United States of America v. Molen et al

Filing 270

ORDER signed by Chief Judge Morrison C. England, Jr. on 02/29/16 ORDERING that plaintiff's 244 Motion for Summary Judgment is DENIED. The Court finds that the state tax liens recorded in 2001, 2003, and May 2004 are senior to the federal tax lien recorded in December 2004. (Benson, A)

1
2
3
4
5
6
7
8

UNITED STATES DISTRICT COURT

9

EASTERN DISTRICT OF CALIFORNIA

10
11

UNITED STATES OF AMERICA,

12

Plaintiff,

13
14

No. 2:10-cv-02591-MCE-KJN

v.

MEMORANDUM AND ORDER

JAMES O. MOLEN, et al.,

15

Defendants.

16
In the pending Motion for Summary Judgment (ECF No. 244), Plaintiff United

17
18

States of America (“Plaintiff”) seeks an order stating that a federal tax lien against

19

Defendants James O. Molen and Sandra L. Molen (collectively, “the Molens”) is senior to

20

two California state tax liens against the Molens. Defendant California Franchise Tax

21

Board filed an Opposition to the Motion (ECF No. 260), and Plaintiff filed a Reply (ECF

22

No. 261). For the reasons that follow, the Court finds that the California state tax liens

23

are senior to the federal tax lien and Plaintiff’s Motion for Summary Judgment is

24

DENIED.1

25

///

26

///

27
1

28

Because oral argument would not have been of material assistance, the Court ordered this
matter submitted on the briefs. See E.D. Cal. Local Rule 230(g).

1

1

BACKGROUND

2
3

Plaintiff and the California Franchise Tax Board do not dispute the following facts:

4

In 1976, the Molens acquired real property at 189 Connors Avenue in Chico,

5

California (“the residence”).

6

In 2001, a Notice of State Tax Lien against the Molens was recorded.

7

In 2002, a deed of trust against the residence was recorded.

8

In 2003, a Notice of State Tax Lien against the Molens was recorded.

9

In April 2004, La Jolla Cove Investors purchased the residence at a trustees’ sale

10

relating to the 2002 deed of trust.

11

In May 2004, a Notice of State Tax Lien against the Molens was recorded.

12

In November 2004, a trustees’ deed was recorded and the residence was

13

transferred to La Jolla Cove Investors.
In December 2004, a Notice of Federal Tax Lien against the Molens was

14
15

recorded.

16

In 2007, La Jolla Cove Investors transferred the residence back to the Molens.2

17

Thus, there are three state tax liens (recorded in 2001, 2003, and May 2004,

18

respectively), and each was recorded before the federal tax lien was recorded in

19

December 2004. Plaintiff concedes that the state tax lien recorded in 2001 is senior to

20

the federal tax lien. However, Plaintiff and the California Franchise Tax Board dispute

21

whether the state tax liens recorded in 2003 and May 2004 are also senior to the federal

22

tax lien.3

23

///

24

///

25
26
27

2

Although La Jolla Cove Investors technically transferred the residence to an entity, the Court
previously determined that entity and another “are nominees of Defendants James O. Molen and Sandra
L. Molen with regard to the transfers of the [residence], and therefore have no ownership interest in the
property and no right to any distribution of sale proceeds.” ECF No. 235 at 2.
3

28

All subsequent references to “state tax liens” are to the state tax liens recorded in 2003 and May

2004.

2

1

DISCUSSION

2
3

“Federal tax liens do not automatically have priority over all other liens. Absent

4

provision to the contrary, priority for purposes of federal law is governed by the common-

5

law principle that ‘the first in time is the first in right.’” U.S. By and Through I.R.S. v.

6

McDermott, 507 U.S. 447, 449 (1993).

7

The California Franchise Tax Board argues that the Court should apply the “first in

8

time, first in right” principle and find that the state tax liens, which were recorded before

9

the federal tax lien, are senior to the federal tax lien.

10

Plaintiff’s argument is more complex. Plaintiff emphasizes that the state tax liens

11

were recorded after La Jolla Cove Investors recorded the deed of trust in 2002 but

12

before La Jolla Cove Investors foreclosed on that deed of trust (and acquired the

13

residence) in November 2004. The significance, according to Plaintiff: because the

14

deed of trust was recorded before the state tax liens, La Jolla Cove Investors’ interest in

15

the residence was senior to those liens, and, more critically, when La Jolla Cove

16

Investors foreclosed on the residence in 2004, it took the property free of all junior liens

17

(including the state tax liens).

18

The California Franchise Tax Board does not dispute Plaintiff’s argument up to

19

this point. However, the parties dispute the applicability and effect of McDermott in this

20

case. In McDermott, the United States Supreme Court explained that “a competing state

21

lien [is] in existence for ‘first in time’ purposes only when it has been ‘perfected’ in the

22

sense that the identity of the lienor, the property subject to the lien, and the amount of

23

the lien are established.” McDermott, 507 U.S. at 449. Unlike a state lien, which is not

24

perfected until it attaches to specific property, “the filing of notice renders [a] federal tax

25

lien extant for ‘first in time’ priority purposes regardless of whether it has yet attached to

26

identifiable property.” Id. at 453.

27

Plaintiff argues that, as a result of the foreclosure on the residence, the state tax

28

liens were not “perfected” until the Molens reacquired the property in 2007. The federal
3

1

tax lien, on the other hand, was extant for “first in time” priority purposes when it was

2

recorded in December 2004. Thus, applying McDermott, Plaintiff argues the federal tax

3

lien is senior to the state tax liens.

4

McDermott is factually distinguishable from this case. In McDermott, the state lien

5

was not perfected when it was recorded because “the property subject to the lien” was

6

not yet established. Id. at 452-53. That is, the McDermotts did not have property to

7

satisfy the lien when it was recorded. Rather, because the state lien extended to “after-

8

acquired-property,” the state lien was perfected later when the McDermotts purchased

9

real estate. Id. The critical distinction between McDermott and this case: the Molens

10

owned the residence when the state tax liens were recorded, and the state tax liens

11

were therefore perfected immediately upon recordation.4 That distinction matters. Cf. id.

12

at 450 (“The first question we must answer, then, is whether the Bank’s judgment lien

13

was perfected in this sense before the United States filed its tax lien . . . . If so, that is the

14

end of the matter; the Bank’s lien prevails.”).

15

Because McDermott is factually distinguishable and does not apply to this case,

16

the Court must resort to the general principle of “first in time, first in right.” Applying that

17

principle, the state tax liens—which were recorded before the federal tax lien—are

18

clearly senior to the federal tax lien.

19

///

20

///

21

///

22

///

23

///

24

///

25

///

26

///

27
28

4

That fact also distinguishes this case from the Sixth Circuit case that Plaintiff cites in its Reply.
See Woods v. Simpson, 46 F.3d 21, 23 (6th Cir. 1995) (“Both the federal and state tax liens were filed
before the debtor, David Simpson, acquired his inheritance.”).

4

1

CONCLUSION

2
3

Plaintiff’s Motion for Summary Judgment (ECF No. 244) is DENIED. The Court

4

finds that the state tax liens recorded in 2001, 2003, and May 2004 are senior to the

5

federal tax lien recorded in December 2004.

6
7

IT IS SO ORDERED.
Dated: February 29, 2016

8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
5