United States of America v. Fitch et al
Filing
49
MEMORANDUM DECISION AND ORDER granting 43 Motion for Summary Judgment against Kathleen Fitch; granting 43 Motion for Default Judgment against Michael Fitch, Portfolio Recovery Associates, LLC, and NCO Financial Systems, Inc. The property at issu e shall be subject to a forced sale. The parties shall submit a stipulated plan for distribution of proceeds from such sale, or simultaneous briefing by 8/22/2011. Simultaneous responses shall be due by 9/12/2011. The Court will issue a decision on the parties' briefing without replies. Signed by Judge B. Lynn Winmill. (caused to be mailed to non Registered Participants at the addresses listed on the Notice of Electronic Filing (NEF) by cjm)
UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF IDAHO
UNITED STATES OF AMERICA,
Case No. 4:10-cv-037-BLW
Plaintiff,
MEMORANDUM DECISION AND
ORDER
v.
MICHAEL J. FITCH; KATHLEEN
FITCH; PORTFOLIO RECOVERY
ASSOCIATES, LLC; NCO FINANCIAL
SYSTEMS, INC.; BANK OF AMERICA
CORPORATION,
Defendants.
Before the Court is Plaintiff the United States of America’s Motion for Summary
Judgment Against Kathleen Fitch and Default Judgment Against Michael J. Fitch,
Portfolio Recovery Associates, LLC, and NCO Financial Systems, Inc. (Dkt. 43). The
Court heard oral argument on July 19, 2011. Having considered the pleadings and
counsels’ arguments at hearing, and having thoroughly reviewed the record, the Court
will grant the United States’ motion, as indicated at hearing, and as more fully expressed
below.
BACKGROUND
The United States filed this action on January 25, 2010, to reduce to judgment
federal income tax assessments against Defendant Michael J. Fitch, and to foreclose
MEMORANDUM DECISION AND ORDER - 1
federal tax liens against Mr. Fitch and the real property located at 705 Leona Circle,
Idaho Falls, ID, 83401. Am. Compl., Dkt. 26-1, ¶ 9. On May 12, 2010, Mr. Fitch was
personally served with the Summons and Complaint (Dkt. 12). Mr. Fitch having failed to
answer or otherwise respond, a Clerk’s Entry of Default was entered against him on July
13, 2010 (Dkt. 25). Since then, Mr. Fitch still has yet to answer or otherwise appear.
A duly authorized delegate of the Secretary of the Treasury made timely
assessments against Michael J. Fitch for unpaid federal taxes, penalties, interest, and
other statutory additions for tax periods 1998-2008. Am. Compl., ¶ 13. On January 25,
2010, the United States also filed an action to reduce these same federal tax assessments
to judgment in the District of Alaska. On January 26, 2011, the court in the Alaskan suit
entered default judgment against Mr. Fitch in the amount of $208,454.40 for the unpaid
balance of these liabilities as of November 10, 2010. See United States v. Michael J.
Fitch, 3-10-cv-00012-TMB (D. Alaska), Ex. 1 to Yost Dec., Dkt. 43-4. The first claim for
relief having been satisfied in the District of Alaska, the United States now seeks default
judgment against Mr. Fitch as to the second claim for relief only – foreclosing the federal
tax liens against Mr. Fitch that arise from these assessments against the subject property.
A foreclosure report obtained by the United States revealed that Portfolio
Recovery Associates, LLC and NCO Financial Systems, Inc. might claim some right,
title, or interest in the subject property. The United States therefore named these nontaxpayer defendants in this action. Although both Recovery Associates and NCO
Financial Systems were properly served with the Summons and Complaint, see Dkts. 13,
MEMORANDUM DECISION AND ORDER - 2
34, neither have appeared in this matter to assert any interest in the subject property. The
Clerk of Court entered default against Portfolio Recovery Associates on June 25, 2010,
and against NCO Financial Systems on February 24, 2011. See Dkts. 24, 40. Neither of
the non-taxpayer Defendants has filed an answer or other response since default was
entered.
The United States has entered into a stipulation of priority with Bank of America
Corporation, providing that Bank of America Corporation’s Deed of Trust described in
the Complaint (¶ 11) is senior and prior to the United States’ tax liens on the subject
property. Therefore, in the event of the foreclosure sale, Bank of America Corporation’s
Deed of Trust shall be satisfied before the United States’ tax liens. See Dkt 41.
The United States named Kathleen Fitch, Michael Fitch’s ex-wife, as a defendant
under 26 U.S.C. § 7403(b), because she may claim some right, title, or interest in the
subject property. The subject property was acquired before the Fitches were married, but
was not the separate property of either; instead it was jointly owned and titled in both
Michael and Kathleen Fitch’s names. Ex. 2 to Yost Dec. Upon their divorce, Michael and
Kathleen Fitch’s Decree of Divorce characterized the subject property as community
property, to be distributed to Kathleen Fitch. Ex. 5 to Yost Dec. Ms. Fitch does not
dispute this. Response Mem., Dkt. 44 at 2. In its motion, the United States asserts that the
federal tax liens arising from its assessments attached to Mr. Fitch’s community property
interest, and were not extinguished by the subsequent transfer of the subject property to
Ms. Fitch as her separate property in the Fitches’ divorce.
MEMORANDUM DECISION AND ORDER - 3
DISCUSSION
1.
The Record Supports Foreclosure Of Michael Fitch’s Federal Tax Liens
Against His Property Interests
In this case, the United States assessed, and gave notice and demand to Michael
Fitch, for unpaid federal taxes, penalties, interest, and other statutory additions for tax
periods 1998-2008. Am. Compl., ¶¶ 13, 15. Mr. Fitch failed to pay, thus a lien arose in
favor of the United States at the times, and in the amounts, of the assessments; the lien
attached to all property, and rights to property of Michael Fitch. 26 U.S.C. §§ 6321,
6322; Drye v. United States, 528 U.S. 49, 55 (1999). On January 26, 2011, in an action
filed by the United States based on these assessments, the United States District Court for
the District of Alaska entered judgment against Mr. Fitch. Ex. 1 to Yost Dec. Also,
Notices of Federal Tax Lien were filed with the Bonneville County Recorder, to perfect
the liens. Am. Compl. ¶¶ 19-21.
A tax lien attaches to any property interest of the taxpayer, including those later
acquired, while the lien is in force. Glass City Bank v. United States, 326 U.S. 265, 26768 (1945). The lien continues in full force until the liability is paid in full or becomes
unenforceable due to the lapse of time. 26 U.S.C. § 6322; United States v. Cache Valley
Bank, 866 F.2d 1242, 1244 (10th Cir. 1989). Once a tax lien under 26 U.S.C. § 6321
arises, the United States may file an action to enforce the lien against any property in
which the taxpayer has an interest. 26 U.S.C. § 7403. Where a claim or interest of the
United States is established, the court “may decree a sale of such property . . . and a
MEMORANDUM DECISION AND ORDER - 4
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.” Id.
The record supports the United States’ request to enforce Mr. Fitch’s federal tax
lien against his property interests. Mr. Fitch has not appeared or otherwise challenged the
propriety of the United States’ request.
2.
Default Judgment Is Appropriate As To Michael Fitch
Where a party against whom judgment is sought has failed to plead or otherwise
defend, the party seeking relief must first secure an entry of default, and then may apply
to the court for default judgment. Fed. R. Civ. P. 55. The Clerk of Court here entered
default against Michael Fitch on July 13, 2010. The United States now seeks default
judgment, not for a specified amount, but for foreclosure on any property in which Mr.
Fitch has an interest, including the subject real property at 705 Leona Circle in Idaho
Falls, Idaho.
Where a party is in default, “the factual allegations of the complaint, except those
relating to the amount of damages, will be taken as true.” TeleVideo Sys., Inc. v.
Heidenthal, 826 F.2d 915, 917-18 (9th Cir. 1987) (quoting Geddes v. United Financial
Group, 559 F.2d 557, 560 (9th Cir. 1977)). For purposes of default judgment, the court
need not enter findings of fact, except as to damages, which are not at issue here. Adriana
Int’l Corp. v. Thoeren, 913 F.2d 1406, 1414 (9th Cir. 1990).
Whether to enter default judgment is in the sole discretion of the court. See Lau Ah
Yew v. Dulles, 236 F.2d 415 (9th Cir. 1956). In Eitel v. McCool, 782 F.2d 1470, 1471-72
MEMORANDUM DECISION AND ORDER - 5
(9th Cir. 1986), the Court identified seven factors for the court to consider in exercising
its discretion to enter default judgment: (1) potential prejudice to the plaintiff; (2) the
merits of plaintiff’s substantive claim; (3) the sufficiency of the Complaint; (4) the
amount at stake in the action; (5) the possibility of a dispute concerning material facts;
(6) whether the default was due to excusable neglect; and (7) the strong policy underlying
the Federal Rules favoring a decision on the merits. Id. at 1471-72. “In applying this
discretionary standard, default judgments are more often granted than denied.” PepsiCo,
Inc. v. Triunfo-Mex, Inc., 189 F.R.D. 431, 432 (C.D. Cal. 1999).
Regarding possible prejudice to the parties, the United States asserts that a failure
to foreclose against Mr. Fitch’s interest in the subject property would impede the United
States in its collection efforts on the judgment obtained for Mr. Fitch’s tax liabilities.
Therefore, the United States argues, the danger of prejudice to the United States weighs
in favor of entering the default judgment. The Court agrees.
The second and third factors “require that a plaintiff state a claim on which the
[plaintiff] may recover.” PepsiCo, Inc. v. California Sec. Cans, 238 F. Supp. 2d 1172,
1175 (C.D. Cal. 2002). The Court finds that the allegations in the Complaint adequately
establish the merits of the United States’ foreclosure claim, therefore these factors weigh
in favor of entering default judgment.
As to the sum at stake, the United States is not seeking a specific amount, but asks
to foreclose Mr. Fitch’s tax liabilities against his property interests. The Court thus finds
that this factor does not weigh against default judgment.
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Regarding the possibility of a dispute regarding the material facts, the United
States notes that, upon entry of default, the well-pleaded allegations of the complaint are
taken as true, citing Fair Housing of Marin v. Combs, 285 F.3d 899, 906 (9th Cir. 2002).
Because sufficient facts have been alleged in the Complaint, and Mr. Fitch has failed to
appear to respond or otherwise defend against the Complaint, there are no disputed
material facts. See Elektra Entertainment Group, Inc. v. Crawford, 226 F.R.D. 388, 393
(C.D. Cal. 2005). Further, the U.S. District Court for the District of Alaska has already
entered default judgment against Mr. Fitch for the tax liabilities involved in the
foreclosure claim. Thus, this factor weighs in favor of entering default judgment.
There is no indication of excusable neglect by Mr. Fitch, despite his having been
properly served. This factor therefore weighs in favor of default judgment.
The Court recognizes the policy favoring a decision on the merits, but here finds
that Mr. Fitch has had more than adequate time to come forward to assert any claims or
defenses he has in this matter. The Court agrees with the United States that its efforts to
collect on Mr. Fitch’s tax liabilities, which have already been reduced to judgment,
should not be impeded by Mr. Fitch’s continued failure to appear in this action.
On examination of the Eitel factors, the Court concludes that default judgment
against Mr. Fitch is appropriate, and will therefore grant the United States’ motion as to
Mr. Fitch, foreclosing his interest in the subject property in partial satisfaction of his tax
liabilities.
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3.
Default Judgment Against The Non-taxpayer Defendants Is Appropriate
Pursuant to 26 U.S.C. § 7403(b), the United States named the non-taxpayer
Defendants in this action – Portfolio Recovery Associates, LLC and NCO Financial
Systems, Inc. – as persons who may have liens upon or claim an interest in the subject
property. Subsection (c) of the statute provides that after all parties have been duly
notified of any such action brought under Section 7403, the court shall proceed to
adjudicate all matters involved in any such action and finally determine the merits of all
claims to and liens upon the property. 26 U.S.C. § 7403(c).
The Court again applies the Eitel factors to determine the propriety of default
judgment as to the non-taxpayer Defendants. As discussed above, the United States filed
well-pleaded allegations to foreclose Mr. Fitch’s federal tax liens against his property
interests. Regarding prejudice, the United States argues – and the Court agrees – that,
where the non-taxpayer Defendants’ interests in the subject property are not extinguished,
title to the property is clouded, thus hindering the United States’ ability to sell the
property. These first three factors weigh in favor of default judgment.
As with Mr. Fitch, the United States is not seeking any damages against the nontaxpayer Defendants. Instead, the United States seeks a determination that the nontaxpayer Defendants have no interest in the subject property. Therefore, this factor does
not weigh against granting default judgment.
Again acknowledging the policy favoring decisions on the merits, the Court finds
that the non-taxpayer Defendants have had more than sufficient time to come forward
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and assert whatever claim they may have in the subject property, but have not done so.
The other parties in the case should not be adversely affected by the non-taxpayer
Defendants’ failure to appear and assert a claim to the subject property.
In light of the foregoing analysis, the Court finds that default judgment is
appropriate. The Court will grant the United States’ motion as to the non-taxpayer
Defendants, finding that they have no interest in the subject property.
4.
Summary Judgment Against Kathleen Fitch Is Appropriate
On the United States’ motion for summary judgment against Ms. Fitch, it presents
only legal issues, and no issues of fact. It is undisputed that, during the tax periods 19982008, at issue here, the subject property was the community property of Michael and
Kathleen Fitch. Exs. 2, 5 to Yost Dec., Dkts. 43-5, 43-8; Am. Compl. ¶ 13; Response
Mem., Dkt. 44 at 2. According to Kathleen Fitch, she filed for divorce from Michael
Fitch in October 2009. Kathleen Fitch Aff., Dkt. 44-1, ¶ 8. The Fitches’ Divorce Decree,
entered January 29, 2010, transferred the subject property to Kathleen Fitch as her
separate property. Divorce Decree, Ex. 5 to Yost Dec., Dkt. 43-8. Ms. Fitch does not
challenge that Mr. Fitch’s tax liens were assessed against him before the Decree was
entered; instead, she asserts that the Decree’s division of property was retroactively
effective to the date she filed for divorce, sometime in October of 2009. Ms. Fitch fails
to cite authority to support her assertion, and the Court has found none.
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A.
Ms. Fitch Has No Legally Recognizable Separate Property Interest In
The Property At Issue, Thus The Property Is Subject To Mr. Fitch’s
Tax Liability
Regardless of when the property was transferred to her by the divorce decree, the
issue is whether Ms. Fitch’s interest in the subject property is immune from Mr. Fitch’s
tax liability. In determining the nature of a taxpayer’s legal interest in property with
respect to tax liens under 26 U.S.C. § 6321, state law controls. United States v. National
Bank of Commerce, 472 U.S. 713, 722 (1985) (other citations omitted). The courts look
to state law to determine whether a property right is created, but federal law to decide
how to treat those property rights. United States v. Rodgers, 461 U.S. 677, 683 (1983)
(citing United States v. Mitchell, 403 U.S. 190, 205 (1971)). At issue here is whether
Idaho’s homestead laws create a property right for Ms. Fitch.
No court appears to have specifically addressed this issue for Idaho. Examining
Texas homestead laws, the United States Supreme Court determined that a separate
property interest was created in the community home of a non-liable spouse, in United
States v. Rodgers, 461 U.S. at 684. However, this determination was based upon a
unique provision under Texas law not applicable here. The Rodgers court determined
that the underlying property interest under Texas’ homestead law was akin to an
undivided life estate, id. at 686, and noted that under § 7403(a), the United States may
enforce its lien and seek 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.” Id.
at 692 (emphasis original) (quoting 26 U.S.C. § 7403(a)). The court thus held that the
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United States’ tax liens attached to the full value of the community property at issue. Id.
at 701.
The Ninth Circuit addressed whether Nevada homestead law1 creates a property
interest, as contemplated by Section 522(p)(1) of the Bankruptcy Code, in In re Greene,
583 F.3d 614 (9th Cir. 2009). The court in Greene held that, in general, a homestead right
does not “run with the land,” but is a “personal right or privilege given by constitutional
or statutory provisions . . . [that] ordinarily is dependent on some title or interest in real
property and [ ] does not exist as a separate estate in property independent[ ] of such title
or interest.” Id. at 622 quoting 40 Corpus Juris Secundum, Homestead § 3 (2006)). The
Greene court further stated that “a homestead is a ‘categorization’ of a status or a
classification, not a property interest.” Id.
Where a state’s homestead law “do[es] not create a present property interest, but
merely confer[s] privileges and exemptions, the federal tax lien is good against
homestead property.” Shaw v. United States, 331 F.2d 493, 497 (9th Cir. 1964) (citation
omitted) (holding that California’s homestead laws do not create property rights but
merely exemptions, and that federal tax liens therefore attach to the entire homestead
community property of a delinquent taxpayer, leaving no separate compensable interest
for the non-liable spouse); see also Aranow v. United States, 38 A.F.T.R.2d 76-5435, 765437 (following Shaw, supra, and finding that Montana’s homestead laws did not create a
property right but merely an exemption).
1
Nevada homestead law, similar to Idaho’s, contains a provision restricting the conveyance or
encumbrance of property by one spouse without the consent of the other. See Nev. Rev. Stat. § 115.040.
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Since 2004, Idaho homestead law no longer contains a devolution provision,
wherein the homestead automatically vests in the surviving spouse, upon the death of the
other. Act effective July 1, 2004, ch. 131, 450, 2004 Idaho Laws (repealing former § 551010). Thus, in Idaho, a husband can devise his share of the community homestead to
someone other than his spouse.2 I.C. § 15-3-101. However, Idaho law prohibits a spouse
from conveying or encumbering the homestead without the consent of the other, as does
Nevada’s homestead law, addressed in Greene. I.C. § 55-1007. However, although both
the devolution and non-encumbrance provisions were in effect in 1999, the District of
Idaho’s Bankruptcy Court found that Idaho law did not create a separate property interest
in In re Hegg, 239 B.R. 833 (Bankr.D.Idaho 1999).
In that case, the Honorable Jim Pappas of the District of Idaho’s Bankruptcy Court
considered the effect on federal tax liens of a transfer of community property to a nondebtor spouse by the debtor spouse. Id. A federal tax lien arose and attached to
community property of the debtor spouse in Hegg; the debtor spouse then transferred the
community property – the couple’s residence – to the non-debtor spouse as her separate
property, upon their divorce. Id. at 835. The court held that the lien was not
extinguished, and that the United States held a valid tax lien on the residence. Id.
In light of the existing case law, this Court agrees with the holding in Hegg.
Applying those cases, the Court here finds that Ms. Fitch lacks a legally recognizable
2
This provision is subject to a “homestead allowance,” which is “not a right to claim ownership of, or
succession to, any homestead owned by the decedent at the time of the decedent’s death,” but only a right
to claim all or part of a $50,000 allowance, as a surviving spouse or child of the decedent. I.C. § 15-2402.
MEMORANDUM DECISION AND ORDER - 12
separate property interest in the subject property. Although the Fitches’ divorce decree
gave the community homestead to Kathleen Fitch, it did not clear the property of the
attached federal tax liens, already assessed. Therefore, the Court finds that Ms. Fitch has
no right or claim to block a forced sale by the Court.
B.
A Forced Sale Of The Subject Property Is Appropriate
Under § 7403, the court concluded, the district court was authorized to exercise
equitable discretion to authorize a forced sale of the property. Rodgers, 461 U.S. at 705.
The Rodgers court identified four number of factors for the district court to consider in
deciding whether to order a forced sale, but emphasized that “the limited discretion
accorded by § 7403 should be exercised rigorously and sparingly, keeping in mind the
Government’s paramount interest in prompt and certain collection of delinquent taxes.”
Id. at 710-712. Regarding the second factor, whether the non-liable spouse had a legally
recognized expectation that his or her separate property would not be subject to a forced
sale, the court noted that “[i]f there is no such expectation, then there would seem to be
little reason not to authorize the sale.” Id. at 710-11. This Court has determined that Ms.
Fitch has no separate property interest in the community property, under Idaho law.
Accordingly, and under the court’s analysis in Rodgers, this Court finds that a forced sale
is appropriate, and will order it.
C.
Distribution Of Proceeds From Sale
As to the distribution of proceeds from a forced sale, the Court encourages the
parties to engage in further discussions regarding the possibility of an agreed proposal. If
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no such agreement can be reached, the Court will invite briefing on the issue, and if
necessary, will set a hearing.
ORDER
IT IS ORDERED:
1.
Plaintiff’s Motion for Default Judgment (Dkt. 43) is GRANTED as against
Defendants Michael Fitch, Portfolio Recovery Associates, LLC, and NCO
Financial Systems, Inc.
2.
Plaintiff’s Motion for Summary Judgment (Dkt. 43) is GRANTED as
against Kathleen Fitch.
3.
The property at issue shall be subject to a forced sale. By no later than
August 22, 2011, the parties shall either submit a stipulated plan for
distribution of proceeds from such sale, or simultaneous briefing – limited
to 15 pages – setting forth the parties’ positions regarding the issue.
Simultaneous responses shall be due on September 12, 2011. The Court
will issue a decision on the parties’ briefing without replies.
DATED: July 25, 2011
_________________________
B. Lynn Winmill
Chief Judge
United States District Court
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