United States of America v. Steward et al

Filing 22

Judge Richard G. Stearns: MEMORANDUM & ORDER entered granting 18 Motion to Dismiss Counterclaim of Holly Lane Associates, LLC. (RGS, law1)

UNITED STATES DISTRICT COURT
DISTRICT OF MASSACHUSETTS
CIVIL ACTION NO. 13-11412-RGS
UNITED STATES OF AMERICA
v.
JAMES P. STEWARD, PAMELA STEWARD,
HOLLY LANE ASSOC., LLC, and CITY OF BEVERLY
MEMORANDUM AND ORDER
ON UNITED STATES’ MOTION TO DISMISS
DEFENDANT HOLLY LANE ASSOC., LLC’S COUNTERCLAIM
February 13, 2014
STEARNS, D.J.
This matter is before the court on plaintiff United States of America’s
motion to dismiss a counterclaim brought by defendant Holly Lane Associates,
LLC (HLA), alleging a wrongful levy. The United States filed the original
Complaint on June 12, 2013, looking to collect the assessed tax liabilities of
defendants James and Pamela Steward. The United States sought: (1) a
money judgment, pursuant to 26 U.S.C. § 7401, against the Stewards for
delinquent taxes; and (2) the enforcement, under 26 U.S.C. § 7403(a), of
associated federal tax liens against the Stewards, by a means of a judicial sale
of real property located at 28 Holly Lane, Beverly, MA (The Property). HLA

is the owner of record of The Property and is also named as a defendant.1
HLA responded by filing a counterclaim against the United States,
captioned “Complaint for Wrongful Levy (Enforcement of Tax Liens Against
Real Property),” requesting both declaratory and injunctive relief. The United
States now moves to dismiss the counterclaim for, inter alia, lack of subject
matter jurisdiction.2 While the United States acknowledges that HLA is not
barred from raising the factual allegations set out in the counterclaim in the
defense of the § 7403 action, it argues that a counterclaim is the wrong vehicle
by which to deliver them. The court agrees, as will be explained, although it
emphasizes that in dismissing HLA’s counterclaim, it is not entering a
judgment on the merits of the dispute over The Property.
STANDARD OF REVIEW
In the context of a motion to dismiss pursuant to Fed. R. Civ. P. 12(b)(1)
for lack of subject matter jurisdiction, “the party invoking the jurisdiction of
a federal court carries the burden of proving its existence.” Johansen v.

1

In accordance with 26 U.S.C. § 7403(b), all persons claiming an interest
in a property that is the subject of a § 7403(a) lien enforcement action must be
made parties to such an action.
2

The United States also relies on the doctrine of res judicata based on
this court’s previous dismissal of a separate complaint brought by HLA against
the United States making a similar claim of wrongful levy.
2

United States, 506 F.3d 65, 68 (1st Cir. 2007) (quoting Murphy v. United
States, 45 F.3d 520, 522 (1st Cir. 1995)).

While the plausible factual

allegations in the complaint (or in this case, the counterclaim) are deemed to
be true, see Bell Atl. Corp. v. Twombly, 550 U.S. 544, 555-556 (2007), a party
“may not rest merely on ‘unsupported conclusions or interpretations of law.’”
Murphy, 45 F.3d at 522 (quoting Washington Legal Found. v. Massachusetts
Bar Found., 993 F.2d 962, 971 (1st Cir.1993)).

“If the party fails to

demonstrate a basis for jurisdiction, the district court must grant the motion
to dismiss.” Johansen, 506 F.3d at 68.
BACKGROUND
The underlying issue can be summarily stated: Is The Property subject
to the federal tax liens arising out of James Steward’s tax liabilities?
Specifically, the United States alleges that: (1) James Steward owes in excess
of $200,000 for “Trust Fund” taxes3 that he failed to pay over to the United
States in various quarters during 1999 and 2000; (2) James and Pamela
Steward owe, jointly and severally, over $5,000 in delinquent income taxes for

3

Trust Fund taxes are income and Federal Insurance Contribution Act
(FICA) taxes that an employer withholds from employees’ paychecks and
keeps “in trust” for the United States until the amounts are paid over to the
Internal Revenue Service (IRS). See 26 U.S.C. § 6672.
3

the year 2010;4 (3) James Steward holds an equity interest in The Property;5
(4) HLA is James Steward’s transferee and/or nominee;2 and, (5) as such, the
federal tax liens, which pursuant to 26 U.S.C. § 6321 attach to “all property and
rights to property” of James Steward, extend to The Property.7 For its part,
4

For present purposes, the allegations regarding the Stewards’ tax
liabilities are taken as undisputed facts.
5

HLA admitted the following facts in its Answer to the Complaint
brought by the United States: In 1996, The Property was transferred to a trust
named “28 Holly Lane Beverly Realty Trust,” in which James and Pamela
Steward held a 45% beneficial interest, and in which James Steward’s father,
Charles A. Steward, held the remaining 55%, with a promise to transfer
Charles Steward’s interest to James Steward upon the payment in full of a
$160,000 note held by Beverly National Bank. Charles Steward died in 2010,
and, according to the terms of the trust instrument for the Charles A. Steward
Trust referenced in his will, The Property was to be transferred to James P.
Steward. See Ans. ¶¶ 16-19.
2

HLA neither admitted nor denied the following facts in its Answer: In
2011, Bank of America (BOA), as executor of the estate of Charles Steward,
filed an action against James Steward and his family seeking to evict them
from The Property. James Steward objected, arguing that he had personally
contributed money toward the purchase and maintenance of The Property.
BOA and James Steward settled the eviction case, and stipulated that the fair
market value of The Property was $555,000. However, to reflect the
contributions towards the maintenance of The Property claimed by James
Steward, BOA agreed to sell The Property to Steward “or his designee” for
$340,000. BOA transferred title to The Property for the agreed price of
$340,000 to HLA on December 23, 2011. BOA’s attorney also filed an
affidavit in Probate and Family Court confirming BOA’s intent to sell The
Property at less than fair market value because “the buyer [had] established
that he had equity in the property totaling over $200,000.” See Ans. ¶¶ 20-24.
7

Pursuant to 26 U.S.C. § 6322, the lien imposed by § 6321 arises at the
time of assessment, which, in the case of Steward’s Trust Fund liabilities, was
4

HLA denies that Steward has any interest in, or control over, The Property or
HLA, and alleges that “[HLA] is a bonafide purchaser for value.” Ans. ¶ 24.8
The IRS Files Tax Lien Notices
On July 26, 2007, the IRS filed a Notice of Federal Tax Lien (NFTL) for
$150,191.04 in unpaid taxes of James Steward, listing The Property as his
residence. Countercl. ¶ 24. On November 8, 2011, the IRS filed an NFTL
against both James and Pamela Steward for their delinquent 2010 income tax
liabilities, again listing The Property as their residence. Id. ¶ 25. On January
5, 2012, a representative of BOA, as administrator of the estate of Charles A.
Steward (James Steward’s father), transferred The Property to HLA for
$340,000. Id. ¶ 19. See also fn. 6, supra. On November 13, 2012, the IRS
filed an NFTL for the unpaid taxes of James Steward, specifically naming HLA
as the “transferee or nominee” of Steward, and listing The Property as HLA’s

in June of 2003. See Compl. ¶ 7.
8

The court notes that, for purposes of defeating a § 6321 federal tax lien
(if such lien did indeed arise and attach), the statutory definition of
“purchaser,” as contained in 26 U.S.C. § 6323(h), controls the inquiry (as
opposed to the common-law construct of a “bona fide purchaser for value”).
See 26 U.S.C. § 6323(a) (listing classes of persons against whom the lien
imposed by § 6321 is not valid in absence of notice). Thus, to prove that it was
a “purchaser” for the purpose of defeating a lien imposed by § 6321, HLA must
prove that “for adequate and full consideration in money or money’s worth”
it “acquire[d] an interest . . . valid under local law against subsequent
purchasers without actual notice.” 26 U.S.C. § 6323(h)(6).
5

residence. Id. ¶ 29.
The IRS Sends HLA a Notice of Levy
Prior to the filing of the November 2012 NFTL, the IRS sent HLA a
Notice of Levy on July 2, 2012, which stated: “THIS IS NOT A BILL FOR
TAXES YOU OWE. THIS IS A NOTICE OF LEVY WE ARE USING TO
COLLECT MONEY OWED BY THE TAXPAYER NAMED ABOVE.” The Notice
listed James Steward as the taxpayer. It instructed HLA as follows: “This levy
requires you to turn over to us this person’s property and rights to property
(such as money, credits, and bank deposits) that you have or which you are
already obligated to pay this person. . . . Make a reasonable effort to identify
all property and rights to property belonging to this person. . . . If you don’t
owe any money to the taxpayer, please complete the back of Part 3, and mail
that part back to us in the enclosed envelope.” Def.’s Opp’n, Ex. U, Dkt. #213, at 40 (emphasis added).
On November 20, 2012, HLA sent a letter to the IRS (which it labeled as
a “wrongful levy protest letter”) explaining its interest in The Property. HLA
asserted that James Steward was never an owner of The Property, that he
possessed only the right to purchase The Property at some undefined point,
and that the IRS lien therefore did not attach to The Property. HLA did not
otherwise respond to the Notice.
6

HLA Brings Wrongful Levy Suit
Though no enforcement action had been taken by the United States with
respect to the levy notice, on April 1, 2013, HLA filed a Complaint against the
United States alleging a wrongful levy under 26 U.S.C. § 7426. See Case No.
13-10743-RGS.9 HLA sought damages, declaratory relief, and injunctive relief.
Subsequently, on June 12, 2013, the United States filed the instant case,
designating it as related to HLA’s wrongful levy Complaint. On July 3, 2013,
the United States moved to dismiss HLA’s Complaint for lack of subject matter
jurisdiction pursuant to Fed. R. Civ. P. 12(b)(1).10 Noting that it had elected
to pursue its claims against The Property through judicial rather than
administrative means, the United States represented that “the IRS is willing

9

HLA averred that “[d]efendant IRS cannot levy against [The Property]
because the IRS liens recorded against the property were invalid because the
delinquent taxpayer Defendant James P. Steward did not hold an ownership
interest in the property at the time the liens were recorded.” Id., Dkt. #1, ¶ 34.
10

The United States also moved to dismiss pursuant to Fed. R. Civ. P.
12(b)(6) for failure to state a claim upon which relief can be granted. The
United States noted that the only relief requested by HLA permitted by 26
U.S.C. § 7426 was injunctive relief, and then only on a showing that “a levy or
sale would irreparably injure rights in property.” 26 U.S.C. § 7426(b)(1). The
July 2, 2012 Notice of Levy, however, sought only personal property belonging
to or owed to the Stewards, and if HLA possessed no such property, monetary
or otherwise, as it contends, obligated it only to return part 3 of the Notice
stating as much.
7

to withdraw the levy.”11 Id., Dkt. #16, at 10.
On August 2, 2013, the court held a hearing on the motion to dismiss
HLA’s Complaint. During the course of the hearing, HLA agreed to a dismissal
without prejudice to its right to defend the instant action.

The court

consequently allowed the motion to dismiss, noting “[t]he government wins
its motion to dismiss, but they're also withdrawing the levy.” Id., Dkt. #22, at
6.
The Counterclaim
On September 3, 2013, HLA filed its answer to the instant Complaint,
denying that James Steward has an interest in The Property or in HLA. It also
asserted the counterclaim, which for all practical purposes is identical to the
dismissed wrongful levy complaint, except for identifying the Complaint
brought by the United States as the “levy” for which it is seeking redress under
§ 7426. Countercl. ¶ 4.
DISCUSSION
An action cannot lie against the United States without the authorization
and consent of Congress, and, absent an “express Congressional waiver of
immunity or consent to be sued,” no court has jurisdiction to hear such an

11

For whatever reason, the IRS has yet to withdraw the levy.
8

action. Murphy, 45 F.3d at 522. See also F.D.I.C. v. Meyer, 510 U.S. 472, 475
(1994) (“Absent a waiver, sovereign immunity shields the Federal Government
and its agencies from suit.”); United States v. Mitchell, 445 U.S. 535, 538
(1980) (noting that there is no jurisdiction “[i]n the absence of clear
congressional consent”); Callahan v. United States, 426 F.3d 444, 450 (1st
Cir. 2005) (quoting Skwira v. United States, 344 F.3d 64, 72 (1st Cir. 2003))
(“It is ‘elementary’ that the United States, as sovereign, is immune from suit
unless it has consented to be sued.”).

Moreover, in passing the Anti-

Injunction Act, 26 U.S.C. § 7421, Congress explicitly prohibited suits “to
restrain assessment or collection” of taxes, with certain limited exceptions
listed in § 7421(a).
In response to the invocation by the United States of the doctrine of
sovereign immunity, HLA argues that in enacting 26 U.S.C. § 7426, “Congress
provided Holly Lane with a right of action against the IRS,” and that a federal
district court has “equitable jurisdiction to determine Holly Lane’s superior
rights and issue an injunction prohibiting the IRS from forcing a judicial sale
of Holly Lane’s property.” Def.’s Opp’n, Dkt. #21, at 6. The statute HLA cites,
§ 7426(a)(1), is one of the enumerated exceptions to the Anti-Injunction Act.
Otherwise known as the “wrongful levy” statute, § 7426(a)(1), provides that

9

“[i]f a levy has been made on property or property has been sold pursuant to
a levy,” any third party with an interest in that property who claims that the
property was “wrongfully levied upon” may bring an action against the United
States. Id. It is evident from the language of the statute that the exception
applies only when a levy “has been made.”
A levy is one of the “two principle tools” – the other being the lien
foreclosure suit – that the Internal Revenue Code provides to the IRS to collect
unpaid taxes via “[a]ffirmative action” against a delinquent taxpayer’s property
and rights to property. United States v. Nat’l Bank of Commerce, 472 U.S.
713, 719-720 (1985).12 The levy power is authorized by 26 U.S.C. § 6331, which
allows the Secretary to collect the taxes of a delinquent taxpayer “by levy upon
all property and rights to property . . . belonging to such person,” and to “seize
and sell such property or rights to property (whether real or personal, tangible
or intangible).” Id. § 6331(a) & (b).
The fatal flaw in HLA’s argument stems from a false factual premise.
Contrary to HLA’s assertion, The Property HLA seeks to “protect” has never
been the subject of an IRS levy. The July 2, 2012 Notice of Levy sent to HLA

12

A federal tax lien “is not self-executing” and therefore “[a]ffirmative
action by the IRS is required to enforce collection of the unpaid taxes.” Id. at
720.
10

was not, on its face, directed to real property, and the IRS took no subsequent
action to forcibly “seize” or to “sell” The Property pursuant to that Notice.
HLA attempts to evade the inevitable by insisting that its counterclaim is not
based on the July 2, 2012 levy, but rather is “based on the IRS’s June 12, 2013
complaint” brought under § 7403. Def.’s Opp’n, Dkt. #21, at 5.
Relying on a dictionary web site (Dictionary.com), HLA argues that
“forced judicial sale is a wrongful levy,” id., and that the § 7426 waiver of
sovereign immunity applies here because “the IRS is seeking to seize and sell
Holly Lane’s property in this case.” Countercl. ¶ 4. This is simply not the case.
A lien foreclosure action is not a levy. As previously noted, a levy and a lien
foreclosure are distinct actions that can be taken by the IRS to collect taxes,
and each action is authorized by a separate section of the Internal Revenue
Code (§ 6331 and § 7403). A levy is a “provisional remedy” that “protect[s] the
Government against diversion or loss” by allowing the IRS to administratively
seize property prior to a determination that “the Government’s rights to the
seized property are superior to those of other claimants.” Nat’l Bank of
Commerce, 472 U.S. at 721. A levy “does not determine the rights of third
parties until after the levy is made, in postseizure administrative or judicial
hearings.” Id. at 731 (emphasis in original). In contrast, a § 7403 action is a
“plenary action” where a court first adjudicates the interests in the property
11

and “finally determine[s] the merits of all claims to and liens upon the
property.” Id. at 737. Only then is property turned over to the United States
(should it prevail). A § 7403 action “adequately protects any vested rights of
third parties in the property at issue.” Stabler v. United States, 786 F. Supp.
2d 1161, 1165 (E.D. La. 2011). In essence, a lien foreclosure action adjudicates
the very same thing that a wrongful levy suit would – except that it is brought
by the United States to affirmatively determine interests before any seizure or
sale of property.
Thus, the bringing of a § 7403 lien enforcement action for judicial sale
cannot serve as the “levy action” which is a condition precedent to jurisdiction
under § 7426. As there is no waiver of sovereign immunity that permits a suit
against the United States for bringing an allegedly improper § 7403
proceeding, the counterclaim must be dismissed for lack of subject matter
jurisdiction.
ORDER
For the foregoing reasons, the United States’ motion to dismiss HLA’s
counterclaim is ALLOWED.
SO ORDERED
/s/ Richard G. Stearns
UNITED STATES DISTRICT JUDGE
12