Hamilton v. US, Civ. No. N-90-128 (TFGD).

• Decision Date: 28 August 1992
• Docket Number: Civ. No. N-90-128 (TFGD).
• Citation: 806 F. Supp. 326
• Parties: Linda HAMILTON, Plaintiff, v. UNITED STATES of America, Defendant.
• Court: U.S. District Court — District of Connecticut

806 F. Supp. 326

Linda HAMILTON, Plaintiff, v. UNITED STATES of America, Defendant.

Civ. No. N-90-128 (TFGD).

United States District Court, D. Connecticut.

August 28, 1992.

V. James Ferraro, New Haven, Conn., for plaintiff.

Scott H. Harris, U.S. Dept. of Justice, Tax Div., John B. Hughes, U.S. Atty's Office, New Haven, D. Conn., Albert S. Dabrowski, U.S. Atty., Hartford, Conn. for defendant.

MEMORANDUM OF DECISION

DALY, District Judge.

Plaintiff Linda Hamilton ("Plaintiff" or "Ms. Hamilton") brings this action against the United States ("the government" or "the defendant") for an alleged wrongful levy. 26 U.S.C. § 7426(a)(1). The case raises an issue of apparent first impression in this Circuit, to wit, whether an executed but unrecorded quitclaim deed purporting to transfer specified real property from the delinquent taxpayer to a third-party defeats the government's levy on that property.

Ms. Hamilton, the third-party in question, seeks to enjoin the government's sale of residential property located at 174-176 Thompson Street, New Haven, Connecticut ("the property"). Ms. Hamilton lives there with her family in a two-family dwelling and claims ownership to it through a quit-claim deed executed in her favor by the record owner, Brenda Jones Agnew ("Ms. Jones"). Ms. Hamilton did not record that quitclaim deed, however, until after the government had seized the property to satisfy Ms. Jones' tax liabilities. Essentially arguing that as a creditor without notice of the prior transaction it is entitled to the protections afforded by Connecticut's recording statute, Conn.Gen.Stat. § 42-10, the government contends that the levy is enforceable.

The matter has been tried to the Court and the parties have supplemented their presentations with post-trial written submissions. This opinion constitutes the Court's findings of fact and conclusions of law pursuant to Federal Rule of Civil Procedure 52.

FINDINGS OF FACT

Ms. Hamilton was looking for property to rent when, in 1983, a friend told her about a two-family home on Thompson Street that was available for sale at a relatively inexpensive price. Unemployed at the time, Ms. Hamilton was convinced that she could not obtain a mortgage for the property on her own. Ms. Jones, a longtime friend who owned two other properties and presumably could get a mortgage, offered to acquire the property, in name only, on Ms. Hamilton's behalf. The two women agreed that Ms. Hamilton would pay the closing costs and make the $3,000 down payment on the $30,000 purchase price. Thereafter, Ms. Hamilton would make all mortgage, tax and miscellaneous payments on the property. In exchange, Ms. Jones would execute a quitclaim deed transferring the property to Ms. Hamilton. This plan was chosen in lieu of a co-signing arrangement on the mortgage — with five people already waiting in line at the bank for the property, plaintiff was advised that such a co-signor arrangement would complicate matters and jeopardize any prospects she had of buying the property.

Both Ms. Jones and Ms. Hamilton were present at the November 1, 1983 closing on the property. Also present were Richard Shapiro, Ms. Hamilton's lawyer, and Owen Carber, a representative from New Haven Savings Bank ("the Bank") — both the seller of the property and the mortgagee. As the women had agreed, Ms. Hamilton paid the closing costs and the $3,000 down payment for the property. Mr. Carber executed a quitclaim deed on behalf of the Bank transferring the property to Ms. Jones. Trans. at 10. That deed was recorded with the Registry of Deeds, leaving Ms. Jones the record owner of the property. See id. at 83-84. The mortgage deed itself, in the amount of $27,000 in favor of the New Haven Savings Bank, also bore the name of Ms. Jones. Exh. 2.

On the same date as the closing, Ms. Jones executed a quitclaim deed purporting to transfer "all right, title, interest, claim and demand whatsoever" in the subject property to Ms. Hamilton. Exh. 1.¹ Testifying at trial as to her understanding of the quitclaim deed, Ms. Jones stated that if there ever was a question as to who owned the property, the quitclaim deed "would prove that Linda owned it." Id. at 23. She later added that "I never owned the property. Only in name only did I own that property. I did not put up any money to buy that property.... I was ... doing an honest deed for a friend." Id. at 36. The quitclaim deed, notarized and witnessed by Mr. Shapiro, was not delivered to Ms. Hamilton at the closing. Nor was it recorded until June 6, 1989, some two months after the government's seizure of the property and approximately five and one-half years after the closing.²

From shortly after the closing until the present, Ms. Hamilton has lived in the property with her children. The first floor of the house has also been periodically leased by her during this period. She has paid all expenses for improvements and repairs to the house as well as the mortgage and tax payments, albeit with the substantial assistance of her mother, her brother and friends. See exhs. 7 (New Haven Savings Bank payment book, in name of plaintiff's mother); 10 (payment receipts from New Haven Savings Bank); exh. 14 (various receipts for expenses incurred in improving/repairing the property). Utilities were set up by Ms. Hamilton when she moved into the house and have been paid by her. At least one bill (water/sewage), however, was initially placed under Ms. Jones' name.³

Although she helped Ms. Hamilton move in and occasionally assisted with cleaning, Ms. Jones never made any payments in connection with the property, never lived there, never rented there, never stayed there and never made any improvements or repairs to it. However, she did list 174 Thompson Street as a source of $600 in rental income on her 1987 tax return. Exh. 502. Ms. Jones also cited the following rental expenses relating to the property on the same return: $1,313 in insurance, $2,894 in mortgage interest payments, $1,510 in repairs, $1,573 in taxes, $2,000 in utilities and $1,400 in depreciation expenses. The property was similarly listed in Ms. Jones' 1988 return, filed jointly with her husband. Exh. 505. That return listed $500 in rental income on the property and $7,983 in rental expenses, including depreciation. Id. Ms. Jones explained at trial that she and Ms. Hamilton were friends and that Ms. Hamilton had no objections to her "reaping the gain" from the property. Trans. at 41. Asked whether Ms. Hamilton knew about her representations on the tax returns, Ms. Jones replied simply "why not?" Id. Ms. Hamilton's testimony on this point was not nearly as clear. Asked whether she knew that Ms. Jones was "doing things on her return related to that home," Ms. Hamilton responded as follows: "I knew that she used the tax — I really don't know. I should not say anything, because I really do not fully understand all the terms. But I did know that something with the interest rate or something interest that you can deduct from your taxes." Id. at 100. She also testified that Ms. Jones had mentioned something to her about taking the interest deduction "the first year that I purchased the house" but that she could not recall any later such references. Asked whether she had voiced any concerns to Ms. Jones regarding such an interest deduction, Ms. Hamilton responded that she had not. Id.⁴

On April 11, 1989, the defendant, through IRS Collection Officer Alice Hammermann ("Officer Hammermann"), seized the subject property in order to satisfy Ms. Jones' unpaid tax liabilities. The seizure followed a property search by Officer Hammermann at the New Haven Town Hall, a review of Ms. Jones' 1987 tax return, an interview with Ms. Jones⁵ and a check with the New Haven Tax Assessor's office, all of which indicated that Ms. Jones was the record owner of the property. Officer Hammermann also wrote a letter to the Southern Connecticut Water Authority to determine if there was any back money owed to the utility. The Water Authority's response also indicated that Ms. Jones was the owner of the property.

On April 12, 1989, immediately after learning of the seizure, Ms. Hamilton telephoned Officer Hammermann and told her that she had a quitclaim deed that would establish that she, Ms. Hamilton, was the owner of the property. Officer Hammermann replied that no such deed had ever been recorded and that if Ms. Hamilton had such a document, she would like to see it. After a successful search for the unrecorded quitclaim deed, see supra note 2, Ms. Hamilton's lawyer, V. James Ferraro, sent Officer Hammermann a copy of the deed along with a letter advising her that he was having the deed recorded with the New Haven Land Records Office. Exh. 5 (June 5, 1989 dated letter from V. James Ferraro to Alice Hammermann). The letter also requested that the government "release the property at 174-176 Thompson Street, New Haven from the IRS seizure, since Brenda Jones is not the owner of the property. The true owner is Linda Hamilton." Id. Notwithstanding Ms. Hamilton's claimed rights to the property, the IRS declined to release the levy. On March 13, 1990, Officer Hammermann orally notified Ms. Hamilton that the IRS intended to advertise immediately and sell the property in order to satisfy Ms. Jones' liabilities. This suit was commenced two days later.

CONCLUSIONS OF LAW

Plaintiff brings this action pursuant to 26 U.S.C. § 7426(a)(1). That statutory section provides for suits by third-parties seeking recovery of property in which they claim an "interest," property allegedly "wrongfully" levied by the Internal Revenue Service ("IRS") in its efforts to collect taxes owing from a delinquent taxpayer.⁶ A levy of property is "wrongful" if made "upon property in which the taxpayer had no interest at the time the lien arose or thereafter." 26 C.F.R. 301.7426-1 (1991); see also S.Rep. No. 1708, 89th Cong., 2d Sess. 30 (1966), reprinted in 1966 U.S.C.C.A.N. 3722, 3751 ("`wrongful,'...