Beal Bank v. United States of America et al
Filing
44
MEMORANDUM DECISION AND ORDER Defendant's Motion to Dismiss (Dkt. 36 ) is GRANTED. case is REMANDED to the Seventh Judicial District of the State of Idaho, in and for the County of Jefferson Case No. CV 2013-1085. Signed by Judge Edward J. Lodge. (caused to be mailed to non Registered Participants at the addresses listed on the Notice of Electronic Filing (NEF) by (jp)
UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF IDAHO
BEAL BANK,
Case No. 4:14-CV-00035-EJL
Plaintiff,
MEMORANDUM DECISION AND
ORDER
v.
UNITED STATES OF AMERICA, et al,
Defendants.
Pending before the Court in the above entitled matter is a Motion to Dismiss made
pursuant to Federal Rule of Civil Procedure 12(c). (Dkt. 36.) The matter has been fully
briefed and is ripe for the Court’s consideration. Having fully reviewed the record herein, the
Court finds that the facts and legal arguments are adequately presented in the briefs and
record. Accordingly, in the interest of avoiding further delay, and because the Court
conclusively finds that the decisional process would not be significantly aided by oral
argument, the Motion shall be decided on the record before this Court without oral argument.
FACTUAL AND PROCEDURAL BACKGROUND
A parcel of real property located in Jefferson County, Idaho was transferred from
James E. Merritt and Virginia C. Merritt to Frederick and Cheryl Hively by way of a
Warranty Deed recorded on September 4, 2002. (Dkt. 1, Amnd. Comp. at ¶ 7.) On the same
day, Cheryl Hively executed and recorded a Quit Claim Deed in favor of her spouse, Fredrick
MEMORANDUM DECISION AND ORDER- 1
Hively. (Dkt. 1, Amnd. Comp. at ¶ 8.) Mr. Hively financed the property by granting and
recording on September 4, 2002 a Promissory Note and Deed of Trust encumbering the real
property and creating a purchase money security interest in favor of the beneficiary. That
beneficial interest is now held by Plaintiff, Beal Bank. (Dkt. 1, Amnd. Comp. at ¶ 9.) The
Warranty Deed, Quit Claim Deed, and Deed of Trust all contain the same error in the legal
description of the real property. (Dkt. 1, Amnd. Comp. at Exs. A-C.)
Beal Bank initiated this action in Idaho State Court seeking to correct the legal
description of the subject property in the deeding instruments. (Dkt. 1, Amnd. Comp.) The
Defendant United States removed the case to this Court pursuant to 28 U.S.C. §§ 1442, 1441.
(Dkt. 1, Notice of Removal.)1 Thereafter, the United States filed the instant Motion to
Dismiss arguing dismissal is appropriate in this case because the Internal Revenue Service’s
(“IRS”) federal tax lien against Frederick and Cheryl Hively, recorded on July 20, 2009, has
priority over Beal Bank’s inchoate security interest. (Dkt. 36.) The Court finds as follows.
STANDARD OF LAW
Rule 12(c) provides that “[a]fter the pleadings are closed—but early enough not to
delay trial—a party may move for judgment on the pleadings.” Fed. R. Civ. P. 12(c). A
motion for judgment on the pleadings is evaluated under the same standard applicable to
motions to dismiss brought under Rule 12(b)(6). See Enron Oil Trading & Trans. Co. v.
1
The named Defendants in this action include the Merritts, the Hivelys, the United
States, and the State of Idaho. (Dkt. 1, Complaint.) Default was entered as to the Hivelys and
the Idaho Tax Commission. (Dkt. 22.) A Limited Judgment was entered as to the Merritts.
(Dkt. 35.)
MEMORANDUM DECISION AND ORDER- 2
Walbrook Ins. Co., Ltd., 132 F.3d 526, 529 (9th Cir. 1997). The standard for a motion for
judgment on the pleadings is that articulated in Ashcroft v. Iqbal, 556 U.S. 662 (2009) and
Bell Atl. Corp. v. Twombly, 550 U.S. 544, 556 (2007).
A motion to dismiss made pursuant to Federal Rule of Civil Procedure 12(b)(6) tests
the sufficiency of a party’s claim for relief.2 When considering such a motion, the Court’s
inquiry is whether the allegations in a pleading are sufficient under applicable pleading
standards. Federal Rule of Civil Procedure 8(a) sets forth minimum pleading rules, requiring
only a “short and plain statement of the claim showing that the pleader is entitled to relief.”
Fed. R. Civ. P. 8(a)(2).
A motion to dismiss will only be granted if the complaint fails to allege “enough facts
to state a claim to relief that is plausible on its face.” Twombly, 550 U.S. at 570. “A claim has
facial plausibility when the plaintiff pleads factual content that allows the court to draw the
reasonable inference that the defendant is liable for the misconduct alleged. The plausibility
standard is not akin to a ‘probability requirement,’ but it asks for more than a sheer
possibility that a defendant has acted unlawfully.” Iqbal, 556 U.S. at 678 (citations omitted).
A judgment on the pleadings may be granted only when it appears beyond doubt that the
claiming party can prove no set of facts in support of his claim which would entitle him to
relief.” Enron Oil, 132 F.3d at 529 (internal quotations and citations omitted).
2
Rule 12(b)(6) of the Federal Rules of Civil Procedure provides that a party may
move to dismiss a complaint for “failure to state a claim upon which relief can be granted.”
Fed. R. Civ. P. 12(b)(6).
MEMORANDUM DECISION AND ORDER- 3
When deciding a motion for judgment on the pleadings, the Court assumes the
allegations in the complaint are true and construes them in the light most favorable to the
non-moving party. Fleming v. Pickard, 581 F.3d 922, 925 (9th Cir. 2009); Erickson v.
Pardus, 551 U.S. 89, 93–94 (2007). A judgment on the pleadings is appropriate when, taking
all the allegations in the complaint as true, the moving party is entitled to judgment as a
matter of law. Milne ex rel. Coyne v. Stephen Slesigner, Inc., 430 F.3d 1036, 1042 (9th Cir.
2005); Westlands Water Dist. v. Firebaugh Canal, 10 F.3d 667, 670 (9th Cir. 1993).
Although “we must take all of the factual allegations in the complaint as true, we are not
bound to accept as true a legal conclusion couched as a factual allegation.” Twombly, 550
U.S. at 555. Therefore, “conclusory allegations of law and unwarranted inferences are
insufficient to defeat a motion to dismiss for failure to state a claim.” Caviness v. Horizon
Comm. Learning Cent., Inc., 590 F.3d 806, 811-12 (9th Cir. 2010) (citation omitted).
DISCUSSION
The Amended Complaint raises a claim for declaratory relief requesting, in part, that
the error in the legal description of the Warranty Deed, Quit Claim Deed, and Deed of Trust
be corrected and that those documents remain in “full force and affect as and from the date
originally recorded.” (Dkt. 1, Amnd. Comp. at 6.) The United States argues dismissal is
appropriate here because its tax lien recorded on July 20, 2009 has priority over the Deed of
Trust held by Beal Bank because that document is inchoate as it does not contain a sufficient
legal description of the property. (Dkt. 36.) Specifically, the United States asserts that the
error in the legal description on the deed instruments renders those documents inchoate and
MEMORANDUM DECISION AND ORDER- 4
any correction now cannot, as a matter of law, relate back to the date they were recorded as
against the United States. (Dkt. 36.) Beal Bank maintains its Deed of Trust recorded on
September 4, 2002 has priority to the United States’ lien because it was choate as of the date
it was recorded despite the typographical error in the legal description. (Dkt. 39.)
The United States’ claim of lien in this case arises under the Internal Revenue Code
of 1954, 26 U.S.C. § 6321 which states:
If any person liable to pay any tax neglects or refuses to pay the same after
demand, the amount (including any interest, additional amount, addition to tax,
or assessable penalty, together with any costs that may accrue in addition
thereto) shall be a lien in favor of the United States upon all property and
rights to property, whether real or personal, belonging to such person.
Such a lien arises at the time the assessment is made. 26 U.S.C. § 6322 (“Unless another date
is specifically fixed by law, the lien imposed by section 6321 shall arise at the time the
assessment is made and shall continue until the liability for the amount so assessed (or a
judgment against the taxpayer arising out of such liability) is satisfied or becomes
unenforceable by reason of lapse of time.”). A competing prior lien, however, retains priority
over a federal tax lien if it is choate when the federal tax lien arises. 26 U.S.C. § 6323(a)
(“The lien imposed by section 6321 shall not be valid as against any purchaser, holder of a
security interest, mechanic's lienor, or judgment lien creditor until notice thereof which meets
the requirements of subsection (f) has been filed by the Secretary.”). That is to say, a prior
competing claim that is specific and perfected at the time the United States’ tax lien arose
has priority over the federal lien. Where, however, the prior lien is not choate, i.e., is not
MEMORANDUM DECISION AND ORDER- 5
perfected and specific, the federal tax lien has priority. United States v. Pioneer American
Ins. Co., 374 U.S. 84 (1963).
The priority of a federal tax lien is governed by federal law. See Aquilino v. United
States, 363 U.S. 509, 513–14 (1960). The federal common law rule of “first in time, first in
right” governs priority contests between federal tax liens and state liens. United States v.
McDermott, 507 U.S. 447, 449 (1993); Pioneer Am. Ins., 374 U.S. at 87 (“The priority of the
federal tax lien ... as against liens created by state law is governed by the common-law rule
‘the first in time is the first in right.’”). Under this rule, a state lien primes a federal tax lien
only if the state lien becomes choate, i.e., specific and perfected, in the federal sense before
the tax lien accrues. Id. The question in this case then is whether Beal Bank’s Deed of Trust
became choate on September 4, 2002 prior to the United States’ tax lien which was recorded
on July 20, 2009.
Whether a state lien is choate is also a question of federal law. Pioneer Am. Ins., 374
U.S. at 88–89; United States v. Brame, 243 F.Supp. 29, 31-32 (D. Idaho 1965). In order for
the deed instruments to have been choate, the state lien must have been “perfected in the
sense that there is nothing more to be done to have a choate lien—when the identity of the
lienor, the property subject to the lien, and the amount of the lien are established.” United
States v. New Britain, 347 U.S. 81, 84 (1954); see also McDermott, 507 U.S. at 449.
Although state law may not necessarily resolve the question, it can be useful in determining
whether a state-created property interest is choate for purposes of federal law. United States
v. Sec. Trust & Sav. Bank, 340 U.S. 47, 49–50 (1950); Brame, 243 F.Supp. at 31 (quoting
MEMORANDUM DECISION AND ORDER- 6
United States v. Acri, 348 U.S. 211, 213 (1955) (“The state’s characterizations of its liens,
while good for all state purposes, does not necessarily bind this Court.”). For instance, a state
lien that is unperfected under state law will virtually never qualify as choate under the federal
standard. Sec. Trust & Sav. Bank, 340 U.S. at 50 (“[I]f the state court itself describes the lien
as inchoate, this classification is practically conclusive.”) (internal quotation omitted).
In this case, the deeding instruments contain errors in the legal description of the
property. Both parties’ briefing recite the same language setting forth Idaho’s requirements
for the legal description of real property in a deeding document. (Dkt. 39 at 8) (Dkt. 40 at 8.)
That is, “[i]n the context of a sale of real property, the Idaho statutes have been collectively
interpreted by the Idaho Supreme Court to require that the ‘description of real property [in
the agreement] must adequately describe the property so that it is possible for someone to
identify ‘exactly’ what property the seller is conveying to the buyer. ‘A description contained
in a deed will be sufficient so long as [the] quantity, identity or boundaries of [the] property
can be determined from the face of the instrument, or by reference to extrinsic evidence to
which it refers.’” In re Old Cutters, Inc., 488 B.R. 130, 141 (D. Idaho 2012) (quoting Ray
v. Frasure, 200 P.3d 1174, 1178 (Idaho 2009) (quoting Garner v. Bartschi, 80 P.3d 1031,
1036 (Idaho 2003)).3
3
Similarly, Idaho’s statute of frauds requires, “an agreement for the sale of real
property must not only be in writing and subscribed by the party to be charged, but the
writing must also contain a description of the property, either in terms or by reference, so that
the property can be identified without resort to parol evidence.” In re Old Cutters, Inc., No.
1:13-cv-00057-EJL, 2014 WL 1319854, at *27 (D. Idaho Mar. 31, 2014) (citing Garner, 80
P.3d at 1036); see also Idaho Code § 9-505(4). “However, a contract that references ‘any
(continued...)
MEMORANDUM DECISION AND ORDER- 7
Here, the United States argues the description in the deed instruments does not
“‘exactly’ identify the real property nor does it allow for determination of the boundaries of
the property from the face of the instrument, or by reference to extrinsic evidence, as a matter
of law, based on the descriptions alleged in Plaintiff’s complaint.” (Dkt. 40 at 8.) Beal Bank
counters that the errors in the deed instruments’ legal description are merely “scrivener’s
errors or typographical mistake[s]” which do not invalidate its lien or, at a minimum, the
motion should be dismissed because there is a question of fact as to whether those errors are
such that there is a question as to the location of the property at issue. (Dkt. 39 at 8-9.)
The errors in the deed documents are found in the metes and bounds legal description
of the real property as to the boundary. Specifically, three of the metes list an angle of either
38E or 35E where the correct angle of 88E should appear. (Dkt. 1, Amnd. Comp. at 4-5.) This
error in the legal description of the property appears to be typographical as there is no
allegation that the actual location of the property is at issue. The United States has, however,
provided a surveyors sketch showing the different property boundaries for each rendition of
the legal descriptions; i.e., the metes and bounds as they appear on the Deed of Trust and the
sought after corrected metes and bounds. (Dkt. 40, Ex. A.) This sketch illustrates the
difference in the property boundaries between the two descriptions.
3
(...continued)
record or external or extrinsic description from which a complete description could be had’
sufficiently describes the real property for purposes of the statute of frauds.’” Id. (quoting
Ray, 200 P.3d at 1178).
MEMORANDUM DECISION AND ORDER- 8
The Court, having reviewed the deeding documents and the record herein, concludes
that the error in the metes and bounds legal description renders the Warranty Deed, Quit
Claim Deed, and Deed of Trust all inchoate for purposes of federal law. Pioneer Am. Ins.,
374 U.S. at 88-89 (The choateness of a state lien is a question of federal law.). Again, for the
state lien to have been perfected, there must have been nothing more to do in order to render
it choate. New Britain, 347 U.S. at 84. Here, this action by Beal Bank is itself evidence that
something more is needed to perfect the deeding documents for this property; i.e., correction
of the legal description. While Beal Bank disputes this reality and argues this declaratory
action is sought to merely correct a minor scrivener’s error, the fact remains that the error in
the legal description of the property means the Warranty Deed, Quit Claim Deed, and Deed
of Trust do not describe the real property “exactly.” Garner, 80 P.3d at 1036.4 Therefore,
those documents were not choate under federal law at the time of recording and the United
States’ tax lien has priority. 26 U.S.C. §§ 6321, 6323.
Were this case before an Idaho State Court, it seems likely that court would apply the
equitable doctrine of relation back to merge the corrected deed back to the date of the
4
Plaintiffs cite to 26 U.S.C. § 3672 and United States v. Sampsell, 153 F.2d 731, 734
(9th Cir. 1946). In Sampsell, the United States’ lien and priority claims were based on the
Internal Revenue Code of 1939, 26 U.S.C. § 3670-3672, for gasoline taxes due from the
refining company seeking reorganization under the Bankruptcy Act. Id. at 733. In that case,
the state claims held priority over the United States’ subsequent claims for gasoline taxes.
The facts in this case are different, however, because the prior state claim was not choate and,
therefore, the United States’ tax liens are entitled to priority.
MEMORANDUM DECISION AND ORDER- 9
original recording.5 Here, however, Beal Bank cannot rely on a relation back theory to give
its mortgage priority over the federal tax liens. Samco Mortg. Corp. v. Keehn, 721 F.Supp.
1209, 1211 (D. Wyo. 1989). “The Supreme Court long ago rejected the relation back theory
to give an inchoate state created lien priority over a federal tax lien.” Id. (citing Sec. Trust
& Sav. Bank, 340 U.S. at 50). The equitable doctrine which permits relation back of any
correction to the Deed of Trust does not apply here where “a federal tax line is vying for
priority with competing claims.” Flagstar Bank, FSB v. Eerkes, No. C12-1951RSL, 2014
WL 4384063, at *2 (W.D. Wash. Sept. 4, 2014); see also Barnhardt v. Hansen, 211 P. 438,
439 (Idaho 1922) (The relation back doctrine does not apply to the prejudice of a third party.)
Based on the foregoing, the Court finds that Beal Bank has failed to state a plausible
claim for declaratory relief as to its request that the instruments remain in full force and
affect as of their original date at least as to any claim for priority against the United States’
tax lien. (Dkt. 1, Amnd. Comp. at 6.) The Motion to Dismiss is granted in this respect. The
United States’ tax lien has priority to the liens held by Beal Bank in the Warranty Deed, Quit
Claim Deed, and the Deed of Trust.
5
“The doctrine of relation back permits a party to a conveyance of real property to
correct an erroneous legal description in the original deed by filing a subsequent or
‘correction’ deed; the correction then becomes effective as of the date of the original deed.”
Barnhardt, 211 P. at 439 (citations omitted); see also Sartain v. Fidelity Financial Servs.,
Inc., 775 P.2d 161, 164 (Idaho 1989). The general rule is summarized as follows:
Where there is no fraud and the rights of third persons have not intervened,
and equity could have reformed the deed, it may be amended by a subsequent
instrument so as to effectuate the intention of the parties.... As against third
persons an alleged defective deed can be cured only by a bill in equity, and not
by a confirmation assuming to relate back to the original deed....
Id. (citations omitted).
MEMORANDUM DECISION AND ORDER- 10
The Court notes, however, that this ruling granting the United States’ Motion to
Dismiss is narrow and limited to only the declaratory relief requesting that the deeding
documents be deemed corrected and in effect as of the date of their recording as to any
priority claim by Beal Bank against the United States. The Court has not made any
substantive ruling on the merits of the other requests for declaratory relief sought in the
Amended Complaint; i.e., the request to correct the legal description of the property and any
priority claims other than those relating to the United States. In so ruling, the Court has
effectively resolved the claim to the extent it provides a basis for federal jurisdiction.
However, state law questions remain.
“Where a district court ‘dismiss[es] every claim over which it had original
jurisdiction,’ it retains “pure[ ] discretion[ ]” in deciding whether to exercise supplemental
jurisdiction over the remaining claims.” Lacey v. Maricopa Cnty., 693 F.3d 896, 940 (9th Cir.
2012) (quoting Carlsbad Tech., Inc. V. HIF Bio, Inc., 556 U.S. 635, 639 (2009)); see also 28
U.S.C. § 1367(c). “In exercising its discretion to decline supplemental jurisdiction, a district
court must undertake a case-specific analysis to determine whether declining supplemental
jurisdiction ‘comports with the underlying objective of most sensibly accommodat[ing] the
values of economy, convenience, fairness and comity.’” Bahrampour v. Lampert, 356 F.3d
969, 978-79 (9th Cri. 2004) (quoting Executive Software N. Am., Inc. v. United States Dist.
Ct., 24 F.3d 1545, 1557–58 (9th Cir. 1994)) (internal quotations and citations omitted).
MEMORANDUM DECISION AND ORDER- 11
The Court has reviewed the entire record in this case and, having done so, declines
to exercise supplemental jurisdiction over the remaining state law issues. The basis for this
Court’s original jurisdiction have been resolved. 28 U.S.C. § 1367(c)(3). While this Court
recognizes that it may retain supplemental jurisdiction, the general considerations underlying
the exercise of supplemental jurisdiction do not support doing so here. See Carnegie–Mellon
Univ. v. Cohill, 484 U.S. 343, 350 n. 7 (1988) (“judicial economy, convenience, fairness, and
comity”—counseled dismissal of the state-law claims.).
The declaratory relief sought by Beal Bank that remains to be resolved in this case
includes the request to correct the deed instruments and possible application of the equitable
relation back doctrine to claims other than those raised by the United States and resolved
herein. Resolution of these remaining issues involves application of state law to facts
concerning real property located in Idaho and equitable principles. For these reasons, the
Court finds the considerations of fairness and comity weigh against exercising supplemental
jurisdiction over the sole remaining state law claim in this case. Therefore, this case will be
remanded to the state court.
ORDER
NOW THEREFORE IT IS HEREBY ORDERED that the Defendant’s Motion to
Dismiss (Dkt. 36) is GRANTED as stated herein.
MEMORANDUM DECISION AND ORDER- 12
IT IS FURTHER ORDERED that the case is REMANDED to the Seventh Judicial
District of the State of Idaho, in and for the County of Jefferson Case No. CV 2013-1085.
DATED: August 20, 2015
Honorable Edward J. Lodge
U. S. District Judge
MEMORANDUM DECISION AND ORDER- 13
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