In re Crystal Cascades Civil, LLC., BK-S-05-20550-BAM (D. Nev. 12/03/2008), BK-S-05-20550-BAM
| Decision Date | 03 December 2008 |
| Docket Number | BK-S-05-20550-BAM,Adv. Proceeding No.: 06-1082-BAM |
| Parties | In re: CRYSTAL CASCADES CIVIL, LLC, Chapter 11, Debtor. RICHARD H. BUENTING, an Individual; and ROAD & HIGHWAY BUILDERS, LLC, a Nevada Limited Liability Company, Plaintiffs, v. CRYSTAL CASCADES CIVIL, LLC, a Nevada Limited Liability Company; BUSINESS BANK OF NEVADA, a Nevada corporation; the INTERNAL REVENUE SERVICE; and THE GORE FAMILY TRUST, Howard L. Gore and Kimberly Hawkins-Gore, Trustees, Defendants. |
| Court | U.S. District Court — District of Nevada |
The court issued its Opinion After Trial in this matter on November 12, 2008 (dkt. # 161). The court now issues an Amended Opinion After Trial to correct typographical and citation format errors. A copy of the amended opinion, marked to show changes, is attached as Exhibit 1.
I. INTRODUCTION
Plaintiffs, Gary H. Buenting and his 50% owned company, Road & Highway Builders, LLC ("Plaintiffs"), claim that their deeds of trust on debtor's real property were senior to two tax liens filed by the Internal Revenue Service ("IRS") against the same property. This claim of priority matters because the real property involved has been foreclosed upon, and there are surplus proceeds of some $321,000. While not a small sum, it is less than either the Plaintiffs' or the IRS's claims. As a result, whoever is senior gets all the money. The loser gets nothing.
No one disputes that the Plaintiffs recorded their deeds of trust after the IRS recorded its tax lien notices. These notices identified the taxpayer only as "Crystal Cascades, LLC, a corporation." The debtor's full and proper name from the time it acquired the real property, however, was "Crystal Cascades Civil, LLC, a Nevada limited liability company." The IRS's notices thereby left out one of the nontrivial words of debtor's name, and misidentified its organizational form.
The main issue at the two-day trial was whether a reasonable search of the relevant real property records would have revealed either notice of tax lien. For the reasons set forth in this opinion, the court finds that a reasonable search would not have revealed either tax lien, and therefore federal law provides that the proceeds of the foreclosure are free of the IRS's liens. They may thus be distributed to Plaintiffs.
II. FACTS
Crystal Cascades Civil, LLC, the debtor in this bankruptcy, owned three parcels of land in Clark County, Nevada (the "real property"). Debtor borrowed heavily against this real property. Business Bank of Nevada made loans secured by first- and second-priority liens against the real property; its first and second deeds of trust were recorded on July 15, 2004.1 Debtor next encumbered the real property on February 4, 2005, borrowing money from and giving deeds of trust to Plaintiffs. A final deed of trust encumbering the real property was recorded February 16, 2005, in favor of the Gore Family Trust.2
At all relevant times, Edward G. Riggs controlled the debtor. Mr. Riggs filed Articles of Organization for the debtor with the Nevada Secretary of State on November 20, 2000. These stated the debtor's name to be Crystal Cascades, LLC.3 In addition, Mr. Riggs used this name, Crystal Cascades, LLC, when he applied to the IRS for an Employment Identification Number, or EIN, for this newly created entity.
On May 31, 2001, an amendment was filed with the Nevada Secretary of State, changing the debtor's name from Crystal Cascades, LLC, to Crystal Cascades Civil, LLC. No change of name was ever filed with the IRS, although the debtor listed its changed name on its income tax returns and on the employment tax returns that led to the IRS liens at issue in this case. Debtor purchased the real property using its proper name, Crystal Cascades Civil, LLC, at some time after this May 31, 2001 name change.
During the third and fourth quarters of 2003, debtor failed to pay its employment taxes. This led to the IRS filing a notice of tax lien on August 11, 2004. Debtor again failed to pay all its employment taxes during the last two quarters of 2004. The IRS filed a second notice of tax lien on January 28, 2005. The IRS filed both tax lien notices in the Clark County Recorder's office using the designation "Crystal Cascades, LLC, a corporation."4
Debtor filed a petition under Chapter 11 of the Bankruptcy Code on September 28, 2005. The court lifted the automatic stay of section 362 in favor of Business Bank of Nevada with respect to the real property on January 30, 2006, so that Business Bank could proceed with a foreclosure of the real property. Business Bank foreclosed on its senior interest at a foreclosure sale held on February 28, 2006. The sale generated a surplus of $321,000 over the amount owed to Business Bank.
Both the IRS and Plaintiffs claim this surplus, which has been held in escrow pending the resolution of this proceeding. The IRS contends that both the August 11, 2004 tax lien notice and the January 28, 2005 tax lien notice, filed under the name "Crystal Cascades, LLC," sufficiently identified the debtor, and therefore the tax liens were effective against third parties, entitling the IRS to the proceeds from the foreclosure sale of the real property. See Quist v. Wiesener, 327 F. Supp. 2d 890 (E.D. Tenn. 2004) (). Plaintiffs contend that both notices failed to sufficiently identify the debtor, and therefore the IRS's tax liens were not effective as against third parties.
III. LEGAL STANDARDS
Although this dispute looks very much like a simple dispute by two nondebtors governed by nonbankruptcy law, this court had and has jurisdiction to hear and determine the matter. As with all bankruptcy-based matters, the district court, and derivatively, this bankruptcy court, has jurisdiction "of all civil proceedings arising under title 11, or arising in or related to cases under title 11." 28 U.S.C. § 1334(b); D. NEV. R. 1001. When Plaintiffs filed this adversary proceeding, the estate owned the real property, making this a core matter arising in a case under title 11 under 28 U.S.C. § 157(b)(2)(K) & (O).5 After the sale of the real property, the surplus proceeds were insufficient to benefit the estate's unsecured creditors. However, the creation and confirmation of this shortfall did not divest the court of jurisdiction over the parties. In the Ninth Circuit, subject matter jurisdiction in bankruptcy cases, as in other federal court cases, "should be determined as of the date that the complaint . . . was filed." Fietz v. Great W. Sav. (In re Fietz), 852 F.2d 455, 457 n.2 (9th Cir. 1988).
Additionally, even if this proceeding did not retain its character as a core matter, the court retained "related to" noncore jurisdiction. With respect to such jurisdiction, the Ninth Circuit has adopted the test articulated by the Third Circuit in Pacor, Inc. v. Higgins, 743 F.2d 984 (3rd Cir. 1984) which states that a proceeding is "related to" if "the outcome of the proceeding could conceivably have any effect on the estate being administered in bankruptcy." Fietz, 852 F.2d at 457 (citing Pacor, 743 F.2d at 994). Any change that occurred during the pendency of this action with regard to the origin of this court's jurisdiction "from arising in a case under title 11" to "related to" jurisdiction would not have been sufficient to alter the test for "related to" jurisdiction.6 By continuing to prosecute the litigation through trial in this matter after the real property was sold, each party consented to this court's entry of final judgment under 28 U.S.C. § 157(c)(2).
Under the Internal Revenue Code, a tax lien arises at the time of assessment, 26 U.S.C. § 6322, on "all property and rights to property, whether real or personal, belonging to" a delinquent taxpayer. 26 U.S.C. § 6321. The primary power of a tax lien, however, lies not in its effect against the taxpayer, but in its priority vis-á-vis other lienholders and subsequent purchasers. Under the Federal Tax Lien Act, a tax lien is valid as against any subsequent purchaser or holder of a security interest, but only if "notice thereof which meets the requirements of [26 U.S.C. § 6323(f)] has been filed." 26 U.S.C. § 6323(a); see also United States v. Pioneer Am. Ins. Co., 374 U.S. 84, 88 (1963) (); and TREAS. REG. § 301.6323(a) ().
Section 6323(f) governs the place of filing for tax lien notices, and defers to state law to select the proper office. 26 U.S.C. § 6323(f)(1)(A)(i). Nevada has chosen "the office of the county recorder in which the real property subject to the liens is situated." NEV. REV. STAT. § 108.827.2....
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