Atlas, Inc. v. United States, Civ. No. A77-1066.

• Citation: 459 F. Supp. 1000
• Decision Date: 20 November 1978
• Docket Number: Civ. No. A77-1066.
• Parties: ATLAS, INC., Plaintiff, v. UNITED STATES of America, Defendant.
• Court: U.S. District Court — District of South Dakota

459 F. Supp. 1000

ATLAS, INC., Plaintiff, v. UNITED STATES of America, Defendant.

Civ. No. A77-1066.

United States District Court, D. North Dakota, Southwestern Division.

November 20, 1978.

Patrick W. Durick, Bismarck, N. D., for plaintiff.

H. Gary Annear, Fargo, N. D., for defendant.

MEMORANDUM OF DECISION AND ORDER

VanSICKLE, District Judge.

This is a quiet title action brought by Atlas, Inc. against the United States. Trial was had before the Court on October 16, 1978. Atlas claims title to the former residence of Arlene Dohn, located at 1714 Avenue "D" East, Bismarck, North Dakota, by virtue of a judgment of the Burleigh County District Court, dated February 22, 1977. The judgment of the Burleigh County District Court provides that Arlene Dohn held the subject property in trust for Atlas and the judgment conveyed Arlene Dohn's interest in the property to Atlas.

The United States claims an interest in Mrs. Dohn's former residence by virtue of a lien for unpaid taxes. The Notice of Federal Tax Lien was filed in the Burleigh County Register of Deeds' office on December 1, 1976.

The issues presented are whether the tax lien of the United States is void, whether it is an encumbrance on the subject property; and if not, what are the relative interests of the parties in the subject property.

On or about October 9, 1972, Mrs. Arlene Dohn, a bookkeeper for Atlas, Inc. began embezzling funds from Atlas. She continued to embezzle funds until her activities were discovered in October of 1975.

During the period October 9, 1972 to October 10, 1975, Mrs. Dohn embezzled a total of $390,723.48 from Atlas. The funds were obtained by altering checks drawn on Atlas and depositing them in the personal checking account of Mrs. Dohn in the Dakota Northwestern Bank, Bismarck, North Dakota.

When Mrs. Dohn's activities were discovered, a lawsuit was started against her by Atlas in the Burleigh County District Court. Atlas prayed for judgment against Mrs. Dohn in the total of the embezzlement and further requested that a constructive trust be imposed on certain properties she had purchased through the use of embezzled funds. Among the properties Atlas sought to have a constructive trust imposed upon was the personal residence of Arlene Dohn. In conjunction with the action against Mrs. Dohn, a lis pendens was filed on October 12, 1975.

The house Mrs. Dohn lived in at the time of her employment by Atlas was purchased by her in December of 1967 for $19,700. She paid $2,400 down and financed the balance with the First Federal Savings and Loan Association, Bismarck, North Dakota. Mrs. Dohn made payments of $160 per month on the home and on September 27, 1972, the payment date immediately preceding her first embezzlement of funds, the balance due and owing on her house was $15,882.67. During the period she was embezzling funds from Atlas, Mrs. Dohn continued to make her monthly payments of $160 per month. On October 8, 1975, Mrs. Dohn paid to First Federal a personal check in the amount of $13,931.93. Of this amount, $13,849.35 went to pay off the principal due on the house at the time.

During the period she was embezzling funds from Atlas, Mrs. Dohn made improvements to her residence including an expenditure of $5,465.51 for a cement patio and fence. She paid for these improvements out of her personal checking account with the Dakota Northwestern Bank.

On December 1, 1976, a date subsequent to the filing of the lis pendens, the Internal Revenue Service filed with the Burleigh County Register of Deeds a Notice of Federal Tax Lien under the Internal Revenue Laws. The amount of the lien was $220,757.49 and the tax liability arose because the funds that Mrs. Dohn embezzled from Atlas, Inc. were not declared by her as income.

On February 22, 1977, the District Court of Burleigh County entered judgment for Atlas and against Arlene Dohn for the sum of $289,546.70, and for a constructive trust on, among other properties, the home which is the subject matter of this lawsuit.

Both parties recognize that the money illegally obtained from Atlas by Mrs. Dohn was includable within her "gross income" and taxable to her in the years it was received. James v. United States, 366 U.S. 213, 81 S.Ct. 1052, 6 L.Ed.2d 246 (1961). The question before the Court is whether specific property which may have been partially paid for out of the embezzled funds can be levied upon by the government for the purpose of satisfying the tax obligation arising from the embezzlement.

The federal tax lien arises under Title 26 U.S.C. § 6321 which provides as follows:

"If any person liable to pay any tax neglects or refuses to pay the same after demand, the amount (including any interest, additional amount, addition to tax, or assessable penalty, together with any costs that may accrue in addition thereto) shall be a lien in favor of the United States upon all property and rights to property, whether real or personal, belonging to such person. Aug. 16, 1954, c. 736, 68A Stat. 779."

The general tax lien of the government, which arises as soon as taxes are assessed and which attaches to all property and rights to property of the tax debtor, prevails against all other unperfected liens with a few statutory exceptions, including judgment lien creditors. Whenever the tax lien of the United States competes with that of the judgment lien creditor, it must be determined whether the United States filed notice of its lien in the proper place prior to the time the competing lienor established his status as a judgment lien creditor. 26 U.S.C. § 6323. The tax lien here was properly filed before the judgment of the Burleigh County District Court. Atlas, however, contends that, under North Dakota law, their filing of a notice of lis pendens in connection with their suit to impress a constructive trust on the property gives their equitable lien priority over the federal tax lien.¹ I do not agree.

Atlas fails to recognize that it is a matter of federal and not state law as to when a lien has acquired sufficient substance and has become so perfected as to defeat a federal tax lien. United States v. Pioneer American Ins. Co., 374 U.S. 84, 83 S.Ct. 1651, 10 L.Ed.2d 770 (1963). For a lien to be sufficiently established to defeat a federal tax lien, the identity of the lienor, the property subject to the lien, and the amount of the lien must be established. In this case, it is clear that the amount of the lien was not established at the time of the filing of the federal tax lien. Whether the equitable lien existed in this case was contingent upon Atlas' proof in its suit. Until it established that the embezzled funds were used to purchase some or all of the property involved, and until it received a judgment from the Burleigh County District Court impressing a lien on such property, its lien was not perfected to the extent required by federal law so that it will defeat a valid federal tax lien.

In United States v. Pioneer American Ins. Co., supra, the Supreme Court dealt with a mortgage which was superior to the federal tax lien. The mortgage provided for reasonable attorney's fees, and under state law the right to attorney's fees was enforceable at the time of default, which was prior to the filing of the federal tax lien, and the suit seeking such attorney's fees was also filed prior to the filing of the federal tax lien. The Court held that under federal law, the claim for attorney's fees was not so perfected as to defeat the federal tax lien because the amount of the attorney's fees was not finally fixed in amount until after the federal tax lien was filed. Accordingly, the Court held that the mortgage was superior to the tax lien as to principal and interest but not as to attorney's fees. In City of Dallas v. United States, 369 F.2d 645 (5th Cir. 1966), the City of Dallas had a city tax lien pursuant to a city ordinance before the filing of the federal tax lien; however, the exact amount of the lien was unknown until after the filing of the federal tax lien. The court held that since the city lien was not certain in amount on the dates the federal liens were perfected, it was inchoate and inferior to the federal lien. In United States v. Morrison, 247 F.2d 285 (5th Cir. 1957), a vendor of realty filed a suit to impress certain property with an equitable vendor's lien for the unpaid purchase price and contemporaneously filed a notice of lis pendens. According to Texas law, the equitable lien came into being at the time of the conveyance, and this predated the federal tax lien as did the filing of the suit to impress the lien. The court noted that the lien's standing under Texas law was not enough, but that the lien must satisfy federal standards. The court discussed the effect of the filing of the notice of lis pendens as...