121 transferred Mill Pond

Batmanghelidj's by warranty

title,

property

Valley Drive in McLean, Virginia (the "Property") to herself and 3

Mr.

Batmanghelidj

as

joint

tenants loan to

with Mr.

the

right

of was

survivorship.

NationPoint's

Batmanghelidj

thereafter secured by a Deed of Trust on the Property.

The Deed

of Trust, also executed on November 8, 2005, was recorded on January 26, 2006. In order to obtain first lien priority on the

Property, NationPoint made payments out of the loan proceeds to satisfy the remaining balance (totaling $756,560.08) on three prior liens against the Property: · A deed of trust originally $600,000 granted by Mrs. recorded on 11/25/98 A deed of trust originally $150,000 granted by Mr. and and recorded on 1/31/05 A deed of trust originally $36,500 granted by Mrs. recorded on 07/22/05 in the amount of Batmanghelidj and

·

in the amount of Mrs. Batmanghelidj

·

in the amount of Batmanghelidj and

In addition, NationPoint paid $5,886.83 in state property taxes owed by Mr. Batmanghelidj and the $35,479 balance on an auto loan for which the Mr. Batmanghelidj was liable. directly NationPoint into Mr.

disbursed

remaining

$185,872.92

Batmanghelidj's bank account. 8, 2005, loan transaction,

In connection with the November Mr. Batmanghelidj executed an

affidavit and Indemnification Agreement stating, in part, that there were no construction liens or state or federal tax liens

4

against the Property or the Property's owners that would remain unsatisfied after the payments. In April 2006 NationPoint assigned the Batmanghelidj loan to First Franklin Financial Corporation, which, in turn, assigned the loan to DB in August 2006. After acquiring the That title

loan, DB conducted a title search of the Property.

search revealed that the representations in Mr. Batmanghelidj's affidavit and Indemnification Agreement were false and that two judgments and two IRS liens still encumbered the Property after the loan proceeds were disbursed. Apparently, Mr. Batmanghelidj

had incurred more than $250,000 in federal income tax liability prior to November 8, 2005, and liens on the Property had

attached at the instant title passed to him.

Upon discovery of

these liens, DB filed an action in Virginia state court, seeking a declaratory judgment that its lien on the Property had

priority over the liens of the IRS and several others.

The IRS

removed the action to the U.S. District Court for the Eastern District of Virginia. On September 17, 2007, the district court granted the IRS's motion under Federal Rule of Civil Procedure 12(c) for judgment on the pleadings. The court held that the IRS's liens

were senior to DB's lien because they attached first and that equitable subrogation did not apply. DB moved to amend its

complaint, but the district court denied the motion with respect 5

to the IRS on the ground that amendment would be futile. appeals the district court's determination that

DB now

equitable

subrogation does not apply.

II. We review de novo the district court's decision to grant judgment on the pleadings in favor of the IRS. v. Metropolitan Life Ins. Co., 474 F.3d 101, 104 Korotynska (4th Cir.

2006).

A Federal Rule of Civil Procedure Rule 12(c) motion for

judgment on the pleadings is decided under the same standard as a motion to dismiss under Rule 12(b)(6). Independence News,

Inc. v. City of Charlotte, 568 F.3d 148, 154 (4th Cir. 2009). "On a Rule 12(b)(6) motion, a complaint must be dismissed if it does not allege enough facts to state a claim to relief that is plausible on its face." Monroe v. City of Charlottesville, 579

F.3d 380, 386 (4th Cir. 2009). "Subrogation is the substitution of another person in the place of the creditor to whose rights he succeeds in

relation to the debt."

Fed. Land Bank of Baltimore v. Joynes, When a "lender of money lent it

18 S.E.2d 917, 920 (Va. 1942).

with the intention and understanding that he be substituted to the position of the creditor," a court will treat the lender as if he had been assigned to the be loan provided "there Id. are no

intervening

equities

prejudiced." 6

Equitable

subrogation is "purely equitable in its nature, dependent upon the facts and circumstances of of the each particular does case." not bar Id. the

"[O]rdinary

negligence

subrogee

application of subrogation where an examination of the facts . . . shows that the equities strongly favor the subrogee."

Centreville Car Care, Inc. v. N. Am. Mortgage Co., 559 S.E.2d 870, 872 (Va. 2002) (internal quotation marks omitted). Following these principles and assuming as true the facts alleged in DB's complaint, we conclude that while DB's predecessor had the "intention and understanding that [it would] be substituted to the position of the [first priority lien

holder]," equitable subrogation is nevertheless improper because there Indeed, are intervening with regard equities to that would be prejudiced. and

NationPoint's

intention

understanding, we think it likely that NationPoint would not have extended a loan to Mr. Batmanghelidj unless it believed it would receive a first priority lien. Moreover, in some

circumstances, lenders like NationPoint may be entitled to rely on representations like those made by Mr. Batmanghelidj that no other liens exist. But while the equities favor DB to some

extent, we think the balance tips in favor of the IRS due to the prejudice it would suffer. Junior lien holders have a right to expect that the liens senior to theirs will eventually be paid, whether that 7

payment

flows

from

the

debtor Car

or

from Inc.,

a

liquidation 559 S.E.2d

of at

the 873.

property.

Centreville

Care,

Absent an agreement to the contrary, however, they do not have the right to expect that senior liens will not change hands. When the transaction merely substitutes one senior lien holder for another without increasing the amount of senior debt, the junior lien holder cannot complain. See Fed. Land Bank of

Baltimore, 18 S.E.2d at 920.

Of course, when the transaction

shrinks the senior debt, junior lien holders are not prejudiced because they are better off than they would have been absent the transaction. Id. at 922.

Junior lien holders are prejudiced, however, when the senior debt increases. Prior to November 8, 2005, there were The

liens totaling $756,560.08 senior to those held by the IRS.

proceeds from the NationPoint loan did not simply satisfy this debt. A substantial amount of loan proceeds -- $227,238.75 --

went either directly into Mr. Batmanghelidj's bank account or to pay unsecured debts rather than towards paying the IRS's

judgment liens. the liens senior

If this court subrogated NationPoint's loan, to those held by the IRS would grow by

$227,238.75.

This result would clearly prejudice the IRS.

DB responds by arguing that it is requesting only that $756,560.08 worth of its $990,000 lien be subrogated. In this

way, the lien amount senior to the IRS liens will not increase 8

and therefore no prejudice will result. was implicitly rejected by the Supreme

This argument, however, Court of Virginia in

Centreville Car Care, Inc. v. N. Am. Mortgage Co.

In that case

a couple bought a home for $210,000 believing that the only lien on the property was the mortgage associated with the seller's original purchase. Of the $208,250 in loan proceeds the buyers

obtained to purchase the home, only $198,928.07 went to satisfy the prior lien on the property. went to the sellers. The remainder of the proceeds

In fact, there was a second lien on the

property held by Centreville Car Care that was promoted to first lien when the prior mortgage was paid. Hence, the lien that

North American Mortgage had on the home was not, as it had thought, first priority. The Virginia Supreme Court held that

"Centreville was entitled to receive the balance of funds from North American Mortgage's loan to the [buyers] that was paid to [the sellers] was after the promissory from those note funds. held by [prior this lien

holder]

satisfied

To

extent,

Centreville was prejudiced." S.E.2d at 873.

Centreville Car Care, Inc., 559

For this reason, among others, the court did not

grant partial or any other type of subrogation to North American Mortgage. Again, subrogation is a matter of equity, "dependent upon the facts and circumstances of each particular case."

Federal Land Bank of Baltimore, 18 S.E.2d at 920. 9

Here, the

equities

possibly

favor

the

IRS

even

more

definitively

than

Centreville Car Care.

Not only did Mr. Batmanghelidj receive

additional funds from NationPoint's loan above the value of the liens, two creditors -- the state government and the auto loan holder -- were essentially allowed to cut the line, receiving payment before more senior, secured lenders like the IRS.

Moreover, the fault here may lie, as it did in Centreville Car Care, Inc., with the title examiner employed by the original lender. DB potentially has recourse against Mr. Batmanghelidj

for his false representations, NationPoint's title examiner for its failure to find the IRS liens, and NationPoint for breach of its assignment agreement. Under these circumstances, we

conclude that the equities do not favor DB, and we therefore decline to apply the doctrine of equitable subrogation. * The district court's order granting the IRS's motion for judgment on the pleadings is therefore AFFIRMED.

We note that the district court concluded that NationPoint was negligent for not finding the IRS liens. Ordinarily, negligence is a question for a jury rather than a court that has before it nothing more than allegations in a complaint. See Estate of Moses v. Sw. Va. Transit Mgmt. Co., 643 S.E.2d 156, 160-61 (Va. 2007). Because we conclude that equitable subrogation is inappropriate here regardless of whether NationPoint was negligent, we do not reach that issue.

*

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