Patrick J. Hannon v. City of Newton, et al.
Filing
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Judge Douglas P. Woodlock: MEMORANDUM AND ORDER entered denying 8 Motion for Summary Judgment; granting 15 Motion for Summary Judgment; ACCORDINGLY I direct the clerk to enter final judgment in Mannings favor providing that the remaining funds from the lawsuit proceeds be distributed first to Manning to the extent of her outstanding judgment lien in the amount of $103,333.33, with the remainder to be distributed to the United States as an unsecured creditor. (Woodlock, Douglas)
UNITED STATES DISTRICT COURT
DISTRICT OF MASSACHUSETTS
PATRICK J. HANNON,
)
)
Plaintiff,
)
)
v.
)
)
CITY OF NEWTON,
)
)
Defendant,
)
)
and
)
)
UNITED STATES OF AMERICA,
)
COMMONWEALTH OF MASSACHUSETTS,)
and RITA S. MANNING,
)
)
Intervenors.
)
CIVIL ACTION NO.
11-10021-DPW
MEMORANDUM AND ORDER
October 24, 2011
The United States and Rita S. Manning, creditors of
plaintiff-taxpayer Patrick J. Hannon, have intervened to claim an
interest in the proceeds of this land damage litigation brought
by Hannon against the City of Newton after the city took his real
property under the power of eminent domain.
The United States
and Manning have each moved for summary judgment, asserting
priority in the order in which their claims should be paid from
the litigation proceeds.
I will grant summary judgment to Rita
Manning and deny it to the United States because the United
States chose to discharge its lien on Hannon’s property pursuant
to 26 U.S.C. § 6325(b)(2)(A) rather than 26 U.S.C. § 6325(b)(3)
and thereby surrendered its priority claim to proceeds generated
by litigation after the discharge.
I.
BACKGROUND
On November 10, 2008, Hannon filed this lawsuit in the
Middlesex Superior Court against the City of Newton, alleging
under-compensation for the taking of his real property located at
20 Rogers Street, Newton MA (“the Property”).
The City had taken
the Property on May 7, 2007 under the power of eminent domain and
made a pro tanto payment of $2,300,000.
Hannon thereafter won a
money judgment of $420,000 in additional compensation and on
October 4, 2010, the City deposited the amount due (including
interest in the amount of $31,245.72) with the court.
The court
ordered that $151,761.73 be paid out to Hannon’s attorneys,
leaving $299,483.99 to be distributed.
Three of Hannon’s creditors then intervened, claiming an
interest in the money judgment.
One such creditor, the
Commonwealth of Massachusetts, through its Department of Revenue,
subsequently disclaimed any interest in the proceeds.
The other
two creditors now dispute who has priority in the distribution of
the lawsuit’s proceeds.
Manning’s claim to the proceeds is as a judgment creditor.
She had obtained a judgment against Hannon on March 17, 2005 in
the Middlesex Superior Court in the amount of $103,333.33.
June 9, 2005, she obtained an execution for precisely that
2
On
amount1 affecting Hannon’s “goods, chattels [and] land.”
The
execution was recorded at the Middlesex County Registry of Deeds
on June 28, 2005.
The claim of the United States to priority in the proceeds
is based on Hannon’s federal income tax liabilities.
A delegee
of the Secretary of Treasury made assessments for income tax,
penalties, and interest for the years 1999, 2000, and 2001
against Hannon and his wife at various times from December 17,
2001 through October 15, 2005.
As of November 5, 2010, the
Hannons owed the United States $7,311,890.07.
That amount (and
perhaps other tax liability as well) remains due and owing, with
statutory additions and interest from that date.
A delegee of
the Secretary of the Treasury filed Notices of Federal Tax Lien
(“NFTLs”) for these assessed tax liabilities at the Registry of
Deeds for Southern Middlesex County at various times from
February 8, 2003 through February 23, 2004, and at the United
States District Court in Boston at various times from January 24,
2003 through February 6, 2004.
On May 4, 2007, three days before the City of Newton issued
its Order of Taking regarding the Property, the Internal Revenue
1
Manning might have been entitled to prejudgment interest,
postjudgment interest, or both pursuant to Mass. R. Civ. P.
54(f); G.L. c. 235, § 8; and G.L. c. 231, § 6B or § 6C. However,
the clerk neither computed nor included interest in the
execution. Thus, no such interest was included within Manning’s
claim under the lien supported by the execution.
3
Service (“IRS”) issued a Certificate of Discharge for the
Property.
The Certificate states:
Whereas, Patrick J & Elizabeth Hannon, of 21 Floral Street,
Newton MA 02161 is/are indebted to the United States for
unpaid internal revenue tax, as evidenced by [the three
NFTLs filed at the Middlesex Registry of Deeds for their
income tax liabilities for the years 1999, 2000, and 2001] .
. . . Whereas, the lien of the United States, listed above,
for said tax has attached to certain property described as:
20 Rogers Street, Newton, MA . . . . Whereas, the Area
Director of Internal Revenue has determined that the value
of the interest of the United States in the foregoing
property, under and by virtue of its aforesaid tax lien,
amounts to the sum of $57,214.55[2] . . . . Now, therefore,
this instrument witnesseth, that I, Rebecca A. Chiaramida,
Collection Area Director, North Atlantic Area of Internal
Revenue Service . . . do, pursuant to the provisions of
section 6325(b)(2)(A) of the Internal Revenue Code,
discharge the property heretofore described from the
aforesaid tax lien, saving and reserving, however, the force
and effect of said tax lien against and upon all other
property or rights to property to which said lien is
attached, wheresoever situated.”
The Certificate was recorded on July 17, 2007.
The United States removed the case to this court on January
6, 2011.
The United States and Manning respectively have filed
cross-motions for summary judgment.
The parties dispute the
effect of the Certificate of Discharge on the claim of the United
States to the lawsuit’s proceeds and on the question of whose
claim has priority in the distribution of the interpleader fund.
2
This value apparently was derived from the eminent domain pro
tanto monies remaining after the priority mortgage payoff due to
Merrill Lynch.
4
II. STANDARD OF REVIEW
A movant is entitled to summary judgment when “the movant
shows that there is no genuine dispute as to any material fact
and the movant is entitled to judgment as a matter of law.”
R. Civ. P. 56(a).
Fed.
“A dispute is genuine if the evidence about
the fact is such that a reasonable jury could resolve the point
in the favor of the non-moving party,” and “[a] fact is material
if it has the potential of determining the outcome of the
litigation.” Farmers Ins. Exch. v. RNK, Inc., 632 F.3d 777, 782
(1st Cir. 2011) (quoting Rodríguez–Rivera v. Federico Trilla
Reg'l Hosp., 532 F.3d 28, 30 (1st Cir. 2008)).
In evaluating a motion for summary judgment, a court must
“view the facts in the light most favorable to the party opposing
summary judgment.”
Cir. 2011).
Rivera–Colón v. Mills, 635 F.3d 9, 10 (1st
“Where, as here, a district court [is called upon
to] rule[] simultaneously on cross-motions for summary judgment,
it must view each motion, separately, through this prism.”
Estate of Hevia v. Portrio Corp., 602 F.3d 34, 40 (1st Cir.
2010).
Thus, the “court may enter summary judgment only if the
record, read in this manner, reveals that there is no genuine
issue as to any material fact and that the moving party is
entitled to judgment as a matter of law.” Id.
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III. DISCUSSION
Neither party disputes that the IRS was first to record a
lien against Hannon, that Manning did so subsequently, or that
the IRS issued a Certificate discharging the Property from the
liens.
The parties’ cross-motions dispute the significance of
the Certificate of Discharge and whether the United States has a
continuing interest in the interpleader fund based on its liens.
The United States contends that it discharged solely its interest
in the Property, reserving an interest in the chose in action
arising from under-compensation and in the proceeds generated
from such litigation as an entirely separate intangible property
interest.
Manning contends that when the United States
discharged its liens on the Property, it discharged its priority
interest in any proceeds from a sale or taking of the Property
since the proceeds substituted for the land as to which the liens
were discharged.
A.
The Federal Statutory Scheme
The Certificate of Discharge states that it was issued
pursuant to 26 U.S.C. § 6325(b)(2)(A).
The statute details the
terms of such a discharge:
Subject to such regulations as the Secretary may prescribe,
the Secretary may issue a certificate of discharge of any
part of the property subject to the lien if . . . there is
paid over to the Secretary in partial satisfaction of the
liability secured by the lien an amount determined by the
Secretary, which shall not be less than the value, as
determined by the Secretary, of the interest of the United
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States in the part to be so discharged.
§ 6325(b)(2).
26 U.S.C.
Notably, the IRS did not choose to discharge the liens
pursuant to 26 U.S.C. § 6325(b)(3).
That subsection provides:
Subject to such regulations as the Secretary may prescribe,
the Secretary may issue a certificate of discharge of any
part of the property subject to the lien if such part of the
property is sold and, pursuant to an agreement with the
Secretary, the proceeds of such sale are to be held, as a
fund subject to the liens and claims of the United States,
in the same manner and with the same priority as such liens
and claims had with respect to the discharged property. 26
U.S.C. § 6325(b)(3).
In subsection (b)(3), Congress provided for a discharge of
liens in a way that would permit the IRS to maintain an interest
in the proceeds of the sale of the discharged property.
By
instead choosing to discharge the Property pursuant to subsection
(b)(2)(A), the IRS collected its payment before the financial
terms of the City of Newton’s exercise of its power of eminent
domain had been fully clarified in the form of land damage action
proceeds.
Several courts have noted3 the difference between discharges
pursuant to the two subsections and concluded that when the IRS
chooses to discharge pursuant to subsection (b)(2)(A) instead of
subsection (b)(3), it gives up its priority claim to the proceeds
of the sale of the discharged property.
3
Remarkably, neither party addressed these cases in their
respective summary judgment submissions.
7
In Estate of Frazier v. Dist. Dir., I.R.S., No. 1:91-CV1877-JTC, 1992 WL 472026 (N.D. Ga. Oct. 14, 1992), the district
court rejected the government’s argument that it maintained its
priority right to property sale proceeds after a § 6325(b)(2)(A)
discharge of the property (precisely the argument it is making
here), holding that “because the government elected to discharge
the lien pursuant to § 6325(b)(2), and not pursuant to
§ 6325(b)(3), the government has no lien on the specific
proceeds.”
Id. at *9.
The court in U.S. v. Holtzclaw, Civil No. S-84-402 MLS, 1988
U.S. Dist. LEXIS 16355 (E.D. Cal. Dec. 12, 1988), came to the
same conclusion:
The court is not persuaded by plaintiff's argument that its
tax liens automatically attach to the surplus proceeds under
the general principle that tax liens attach to all property of
the taxpayer. A specific statutory provision exists under the
Internal Revenue Code that provides for the transfer of tax
liens from real property to the sale proceeds . . . . Because
the Internal Revenue Code has its own specific mechanism
[provided in 26 U.S.C. § 6325(b)(3)] for substituting the sale
proceeds in place of the real property for satisfaction of
federal tax liens, the government's failure to comply with
those procedures results in a waiver of its right to proceed
against the surplus sale proceeds. Id. at *18-19.
In short, as the bankruptcy court for the Northern District of
Georgia
observed,
“by
discharging
the
tax
liens
pursuant
to
[§ 6325(b)(2)], the Service relinquished its preferred status as
the holder of a tax lien.”
In re Miller, 98 B.R. 110, 112 (N.D.
Ga. 1989) (drawing the same distinction between 26 U.S.C. §
6325(b)(2) and (b)(3)).
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I find the reasoning of these courts persuasive.
Congress
provided the IRS with two options for discharging a lien on
property without waiving the right of the United States to
priority payment.
Under 26 U.S.C. § 6325(b)(3), the IRS
discharges the property while expressly maintaining its right to
the proceeds after the sale is complete.
Under 26 U.S.C. §
6325(b)(2)(A), the IRS calculates its interest and collects the
value of that interest in exchange for a discharge of the
property.
The IRS here collected the value of its interest as
calculated under § 6325(b)(2)(A) in exchange for the discharge
and maintains no continuing interest based on the liens in any
subsequent proceeds from the taking of the Property.4
The requirement that 26 U.S.C. § 6325(b)(2)(A) imposes on
the IRS supports this reading of the statute.
The IRS may only
issue a discharge of the taxpayer’s property pursuant to this
subsection if the Secretary is paid “an amount determined by the
Secretary, which shall not be less than the value, as determined
by the Secretary, of the interest of the United States in the
part to be so discharged.”
26 U.S.C. § 6325(b)(2)(A).
4
If the
A § 6325(b)(2)(A) discharge might make sense where, for
instance, the value of a property is undisputed and the
government wants to ensure expeditious payment of the value of
its interest to be discharged. It is difficult to imagine a
situation in which a § 6325(b)(2)(A) discharge would be a wise
course of action where eminent domain is involved and where the
property value may be disputed. Unfortunately for the United
States, however, that is the course it chose with respect to the
property at issue in this case.
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IRS could maintain its lien on the proceeds of a subsequent sale,
it would be anomalous to require that the money accepted in
exchange for the discharge also equal the value of that entire
interest.
The clearest rationale for this requirement is that
Congress did not anticipate that additional funds would be
readily accessible based on tax liens after a 26 U.S.C. §
6325(b)(2)(A) discharge, and therefore required that the
Secretary collect the value of the entire interest of the United
States in the property in exchange for the Certificate of
Discharge.
As a matter of federal statutory law, when it issued the
discharge pursuant to 26 U.S.C. § 6325(b)(2)(A) the United States
surrendered its interest in any additional damages that might
be–-and subsequently were--due Hannon as a result of any
subsequent land damage proceeding.
Because the government has no
lien on the litigation proceeds, Manning’s lien has priority.
B.
The State Property Regime
The position of the United States fares no better when the
focus turns from the federal statutory scheme to the state
property regime which provides the foundation for analysis of the
reach of a federal tax lien.
The Supreme Court has instructed
that “[t]he federal tax lien statute itself creates no property
right but merely attaches consequences, federally defined, to
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rights created under state law.”
United States v. Craft, 535
U.S. 274, 278 (2002) (internal citations omitted).
Massachusetts law has long been settled that proceeds
received as damages arising out of an eminent domain taking are,
in the words of Chief Justice Shaw, “to be regarded as capital
substituted, by act of law, in the place of the land taken.”
Gibson v. Cooke, 42 Mass. (1 Met.) 75, 76 (1840).
See also
Spadea v. Stewart, 214 N.E.2d 72, 74 (Mass. 1966) (“compensation
for the taking represents the land”); Cornell-Andrews Smelting
Co. v. Boston & Providence Railroad Corp., 95 N.E. 887, 890
(Mass. 1911) (“compensation paid for land taken by the exercise
of the power of eminent domain in equity represents the land and
is subject to all the rights of persons who had rights in the
land.”).
The United States dismisses this treatment of eminent domain
proceeds as a “legal fiction.”
However, the use of a dismissive
label cannot overcome the settled understanding of state property
rights.
Although equitable conversion may be a legal fiction in
the sense that the law treats money as if it were land, it is not
a legal fiction regarding the question relevant here: whether it
accurately describes what rights the parties have in the eminent
domain damages.
The United States cites three cases in support of its
contention that equitable conversion is inapplicable here
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because, as a state law “legal fiction,” it cannot defeat the
attachment of a federal tax lien.
Each is inapposite.
In United States v. Craft, the Court held that, although
“Michigan characterizes its tenancy by the entirety as creating
no individual rights whatsoever,” in reality Michigan law
accorded a tenant by the entirety a significant number of
property rights.
535 U.S. 274, 281-82 (2002).
In Drye v. United
States, the Court held that, although Arkansas law allowed an
heir to disclaim his inheritance, nonetheless Arkansas law
accorded the heir significant property rights in that it gave him
the choice to inherit or to channel the inheritance elsewhere.
Drye, 528 U.S. 49, 59-61 (1999).
In both cases the Court
concluded that the interest involved was therefore “property” for
the purposes of federal tax law.
Craft, 535 U.S. at 288; Drye,
528 U.S. at 61.
The Court in both Craft and Drye disregarded state law
labels and looked to the underlying substantive property rights.
In the instant case, regardless of the doctrine’s label,
Massachusetts law accords Manning the same interest in the land
damage litigation proceeds as she maintained in the Property
before the exercise of the power of eminent domain.
Cornell-
Andrews Smelting Co., 95 N.E. at 890 (Mass. 1911).
The federal
tax lien statute “merely attaches consequences, federally
defined,” to that state-created property right, Craft, 535 U.S.
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at 278, and therefore Manning maintains her lien on the
litigation proceeds just as she maintained her lien on the
Property itself.
The third case cited by the United States, Landmark First
Nat. Bank of Fort Lauderdale v. Comm’r of Corps. and Taxation,
378 N.E.2d 458 (Mass. App. 1978), relates to Massachusetts tax
law.
“The interpretation of [a federal tax statute] is a federal
question, and in answering that question [federal courts] are in
no way bound by state courts’ answers to similar questions
involving state law.”
Craft, 535 U.S. at 288.
Federal tax law
looks to the substantive rights described by Massachusetts
property law; how a property subject to equitable conversion
might be taxed under Massachusetts law simply does not figure
into the analysis.
The United States further attempts to challenge the
applicability of the doctrine of equitable conversion by
suggesting that whatever property interest Manning had was only
in the land and not in the damages resulting from its taking by
eminent domain.
The argument rests on artificial distinctions.
It proceeds by splintering the stick that constitutes the
underlying property right.
Cf. United States v. Craft, 535 U.S.
at 278 (using the metaphor of “‘a bundle of sticks’--a collection
of individual rights which, in certain combinations, constitute
property”).
The United States identifies three separate and
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successive property interests involved in the eminent domain
proceeding.
First, there is the real property itself.
Manning’s
execution of the judgment plainly attaches to that because it
reaches Hannon’s “goods, chattels or land.”
But the eminent
domain proceeding, the United States contends, transmuted the
interest in the land into a second interest in a chose of action,
which is an intangible property right not within the scope of the
execution.
Moreover, the land damage proceeds, which the United
States identifies as a third property interest, are similarly
said to be outside the terms of the execution.
This splintering of one property right into three is far too
technical a treatment of the core interest involved.
Massachusetts law clearly recognizes one continuing interest:
successively in the land, the chose in action, and the proceeds,
with the latter two dimensions to the single interest being
treated as a representation of the land.
Manning maintained that
interest throughout the eminent domain proceeding and to this
day.
The United States chose not to do so.
Relabelling the
interest to reflect the various stages of the eminent domain
proceeding will not oust Manning of her secured interest in the
property right.
In a similarly unpersuasive exercise in artificial
relabelling, the United States contends that if the proceeds of
the litigation are treated as analogous to the real property,
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then the Certificate of Discharge would be void pursuant to 26
C.F.R. § 301.6325-1(f)(3) due to Hannon’s “reacquisition” of the
property.
However, Hannon did not sell and then reacquire the
property as the regulation contemplates.
Rather, his land was
subject to a taking, and he subsequently received a partial
payment in lieu of the Property through the pro tanto.
sought more money through a land damage action.
He then
Claiming that
the final payment made by the City of Newton was part of an
“acquisition” does not obscure its true identity as damages
compensating the taxpayer for the earlier taking.
The United States made a deliberate, if improvident,5 choice
to liquidate its priority interest in the Hannon property through
a § 6325(b)(2)(A) discharge in the face of an eminent domain
taking.
In doing so it secured immediate payment from the pro
tanto payment.
It gave up for this immediacy the further–-but
delayed–-opportunity for additional compensation from a land
damage action.
Having made its choice, it may not return to
revive a preferred interest in proceeds from the litigation.
5
In a curious argument, the United States suggests that
because it may have misapprehended the meaning of § 6325(b)(2)
and its right to recovery of proceeds under that statutory
provision, the statute should be read to avoid the consequences
of this misapprehension. Needless to say, the statute will be
read according to its plain terms, irrespective of any selfserving misunderstanding of its meaning by one of the parties.
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IV. CONCLUSION
For the reasons set forth above, I (1) DENY the United
States’ motion for summary judgment (Dkt. No. 8); and (2) GRANT
Rita Manning’s cross-motion for summary judgment (Dkt. No. 15).
I direct the clerk to enter final judgment in Manning’s favor
providing that the remaining funds from the lawsuit proceeds be
distributed first to Manning to the extent of her outstanding
judgment lien in the amount of $103,333.33, with the remainder to
be distributed to the United States as an unsecured creditor.
/s/ Douglas P. Woodlock
DOUGLAS P. WOODLOCK
UNITED STATES DISTRICT JUDGE
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