McLain et al v. McLain et al
ORDER ADOPTING FINDINGS AND RECOMMENDATIONS. IT IS ORDERED that the proposed Findings and Recommendation entered by Judge Ostby 67 are ADOPTED IN FULL. IT IS FURTHER ORDERED that the McLain Defendants' Motion for Summary Judgment on Adverse Possession 23 is DENIED. IT IS FURTHER ORDERED that the McLain Plaintiffs' Cross-Motion for Summary Judgment on Adverse Possession 30 is DENIED. IT IS FURTHER ORDERED that the McLain Defendants' Motion to Dismiss the United States 39; Intervenor Complaint (Doc. 23) is DENIED, with leave to renew with regard to the United States' alternate claim on Frank's beneficial interest. IT IS FURTHER ORDERED that the McLain Defendants' objections to the proposed Findings and Recommendation are OVERRULED. Signed by Judge Susan P. Watters on 2/23/2017. (EMH)
IN THE UNITED STATES DISTRICT COURT FOR THE
DISTRICT OF MONTANA
FAITH MCLAIN, CHRISTEEN
MCLAIN, JOHN MCLAIN, MOLLY
MCLAIN, MIRA MCLAIN, AND
MATTHEW MCLAIN, AS
BENEFICIARIES OF THE ESTATE
OF BERNARD MCLAIN, AND
MARY MCLAIN, INDIVIDUALLY
AS BENEFICIARY OF THE ESTATE
OF BERNARD MCLAIN AND AS
TRUSTEE OF THE E-3 RANCH
Civil No. 1:16-cv-00036-SPW
FRANCIS MCLAIN, INDIVIDUALLY
AND AS CO-MANAGER OF TERA
BANI RETREAT MINISTRIES,
INDIVIDUALLY AND AS
MANAGING DIRECTOR OF TERA
BANI RETREAT MINISTRIES,
ALAKHI JOY MCLAIN, SOHNJA
MAY MCLAIN, AND DANE SEHAJ
MCLAIN, AS PURPORTED
CERTIFICATE HOLDERS OF THEE3 RANCH TRUST,
THE UNITED STATES OF
Intervenor Defendant and
FEB 2 3 2017
Clerk, U.S. District Court
District Of Montana
FAITH MCLAIN, CHRISTEEN
JOHN MCLAIN, MOLLY MCLAIN,
MIRA MCLAIN, AND MATTHEW
MCLAIN, as Beneficiaries of THE
ESTATE OF BERNARD MCLAIN;
and MARY MCLAIN, as Beneficiary of
the ESTATE OF BERNARD MCLAIN,
and as Trustee of the E-3 RANCH
FRANCIS MCLAIN, Individually, and
as Co-Manager of TERA BANI
RETREAT MINISTRIES; CAROLINE
MCLAIN, Individually, and as
Managing Director of TERA BANI
RETREAT MINISTRIES; and
ALAKHI JOY MCLAIN, SOHNJA
MAY MCLAIN, AND DANE SEHAJ
MCLAIN, as Beneficiaries of the E-3
AMERICAN BANK OF MONTANA,
Additional Defendant on
United States' Claims
On July 8, 2014, the McLain Plaintiffs brought this declaratory judgment
action in Montana state court against the McLain Defendants. On March 11, 2016,
the state court granted the United States' Motion to Intervene. (Doc. 1-3). On
April 8, 2016, the United States removed the case to federal court, invoking this
Court's jurisdiction under 28 U.S.C. § 1441. (Doc. I).
The principal issue in this case is the ownership of a ranch located in the
Paradise Valley known as the E-3 Ranch. The McLain Plaintiffs and McLain
Defendants filed cross-motions for summary judgment concerning whether one
family member owns the ranch through adverse possession. (Docs. 23 and 30).
The McLain Defendants also filed a motion to dismiss the United States'
Intervenor Complaint. (Doc. 23).
On October 24, 2016, United States Magistrate Judge Carolyn Ostby issued
her Findings and Recommendations recommending that this Court deny the crossmotions for summary judgment and deny the motion to dismiss. (Doc. 67). The
McLain Defendants timely filed Objections to the Findings and Recommendations.
Statement of facts
The McLain Defendants do not object to the factual history contained in the
Background section of Judge Ostby's Findings and Recommendations. Judge
Ostby's Background section is therefore adopted in full.
Standard of review
A district court reviews de novo any part of a Magistrate Judge's Findings
and Recommendations to which there has been proper objections. 28 U.S.C. §
636(b)(l); Fed. R. Civ. P. 72(b)(3).
Summary judgment standard
"The court shall grant summary judgment ifthe 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." Fed. R. Civ. P. 56(a). A party seeking summary judgment
always bears the initial responsibility of informing the court of the basis for its
motion, and identifying those portions of the pleadings, depositions, answers to
interrogatories, and admissions on file, together with the affidavits, if any, which it
believes demonstrate the absence of a genuine issue of material fact. Celotex
Corp. v. Catrett, 477 U.S. 317, 323 (1986).
Material facts are those which may affect the outcome of the case. Anderson
v. Liberty Lobby, Inc., 477 U.S. 242, 248 (1986). A dispute as to a material fact is
genuine if there is sufficient evidence for a reasonable fact-finder to return a
verdict for the nonmoving party. Anderson, 477 U.S. at 248. If the moving party
meets its initial responsibility, the burden then shifts to the opposing party to
establish that a genuine issue of fact exists. Matsushita Elec. Indus. Co. v. Zenith
Radio Corp., 475 U.S. 574, 586 (1986).
Motion to dismiss standard
A motion to dismiss for failure to state a claim is governed by Fed. R. Civ.
P. 12(b)(6). Dismissal under Rule 12(b)(6) is proper only when the complaint
either (1) lacks a cognizable legal theory or (2) fails to allege sufficient facts to
support a cognizable legal theory. Zixiang Liv. Kerry, 710 F.3d 995, 999 (9th Cir.
2013). To survive a motion to dismiss, "a complaint must contain sufficient
factual matter, accepted as true, to 'state a claim to relief that is plausible on its
face."' Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009) (quoting Bell Atlantic
Corporation v. Twombly, 550 U.S. 544, 570 (2007)). "A claim has facial
plausibility when the pleaded factual content allows the court to draw the
reasonable inference that the defendant is liable for the misconduct alleged."
Iqbal, 556 U.S. at 678.
The McLain Defendants make two objections to Judge Ostby's Findings and
Recommendations. First, the McLain Defendants argue the undisputed facts
establish Caroline McLean obtained ownership of the E-3 Ranch by adverse
possession. Second, the McLain Defendants argue the United States' Intervenor
Complaint should be dismissed as a matter of law on several grounds: (a) the
enforcement of a trust fund recovery penalty against Frank McLain violates
Double Jeopardy; (b) the United States' claims are untimely; and (c) the United
States' alternate claim to foreclose on Frank McLain's interest in Bernard
McLain's estate should be dismissed because such an interest is not a cognizable
property interest that can be foreclosed on.
Disputed facts prevent summary judgment on the McLain
Defendants' adverse possession claim
In Montana, a party asserting a claim for adverse possession must prove the
possession was actual, visible, exclusive, hostile, and continuous for the statutory
period. Tester v. Tester, 3 P.3d 109, 114 (Mont. 2000). An adverse possession
claim may be defeated with evidence that the use was permissive. Lyndes v.
Green, 325 P.3d 1225, 1229 (Mont. 2014). Permission means more than mere
acquiescence; it denotes the grant of a permission in fact or a license. Lyndes, 325
P.3d at 1230 (citing Cremer v. Cremer Rodeo Land and Livestock Co., 627 P.2d
1199, 120 l (Mont. 1981) ). Permissive use can ripen into hostile use if the
possessor repudiates the permissive possession and gives the owner actual notice.
Martin v. Randono, 573 P.2d 1156, 1160 (Mont. 1978).
Judge Ostby concluded disputed facts prevented summary judgment on the
hostile element of the McLain Defendants' adverse possession claim. The McLain
Defendants object to Judge Ostby's conclusion, arguing there is no evidence they
ever received permission to use the E-3 Ranch. The Court agrees with Judge
Ostby because, whether it is ultimately determined that the E-3 Ranch is owned by
Bernard's estate or the E-3 Ranch Trust, numerous pieces of evidence, including
the McLain Defendants' own affidavits, create disputed issues of fact regarding
whether the McLain Defendants' possession of the E-3 Ranch was permissive.
For example, Frank McLain's affidavit contradicts itself. First, Frank's
affidavit states the quitclaim of the E-3 Ranch to his parents "was always intended
to be a temporary arrangement" and that his parents had agreed to quitclaim the E3 Ranch back to Frank and Caroline McLain after Frank repaid the debt owed to
his parents. (Doc. 3-3 at 44). Frank's affidavit continues that "[m]y parents
understood that they were holding the title on a temporary basis" and "[t]here was
never any question that my wife and I would continue to possess and control the
property after [the quitclaim] of the E-3 Ranch to my parents." (Doc. 3-3 at 44).
Next, in contradiction to those statements, Frank's affidavit states neither he nor
his wife "ever sought or received any permission from either of my parents to
possess and control the property." (Doc. 3-3 at 44). Frank's affidavit does not
explain how his or his wife's possession was without permission when his parents
had apparently agreed to a temporary arrangement wherein there was no question
Frank and his wife would continue to possess the property but the property would
not be quitclaimed back to Frank until his debt was repaid.
Caroline's affidavit contains a similar contradiction. First, Caroline's
affidavit states the quitclaim of the E-3 Ranch to Frank's parents "was always
intended to be temporary ... [they] understood that the property ultimately
belonged to my husband Frank and me, and had verbally agreed with Frank to
quitclaim it back to us or to the E-3 Ranch Trust once Frank's debt to them was
repaid." (Doc. 3-3 at 88-89). Next, in contradiction to that statement, Caroline's
affidavit states Frank's parents did not "give Frank or me express permission to
possess and control the property." (Doc. 3-3 at 89). Similar to Frank's affidavit,
Caroline's affidavit does not reconcile the absence of permission with the apparent
temporary agreement regarding possession.
Mary's affidavit also indicates the McLain Defendants' possession was not
hostile. Mary's affidavit states that, as power of attorney to Bernard McLain and
as a Trustee of the E-3 Ranch Trust, she always believed that the McLain
Defendants' use of the E-3 Ranch was with the permission of Bernard and/or the
E-3 Ranch Trust. (Doc. 32-1 at 4).
Assuming the E-3 Ranch belongs to Bernard's estate, the affidavits of Frank,
Caroline, and Mary create disputed issues of fact regarding the hostile element of
the McLain Defendants' adverse possession claim. Lyndes, 325 P.3d at 1229. The
Court is unaware of any undisputed facts that establish the alleged permissive use
ripened into a hostile use for the required statutory period. Martin, 573 P.2d at
Turning to the alternate theory that the E-3 Ranch belongs to the E-3 Ranch
Trust, Frank's affidavit states he was the "managing director" of the E-3 Ranch
Trust with duties to "protect the trust's assets for its Certificate Holders." (Doc. 33 at 43). Assuming the E-3 Ranch Trust holds title to the E-3 Ranch, the McLain
Defendants do not explain how Frank or his wife possessed the E-3 Ranch without
the E-3 Ranch Trust's permission when Frank, as managing director of the trust,
was charged with "protect[ing] the trust's assets."
The Court agrees with Judge Ostby that disputed issues of fact prevent
summary judgment on the McLain Defendants' adverse possession claim. The
McLain Defendants' objection is overruled.
The United States' Intervenor complaint is not barred by Double
Jeopardy, the statute of limitations, or due to a lack of a
cognizable property interest
Judge Ostby recommended against dismissing the United States' Intervenor
complaint. The McLain Defendants object, arguing the United States' Intervenor
Complaint should be dismissed as a matter of law on several grounds: (1) the
enforcement of a trust fund recovery penalty against Frank McLain violates
Double Jeopardy; (2) the United States' claims are untimely; and (3) the United
States' alternate claim to foreclose on Frank McLain's beneficial interest in
Bernard McLain's estate should be dismissed because such an interest is not a
cognizable property interest that can be foreclosed on. The Court agrees with
The Double Jeopardy Clause does not bar the United
States' claim because the United States' claim is a civil
penalty not a criminal punishment
The Double Jeopardy Clause provides "No personal shall ... be subject for
the same offence to be twice put in jeopardy oflife or limb .... " U.S. Const.
amend. V. The Clause does not prohibit "all additional sanctions" for the same
conduct; rather, it protects only against the imposition of multiple criminal
punishments for the same offense. Hudson v. U.S., 522 U.S. 93, 99 (1997). The
Supreme Court has adopted a two-step process to determine whether a penalty is
civil or criminal. First, the Court must determine under statutory construction
principles whether Congress indicated an express or implied preference for one
label or the other. Hudson, 522 U.S. at 99. Next, even if Congress indicated the
penalty is civil, the Court must evaluate whether the statutory scheme is so
punitive either in purpose or effect that it transforms the intended civil sanction
into a criminal penalty. Hudson, 522 U.S. at 99. In making the latter
determination the Court should consider: (1) whether the sanction involves an
affirmative disability or restraint; (2) whether it has historically been regarded as a
punishment; (3) whether it comes into play only on a finding of scienter; (4)
whether its operation will promote the traditional aims of punishment, retribution,
and deterrence; (5) whether the behavior to which it applies is already a crime; (6)
whether an alternative purpose to which it may rationally be connected is
assignable for it; and (7) whether it appears excessive in relation to the alternative
purpose assigned. Hudson, 522 U.S. at 99-100.
Judge Ostby concluded Congress intended 26 U.S.C. § 6672 to be a civil
penalty and that § 6672 is not so punitive as to transform it into a criminal penalty.
The McLain Defendants object, arguing the United States' claim is an attempt to
punish Frank McLain for conduct for which he has already been convicted and
sentenced to prison under 26 U.S.C. § 7202.
Regarding Hudson's first step, the Court agrees with Judge Ostby that
Congress intended § 6672 to be a civil penalty. Whereas § 7202 falls under Title
26's chapter titled "Crimes, Other Offense, and Forfeitures,"§ 6672 falls under
Title 26's chapter titled "Additions to the Tax, Additional Amounts, and
Assessable Penalties." Had Congress intended the penalty imposed by § 6672 to
be a criminal punishment it would have likely placed the statute under Title 26's
criminal chapter and attached any penalties to a finding of guilt.
Turning to Hudson's second step, every court to consider whether§ 6672
imposes a criminal punishment has found it does not. See U.S. v. Pepperman, 976
F.2d 123, 127 (3rd Cir. 1992) ("[T]he liability imposed under section 6672 is not
penal in nature, but rather is a means of ensuring that withholding taxes are paid.");
Erwin v. U.S., 591 F.3d 313, 319 (4th Cir. 2010) ("§ 6672 does not actually punish;
rather, it brings the government only the same amount to which it was entitled by
way of the tax.") (internal quotations and citation omitted); Turnbull v. US., 929
F.2d 173, 178 n. 6 (5th Cir. 1991) ("[T]he government only collects the taxes due,
not both the taxes due and an additional penalty equal to the amount of the taxes.
Therefore, section 6672 is simply a means of ensuring that the tax which is
unquestionably owed the Government is paid.") (internal quotations and citation
omitted); Finley v. US., 123F.3d1342, 1348 (10th Cir. 1997) ("§ 6672 does not
raise a concern regarding the protection of a taxpayer from harsh, additional
penalties imposed for purposes of punishment and deterrence .... "). The McLain
Defendants cite Mortenson v. National Union Fire Ins. Co. ofPittsburgh, PA., 249
F.3d 667 (7th Cir. 2001), in support of their position. However, contrary to the
McLain Defendants' position, and consistent with the other circuits, Mortenson
states "the section 6672(a) penalty is not a criminal penalty .... " 249 F.3d at 670
The McLain Defendants also argue the § 6672 penalty is punitive as applied
because the Government stipulated in the criminal case that no tax loss occurred,
thus any penalty imposed would not be to recover tax loss. The McLain
Defendants mischaracterize the record. The Government did not stipulate to
anything. United States District Judge Patrick Schiltz stated he would assume for
purposes of sentencing that no tax loss occurred because whether any tax loss
occurred was irrelevant to that determination. (Doc. 24-3 at 2).
The Court agrees with Judge Ostby that, under Hudson, the United States'
claim for a trust fund recovery penalty under § 6672 is not barred by the Double
Jeopardy Clause. The McLain Defendants' objection is overruled.
The United States' claim is not time barred
Judge Ostby concluded the United States' claim is subject to the ten-year
limitation contained in the federal collection statute, 26 U.S.C. § 6502(a)(l ). The
McLain Defendants object, arguing the claim is subject to the four-year limitation
contained in the Montana Uniform Fraudulent Transfer Act or, in the alternative,
the six-year limitation contained in the Federal Debt Collection Procedure Act
(FDCPA). The Court agrees with Judge Ostby.
When the United States asserts a transfer of property by a taxpayer is a
fraudulent conveyance, the claim is not limited to the time period set for a state
fraudulent conveyance proceeding, but rather, is governed by the ten-year federal
collection statute found in 26 U.S.C. § 6502(a)(l). US. v. Bacon, 82 F.3d 822,
822-825 (9th Cir. 1996); Bresson v. Commissioner ofInternal Revenue, 213 F.3d
1173, 1179 (9th Cir. 2000). The McLain Defendants argue Bacon and Bresson
"should be revisited" in light of US. v. California, 507 U.S. 746 (1993), but fail to
articulate how or why. Given Bresson's lengthy discussion of California and other
Supreme Court precedent, the Court is unpersuaded. See Bresson, 213 F.3d at
The McLain Defendants also argue the six-year limitation contained in the
FDCPA governs the United States' claim. However, the FDCPA explicitly
excludes the United States' claim from its purview with the following limitation:
(b) Limitation. -To the extent that another Federal law specifies
procedures for recovering on a claim or a judgment for a debt arising
under such law, those procedures shall apply to such claim or
judgment to the extent those procedures are inconsistent with this
28 U.S.C. 300l(b). The FDCPA further provides:
(b) Effect on rights of the United States. -This chapter shall not be
construed to curtail or limit the right of the United States under any
other Federal law or any State law-( 1) to collect taxes or to collect any other amount collectible in
the same manner as a tax;
28 U.S.C. § 3003(b). By its own terms, the FDCPA does not apply to Government
actions to collect taxes. See U.S. v. Letscher, 83 F.Supp.2d 367, 378 (S.D.N.Y.
1999) and U.S. v. Bantau, 907 F.Supp. 988, 990 (N.D. Texas 1995) (both finding
the FDCP A's six-year limitation inapplicable to a government action for the
collection of taxes).
The Court agrees with Judge Ostby that the United States' claim is subject to
the ten-year limitation contained in the federal collection statute, 26 U.S.C. §
6502(a)(l). The McLain Defendants' objection is overruled.
Dismissal of the United States' alternate claim to foreclose
on Frank's interest should the McLain Plaintiffs prevail is
Judge Ostby concluded numerous issues need to be resolved before the
Court can determine whether dismissal of the United States' alternate claim is
proper. Judge Ostby recommended the Court deny the motion to dismiss the
United States' alternate claim with leave to renew. The McLain Defendants
object, arguing that, should the McLain Plaintiffs prevail, Frank would have only
an expectancy interest in the E-3 Ranch, which is not a cognizable property interest
under Montana law. The Court agrees with Judge Ostby.
The United States holds a lien on all property and rights to property
belonging to a person liable for unpaid taxes if the person neglects or refuses to
pay the unpaid taxes upon demand by the United States. 26 U.S.C. § 6321.
Whether a state-law right constitutes 'property' or 'rights to property' is a matter of
federal law. Drye v. U.S., 528 U.S. 49, 58 (1999). "The Court looks initially to
state law to determine what rights the taxpayer has in the property the Government
seeks to reach, then to federal law to determine whether the taxpayer's state-
delineated rights qualify as 'property' or 'rights to property' within the compass of
the federal tax lien legislation." Drye, 528 U.S. at 58.
Here, the Court cannot undertake a Drye analysis because numerous issues
need to be resolved before Frank's interest can be determined under Montana law,
such as:(!) whether Bernard's estate or the E-3 Ranch Trust owns the E-3 Ranch
and (2) whether Caroline obtained ownership of the E-3 Ranch via adverse
possession. The McLain Defendants argue no Drye analysis is necessary because
even ifthe McLain Plaintiffs prevail, Frank has at most an expectancy interest,
which is not recognized as a property interest under Montana law. The McLain
Defendants are incorrect for two reasons. First, it is unclear at this point whether,
should the McLain Plaintiffs prevail, Frank would only have an expectancy interest
in the E-3 Ranch. Second, even if that were true, a Drye analysis is still necessary.
State law determines what rights a person has in property, but federal law
determines whether that right qualifies as a "right" or "right to property" under the
federal tax statutes. Drye, 528 U.S. at 58. Thus, even ifFrank had only an
expectancy interest in the E-3 Ranch, federal law determines whether his
expectancy interest constitutes a "right to property" for federal tax lien purposes.
The Court agrees with Judge Ostby that numerous issues need to be resolved
before the Court can determine whether dismissal of the United States' alternate
claim is proper. The McLain Defendants' objection is overruled.
IT IS ORDERED that the proposed Findings and Recommendation entered
by Judge Ostby (Doc. 67) are ADOPTED IN FULL.
IT IS FURTHER ORDERED that the McLain Defendants' Motion for
Summary Judgment on Adverse Possession (Doc. 23) is DENIED.
IT IS FURTHER ORDERED that the McLain Plaintiffs' Cross-Motion for
Summary Judgment on Adverse Possession (Doc. 30) is DENIED.
IT IS FURTHER ORDERED that the McLain Defendants' Motion to
Dismiss the United States' Intervenor Complaint (Doc. 23) is DENIED, with leave
to renew with regard to the United States' alternate claim on Frank's beneficial
IT IS FURTHER ORDERED that the McLain Defendants' objections to the
proposed Findings and Recommendation are OVERRULED.
cJ?11 "day of February, 2017.
Susan P. Watters
United States District Court Judge
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