In re Crystal Cascades Civil, LLC, BAP No. NV-08-1314-JuHMo.

• Decision Date: 18 June 2009
• Docket Number: BAP No. NV-08-1314-JuHMo.,Adv. No. 06-01082.,Bankruptcy No. 05-20550.
• Citation: 415 B.R. 403
• Court: U.S. Bankruptcy Appellate Panel, Ninth Circuit
• Parties: In re CRYSTAL CASCADES CIVIL, LLC, Debtor, United States of America, Appellant, v. Richard H. Buenting; Road & Highway Builders, LLC, Appellees.

415 B.R. 403

In re CRYSTAL CASCADES CIVIL, LLC, Debtor,

United States of America, Appellant, v. Richard H. Buenting; Road & Highway Builders, LLC, Appellees.

BAP No. NV-08-1314-JuHMo.

Bankruptcy No. 05-20550.

Adv. No. 06-01082.

United States Bankruptcy Appellate Panel of the Ninth Circuit.

Argued and Submitted on May 19, 2009.

June 18, 2009.

COPYRIGHT MATERIAL OMITTED

James D. Greene, Rice Silbey Reuther & Sullivan, Callister & Reynolds, Rice Silbey Reuther & Sullivan, LLP, Aubree Cherney, Las Vegas, NV for Debtor.

Michael Lehners, Christopher P. Burke, for Appellee.

Steven Myhre, Karen L. Pound, for Appellant.

Before: JURY, HOLLOWELL, and MONTALI, Bankruptcy Judges.

MEMORANDUM

MEREDITH A. JURY, Bankruptcy Judge.

Appellees Richard H. Buenting ("Buenting") and Road & Highway Builders, LLC ("Road & Highway")(collectively, "Appellees") filed an adversary complaint against appellant United States of America ("IRS") seeking a judicial declaration that their later-in-time recorded liens against Crystal Cascades Civil, LLC's real property were superior to the IRS's two notices of federal tax lien (variously, "NFTLs" and "liens") recorded against the same property.¹

The validity of the IRS's tax liens against Appellees is governed by 26 U.S.C. § 6323(f).² The statute requires the IRS to record its tax lien in a manner that allows third parties to discover the lien through a reasonable inspection of the public index of deeds. IRC § 6323(f)(4)(A).

Here, the NFTLs identified the taxpayer as "Crystal Cascades, LLC, a corporation" instead of "Crystal Cascades Civil, LLC", which was debtor's name registered with the Nevada Secretary of State. Therefore, Appellees contended the tax liens were outside the chain of title and could not be discovered by a reasonable inspection of the public index of real property records in Clark County, Nevada where the property was located.

After a trial, the bankruptcy court issued its ruling in a written opinion entered on November 12, 2008, which was amended on December 3, 2008 and published as Buenting v. Crystal Cascades Civil, LLC (In re Crystal Cascades Civil, LLC), 398 B.R. 23 (Bankr.D.Nev.2008). The bankruptcy court held that a search of the real property records in Clark County, Nevada using debtor's exact legal name constituted a reasonable inspection within the meaning of IRC § 6323(f)(4)(A). In so deciding, the court concluded that the standard for a reasonable inspection under the statute should be tested against how a nonprofessional person³ would search the public records index, which would be an exact name search. Crystal Cascades Civil, LLC, 398 B.R. at 34. The court also considered the nature of the public index and search methods that were available in Clark County, Nevada. Id. at 36-37. Because an exact-name search would not have revealed the tax liens, the court awarded Appellees $321,000 in surplus proceeds that remained after the foreclosure sale of debtor's property.

The IRS timely filed this appeal, contending that the bankruptcy court applied the incorrect legal standard when making its ruling on what constituted a reasonable inspection under the circumstances here.

There is no precise legal standard for what constitutes a reasonable inspection under all circumstances. We hold that what constitutes a reasonable inspection within the meaning of IRC § 6323(f)(4)(A) is properly analyzed from the perspective of an ordinary prudent person and will vary by locality. This was the approach followed by the bankruptcy court.

Accordingly, for the reasons more fully explained below, WE AFFIRM.

I. FACTS

The initial Articles of Organization filed with the Nevada Secretary of State on November 20, 2000 reflected debtor's legal name as "Crystal Cascades, LLC". Debtor also used this name to obtain an Employment Identification Number ("EIN") from the IRS.

On May 31, 2001, amended Articles of Organization changed debtor's name from Crystal Cascades, LLC to Crystal Cascades Civil, LLC. Crystal Cascades, LLC transferred the real property at issue in this appeal to Crystal Cascades Civil, LLC at some time after this May 31, 2001 name change. Debtor did not provide the IRS with a formal notice of the name change. But it used both its old name and new name on its tax returns that led to the IRS's tax liens at issue in this appeal.

Debtor filed its chapter 11 petition on September 28, 2005. On January 30, 2006 the bankruptcy court entered a stipulation and order vacating the automatic stay with respect to the real property at issue in this appeal in favor of Business Bank of Nevada ("Business Bank"). Business Bank held the first and second deeds of trust on the property, the underlying notes were in default and the bank sought to complete its foreclosure sale. Debtor entered into the stipulation with Business Bank after concluding that the property's value was less than the amount of liens encumbering it.

Appellees did not receive notice of the stipulation, but they discovered it on February 6, 2006, during a routine search of the docket. Due to their lack of notice, Appellees filed their adversary complaint⁴ on February 21, 2006, seeking to reimpose the automatic stay and to obtain a judicial declaration regarding the priority of their liens over the government's tax liens. In conjunction with filing the complaint, Appellees moved for a preliminary injunction against the pending foreclosure sale. At the February 27, 2006 hearing on this motion, the court denied the relief, authorized the foreclosure sale to go forward on February 28, 2006, and ordered that any excess proceeds be deposited in an interest-bearing account pending resolution of Appellees' adversary proceeding.⁵

Stewart Title Company ("Stewart Title") conducted the nonjudicial foreclosure sale on Business Bank's behalf. The title officer responsible for conducting the sale performed a title search that determined who would receive notice of the foreclosure sale. The title officer did not find the NFTLs. Consequently, the IRS did not receive notice of the sale.

Road & Highway purchased the property at the foreclosure sale for $1.5 million.⁶ Thereafter, the IRS notified Road & Highway that it was exercising its statutory right of redemption under IRC § 7425. Appellees negotiated a release of the IRS's claim to a right of redemption in exchange for $100,000.⁷ The trial regarding the priority of the IRS's NFTLs over Appellees' liens occurred in November 2007. The bankruptcy court ruled against the IRS and in favor of Appellees. The IRS timely filed this appeal.

II. JURISDICTION

The bankruptcy court had jurisdiction over this core proceeding under 28 U.S.C. §§ 1334(b) and 157(b)(2)(K) and (O). We have jurisdiction under 28 U.S.C. § 158.⁸

III. ISSUE

Whether the bankruptcy court applied the correct legal standard in reaching its decision that a reasonable inspection of the relevant property records in Clark County, Nevada would not have revealed the tax liens.

IV. STANDARD OF REVIEW

Whether a reasonable inspection of the relevant property records within the meaning of IRC § 6323(f)(4)(A) would have revealed the IRS's NFTLs is a mixed question of law and fact that we review de novo. TKB Int'l, Inc. v. United States, 995 F.2d 1460, 1465 (9th Cir.1993)(citing Kivel v. United States, 878 F.2d 301, 304 (9th Cir.1989)). Because our review is de novo, we consider whether a reasonable inspection of the public index occurred as if no decision had been rendered by the bankruptcy court. United States v. Silverman, 861 F.2d 571, 576 (9th Cir.1988).

V. DISCUSSION

The priority of a federal tax lien is governed by federal law. United States v. Equitable Life Assurance Soc'y, 384 U.S. 323, 328, 86 S.Ct. 1561, 16 L.Ed.2d 593 (1966). When a taxpayer neglects or refuses to pay a tax liability after assessment, notice, and demand, the amount due becomes "a lien in favor of the United States upon all property and rights to property, whether real or personal, belonging to such person." IRC § 6321.

Once the IRS files a proper notice of a tax lien, the lien is valid against a subsequent purchaser of the property, provided that the purchaser is given notice of the encumbrance. IRC § 6323(a).⁹ The filing requirements for the notice are set forth in IRC § 6323(f).¹⁰ The notice itself must be on Form 668 and its contents are dictated by the Secretary of the Treasury. IRC § 6323(f)(3). Treasury Regulation ("Treas.Reg.") § 301.6323(f)-1(d)(2) requires that the NFTL "must identify the taxpayer, the tax liability giving rise to the lien, and the date the assessment arose...."

With respect to real property, the notice requirement under the statute requires proper filing of the tax lien under the laws of the state "in which the property subject to the lien is situated." IRC § 6323(f)(1)(A)(i). Where, as here, the property is situated in a state that invalidates a deed against a bona fide purchaser unless the filing of that deed has been recorded, the NFTL "shall not be treated as meeting the ... requirements" with respect to such a purchaser "unless the fact of filing [the tax lien] is entered and recorded in [an] index ... in such a manner that a reasonable inspection of the index will reveal the existence of the lien."¹¹ IRC § 6323(f)(4)(A).

IRC § 6323(f)(4)(A) thus defines the rights of the subsequent purchaser of real property vis-a-vis the IRS's NFTLs and fixes a standard by which such rights are to be measured. However, there is no precise legal test for determining what constitutes a "reasonable inspection" within the meaning of the statute. The term is defined neither in the statute nor in the regulations. Central to this case, therefore, is the interpretation of the word "reasonable".

The IRS's various assignments of error in this appeal demonstrate that the word "reasonable" raises numerous questions which we must address: Should the reasonableness of an inspection of the public records be tested against the conduct of an...