Equity Mortg. Corp. v. Loftus
| Decision Date | 18 October 1974 |
| Docket Number | No. 74-1003,74-1003 |
| Citation | 504 F.2d 1071 |
| Parties | 74-2 USTC P 9757 EQUITY MORTGAGE CORPORATION, a Virginia corporation, Appellee, v. Harold J. LOFTUS, Jr. and Jeanne M. Loftus, Defendants, United States of America, Appellant. |
| Court | U.S. Court of Appeals — Fourth Circuit |
Gary R. Allen, Atty., Tax Div., U.S. Dept. of Justice (Scott P. Crampton, Asst. Atty. Gen., Meyer Rothwacks, Crombie J. D. Garrett, Attys., Tax Div., U.S. Dept. of Justice, Brian P. Gettings, U.S. Atty., and James A. Oast, Jr., Asst. U.S. Atty., on brief) for appellant.
Robert M. White, Norfolk, Va. (White & Selkin, Norfolk, Va., on brief) for appellee.
Before BOREMAN, Senior Circuit Judge, WINTER and CRAVEN, Circuit judges.
When Equity Mortgage Corporation (Equity) foreclosed its second deed of trust on property owned by Mr. and Mrs. Harold Loftus in Virginia Beach, Virginia, it purchased the property for $1,000, subject to a first deed of trust to Mutual Federal Savings and Loan Association (Mutual) on which the principal balance was $17,956.33. At the time, the principal balance on the second deed of trust was $3,210.28. Additionally, before foreclosure, Equity had made payments to Mutual of $1,796.40 on account of the debt in order to avoid a foreclosure by Mutual and extinguishment of Equity's second lien.
Equity's foreclosure extinguished a federal tax lien for unpaid income taxes which was junior to Equity's second deed of trust. Within the time prescribed by statute, the government purported to exercise its right of redemption under 28 U.S.C. 2410(d) and 26 U.S.C. 7425(d), and tendered Equity $1,019.27-- Equity's purchase price at the foreclosure sale, plus statutory interest-- but Equity declined the tender.
In this suit to quiet title, the district court, construing 28 U.S.C. 2410(d) (1), held that the government could have redeemed only by paying Equity the full amount of its lien. We disagree. We hold that under the statute the government may redeem by paying Equity the amount the latter paid at foreclosure together with the expenses necessarily incurred in connection with such property which we hold included payments to Mutual prior to Equity's foreclosure as well as after foreclosure and prior to redemption. Additionally, on general principles of equity, we hold that the government must pay Equity subsequent amounts it paid to Mutual while this litigation was pending. Finally, we reject Equity's claim that the statute fixing the redemption price is unconstitutional. We reverse and remand for further proceedings in accordance with the views set forth herein.
The facts are not disputed, and we adopt the statement set forth in the government's brief:
At all pertinent times prior to March 21, 1969, taxpayers, Harold and Jeanne Loftus, were the owners of certain real property located in Virginia Beach, Virginia. The property was subject to a first deed of trust securing a note executed by taxpayers in favor of Mutual Federal Savings and Loan Association (Mutual), and a second deed of trust (duly recorded on June 15, 1966) securing a note executed by taxpayers in favor of Equity.
On June 15, 1967, notice of a federal tax lien arising under assessments made against taxpayers for federal income taxes for the years 1961 through 1963 in the amount of $17,221.79 was filed in the Circuit Court of the City of Virginia Beach, Virginia. The government's tax lien was junior to both the first deed of trust securing the note held by Mutual and the second deed of trust securing the note held by Equity.
Thereafter, taxpayers defaulted on payments due on both of these notes, and Equity made payments to Mutual on the note secured by the first deed of trust in the total amount of $1,796.40 during the period July 15, 1968, to February 28, 1969. Equity thereupon instructed its trustee to foreclose on the second deed of trust. After proper notice was given to the Commissioner of Internal Revenue, pursuant to Section 7425 of the Internal Revenue Code of 1954, the property was offered for sale at public auction on March 21, 1969, at which time Equity purchased the property, subject to the first deed of trust, for the sum of $1,000. As of that date, there was a principal balance outstanding on Mutual's note, secured by the first deed of trust, of $17,956.33, and a principal balance outstanding on Equity's note, secured by the second deed of trust, of $3,210.28. The effect of the foreclosure sale under Virginia law was to discharge the property from the Government's junior tax lien and to satisfy taxpayers' obligation on the note held by Equity only to the extent of the purchase price less expenses of sale (i.e., $1,000 less $198.05 = $801.95).
On March 26, 1969, Equity offered to assign the property to the Government for the amount then owed Equity by taxpayers of $5,224.80 (including the principal balance outstanding on the note, Equity's payments to Mutual and certain foreclosure expenses) plus a five-percent 'Trustee's commission.' The offer was not accepted. Instead, on July 16, 1969, within the 120-day period allowed for the exercise of the Government's right of redemption under Section 7425 of the Internal Revenue Code and 28 U.S.C. 2410, the Government tendered Equity a check in the amount of $1,019.27 (reflecting Equity's purchase price plus statutory interest as provided for under 28 U.S.C. 2410(d)) for the purpose of exercising its right of redemption. Although Equity declined to accept the tender, the District Director of Internal Revenue caused a certificate of redemption to be recorded in the Circuit Court of the City of Virginia Beach on July 18, 1969. On April 15, 1970, Equity recorded its deed at a cost of $103.50 based on an estimated fair market value for the property of $32,500. Between the date of the foreclosure sale and the date of the tender, Equity made additional payments to Mutual on the note secured by the first deed of trust in the total amount of $563.80, and between the date of tender and June 1, 1970, Equity made further payments on Mutual's note in the amount of $1,656.20.
The District Court invalidated the certificate of redemption on the grounds that the Government's tender was insufficient in light of the payments made by Equity to Mutual, its expenses of recording its deed, and the principal balance remaining outstanding on its note. Notwithstanding the fact that taxpayer's obligation to Equity was satisfied by the foreclosure sale only to the extent of the net proceeds thereof, the court concluded that the provisions of 28 U.S.C. 2410(d)(1) required the tender of the full amount of the obligation secured by the lien where, as here, the purchase (Equity) has stated its willingness (after this action was commenced) to waive its right to a deficiency judgment if the full amount were tendered.
The government's right of redemption, which is not contested, was created by 26 U.S.C. 7425(d). Section 7425(b) governs a sale of property on which the United States has or claims a lien, and 7425(d) states that 'in the case of a sale of real property to which subsection (b) applies to satisfy a lien prior to that of the United States, the Secretary . . . may redeem within the period of 120 days from the date of sale . . ..' The section states that the redemption price shall be the amount prescribed in 28 U.S.C. 2410(d). The pertinent part of 2410(d) reads:
(2) interest on the amount paid (as determined under paragraph (1)) at 6 percent per annum from the date of such sale, and
(3) the amount (if any) equal to the excess of (A) the expenses necessarily incurred in connection with such property, over (B) the income from such property plus (to the extent such property is used by the purchaser) a reasonable rental value of such property.
The part of the language of 2410(d) which gives rise to this litigation is that in subparagraph (1)-- 'the actual amount paid by the purchaser . . . which (since Equity was the lienor and purchaser) shall include the amount of the obligation . . . to the extent satisfied by reason of such sale . . .' The language is troublesome because one is required to look to state law to determine the effect of the lienor's purchase of the property at foreclosure on the overall obligation, and the laws of the various states differ. It is not disputed that, under the applicable Virginia law, Equity's lien was satisfied only to the extent of the purchase price ($1,000), less the expenses of sale ($198.05), and that Equity would be entitled to a deficiency judgment against Mr. and Mrs. Loftus for the remaining unpaid balance. But this is not necessarily true in other states and, hence, 2410(d)(1) may have a different effect in them in prescribing what the government must pay if it exercises its right to redeem.
That there are these differences in state law and that therefore 2410(d)(1) prescribes a shifting quantum of redemption price depending upon the state in which it is applied are fully recognized in the examples to 26 C.F.R. 400.5-1(c)(2), the temporary regulations to the Federal Tax Lien Act of 1966, and, specifically, to subparagraph (1)(i), which is a restatement of 2410(d)(1). They follow:
Example (1). A, a delinquent taxpayer, owns Blackacre located in X State upon which B holds a mortgage. After the mortgage is properly recorded, a notice of tax lien is filed which is applicable to Blackacre. Subsequently, A defaults on the mortgage and B forecloses on the mortgage which has an...
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