944 F.2d 526 (9th Cir. 1991), 90-55804, Han v. United States
|Citation:||944 F.2d 526|
|Party Name:||Jea Min HAN; Jae Soon Han, Plaintiffs-Appellants, v. UNITED STATES of America, Defendant-Appellee.|
|Case Date:||September 11, 1991|
|Court:||United States Courts of Appeals, Court of Appeals for the Ninth Circuit|
Argued and Submitted June 6, 1991.
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.
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'...
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