Han v. U.S.

Citation944 F.2d 526
Decision Date11 September 1991
Docket NumberNo. 90-55804,90-55804
Parties-5580, 91-2 USTC P 50,486 Jea Min HAN; Jae Soon Han, Plaintiffs-Appellants, v. UNITED STATES of America, Defendant-Appellee.
CourtUnited States Courts of Appeals. United States Court of Appeals (9th Circuit)

Allan B. Cooper, Ervin, Cohen & Jessup, Beverly Hills, Cal., for plaintiffs-appellants.

Calvin C. Curtis and Nancy Morgan, Tax Div., Dept. of Justice, Washington, D.C., for defendant-appellee.

Appeal from the United States District Court for the Central District of California.

Before D.W. NELSON, O'SCANNLAIN and TROTT, Circuit Judges.

TROTT, Circuit Judge:

Jea Min Han and Jae Soon Han purchased a piece of residential property from Yue Khang Lok. The Hans were not aware that the property was encumbered by a federal tax lien. After the purchase, the Internal Revenue Service ("IRS") levied upon the property to satisfy the lien. In an attempt to stave off the foreclosure sale and to protect their investment, the Hans filed a complaint for wrongful levy and for injunctive relief against the IRS. The district court granted summary judgment against the Hans, holding essentially that the IRS was entitled to the full value of the property. The Hans argue on appeal that the IRS is entitled to recover only the previous owner's equity in the property, and in the alternative, that the Hans should be equitably subrogated to the priority position of the lender whose existing loan they paid off when they purchased the property. 1 We agree with the second argument, and we reverse.

I

Yue Khang Lok owned a house in Arcadia, California, which he sold to the Hans. Because Lok failed to pay $2.3 million in income taxes for 1985-87, the IRS filed a lien against the Arcadia house. Although this lien was properly recorded before escrow opened on the house, the Hans were unaware of it until after escrow closed. Their real estate agent, Kay Shin, knew of the tax lien, but Lok represented to her that it would be paid off before close of escrow. Ms. Shin did not advise the Hans of this problem.

Lok sold the Arcadia property to the Hans for $550,000. At the time of sale, World Savings and Loan Association ("World Savings") held a first trust deed for $367,000 that was recorded prior to the tax lien's recordation. This loan was paid off in escrow. After $38,000 was paid for settlement charges and other miscellaneous debts, Lok's net from the sale was approximately $145,000.

Escrow closed on January 5, 1988, and the IRS levied on the property on March 24, 1989. The levy was served on the Hans, putting the IRS in constructive possession of the property. The IRS has never taken actual possession, although it declared its intention to sell the property at a public auction on May 17, 1989. The plan to sell was withdrawn pending resolution of this lawsuit.

The Hans filed this action, seeking declaratory relief limiting the IRS to what it would have yielded from foreclosure if the property still belonged to Lok. The Hans asserted the IRS is only entitled to $145,000, which represents the difference between the sale price of $550,000, and the $405,000 in liens and other obligations paid in escrow. Alternatively, they argued that they are entitled to equitable subrogation, which would give them a priority position on the property in front of the IRS in the amount of World Savings's first trust deed. Equitable subrogation permits a person who pays off an existing encumbrance to assume the same priority position as the holder of that encumbrance. Under this argument, they assert that if the property is now sold, they are entitled to the first $367,000 yielded by the transaction, as World Savings would have been if it still held the first trust deed.

The district court rejected the Hans' first argument, finding no basis for limiting the IRS to what it would have received if Lok had still owned the property at the time of a foreclosure sale. "[T]he government may enforce its entire tax lien without limitation." The court also rejected the equitable subrogation argument, but it did so only because a purchaser with actual knowledge of a previously existing lien is ineligible for this equitable remedy, and it found that the Hans had the equivalent of actual knowledge of the tax lien. The Hans' agent, Kay Shin, had actual knowledge of the tax lien, leading the court to conclude that the Hans had imputed actual knowledge, based on agency principles that impute the knowledge of the agent to the principal. In every other respect, however, the court concluded that the Hans qualified for equitable subrogation.

II

The Hans assert that the IRS should be limited in its recovery to the value of Lok's interest in the Arcadia house. They claim that the IRS is only entitled to $145,000, the amount netted by Lok. The Hans argue that because the California rule is that title is transferred to the holder of a deed of trust, see Hohn v. Riverside County Flood Control & Water Conservation Dist., 228 Cal.App.2d 605, 611, 39 Cal.Rptr. 647, 651 (1964), World Savings held title to the entire property at the time of sale, except the $145,000 unencumbered portion. Lok held title only to the $145,000 portion. They further rely on United States v. Rodgers, 461 U.S. 677, 690-91, 103 S.Ct. 2132, 2140-41, 76 L.Ed.2d 236 (1983), which holds that a tax lien cannot extend beyond the interest held by the taxpayer. If Lok only had title to the $145,000, and the IRS cannot levy beyond his interest, then the IRS would be limited to recovering only Lok's equity.

The fatal defect in this line of reasoning is that it assumes the extent of Lok's liability to the IRS secured by the lien was somehow fixed at the moment of sale. Assuming for the moment that World Savings held actual title, the IRS nonetheless is not limited to the value of Lok's interest at the moment of sale. A tax lien "shall continue until the liability for the amount so assessed ... is satisfied or becomes unenforceable by reason of lapse of time." 26 U.S.C. § 6322 (1988). The IRS is authorized to seize liened property even if it has been sold to a third party. 26 C.F.R. 301.6331-1 (1990). Nowhere in the statutory or regulatory scheme is there a provision limiting the IRS's recovery. A lien continues unabated regardless of sale, so long as it is properly recorded. Because the lien is unaffected by sale, we see no basis for fixing the amount of the lien at the time of sale. We decline to legislate where Congress has failed to do so.

Furthermore, the fact that the IRS may recoup more than it would have if it had foreclosed while Lok still held the property does not affect our analysis. In Fidelity National Title Insurance Co. v. United States Department of the Treasury, 907 F.2d 868 (9th Cir.1990), we permitted the IRS to recover a greater sum due to a foreclosure sale than it would have received if the property had still been held by the delinquent taxpayer. "It is true that the IRS was placed in a better position after the foreclosure sale than it was in prior to sale. However, no California court has said that equitable subrogation should apply solely because an existing lienholder is put in a better position." Id. at 871. Additionally, where the IRS receives a "bonus" because of a sale, if the extra proceeds are applied to reduce a legitimate tax lien, the IRS has not necessarily been unjustly enriched. Simon v. United States, 756 F.2d 696, 699 (9th Cir.1985).

III

The Hans' more persuasive argument is that they are entitled to be equitably subrogated to World Savings's position as first-place lienholder because they paid and discharged World Savings's first trust deed. Under the doctrine of equitable subrogation, the Hans would stand in the shoes of World Savings and retain the same priority that World Savings had on its trust deed. If this argument prevails, and the property were now sold to satisfy the tax lien, the Hans would recover the $367,000 they paid to World Savings in escrow when they purchased the property.

Equitable subrogation is appropriate where:

"(1) Payment [was] made by the subrogee to protect his own interest. (2) The subrogee [has] not ... acted as a volunteer. (3) The debt paid [was] one for which the subrogee was not primarily liable. (4) The entire debt [has] been paid. (5) Subrogation [would] not work any injustice to the rights of others."

Caito v. United California Bank, 20 Cal.3d 694, 704, 576 P.2d 466, 471, 144 Cal.Rptr. 751, 756 (1978) (quoting Grant v. de Otte, 122 Cal.App.2d 724, 728, 265 P.2d 952 (1954)). Equitable subrogation is a broad equitable remedy, not limited to circumstances where these five factors are met, but is appropriate whenever "one person, not acting as a mere volunteer or intruder, pays a debt for which another is primarily liable, and which in equity and good conscience should have been discharged by the latter." Id....

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