Patrick J. Hannon v. City of Newton, et al.
Filing
31
Judge Douglas P. Woodlock: MEMORANDUM AND ORDER entered denying 19 Motion for Reconsideration ; denying 22 Motion to Intervene (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
September 24, 2012
This case involves the disposition of the proceeds of an
undercompensation action related to the eminent domain taking of
property at 20 Rogers Street in Newton, Massachusetts, formerly
owned by Plaintiff Patrick J. Hannon.
The United States and Rita
S. Manning intervened in order to assert their separate interests
in the proceeds.
On October 24, 2011, I issued a Memorandum and Order holding
that the United States had discharged its lien on Hannon’s
property pursuant to 26 U.S.C. § 6325(b)(2)(A) and, in doing so,
surrendered its priority claim to proceeds generated by
litigation after the discharge.
Final judgment entered that day
directing that the funds from the lawsuit be distributed first to
Manning and then to the United States as an unsecured creditor.
The United States timely filed a Motion for Reconsideration
of my October 24, 2011 Memorandum and Order.
Julie Foshay, a
third party who had previously recorded a judgment against
Hannon, thereafter moved to intervene.
I.
A.
BACKGROUND
Facts
At various times from December 17, 2001 through October 15,
2005, Hannon and his wife were assessed income tax, penalties,
and interest for the years 1999, 2000, and 2001 by a delegee of
the Secretary of the Treasury.
Notices of Federal Tax Liens for
the assessed liabilities were filed at the United States District
Court in Boston at various times between January 24, 2003 and
February 6, 2004, and at the Registry of Deeds for Southern
Middlesex County at various times between February 8, 2003 and
February 23, 2004.
On April 14, 2004, Julie Foshay recorded a writ of
attachment of Hannon’s “goods or estate” in Massachusetts in the
amount of $1,553,730 at the Middlesex Registry of Deeds.
Rita Manning obtained a judgment against Hannon on March 17,
2005 in the Middlesex Superior Court in the amount of
$103,333.33.
She obtained an execution for that amount against
Hannon’s “goods, chattles [and] land” on June 9, 2005, and she
recorded that execution at the Middlesex County Registry of Deeds
on June 28, 2005.
2
Approximately one year later, on June 6, 2006, Foshay
recorded a second writ of attachment at the Middlesex Registry of
Deeds increasing the amount of her attachment to $1,877,520.
On
August 10, 2006, Foshay recorded a copy of a judgment she was
awarded against Hannon for “$1,001,134 plus interest in the
amount of $636,114 through and including March 20, 2006 plus
interest from and after said date at the statutory rate
(currently 12% or $329.14 per diem), and her costs of action.”
At the time of these recordings, Hannon owned property at 20
Rogers Street in Newton, Massachusetts (“the Property”).
On May
7, 2007, the City of Newton took the Property under the power of
eminent domain and made a pro tanto payment of $2,300,000.
Three
days beforehand, the Internal Revenue Service (“IRS”) had issued
a Certificate of Discharge for the Property pursuant to 26 U.S.C.
§ 6325(b)(2)(A).
The Certificate was recorded on July 17, 2007,
and stated that the value of the interest of the United States in
the Property was $57,214.55.
This amount was collected by the
United States in exchange for the discharge.
B.
Procedural History
On November 10, 2008, Hannon filed this action in the
Middlesex Superior Court against the City of Newton, alleging
under-compensation for the taking of the Property.
On May 14,
2010, Manning moved to intervene and her motion was allowed on
May 20, 2010.
On May 19, 2010, the IRS issued a Notice of Levy
3
to the City of Newton with respect to all property and rights to
property belonging to Hannon.
Two months later, judgment entered
for Hannon against the City of Newton for the sum of $420,000.00
with interest in the sum of $31,245.72 as well as the costs of
the action.
On September 15, 2010, the City of Newton moved for leave to
deposit with the court the damages awarded in the action in order
to avoid further accrual of statutory interest.
The motion
stated that
the payee of the judgment is in dispute. Several
parties lay claim to the judgment. In addition to the
Plaintiff . . . Rita S. Manning filed a Motion to
Intervene on May 14, 2010. The United States Internal
Revenue Services has also filed a Notice of Levy with
the City.
The motion was allowed on September 23, 2010.
On October 4,
2010, the City of Newton deposited the amount due, plus interest,
with the court.
On December 7, 2010, the United States moved to intervene
and its motion was granted.
On December 22, 2010, the court
ordered that $151,761.73 be paid out to Hannon’s attorneys,
leaving $299,483.99 to be distributed.
The United States removed
the case to this court on January 6, 2011.
After Manning and the United States respectively filed
cross-motions for summary judgment, I issued the October 24, 2011
Memorandum and Order denying the United States’ motion
4
for summary judgment and granting Manning’s cross-motion for
summary judgment and judgment was entered accordingly.
In response, the United States filed its Motion for
Reconsideration.
While that motion was pending, Julie Foshay
filed her Motion to Intervene as of right, which has been opposed
by the United States.
II.
MOTION FOR RECONSIDERATION
The United States filed a Motion for Reconsideration and to
Alter or Amend Judgment under Federal Rule of Civil Procedure
59(e).
The motion raises three arguments: (1) federal tax liens
attach to Hannon’s claim for under-compensation regardless of 26
U.S.C. § 6325(b); (2) the October 24, 2011 Memorandum and Order
misapplied 26 U.S.C. § 6325(b)(3); and (3) the October 24, 2011
Memorandum and Order’s reliance on United States v. Holtzclaw,
Civil No. S-84-402 MLS, 1988 U.S. Dist. LEXIS 16355 (E.D. Cal.
Dec. 12, 1988); In re Miller, 98 B.R. 110, 112 (N.D. Ga. 1989);
and Estate of Frazier v. Dist. Dir., I.R.S., No. 1:91-CV-1877JTC, 1992 WL 472026 (N.D. Ga. Oct. 14, 1992) was misplaced.
I
find none of these arguments persuasive.
A.
Standard of Review
Although there is no formal rule of civil procedure that
provides by terms for a motion for “reconsideration,” Federal
Rule of Civil Procedure 59(e) gives a party 28 days from the
entry of judgment to move to alter or amend that judgment.
5
Fed.
R. Civ. P. 59(e).
“Reconsideration under Rule 59 is proper in
four circumstances: 1) if the initial ruling was based on an
inadequate record; 2) if there has been a material change in
controlling law; 3) if there is newly discovered evidence that
bears on the question; or 4) if the earlier decision is clearly
erroneous and would work a manifest injustice.”
In re iBasis,
Inc. Derivative Litigation, 551 F. Supp. 2d 122, 123 (D. Mass.
2008) (citing Ellis v. United States, 313 F.3d 636, 647–48 (1st
Cir. 2002)).
However, “[s]uch problems rarely arise; therefore
the motion for reconsideration should be equally rare.”
Reyes
Canada v. Rey Hernandez, 224 F.R.D. 46, 48 (D.P.R. 2004) (citing
Bank of Waunakee v. Rochester Cheese Sales, Inc., 906 F.2d 1185,
1191 (7th Cir. 1990)).
B.
The IRS Discharged its Liens With Respect to the
Compensation for Hannon’s Property
The United States contends that federal tax liens attached
to Hannon’s claim for undercompensation.
It presents four
arguments in support of this proposition.
1.
Discharge Was As To Realty Only
First, the United States contends that “the discharge was of
the realty only, for the purpose of giving the City clear title.”
Again, I disagree.
A discharge was not necessary to give the
City of Newton clear title; the exercise of the power of eminent
domain itself accomplished this goal.
When the government
exercises its power of eminent domain, all liens on the property
6
are generally extinguished.
New England Cont’l Media, Inc. v.
Town of Milton, 588 N.E.2d 1382, 1384 (Mass. App. Ct. 1992).
This is longstanding Massachusetts law: Chief Justice Holmes
wrote in 1901 that “if there is such a thing as a new title known
to the law, one founded upon a taking by the right of eminent
domain is as clear an example as can be found.”
Terminal Co., 59 N.E. 763, 765 (Mass. 1901).
Emery v. Boston
The United States’s
decision to discharge its lien on Hannon’s property cannot be
justified on the basis of the necessity to clear title.
2.
Discharge under § 6325(b)(2)(A)
Second, the United States contends that “[n]othing in § 6325
or the regulations states that the issuance of a certificate of
discharge under § 6325(b)(2)(A), rather than § 6325(b)(3),
overrides the general rule that federal tax liens apply to all of
the taxpayer’s property and rights to property.”
disagree.
Again, I
Both the statutory scheme of 26 U.S.C. § 6325,
considered in its entirety, and the particular requirements of
§ 6325(b)(2)(A) indicate that a discharge pursuant to that
section discharges any lien on the proceeds of the sale of the
property at issue.1
1
I do not hold that 26 U.S.C. § 6325(b)(2)(A) “overrides” the
general rule that federal tax liens apply to all of the
taxpayer’s property and rights to property. Instead, I hold that
the United States, by discharging property pursuant to
§ 6325(b)(2)(A), relinquished its lien on the proceeds of the
sale beyond the amount claimed by the Secretary in exchange for
the discharge.
7
The structure of § 6325 as a whole indicates that a
certificate of discharge under § 6325(b)(2)(A) discharges all
interest in the proceeds from the sale of that property.
As I
wrote in the October 24, 2011, Memorandum and Order:
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.
Hannon v. City of Newton, 820 F. Supp. 2d 254, 258 (D. Mass.
2011).
The juxtaposition of § 6235(b)(2)(A) and § 6235(b)(3)
makes clear that, unlike a discharge pursuant to § 6235(b)(3), a
discharge pursuant to § 6235(b)(2)(A) does not preserve the IRS’s
right to the proceeds of the sale.
Further, the language in § 6325(b)(2)(A) itself indicates
that when the IRS discharges a lien pursuant to that subsection,
it relinquishes its claim to the proceeds of the sale beyond the
amount claimed by the Secretary.
As I noted in the October 24,
2011, Memorandum and Order:
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).
If the 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
8
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.
Hannon, 820 F. Supp. 2d at 258.
In its Motion for Reconsideration, the United States argues
that
[i]t is true that if the IRS does receive the full
value of its interest, there should ordinarily be no
basis to claim proceeds because receiving full value
means receiving the lesser of either full payment of
the tax liability or the full value of the taxpayer’s
interest . . . . In the event that a taxpayer does have
a right to proceeds of property that has been
discharged from federal tax liens, and a tax liability
remains outstanding, however, those proceeds are
treated the same as any other property under § 6321 and
the federal tax liens attach to them, regardless of
whether that is due to an inaccurate estimate of value
or fraud or anything else.
(emphases in original).
I find this argument inconsistent with
the statute.
There is no exception in the statute stating that the IRS
may issue a discharge pursuant to § 6325(b)(2)(A) for an amount
less than the value of the interest of the United States in the
property to be discharged where the IRS anticipates additional
proceeds may accrue and is consequently unsure of the value of
its interest.
The language of the requirement is straightforward
when it provides that the IRS may issue a discharge “if . . .
there is paid over to the Secretary” a payment “which shall not
9
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) (emphases added).
Where the IRS is
unsure of the value of the property or of the lien, it would be
prudent, if it is possible to do so, to discharge the property
pursuant to § 6325(b)(3) so that “the proceeds of [the] sale
[will] be held, as a fund subject to the liens and claims in the
United States, in the same manner and with the same priority as
such liens and claims had with respect to the discharged
property.”
Here, the IRS did not use subsection (b)(3), and is
left with the consequences of its decision to choose a statutory
provision that fully discharged its lien on the proceeds of the
sale.
3.
In re Levine
The United States contends that In re Levine, No. H. 4564,
67-2 U.S. Tax Cas. (CCH) P9479, 1967 U.S. Dist. LEXIS 11483 (D.
Conn. May 1, 1967), supports the proposition that a discharge
pursuant to § 6325(b)(2)(A) does not discharge the lien with
respect to the proceeds of the sale.
In re Levine states:
The discharge of lien was intended only to clear the
record title of the real estate so that the trustee
could dispose of his interest. By its terms it saved
and preserved all of its lien rights as to all other
property and that would by operation of law include the
cash proceeds of the sale by the trustee.
Id. at *3-4.
The United States argues that I should follow In re
Levine’s lead and hold that the IRS preserved its lien rights
10
with respect to compensation for the Hannon property even after
discharge.
As a preliminary matter, I note that it is not clear from
the opinion in In re Levine whether the discharge in that case
was issued pursuant to § 6325(b)(2)(A), rather than § 6325(b)(3).
Assuming for the sake of argument that it was, I nonetheless find
In re Levine unpersuasive.
The In re Levine Court assumed,
essentially as a matter of ipse dixit, that the discharge did not
affect the right of the United States to the proceeds of the
sale.
The In re Levine Court did not consider the statutory
structure of § 6325 or the limitation in subsection (b)(2)(A)
that a discharge may be issued only if a payment is made for not
less than the value of the United States’s interest in the
property.
The analysis of In re Levine is less than complete and
it does not cause me to reconsider my decision.
4.
Regulations
Finally, the United States cites 26 C.F.R. § 301.63251(f)(3), which states that:
any lien for Federal taxes attaches to any property
with respect to which a certificate of discharge has
been issued if the person liable for the tax reacquires
the property after the certificate has been issued.
Thus, if property subject to a Federal tax lien is
discharged therefrom and is later reacquired by the
delinquent taxpayer at a time when the lien is still in
existence, the tax lien attaches to the reacquired
property and is enforceable against it as in the case
of after-acquired property generally.
11
I rejected the applicability of this regulation in my October 24,
2011, Memorandum and Order, noting that “Hannon did not sell and
then reacquire the property as the regulation contemplates” and
that “[c]laiming 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.”
Hannon, 820 F. Supp. 2d at 260.
The United States
raises no compelling reason to reconsider this argument now.
C.
Application of § 6325(b)(3)
The United States contends that the October 24, 2011,
Memorandum and Order misapplies § 6325(b)(3).
The United States
presents a three-pronged argument, contending that: (1) the IRS
could not have unilaterally invoked § 6325(b)(3) in this case;
(2) § 6325(b)(3) does not apply to the transfer of property
pursuant to the exercise of the power of eminent domain because
such a transfer is not a “sale”; and (3) Congress enacted
§ 6325(b)(3) in order to facilitate property sales where the
status of a federal tax lien is disputed, which was not the case
with respect to the liens on Hannon’s property.
The United States misapprehends the basis of my holding.
Section 6325(b)(3) was important for the purposes of my analysis
because its juxtaposition with § 6325(b)(2)(A) demonstrates that
a discharge pursuant to the latter subsection discharges the
IRS’s lien on the proceeds of the sale of the property at issue.
12
I did not reach whether a discharge pursuant to § 6325(b)(3)
would have been a feasible option for the IRS here (like the
United States, I doubt that to be the case) because that was not
the question presented.2
The question presented related to the
effect of a § 6325(b)(2)(A) discharge; § 6325(b)(3) was only
relevant because of its comparative role in the interpretation of
§ 6325(b)(2)(A).
The United States argues that because a § 6325(b)(3)
discharge was not a feasible option with respect to the Hannon
property, the IRS had no choice but to discharge the property
pursuant to § 6325(b)(2)(A) in order to enable the transfer of
the property and ensure that the United States would be paid from
the resulting proceeds.
This argument exposes the futility of
2
To the extent that the introduction to the October 24, 2011,
Memorandum and Order might be read to imply that somehow only a §
6325(b)(3) discharge would have been appropriate, the language
was infelicitously chosen. The Memorandum and Order stated that
I would “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.” Hannon v. City of Newton, 820
F. Supp. 2d 254, 254-55 (D. Mass. 2011). A more nuanced
explanation for my ruling would have stated that I granted
summary judgment to Manning and denied it to the United States
because the United States chose to discharge its lien on Hannon’s
property pursuant to § 6325(b)(2) rather than discharging it
pursuant to § 6325(b)(3), if possible, or issuing no discharge
and collecting from the proceeds of the damages arising out of an
eminent domain taking. In any event, by issuing a discharge
pursuant to § 6325(b)(2)(A), the United States surrendered its
priority claim to proceeds generated by litigation after the
discharge.
13
the United States’s focus on the applicability of § 6325(b)(3)
instead of on the import of that subsection for the
interpretation of § 6325(b)(2)(A).
The United States was not
faced with a dichotomous choice between a discharge pursuant to
§ 6325(b)(2)(A) and a discharge pursuant to § 6325(b)(3).
The
United States had a third option: it could have done nothing.
As I discussed in the October 24, 2011, Memorandum and
Order, proceeds received as damages arising out of an eminent
domain taking are “to be regarded as capital substituted, by act
of law, in the place of the land taken.”
Mass. (1 Met.) 75, 76 (1840).
Gibson v. Cooke, 42
“[C]ompensation 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 . . . .”
Cornell-Andrews Smelting Co.
v. Boston & Providence R.R. Corp., 95 N.E. 887, 890 (Mass. 1911).
Faced with the imminent taking of Hannon’s property by the City
of Newton, the United States did not need to issue a discharge of
its lien at all.
It could have simply waited and collected on
its lien from the compensation paid for the land.
As I wrote in
the October 24, 2011, Memorandum and Order:
The United States made a deliberate, if improvident,
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
14
return to revive a preferred interest in proceeds from
the litigation.
Hannon, 820 F. Supp. 2d at 260-61.
D.
Persuasive Authorities
In the October 24, 2011, Memorandum and Order, I stated that
I found the reasoning of Frazier, Miller, and Holtzclaw to be
persuasive.
Each of these opinions noted the distinction between
§ 6325(b)(2)(A) and§ 6325(b)(3) and used the juxtaposition of
these two subsections as a means of interpreting § 6325(b)(2)(A).
The United States argues that my reliance on the three cases was
unwarranted.
First, the United States attempts to distinguish the three
opinions.
It states that “two of the three are unpublished, the
most recent is from 1992, and none is from a court in this
circuit.”3
It argues that the facts of the three cases are
distinguishable from the facts of the case before me now and that
the language with respect to § 6325 in each of the three cases
was mere dicta.
3
The United States objects to my use of United States v.
Holtzclaw, Civil No. S-84-402 MLS, 1988 U.S. Dist. LEXIS 16355
(E.D. Cal. Dec. 12, 1988); In re Miller, 98 B.R. 110, 112 (N.D.
Ga. 1989); and Estate of Frazier v. Dist. Dir., I.R.S., No. 1:91CV-1877-JTC, 1992 WL 472026 (N.D. Ga. Oct. 14, 1992) on these
bases. There is a measure of hypocritical dissembling in this
objection. I note that the sole case the United States cites in
support of its interpretation of § 6325(b)(2)(A), In re Levine,
No. H. 4564, 67-2 U.S. Tax Cas. (CCH) P9479, 1967 U.S. Dist.
LEXIS 11483 (D. Conn. May 1, 1967), is also a decision
unpublished in F. Supp. that was issued well before 1992 by a
court outside of this circuit.
15
I find none of these distinctions relevant for my analysis
of § 6325(b)(2)(A).
The cited opinions provided persuasive
reasoning regarding how to interpret § 6325(b)(2)(A) in light of
§ 6325(b)(3).
Their reasoning was not fact-bound and certainly
was not diminished in persuasiveness by the date or publication
status4 of the opinion.
That the facts were different, that the
analysis was dicta, and that the cases are not binding authority,
are not factors that change the compelling nature of the
statutory analysis.
Second, the United States argues that the three opinions
were wrongly decided because a certificate of discharge pursuant
to § 6325(b)(2) “discharges the specified realty from the federal
tax liens, nothing more.”5
The United States provides no case
law, statute, or regulation in support of this interpretation of
4
I have indicated elsewhere my view that lack of book
publication of a District Court opinion is not a compelling
reason to treat the reasoning of such an opinion with less
consideration than an opinion submitted for publication to West’s
Federal Supplement series of reports. Vertex Surgical, Inc. v.
Paradigm Biodevices, Inc., 648 F.Supp.2d 226, 233-36 (D. Mass.
2009).
5
The United States also argues that Holtzclaw was wrong because
“[s]ection 6325(b)(3) is plainly not the exclusive basis upon
which the IRS may claim proceeds of a sale of property.” It is
not clear to me that Holtzclaw held otherwise, but regardless I
need not resolve that peripheral issue here. It is not necessary
to determine the dimensions of the entire universe of ways in
which the IRS might claim the proceeds of a sale of property in
order to find the analysis in Holtzclaw persuasive with respect
to the import of § 6325(b)(3) for other discharges of property
pursuant to § 6325.
16
§ 6325(b)(2).
disagree.
For the reasons discussed above, supra, I
The United States chose to discharge its tax liens
pursuant to § 6325(b)(2), and in doing so it relinquished its
priority claim to any proceeds generated by land damage
litigation after the discharge.
Because the United States has failed to show that my October
24, 2011 Memorandum and Order was “clearly erroneous and would
work a manifest injustice,” In re iBasis, Inc. Derivative
Litigation, 551 F. Supp. 2d at 123, I will deny its Motion for
Reconsideration and to Alter or Amend Judgment.
III.
MOTION TO INTERVENE
Foshay moves to intervene as of right pursuant to Federal
Rule of Civil Procedure 24(a)(2).
The Rule provides that “[o]n
timely motion, the court must permit anyone to intervene
who . . . claims an interest relating to the property or
transaction that is the subject of the action, and is so situated
that disposing of the action may as a practical matter impair or
impede the movant's ability to protect its interest, unless
existing parties adequately represent that interest.”
Civ. P. 24(a)(2).
Fed. R.
By its plain terms, then, Rule 24 requires
that a would-be intervenor show that (1) its motion is timely,
(2) it has an interest in the property at the foundation of the
action, (3) the disposition of the action threatens to impair the
would-be intervenor’s ability to protect its interest, and (4)
17
none of the existing parties adequately represent the would-be
intervenor’s interest.
Cir. 2011).
Ungar v. Arafat, 634 F.3d 46, 50 (1st
“Each of these requirements must be fulfilled;
failure to satisfy any one of them defeats intervention as of
right.”
Id. at 51.
It is undisputed that Foshay had an interest relating to the
property that forms the foundation of this case and that property
interests are at the heartland of Fed. R. Civ. P. 24(a)’s
concerns.
See Diaz v. S. Drilling Corp., 427 F.2d 1118, 1124
(5th Cir. 1970) (“Interests in property are the most elementary
type of right that Rule 24(a) is designed to protect.”).
It is
also undisputed that no existing party adequately represented
Foshay’s interest.
Neither the United States nor Manning had an
interest in enforcing Foshay’s right (if any) to the litigation
proceeds.
I find that the writs of attachment and judgment
recorded at the Middlesex Registry of Deeds and the circumstances
of this case demonstrate that the second and fourth requirements
of Rule 24(a)(2) are met by Foshay.
The United States, however, disputes whether the first and
third requirements are met.
It contends that the disposition of
this action does not threaten to impede or impair Foshay’s
ability to protect her interest and that her motion to intervene
is untimely.
18
A.
Impairment of Foshay’s Ability to Protect Her Interest
The United States opposes Foshay’s claim that the
disposition of this action threatens to impede or impair her
ability to protect her interest.
The United States does so on
two grounds.
First, the United States argues that Foshay’s motion is
futile because her interest is junior to the federal tax liens on
the damages award.
For this argument, the United States depends
upon the contentions unsuccessfully made in its Motion for
Summary Judgment and Motion for Reconsideration, both of which I
have denied.
For the reasons developed in my October 24, 2011,
Memorandum and Order granting summary judgment to Manning and
restated above in denying the government’s Motion for
Reconsideration, I find the contentions relied upon by the
government to be unconvincing as to Foshay as well.
Second, the United States argues that Foshay “admits that
the federal tax liens are senior to her purported attachment
against Hannon’s property interest in the under-compensation
award.”
The United States mischaracterizes Foshay’s position.
In the course of justifying the delay in filing her motion to
intervene, Foshay stated that the discharge issued by the IRS “to
Foshay in good faith appeared to be a discharge of the IRS’s
liens on the real estate only, while retaining a lien on the
proceeds of the taking.”
This was not an admission with respect
19
to the legal significance of the certificate of discharge--which,
in any event, is for the Court to determine--but instead an
explanation of why Foshay did not seek to intervene earlier.
Apparently, Foshay at one point mistakenly believed that the IRS
maintained its priority with respect to the proceeds of Hannon’s
land damages action, but this error does not undermine her claim
that the disposition of this action threatened to impede her
ability to protect her interest in those proceeds.
Foshay has demonstrated that she has an interest in the
proceeds of the land damages action.
If judgment is entered
ordering payment of the proceeds to Manning and the United
States, Foshay will not have been paid and her interest in that
sum will have been impeded.
I therefore find that Foshay has
demonstrated that the third requirement of Rule 24(a)(2) is met.
B.
Timeliness
Foshay contends that her motion to intervene was timely
because (1) she was ignorant of the developments in this case
until shortly before filing the motion (not having followed the
case’s progress since mid-2010) and (2) until her counsel read my
October 24, 2011, Memorandum and Order, she believed that the
United States’s claim to the litigation proceeds had priority
over her own claim.
Foshay explains that when she learned of the
October 24, 2011, Memorandum and Order, she promptly moved to
intervene.
For its part, the United States contends that
20
Foshay’s motion was untimely because it was not filed within nine
months of the May 19, 2010, Notice of Levy issued to the City of
Newton.
I find Foshay’s justification for her delay in seeking
to intervene in this Court to be plausible, if barely sufficient
as an explanation (and as such unopposed by the United States).
Consequently, I turn to the determinative question whether her
intervention is barred by the statute of limitations governing 26
U.S.C. § 7426(a)(1).
Pursuant to § 7426(a)(1),
[i]f a levy has been made on property or property has
been sold pursuant to a levy, any person (other than
the person against whom is assessed the tax out of
which such levy arose) who claims an interest in or
lien on such property and that such property was
wrongfully levied upon may bring a civil action against
the United States in a district court of the United
States. Such action may be brought without regard to
whether such property has been surrendered to or sold
by the Secretary.
A wrongful levy action pursuant to § 7426(a)(1) is the exclusive
remedy available to third parties who assert an interest in the
levied property.
Miller v. Tony & Susan Alamo Foundation, 134
F.3d 910, 916-17 (8th Cir. 1998); Dahn v. United States, 127 F.3d
1249, 1253 (10th Cir. 1997); Fid. & Deposit Co. of Md. v. City of
Adelanto, 87 F.3d 334, 335 (9th Cir. 1996); Kirk v. United
States, 1996 WL 90560, at *1, 961 F.2d 211, 211
(Table) (4th
Cir. 1992); Williams v. United States, 947 F.2d 37, 39 (2d Cir.
1991); Trust Co. of Columbus v. United States, 735 F.2d 447, 448
(11th Cir. 1984); United Sand & Gravel Contractors, Inc. v.
21
United States, 624 F.3d 733, 739 (5th Cir. 1980).
See also
Markham v. Fay, 74 F.3d 1347, 1354 (1st Cir. 1996) (stating in
dicta that “[t]hird parties are limited to [the] remedy [of a
suit for wrongful levy under 26 U.S.C. § 7426(a)(1)] . . . when
the government proceeds by levy . . . .”).
With one exception not applicable here, “no suit or
proceeding under section 7426 shall be begun after the expiration
of 9 months from the date of the levy or agreement giving rise to
such action.”
26 U.S.C. § 6532(c)(1).
See EC Term of Years
Trust v. United States, 550 U.S. 429, 431 (2007) (applying the
statute of limitations).
After the expiration of the nine-month
limitations period, “the government ha[s] not waived its
sovereign immunity, thus precluding suit.”
EC Term of Years
Trust v. United States, 434 F.3d 807, 808 n.3 (5th Cir. 2006),
aff’d, 550 U.S. 429 (2007).
“[T]he failure to file a timely
wrongful levy claim prior to the expiration of the time
limitation in section 6532(c) deprives the district court of
subject matter jurisdiction.”
Becton Dickinson and Co. v.
Wolckenhauer, 315 F.3d 340, 353 (3d Cir. 2000).
Over nine months
passed after the government issued its notice of levy before
Foshay sought to intervene in this case.
Consequently, the
limitations period has expired and this Court does not have
subject matter jurisdiction to entertain Foshay’s claim to the
levied property.
22
Foshay contends that she does not assert her claim pursuant
to § 7426(a)(1) and that as a result her claim is remediable.
She offers two arguments in support of this proposition.
First,
she argues that the levy did not apply to the proceeds in which
she asserts an interest.
Second, she argues that her suit is “an
action in the nature of interpleader” and is subject to a longer
statute of limitations than the nine-month limitation imposed by
§ 6532(c)(1) on wrongful levy actions.
I find neither argument
compelling.
1.
Extent of the Levy
Foshay’s first argument is based on the language in the
notice of levy.
The government’s notice described the levy as
applying to the amounts that the City of Newton was “obligated to
pay” Hannon and to “property belonging” to him.
Foshay contends
that the levy therefore applied only to the property, if any,
remaining after satisfying the extant judgment liens.
She argues
that this interpretation of the notice conforms to the
requirements of the statute governing the obligation to surrender
levied property, which excepts from the duty to surrender
property that is “subject to an attachment or execution under any
judicial process.”
26 U.S.C. § 6332(a).
Foshay’s argument fundamentally misconstrues the workings of
an IRS levy.
Hannon.
The litigation damages were “property belonging” to
Nothing in the language of the notice of levy excepted
23
the portions of the proceeds on which third parties had placed a
lien or attachment.
After the property was levied, those third
parties had a nine month period in which to initiate a wrongful
levy action and press their claims.
This is the general nature
of an IRS levy:
The administrative levy has been aptly described as a
“provisional remedy.” In contrast to the lienforeclosure suit, the levy does not determine whether
the Government’s rights to the seized property are
superior to those of other claimants; it, however, does
protect the Government against diversion or loss while
such claims are being resolved. The underlying
principle justifying the administrative levy is the
need of the government promptly to secure its revenues.
United States v. Nat’l Bank of Commerce, 472 U.S. 713, 721 (1985)
(internal citation and quotations marks omitted).
The IRS levied
upon all of the property belonging to Hannon in the hands of the
City of Newton.
The existence of liens senior to those of the
government gave rise not to a limitation on the levy, but instead
to grounds for suit pursuant to § 7426(a)(1).
Section 6332(a) does not bolster Foshay’s argument.
That
statute imposes an obligation to surrender property “subject to
levy” to the government.
It excepts from this obligation
property that is “subject to an attachment or execution under any
judicial process.”
26 U.S.C. § 6332(a).
The exception is from
the duty to surrender, not from the categorization of the
property as “subject to levy.”
The exception is crucial because
third parties are liable for costs, interest, and “a penalty
24
equal to 50 percent of the amount recoverable” if they fail to
surrender the property as required.
26 U.S.C. § 6332(d).
Under
the exception, the City of Newton is not subject to those
liabilities for its failure to surrender the proceeds to the
government “upon demand of the Secretary.”
26 U.S.C. § 6332(a).
The exception, however, does not purport to govern the extent of
the levy itself, and Foshay cites no case law in support of this
strained reading of § 6332(a).
Foshay does cite two cases in support of her contentions
with respect to the limited extent of the levy.
I find neither
of these cases to be a convincing basis for her argument.
First, Foshay cites Dannenberg v. Leopold & Co., 188 Misc.
250, 65 N.Y.S.2d 549 (N.Y. City Ct. 1946).
The Dannenberg Court
held that because the property was subject to attachment, “when
the government made its levy there was nothing for it to levy
upon as, for all practical purposes, the fund had then already
been legally appropriated to the use of this judgment creditor.”
Dannenberg, 188 Misc. at 251-52.
Foshay contends that Dannenberg
provides persuasive reasoning in support of the argument that the
property that she claims here was not subject to the IRS’s levy.
I disagree.
Dannenberg was decided by the New York City
Court in 1946 and significantly predated the Supreme Court’s 1985
decision in United States v. Nat’l Bank of Commerce, which
described an IRS levy as operating in the opposite way: the levy
25
is a provisional remedy and the seniority of other liens is
worked out after the fact.
at 721.
Indeed, Dannenberg predated § 7426(a)(1) itself by
twenty years.
(1966).
See Nat’l Bank of Commerce, 472 U.S.
See S. Rep. No. 1708, 89th Cong., 2d Sess., 30
See also EC Term of Years Trust, 550 U.S. at 431 (“the
Federal Tax Lien Act of 1966 added § 7426(a)(1).”).
Dannenberg
is not compelling with respect to the interpretation of a statute
that did not yet exist at the time it was decided.
In light of
the later, and contrary, development of the law, I conclude
Dannenberg is not helpful here.
Second, Foshay cites United States v. Fontana, 528 F. Supp.
137 (S.D.N.Y. 1981).
The Fontana Court rejected a jurisdictional
challenge to a dispute over the priority of a government lien,
where the property at issue in the dispute remained in the hands
of a third party at the time of litigation.
The government
argued that the remedy under § 7426(a)(1) was exclusive and that
the nine-month statute of limitations had expired.
The Fontana
Court was not convinced, stating that “[t]he jurisdictional issue
is simply resolved by the recognition that Great Lakes is not
attempting to sue the United States . . . . When the property is
in the hands of a nongovernmental party, other remedies may be
available.”
Fontana, 528 F. Supp. at 140.
Fontana, like Dannenberg, was decided before the Supreme
Court’s decision in United States v. Nat’l Bank of Commerce.
26
There, the Supreme Court stated that the notice of levy “gives
the IRS the right to all property levied upon and creates a
custodial relationship between the person holding the property
and the IRS so that the property comes into the constructive
possession of the Government.”
Nat’l Bank of Commerce, 472 U.S.
at 720 (internal citation omitted).
Although the litigation
proceeds here are in the hands of another party (now, this
Court), they are in the constructive possession of the government
until final judgment enters.
Consequently, a suit claiming the
proceeds is a claim against the United States, regardless of
whether the United States currently possesses the litigation
proceeds itself.
See Fid. & Deposit Co. of Md., 87 F.3d at 334-
335 (holding that § 7426(a)(1) was the exclusive vehicle for
plaintiff’s claim to property subject to both a government levy
and plaintiff lien, but physically possessed by a third party).
In light of United States v. Nat’l Bank of Commerce, I find
Fontana to be unpersuasive as well.
Neither the case law cited nor the statutory interpretation
offered by Foshay is a compelling basis for disregarding the
exclusive remedy of § 7624(a)(1) and the fact that its
limitations period has expired.
The notice of levy applied to
all property owed by the City of Newton to Hannon, and Foshay’s
sole method of challenging that levy is no longer available to
her.
I consequently reject Foley’s first argument.
27
2.
Interpleader
Foshay’s second argument is that she “seeks merely to
participate in a sorting out of the proper order among competing
property claims to the fund on deposit in court, an action in the
nature of interpleader, not involving wrongful levy, and not
governed by the nine-month statute [of limitations] applicable to
wrongful levy actions.”
In support of this argument, Foshay
cites Sandclay Trucking, Inc. v. Free Piping, Inc., 1996 WL
511673 (M.D. Fla. June 24, 1996), and Estate of Johnson, 836 F.2d
940 (5th Cir. 1988).
I find Sandclay Trucking unconvincing and
Estate of Johnson inapposite.
The plaintiff in Sandclay Trucking initiated a suit “in the
nature of interpleader” pursuant to 28 U.S.C. § 2410(a)(5) to
determine the ownership of property regarding which the IRS had
served a notice of levy and the plaintiff had obtained a writ of
garnishment.
The government argued that § 7426(a)(1) provided
the plaintiff’s sole remedy and that the limitations period
governing that statute had expired.
The Sandclay Trucking Court
observed that “even courts that have not permitted actions under
section 2410 questioning the validity of the underlying tax
assessment have permitted suits where the third party disputes
only the priority of the IRS lien and not its legitimacy.”
Sandclay Trucking, 1996 WL 511673, at *2.
28
In support of this
observation, the Sandclay Trucking Court cited Estate of Johnson
and Harrell v. United States, 13 F.3d 232 (7th Cir. 1993).
On the basis of these cases, the court “reject[ed] the IRS’s
statute of limitations argument.”
511673 at *3.
Sandclay Trucking, 1996 WL
I find Sandclay Trucking unconvincing because the
two cases cited in the decision are inapposite.
In Estate of Johnson, the IRS placed a lien on Johnson’s
assets and seized them pursuant to 26 U.S.C. § 6861(a).
The
executor of Johnson’s estate subsequently brought a quiet title
action with respect to the property.
at 941-942.
Estate of Johnson, 836 F.2d
The decision did not mention a levy and consequently
did not consider the exclusivity of § 7426(a)(1) in the context
of a levy.
Estate of Johnson did not address the facts facing
the Sandclay Trucking Court and did not address the facts with
which I am presented today.
In Harrell, a taxpayer brought a quiet title suit pursuant
to 28 U.S.C. § 2410(a) to challenge the government’s levy of his
wages.
Harrell, 13 F.3d at 233.
The Seventh Circuit allowed the
taxpayer’s suit, noting that “the sorting out of competing
property claims . . . is just the task for which the quiet-title
act was designed.”
Id. at 234.
However, Harrell involved a suit
brought by the taxpayer against whom the tax was assessed,
whereas § 7426 governs suits brought by any person “other than
the person against whom is assessed the tax out of which such
29
levy arose . . . .” (emphasis added).
Therefore, the Seventh
Circuit had no occasion to consider § 7426 or the exclusive
remedy that it provides when it is applicable.
Harrell is
consequently inapposite with respect to both Sandclay Trucking
and the case before me today.
Unlike Sandclay Trucking, courts have generally found that
suits pursuant to § 2410(a) are impermissible where a remedy is
available pursuant to § 7426(a)(1).
They have held that
§ 7426(a)(1) provides the exclusive remedy for a third party
challenging the government’s levy of property in which the third
party has an interest.
See Fid. & Deposit Co. of Md., 87 F.3d at
335; United Sand & Gravel Contractors, Inc., 624 F.3d at 739; Am.
Nat. Bank & Trust Co. v. Thomas, 680 N.E.2d 480, 482-83 (Ill. Ct.
App. 1997).
I similarly find that where the plaintiff could sue for
wrongful levy pursuant to § 7426(a)(1), allowing suits styled as
“quiet title” actions pursuant to § 2410(a)(1) or actions “in the
nature of interpleader” pursuant to § 2410(a)(5) would undermine
the nine-month statute of limitations that Congress “thought
essential to the Government’s tax collection.”
Trust, 550 U.S. at 434.
EC Term of Years
I “simply cannot reconcile the 9-month
limitations period for a wrongful levy claim under § 7426(a)(1)
with the notion that the same challenge would be open under [28
U.S.C. § 2410(a)] for up to [six] years.”
30
Id. at 435.
I
therefore hold that § 7426(a)(1) provides the exclusive remedy
available to Foshay, and I consequently reject Foshay’s second
argument.
In the final analysis, Foshay has not demonstrated that she
has any claim against the government.
While she has an interest
in the proceeds, she may not pursue it because the limitations
period has passed for the exclusive remedy available to her.
No
purpose would be served by allowing Foshay to intervene when
there is no reason to believe that considering and deciding her
claim “in the normal course” would lead to anything other than
dismissal of that claim for the reasons discussed above.
In
short, her effort to intervene is futile.
IV.
CONCLUSION
For the reasons set forth above, I (1) DENY the United
States’ Motion for Reconsideration (Dkt. No. 20), and (2) DENY
Foshay’s Motion to Intervene (Dkt. No. 22).
/s/ Douglas P. Woodlock
DOUGLAS P. WOODLOCK
UNITED STATES DISTRICT JUDGE
31
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