Mills, Esq., et al v. United States of America Department of Treasury, et al

Filing 37

Memorandum Opinion and Order: State Defendants' motion for summary judgment is denied and the United States' motion for summary judgment is granted. Plaintiff Gerald Mills is ordered to disburse the entire amount of the funds held in escrow to the United States. re 29 30 . Judge Jeffrey J. Helmick on 9/5/2014. (S,AL)

UNITED STATES DISTRICT COURT
FOR THE NORTHERN DISTRICT OF OHIO
WESTERN DIVISION
Gerald Mills, Esq., et al.
Case No. 3:13-cv-01101

Plaintiffs,
v.

MEMORANDUM
OPINION & ORDER

United States of America, et al.
Defendants.

I.

INTRODUCTION

Before me is the motion of Defendant United States of America for summary judgment
pursuant to Rule 56. Plaintiffs Gerald Mills, Esq., and NUH, Inc., and Defendants the Ohio Bureau
of Workers Compensation (“OBWC”), Ohio Department of Jobs and Family Services (“ODJFS”),
and Ohio Department of Taxation (“ODT”) (collectively the “State Defendants”) also have filed a
joint motion for summary judgment. This Court has jurisdiction pursuant to 28 U.S.C. § 1335(a) and
venue is appropriate pursuant to 28 U.S.C. § 1397. The parties have completed briefing and, for the
reasons stated below, the Plaintiffs’ and State Defendants’ joint motion for summary judgment,
(Doc. No. 30), is denied and the United States’ motion for summary judgment is granted. (Doc. No.
29).

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II.

BACKGROUND

The facts of the case are not much in dispute. Mills and NUH filed this interpleader action
asking me to prioritize various state and federal tax liens and past due amounts connected to the sale
of a Little Caesar’s pizza franchise business, and to relieve buyer NUH of successor liability. (Doc.
No. 1). In December 2011, NUH and JJ Littin entered into a purchase and sale agreement. (Doc.
No. 1-2). NUH agreed to pay JJ Littin $250,000 in cash, plus the cost of inventory, at closing.
(Doc. No. 1-2 at 1). The parties agreed to allocate the purchase price at closing. (Doc. No. 1-2 at
2). The parties also agreed the sales proceeds first would be used to satisfy all existing liens, with the
remainder placed in escrow to settle any federal or state tax liens. (Doc. No. 1-2 at 2-3).
The deal closed on February 3, 2012. The closing statement indicates $111,236.14 from the
sale proceeds satisfied certain liens filed by the State Defendants and other non-parties, including
attorneys’ fees. (Doc. No. 1-1). The closing statement also indicates the sum of $41,683.48 was
“held in escrow” to pay estimated commercial activity taxes and $97,080.38 “to fund an Offer in
Compromise with the Internal Revenue Service and the State of Ohio.” (Doc. No. 1-1 at 1).
The parties do not dispute JJ Littin’s liability for “large sums due for . . . federal withholding,
unemployment, social security, [and] Medicare.” (Doc. No. 1-2 at 2). The total amount of JJ Littin’s
unpaid state and federal taxes during the period 2003-2012 exceeds $700,000. The United States
filed three Notices of Federal Tax Lien on July 5, 2012. Excepting two amounts totaling $15,767.25,
the United States assessed the unpaid federal liability prior to close and valued at $559,405.99. (Doc.
Nos. 29-3, 29-4, 29-5). The State Defendants assert there is a total of $150,821.41 in unpaid state
taxes, allocated as follows: Ohio Department of Job and Family Services – $25,322.31 (Doc. No.
15); Ohio Bureau of Workers Compensation – $38,673.45 (Doc. No. 14); Ohio Department of
Taxation – $86,825.65 (Doc. No. 16). The State Defendants assert they knew the full extent of their
claims on or about November 20, 2012. (Doc. No. 30 at 4).
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In December 2012, the IRS issued a Notice of Levy to Mills in an attempt to collect JJ
Littin’s federal tax liabilities from the amount held in escrow. (Doc. No. 13 at 7). In March 2013,
the IRS issued a final demand for payment to Mills. (Id.). Plaintiffs then filed this action, seeking
permission to release the sale proceeds to the State Defendants with the remainder to the United
States and a release from any and all liability to all Defendants regarding the escrow account. (Doc.
No. 1 at 7-8). The United States moved for summary judgment demanding judgment in the amount
of $138,763.83 plus any accrued interest. (Doc. No. 29-1 at 9). The State Defendants and Plaintiffs
moved for summary judgment demanding judgment in the amount of $94,180.15, allocated among
the State Defendants. (Doc. No. 30 at 13).
III.

STANDARD

A district court shall grant a party’s motion for summary judgment if the movant
demonstrates there is no genuine dispute of material fact and that the movant is entitled to judgment
as a matter of law. Fed. R. Civ. P. 56(a). The movant may meet its burden by showing there is an
absence of evidence to support an element of a claim on which the non-movant has the ultimate
burden of proof. Celotex Corp. v. Catrett, 477 U.S. 317, 323 (1986). If the movant has satisfied its
burden, the non-movant then must set forth “specific facts showing that there is a genuine issue for
trial.” Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 587 (1986). All evidence must be
viewed in the light most favorable to the non-movant, and all reasonable inferences drawn in the
non-movant’s favor. White v. Baxter Healthcare Corp., 533 F.3d 381, 390 (6th Cir. 2008). A factual
dispute is genuine if a reasonable jury could resolve the dispute and return a verdict in the nonmovant’s favor. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248 (1986). A disputed fact is material
only if its resolution might affect the outcome of the case under the governing substantive law.
Rogers v. O’Donnell, 737 F.3d 1026, 1030 (6th Cir. 2013).

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IV.
A.

ANALYSIS

PRIORITY OF TAX LIENS AND PAST DUE AMOUNTS
Among competing liens, the rule of “first in time, first in right” governs. Terwilliger’s Catering

Plus, Inc. v. Baverly, 911 F.2d 1168, 1176 (6th Cir. 1990) (quoting United States v. City of New Britain, 347
U.S. 81, 85 (1954)). A federal tax lien attaches to a delinquent taxpayer’s property and rights to
property. 26 U.S.C. § 6321. Federal tax liens do not require notice or recordation to be valid. Knox
v. Great W. Life Assurance Co., 212 F.2d 784, 784 (6th Cir. 1954). On the contrary, they become
choate at the moment the collector receives his assessment list. Metropolitan Life Ins. Co. v. United
States, 107 F.2d 311, 313 (6th Cir. 1939). That liability remains in force until satisfied or rendered
unenforceable due to lapsed time. 26 U.S.C. § 6322.
Section 6323 protects purchasers, and holders of security interests, mechanic’s liens and
judgment liens from secret United States liens arising under § 6321 by requiring the United States to
file notice. 26 U.S.C. §§ 6323(a), (f). It is broadly accepted that § 6323 narrowly applies to specific
parties Congress intended to protect by the statute. See, e.g., City of New Britain, 347 U.S. at 88
(“There is nothing . . . to show that Congress intended antecedent federal tax liens to rank behind
any but the specific categories of interests set out therein.”); United States v. Equitable Life Assurance
Soc'y, 384 U.S. 323, 329-30 (1966) (narrowly limiting § 6323 to its specifically enumerated categories,
not “ancillary interests”). The statute defines a purchaser as one whom “for adequate and full
consideration in money or money’s worth, acquires an interest (other than a lien or security interest)
in property which is valid under local law against subsequent purchasers without actual notice.” 26
U.S.C. § 6323(h)(6).
The State Defendants assert the United States’ claims of priority over their liens are limited
by § 6323. (Doc. No. 30 at 8). Because the present dispute involves a purchase, the argument goes,
the United States’s liens were inchoate until it filed notices of federal tax liens in July and October
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2012 and thus the State Defendants’ liens take priority. This argument is mistaken. The statute
protects purchasers, not purchases, and the State Defendants are not purchasers. Rather, the State
Defendants’ claims are ancillary interests and they cannot avail themselves of § 6323’s protections.
Thus, at least concerning the State Defendants, I must look to the date the federal tax liens
were assessed, not the date the United States filed its Notice of Federal Tax Lien. The State
Defendants assert their interest became fixed no earlier than February 3, 2012. Therefore all of JJ
Littin’s delinquent federal tax assessments on or before this date and estimated in the range of
$543,638.74 take priority over the State Defendants’ claims. As this amount more than doubles the
negotiated purchase price, and dwarfs the funds at issue today, I need not decide the priority to be
assigned to the delinquent federal tax assessments dated after February 3, 2012.
B.

PROPERTY OR PROPERTY INTEREST IN CONTRACTED SALE PROCEEDS
The United States seeks to satisfy its lien against JJ Littin with proceeds from the sale.

Whether JJ Littin’s interest in the sale proceeds constitutes “property and rights to property” is a
question of federal law dependent on state law. United States v. Craft, 535 U.S. 274, 278 (2002). I
must look first to Ohio law to determine what rights JJ Littin has to the property the United States
seeks to reach, then to federal law to determine whether JJ Littin’s state rights qualify as property or
rights to property within federal legislation. Drye v. United States, 528 U.S. 49, 58 (1999) (citing
Morgan v. Comm’r of Internal Revenue, 309 U.S. 78, 80 (1940)).
Ohio law requires a business purchaser to “withhold a sufficient amount of the purchase
money” to satisfy outstanding state tax liabilities. Ohio Rev. Code § 5739.14. If the purchaser “fails
to withhold purchase money,” the purchaser then becomes “personally liable for the payment of the
taxes, interest, and penalties accrued and unpaid during the operation of the business by the former
owner.” Ohio Rev. Code § 5739.14; State v. Sloan, 132 N.E.2d 460, 462 (Ohio 1956). The statute
does not affect contractual obligations, it merely allocates the parties’ tax state obligations. Campbell
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v. Marple, No. 00CA0013, 2000 WL 171552, at *3-4 (Ohio Ct. App., November 13, 2000). Ohio law
does not require the use of an escrow agent in sales such as the one at issue in the litigation, though
the use of escrow is not uncommon. See, e.g., Ohio Dep't. of Taxation v. B/G 98 Co., LLC, 753 N.E.2d
214 (Ohio Ct. App. 2001).
After the existing state liens were paid, NUH placed the remainder of the sale proceeds into
the escrow account. The terms relating to escrow make clear the parties intended the escrow to
satisfy the United States’ liens, not to prioritize those of the State Defendants. Furthermore, the
agreement contemplated the need to pay the United States from the sale proceeds and instructed the
escrow agent to do so.
Any sums not required for liens shall be held in escrow by Buyer’s counsel, Gerald L.
Mills. Seller’s counsel shall negotiate a settlement of any federal taxes as to which a lien
has not been filed. Upon written notice that an offer in compromise has been reached
for the amount held in escrow or less, Gerald L. Mills shall disburse the lesser of the
amount of the offer in compromise or the entire amount to the Internal Revenue
Service.
(Doc. No. 1-2 at 3).
As discussed above, the United States’ liens were choate at the time of closing on February
3, 2012. While settlement negotiations regarding the federal taxes apparently were not successful,
this does not change the primacy of the federal lien. Further, the parties’ agreement specifically
contemplated a scenario in which the unpaid federal taxes equaled or exceeded the amount held in
escrow.
Finally, the State Defendants argue that the state liens hold priority over the funds in escrow
because Ohio law makes NUH “immediately liable for the outstanding amounts owed to [the state]
agencies.” (Doc. No. 30 at 10). This is incorrect. Section 5739.14 clearly states a purchaser only
becomes liable if the purchaser “fails to withhold purchase money.” Ohio Rev. Code 5739.14; Sloan,
132 N.E.2d at 462 (“If a purchaser fails to comply with this section, either by obtaining a certificate
that no taxes are due or by withholding the amount of taxes due, he becomes personally liable for
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such taxes.”). NUH agreed to pay JJ Littin a set amount for the business and performed its legal
obligation to hold the purchase money in escrow to facilitate payment of the unpaid taxes. The
escrow funds were not NUH’s to keep, but instead were designated to pay the unpaid tax liabilities
JJ Littin had accrued. The federal liens hold priority under the first-in-time principle and therefore
the United States is entitled to the funds held in the escrow account.
V.

CONCLUSION

For the reasons stated above, the State Defendants’ motion for summary judgment, (Doc.
No. 30), is denied and the United States’ motion for summary judgment is granted. (Doc. No. 29).
Plaintiff Gerald Mills is ordered to disburse the entire amount of the funds held in escrow to the
United States.

So Ordered.
s/Jeffrey J. Helmick
United States District Judge

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