United States v. Ochescu et al

Filing 43

ORDER Granting Plaintiff's 39 Motion for Partial Summary Judgment. Defendant Republic Services, Inc.'s liens are subordinate to the United States' tax liens and the property will not be subject to Republic's liens following the United States' foreclosure on its liens. Signed by Judge Andrew P. Gordon on 8/24/2017. (Copies have been distributed pursuant to the NEF - SLD)

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1 UNITED STATES DISTRICT COURT 2 DISTRICT OF NEVADA 3 *** 4 UNITED STATES OF AMERICA, 5 Plaintiff, 6 v. 7 CONSTANTIN OCHESCU, et al., 8 Defendants. Case No. 2:15-cv-02424-APG-GWF ORDER GRANTING UNITED STATES’ MOTION FOR PARTIAL SUMMARY JUDGMENT (ECF No. 39) 9 Plaintiff United States of America brought this action to reduce federal tax liabilities to 10 11 judgment and to foreclose tax liens on real property. The motion before me involves a dispute in 12 lien priority on the subject property between the United States and defendant Republic Services, 13 Inc. 14 I. BACKGROUND 15 Defendant Constantin Ochescu owes over $600,000 in federal income taxes. ECF No. 1 at 16 3. Ochescu owned property located at 8064 Cetus Circle in Las Vegas. Id. He married defendant 17 Liliana Cosma in 2006. Id. Property owners like Ochescu and Cosma are required by Clark 18 County Municipal Code 9.04.240(a) to subscribe to Republic’s trash collection service. Ochescu 19 and Cosma did not pay their bills from Republic, resulting in Republic recording eighteen liens 20 against the Cetus Circle property. Five of those liens were recorded with the Clark County 21 Recorder before the first IRS tax lien was assessed in December 2005. Despite the unpaid bills, 22 Republic is required to continue its trash collection service as a matter of public health and 23 welfare. 24 On December 29, 2006, Ochescu conveyed his interest in the property to himself and 25 Cosma as joint tenants. On April 6, 2007, the IRS recorded a notice of federal tax lien. On 26 March 23, 2011, Ochescu and Cosma conveyed the property to Cosma as her sole and separate 27 property. The IRS recorded additional notices of tax liens for different tax years on February 7, 28 1 2013 and May 29, 2015. The IRS recorded a nominee notice of federal tax lien against Cosma on 2 November 4, 2015. 3 The IRS then brought this lawsuit, seeking to reduce the tax assessments against Ochescu 4 to judgment, to adjudicate Cosma as Ochescu’s nominee or fraudulent transferee, and to foreclose 5 its liens on the Cetus Circle property. The IRS joined as defendants Ditech Financial, LLC and 6 Republic because those entities may claim a right or interest in the property. 7 The United States now moves for partial summary judgment against Republic to 8 determine the relative priority of Republic’s liens on the property for unpaid trash collection bills. 9 The United States contends that as between the IRS liens and Republic’s liens, the IRS liens have 10 priority because they arose with the first assessment on December 26, 2005, and all of Republic’s 11 liens were either recorded later or were inchoate on that date. The United States thus argues its 12 liens are superior under federal law and that state law does not make Republic’s liens superior, 13 nor could it without violating the Supremacy Clause. The United States also argues Republic’s 14 liens cannot remain on the property after the IRS conducts a foreclosure sale on its superior liens. 15 The United States thus seeks a ruling that its liens are superior to Republic’s and that the property 16 may be sold free and clear of Republic’s liens. 17 Republic opposes, arguing that under Nevada law its liens are superior to Ditech’s, and 18 Ditech’s lien is superior to the IRS’s, so Republic’s lien must be superior to the IRS’s. Republic 19 contends that under Nevada Revised Statutes § 444.520, it has a perpetual superior lien that is not 20 subordinated to federal tax liens. Republic argues that allowing the property to remain subject to 21 Republic’s liens following the IRS’s foreclosure sale does not run afoul of federal law or the 22 Supremacy Clause. 23 II. ANALYSIS 24 The relative priority of a federal lien for unpaid taxes is governed by federal law. United 25 States v. Equitable Life Assur. Soc. of U.S., 384 U.S. 323, 330 (1966). Liens for unpaid federal 26 taxes do not automatically take priority over other liens. U.S. By & Through I.R.S. v. McDermott, 27 28 Page 2 of 7 1 507 U.S. 447, 449 (1993). Rather, where Congress has not specifically expressed its intention,1 2 the relative priority of a federal tax lien as against a lien created under state law is determined by 3 the “general rule that ‘the first in time is the first in right.’” In re Kimura, 969 F.2d 806, 813 (9th 4 Cir. 1992) (quoting United States v. City of New Britain, 347 U.S. 81, 85 (1954)). The priority of 5 a lien created under state law “depends on the time it attached to the property in question and 6 became choate.” United States v. Pioneer Am. Ins. Co., 374 U.S. 84, 88-89 (1963) (quotation 7 omitted). A choate state law lien takes priority over a later-assessed federal tax lien, but an 8 inchoate state law lien does not, even if it was recorded first. Id. 9 “A state-created lien is not choate until the ‘identity of the lienor, the property subject to 10 the lien, and the amount of the lien are established.’” United States v. Kimbell Foods, Inc., 440 11 U.S. 715, 721 (1979) (quoting New Britain, 347 U.S. at 84); Pioneer Am. Ins. Co., 374 U.S. at 89 12 (“The federal rule is that liens are perfected in the sense that there is nothing more to be done to 13 have a choate lien—when the identity of the lienor, the property subject to the lien, and the 14 amount of the lien are established.” (quotation omitted)). “Failure to meet any one of these 15 conditions forecloses priority over the federal lien, even if under state law the nonfederal lien was 16 enforceable for all purposes when the federal lien arose.” Kimbell, 440 U.S. at 721. 17 Whether a lien created under state law is sufficiently choate to take priority over a federal 18 tax lien is a question of federal law. United States v. Sec. Trust & Sav. Bank of San Diego, 340 19 U.S. 47, 49-50 (1950) (“[A]lthough a state court’s classification of a lien as specific and perfected 20 is entitled to weight, it is subject to reexamination by this Court.”). But “if the state court itself 21 describes the lien as inchoate, this classification is practically conclusive.” Id. at 49-50 (quotation 22 omitted). 23 The identity of the lienor, the property subject to the lien, and the lien amount must be 24 “definite, and not merely ascertainable in the future by taking further steps . . . .” U.S. for Use & 25 Benefit of Consol. Elec. Distrib., Inc. v. J.D. Grainger Co., 945 F.2d 259, 263 (9th Cir. 1991) 26 27 28 1 Republic does not argue that its liens fall within any of the statutorily identified liens that would take priority over a federal tax lien. See 26 U.S.C. § 6323. Page 3 of 7 1 (quotation omitted). Thus, a general lien that is “effective to protect the lienor against others than 2 the Government” does not take priority over a federal tax lien if it is “contingent[] on taking 3 subsequent steps either for giving public notice of the lien or for enforcing it.” People of State of 4 Ill. ex rel. Gordon v. Campbell, 329 U.S. 362, 374-75 (1946). As a result, recording a lien may 5 not be sufficient to defeat priority of a federal tax lien if the state law lien “does not have the 6 required degree of specificity and perfection.” Id. “It is not enough that the lienor has power to 7 bring these elements, or any of them, down from broad generality to the earth of specific 8 identity.” Id. at 375. 9 For example, a state attachment lien is not sufficiently choate to take priority over a 10 federal tax lien where the property subject to the lien is attached before the federal tax lien arises 11 but final judgment on the attachment lien is not entered until after the federal tax is assessed. See 12 United States v. Acri, 348 U.S. 211, 213-14 (1955); Sec. Trust & Sav. Bank of San Diego, 340 13 U.S. at 50; United States v. Dishman Indep. Oil, Inc., 46 F.3d 523, 527 (6th Cir. 1995). Because 14 the amount of the state law lien is not established until final judgment is entered, it is not 15 sufficiently choate to take priority over the federal tax lien. See Acri, 348 U.S. at 214 (“We hold 16 here that the attachment lien in Ohio is for federal tax purposes an inchoate lien because, at the 17 time the attachment issued, the fact and the amount of the lien were contingent upon the outcome 18 of the suit for damages.”). 19 The test for choateness or perfection also requires that the creditor have the right to 20 summarily enforce its lien. See United States v. Vermont, 377 U.S. 351, 359 (1964) (holding the 21 state’s assessment was choate where the “assessment is given the force of a judgment, and if the 22 amount assessed is not paid when due, administrative officials may seize the debtor’s property to 23 satisfy the debt” (quotation omitted)); Sec. Tr. & Sav. Bank of San Diego, 340 U.S. at 51 (stating 24 it “has never been held sufficient to defeat the federal priority merely to show a lien effective to 25 protect the lienor against others than the Government, but contingent upon taking subsequent 26 27 28 Page 4 of 7 1 steps for enforcing it”); id. at 52, Jackson, J., concurring (“The history of this tax lien statute 2 indicates that only a judgment creditor in the conventional sense is protected.”).2 3 The amount of unpaid federal taxes constitutes a lien in the United States’ favor on “all 4 property and rights to property, whether real or personal, belonging to” the person who failed to 5 pay. 26 U.S.C. § 6321. That lien arises “at the time the assessment is made . . . .” 26 U.S.C. 6 § 6322. Here, the first IRS lien arose on December 26, 2005, when the first assessment was 7 made. ECF No. 39-2 at 3. Additional liens arose on April 19, 2010, June 28, 2010, December 5, 8 2011, August 6, 2012, August 4, 2014, and on March 9, 2015. ECF Nos. 39-4; 39-5; 39-6; 39-10. 9 Republic has been providing services to the Cetus Circle property since July 1999. ECF 10 No. 41 at 17. Ochescu and Cosma collectively owe $7,778.61 for unpaid bills relating to 11 Republic’s services. Id. Republic recorded its first notice of claim of lien in October 2000. Id. at 12 49. It thereafter recorded seventeen additional notices. Id. at 30-47. Each notice identifies 13 Republic as the lienor, the Cetus Circle real estate as the property subject to the lien, and the 14 amount of the lien. Five of the notices predate December 26, 2005. Id. at 40-44. 15 16 17 18 19 20 Republic’s liens arise under Nevada state law. Pursuant to Nevada Revised Statutes § 444.520(3), until paid, charges for Republic’s services constitute: a perpetual lien against the property served, superior to all liens, claims and titles other than liens for general taxes and special assessments. The lien is not extinguished by the sale of any property on account of nonpayment of any other lien, claim or title, except liens for general taxes and special assessments. The lien may be foreclosed in the same manner as provided for the foreclosure of mechanics’ liens. 21 Foreclosure of a mechanic’s lien entails commencement of a court action. Nev. Rev. Stat. 22 § 108.239(1). Additionally, Republic must file a notice of a pendency of the action, cause a 23 notice of foreclosure to be published in a newspaper for three successive weeks, and mail notice 24 to any other recorded lien claimants. Id. §§ 108.239(2), (4). Thereafter, others who hold or claim 25 26 27 28 2 See also Minn., Dep’t of Revenue v. United States, 184 F.3d 725, 728-29 (8th Cir. 1999); Monica Fuel, Inc. v. IRS, 56 F.3d 508, 512-13 (3d Cir. 1995). Page 5 of 7 1 a notice of lien may join in the action. Id. § 108.239(3). The court then must hear and determine 2 the claims and enter judgment regarding the relative rights of the parties. Id. § 108.239(7). 3 Republic’s liens are inchoate under federal law because they are not summarily 4 enforceable. Rather, Republic must institute a judicial proceeding, provide notice, and have its 5 rights adjudicated in relation to any competing claims. These acts are not merely ministerial. See 6 Minn., Dep’t of Revenue v. United States, 184 F.3d 725, 730 (8th Cir. 1999). Republic does not 7 dispute that its liens are not summarily enforceable. 8 9 Instead, Republic relies on Nevada state law to argue its liens are superior. However, a state cannot “impair the standing of the federal liens, without the consent of Congress.” New 10 Britain, 347 U.S. at 84. Additionally, the property does not remain subject to Republic’s liens 11 following foreclosure of a federal tax lien because foreclosure of a senior lien extinguishes all 12 junior liens. See McDonald v. D.P. Alexander & Las Vegas Boulevard, LLC, 123 P.3d 748, 752 13 (Nev. 2005); Restatement (Third) of Property (Mortgages) § 7.1 (“A valid foreclosure of a 14 mortgage terminates all interests in the foreclosed real estate that are junior to the mortgage being 15 foreclosed and whose holders are properly joined or notified under applicable law.”). 16 Republic contends that application of federal law is “confusing and unworkable” because 17 Republic’s lien is superior to Ditech’s, Ditech’s is superior to the United States’, so the United 18 States cannot be superior to Republic. ECF No. 41 at 3. Because the competing priority of Ditech 19 versus the IRS, and Ditech versus Republic are not before me in this motion, I express no opinion 20 on the relative priority of those claims. However, New Britain “established a rule for resolving 21 circular priorities.” McKee-Berger-Mansueto, Inc. v. Bd. of Educ. of City of Chicago, 691 F.2d 22 828, 834 (7th Cir. 1982). “First, the portion of the fund for which federal law creates a lien 23 superior to that of the government’s tax lien is set aside.” Id. Thus, to the extent Ditech’s lien is 24 superior to the federal tax lien, the amount necessary to satisfy that lien would be set aside. Next, 25 the United States’ lien would be paid out of the remainder (if any). Id. Finally, the portion 26 reserved at the first step plus any amount remaining after the IRS lien is satisfied would be 27 distributed according to the state law rules of priority as between Ditech and Republic. Id. 28 Page 6 of 7 1 This resolution to the circular priority problem also addresses Republic’s policy argument 2 that it should not be forced to provide service even when bills go unpaid yet have its lien 3 subordinated to a federal tax lien. To the extent Republic is superior to Ditech, it may yet get 4 paid on its liens. Additionally, Republic could have foreclosed on at least some of its liens before 5 the federal tax was assessed, but it chose not to do so. Finally, Republic concedes that under 6 § 444.250, its lien would be subordinate to Nevada state taxes and special assessments. Republic 7 offers no explanation why it is able to operate with the prospect of its liens being subordinated to 8 Nevada state taxes but not to federal taxes. 9 In sum, I grant the United States’ motion for partial summary judgment. Republic’s liens 10 are inchoate and thus subordinate to the United States’ tax liens, and the property will not be 11 subject to Republic’s liens after the United States forecloses on its liens. 12 III. CONCLUSION 13 IT IS THEREFORE ORDERED that plaintiff United States of America’s motion for 14 partial summary judgment (ECF No. 39) is GRANTED. Defendant Republic Services, Inc.’s 15 liens are subordinate to the United States’ tax liens and the property will not be subject to 16 Republic’s liens following the United States’ foreclosure on its liens. 17 DATED this 24th day of August, 2017. 18 19 20 ANDREW P. GORDON UNITED STATES DISTRICT JUDGE 21 22 23 24 25 26 27 28 Page 7 of 7

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