E.J. Friedman Co., Inc. v. U.S., No. 92-55572

• Decision Date: 29 September 1993
• Docket Number: No. 92-55572
• Citation: 6 F.3d 1355
• Parties: -6272, 93-2 USTC P 50,630 E.J. FRIEDMAN COMPANY, INC., Plaintiff-Appellant, v. UNITED STATES of America, Defendant-Appellee.
• Court: U.S. Court of Appeals — Ninth Circuit

Page 1355

6 F.3d 1355

72 A.F.T.R.2d 93-6272, 93-2 USTC P 50,630

E.J. FRIEDMAN COMPANY, INC., Plaintiff-Appellant, v. UNITED STATES of America, Defendant-Appellee.

No. 92-55572.

United States Court of Appeals, Ninth Circuit.

Argued and Submitted Aug. 4, 1993.

Decided Sept. 29, 1993.

William W. Holcomb and Robert H. Horn, Tyre, Kamins, Katz & Granof, Los Angeles, CA, for plaintiff-appellant.

Sally J. Schornstheimer and Gary R. Allen, U.S. Dept. of Justice, Washington, DC, for defendant-appellee.

Appeal from the United States District Court for the Central District of California.

Before: NORRIS, WIGGINS, O'SCANNLAIN, Circuit Judges.

WIGGINS, Circuit Judge:

OVERVIEW

E.J. Friedman Company, Inc. ("Friedman") ¹ brought an action in district court to compel the United States to discharge a federal tax lien encumbering several parcels of property. Friedman advanced several theories to support its request for relief. The district court dismissed all of Friedman's claims. Friedman appeals, and we affirm.

FACTS AND PRIOR PROCEEDINGS

Berkshire Dallas, Inc. ("Berkshire") purchased a parcel of property on which it planned to build 56 homes in two phases. Sterling Savings and Loan Association ("Sterling") made two loans to Berkshire, one in the amount of $695,000 ("Land Loan"), which partially financed Berkshire's purchase of the property, and another in the amount of $2,083,000 ("Construction Loan"), which was to finance construction of the first twenty-six homes in the project. The loans were secured by first and second deeds of trust on the property.

Friedman also made two loans to Berkshire. The first, in the amount of $470,000, was for purchase of the property. Later, Friedman loaned Berkshire an additional $200,000. Both loans were secured by deeds of trust on the property, which were subordinate to Sterling's deeds of trust.

Subsequent to the recording of all the trust deeds, the IRS recorded a federal tax lien against the real property owned by Berkshire, including all the property at issue here. On the date the tax lien was recorded, Berkshire was in default on all of the loans, and numerous mechanics' liens and stop notice claims had been filed against Berkshire's development property. After the tax lien was recorded, Sterling informed Friedman that it intended to foreclose on the property, eliminating all junior interests including Friedman's. To this point, fourteen homes had been completed and sold. The remaining twelve homes were either in escrow or subject to binding contracts of sale pending the completion of construction.

In an effort to avoid having its interest in the property foreclosed, Friedman began negotiating a workout agreement with Sterling. Friedman contacted an IRS agent to discuss the possibility of securing a release of the tax lien under 26 U.S.C. Sec. 6325 on the ground that the Berkshire had no equity in the property.

Based on the conversation with the agent, Friedman determined that it would not seek a release of the tax lien at that time because it would take too long. Instead, Friedman, Sterling, and Ticor Title Insurance Co. ("Ticor") agreed to the following workout arrangement.

Friedman convinced Sterling and Ticor to proceed with sales of the remaining twelve homes. Ticor would insure over the tax liens and not show the lien as an exception on the title policies. Proceeds of the sales would go to Sterling to pay down its senior loans. After the homes were sold, Friedman would purchase the rest of Sterling's loans. Friedman agreed to indemnify Ticor and Sterling against the tax lien. Eleven of the homes were sold pursuant to this agreement. Berkshire sold the other home for cash outside of escrow and misappropriated the funds.

Following the home sales, Friedman purchased Sterling's Land Loan, which was secured by the unbuilt portion of the development and the house that was sold by Berkshire. Friedman and Sterling released their trust deeds on the eleven homes sold under the workout agreement. Friedman foreclosed on the unbuilt portion of the development, and the IRS declined to exercise its rights of redemption. Friedman still retains the Land Loan deeds of trust, which encumber the lot and house improperly sold by Berkshire.

Subsequently, Friedman applied for a discharge of the tax lien. The IRS refused to release the lien, and Friedman filed this action. Friedman seeks a discharge of the tax lien encumbering the eleven homes sold under the workout agreement and the home sold by Berkshire.

STANDARDS OF REVIEW

"Whether the United States waived its sovereign immunity is a question of law reviewed de novo." Arford v. United States, 934 F.2d 229, 231 (9th Cir.1991) (emphasis deleted). Waivers of sovereign immunity must be strictly construed in favor of the government. See Campbell v. United States, 835 F.2d 193, 195 (9th Cir.1987). Interpretation of a statute also presents a question of law reviewed de novo. See Home Sav. Bank v. Gillam, 952 F.2d 1152, 1156 (9th Cir.1991).

DISCUSSION

First, we must determine whether the United States has waived its sovereign immunity to this action. This court has stated that "[i]n an action against the United States, in addition to statutory authority granting subject matter jurisdiction, there must be a waiver of sovereign immunity." Arford, 934 F.2d at 231. While, 28 U.S.C. Sec. 1340 provides statutory authority for subject matter jurisdiction over Friedman's claims, see Arford, 934 F.2d at 231, Friedman must still clear the second jurisdictional hurdle by pointing to a waiver of sovereign immunity before we can conclude that the district court had subject matter jurisdiction. See id.; Gilbert v. DaGrossa, 756 F.2d 1455, 1458 (9th Cir.1985).

Friedman argues that 28 U.S.C. Sec. 2410, 28 U.S.C. Sec. 2201, and 5 U.S.C. Sec. 702 waive sovereign immunity in this case. We disagree.

I.

First, Friedman argues that it can bring this action under 28 U.S.C. Sec. 2410. Section 2410 provides that "the United States may be named a party in any civil action or suit in any district court ... to quiet title to ... real or personal property on which the United States has or claims a mortgage or other lien." 28 U.S.C. Sec. 2410 (1993). On its face, it would appear that this statute permits Friedman to bring this claim for relief. The government contends, however, that Friedman does not have a sufficient interest in the property to bring this action. Moreover, there is some question as to whether this kind of action is cognizable under Sec. 2410.

In Shaw v. United States, 331 F.2d 493 (9th Cir.1964), this court dismissed an action to quiet title brought by the wife of a taxpayer against whom the IRS had filed a notice of tax lien. The court indicated that because the wife's complaint showed no invasion of any property interest of her own, she had failed to state a claim under Sec. 2410. Id. at 496-98. Thus, Shaw indicates that a party must have some "property interest of [its] own" to be able to bring a quiet title action under Sec. 2410.

Friedman argues that its interest in the various properties is sufficient. We agree in part and disagree in part. Under the stipulated facts, Friedman still holds a trust deed on the lot and home Berkshire sold for cash. Thus, Friedman has an interest of its own in this property that would permit it to bring an action to quiet title. Friedman also seeks to quiet title to the eleven homes sold under the workout agreement. However, Friedman has "no property interest of [its] own" in these properties. Accordingly, Sec. 2410 does not permit Friedman to bring an action to quiet title to the homes sold under the workout agreement. See id.; see also Raulerson v. United States, 786 F.2d 1090, 1091 (11th Cir.1986) (indicating that an action to quiet title under Sec. 2410 cannot be brought by a party that has forfeited its rights in the property); Commonwealth Land Title Ins. Co. v. United States, 759 F.Supp. 87, 92-94 (D.Conn.1991) (indicating that a title company did not have a sufficient interest in property it insured to bring a Sec. 2410 action).

Notwithstanding the fact that Friedman's interest in the home Berkshire sold for cash is probably sufficient to support an action under Sec. 2410, we conclude that Friedman's action is not cognizable under that section. This court has stated that Sec. 2410 permits "quiet title actions challenging the procedural aspects of tax liens, but not the merits of the underlying tax assessments." Arford, 934 F.2d at 232. Here, Friedman's claim is not easily classified as either. Friedman does not argue that any procedural violations occurred in connection with this lien. On the other hand, he does not challenge the merits of the assessment underlying the lien either. What he seeks is a declaration that the property is not encumbered by the tax lien because the lien is worthless. We conclude that such a claim simply does not fall within the scope of Sec. 2410.

This court has indicated that Sec. 2410 permits only claims that are procedural. See Elias v. Connett, 908 F.2d 521, 527 (9th Cir.1990) (stating that a "taxpayer may only contest the procedural validity of a tax lien" under Sec. 2410); see also Johnson v. United States, 990 F.2d 41, 43 (2nd Cir.1993) (indicating that Johnson's claim could be maintained under Sec. 2410 because it was procedural in nature). Moreover, the IRS has specifically provided a procedure for discharging a lien when the interest of the United States is valueless. See 26 U.S.C. Sec. 6325(b)(2)(B) (1993). Section 6325 permits the Secretary to release tax liens that are valueless. However, the section leaves the determination to the discretion of the Secretary. See United States v. Polk, 822 F.2d 871, 874 (9th Cir.1987). To permit a party to discharge a "valueless" lien in a quiet title action under Sec. 2410 would be contrary to the provisions of Sec. 6325(b)(2)(B) and would rob the Secretary of the discretion granted him by Congress. Cf. Polk, 822 F.2d...