Smith v. United States

• Decision Date: 07 March 2014
• Docket Number: CIVIL ACTION NO. 3:11-CV-01996 (VLB)
• Court: U.S. District Court — District of Connecticut
• Parties: DYANE V. SMITH, Plaintiff, v. UNITED STATES OF AMERICA, Defendant. UNITED STATES O F AMERICA, Counterclaim Plaintiff, v. DAVID R. SMITH, DYANE V. SMITH, ARGENT MORTGAGE COMPANY, LLC, JOWDY AND JOWDY, and TOWN OF REDDING, Counterclaim Defendants.

DYANE V. SMITH, Plaintiff, v. UNITED STATES OF AMERICA, Defendant.

UNITED STATES O F AMERICA, Counterclaim Plaintiff, v. DAVID R. SMITH, DYANE V. SMITH, ARGENT MORTGAGE COMPANY, LLC,JOWDY AND JOWDY, and TOWN OF REDDING, Counterclaim Defendants.

CIVIL ACTION NO. 3:11-CV-01996 (VLB)

UNITED STATES DISTRICT COURT DISTRICT OF CONNECTICUT

March 7, 2014

MEMORANDUM OF DECISION GRANTING IN PART AND DENYING IN PART

PLAINTIFF'S [DKT. 47] MOTION FOR SUMMARY JUDGMENT AND GRANTING IN

PART AND DENYING IN PART DEFENDANT'S [DKT. 48]

CROSS-MOTION FOR SUMMARY JUDGMENT

I. Introduction

The Plaintiff and Counterclaim Defendant, Dyane V. Smith (hereinafter the "Plaintiff"), filed an action to quiet title against the Defendant and Counterclaim Plaintiff, the United States of America (hereinafter the "Defendant"), pursuant to 26 U.S.C. § 2409(a) and Conn. Gen. Stat. § 47-31 and to remove a federal tax lienon property located at 24 Ridgewood Drive in Redding, Connecticut (the "Property"). The Defendant counterclaimed to foreclose on the Property. The Plaintiff moved for summary judgment pursuant to Fed. R. Civ. P. 56(a), and the Defendant cross-moved for summary judgment pursuant to Fed. R. Civ. P. 56(a). For the reasons that follow, the Plaintiff's motion for summary judgment in GRANTED IN PART and DENIED IN PART, and the Defendant's cross-motion for summary judgment is GRANTED IN PART and DENIED IN PART.

II. Background

The Plaintiff is a natural person residing in Redding, Connecticut. [Dkt. 47-6, Local Rule 56(A)(1) Statement in Support of Plaintiff's Motion for Summary Judgment, ¶ 1; Dkt. 48-6, Local Rule 56(a)(2) Statement, Response to Plaintiff's Local Rule 56(a)(1) Statement, ¶ 1]. The Defendant is the Government of the United States of America, acting through its agency, the Internal Revenue Service. [Dkt. 47-6, ¶ 2; Dkt. 48-6, ¶ 2]. On June 2, 1993, the Plaintiff and the Counterclaim Defendant David R. Smith ("Smith"), the Plaintiff's ex-husband, acquired title to the Property by warranty deed recorded on the Redding land records on July 28, 1993 in volume 178, pages 250-251. [Dkt. 47-6, ¶ 4; Dkt. 48-6, ¶ 4].

However, on January 1, 2000, Smith moved out of the residence and began residing at 84 North Salem Drive, Ridgefield, Connecticut, taking with him his financial records as well. [Dkt. 47-2, Plaintiff's Affidavit, ¶ 7]. On January 12, 2001, Smith initiated a contested dissolution of marriage in the Danbury Superior Court in Connecticut. [Dkt. 47-6, ¶ 5; Dkt. 48-6, ¶ 5]. From the commencement ofthe divorce proceeding, Smith filed his income taxes as "married, filing separately," including income tax returns due to be filed in 2001, 2002, and 2003. [Dkt. 47-6, ¶¶ 6, 8; Dkt. 48-6, ¶ 6]. Unbeknown to the Plaintiff, Smith did not file a timely tax return for 2000 or 2001; instead, he filed those returns on February 2, 2003 on a form 4340 for 1040 taxes. [Dkt. 48-6, ¶ 6; Dkt. 48-4, Defendant's Exhibit 1, Form 4340 for David R. Smith for 1040 taxes the tax period ended December 31, 2000; Dkt. 48-5, Defendant's Exhibit 2, Form 4340 for David R. Smith for 1040 taxes the tax period ended December 31, 2001].

In early August 2001, while the divorce action was still pending, a lis pendens was recorded by the Plaintiff on the Property pursuant to Connecticut law and recorded in the Redding land records in volume 251, pages 949-950. [Dkt. 47-6, ¶ 7; Dkt. 48-6, ¶ 7]. On March 3, 2003, a delegate of the Secretary of the Treasury made an assessment against Smith for 1040 taxes for the tax period ending December 31, 2000 in the amount of $95,304, and on March 10, 2003 another assessment was made for the tax period ending December 31, 2001 in the amount of $32,970. [Dkt. 47-6, ¶ 9; Dkt. 48-6; ¶ 9; Dkt. 48-4; Dkt. 48-5].

On July 15, 2003, the Regional Family Trial Court issued a Judgment of Dissolution after a full hearing, dissolving the marriage of the Plaintiff and Smith. [Dkt. 47-6, ¶ 11; Dkt. 48-6, ¶ 11; Dkt. 47-8, Plaintiff's Exhibit 4]. Article 10 of the Memorandum of Decision related to the dissolution judgment stated: "[b]y judicial decree, [Smith's] interest in the [Property] shall be transferred to the [Plaintiff], and she shall be responsible for the first mortgage. She shall hold [Smith] harmless and indemnified of the same. [The Plaintiff] shall beresponsible for recording a certified copy of the dissolution of marriage judgment on the Redding Land Records." [Dkt. 47-8, p. 41, ¶ 10]. Article 11 stated that Smith "is ordered to pay" $125,000 towards the Plaintiff's legal fees and $65,500 for their minor child's legal fees "due to his repeated contempt of court, the total lack of credibility of his testimony regarding the couple's finances, his manipulation of family assets to put them beyond the reach of the court, his repeated failures to comply with requests for the production of financial documents, and his deliberate and intentional violation of the automatic orders that prohibit the creation of debt during the course of dissolution proceedings." [Id. at p. 42, ¶ 11(a) and (c)]. The same article also provides that Smith "borrowed against the 401K in the amount of $50,000. He has also paid his mother $60,000, all without court order." [Id. at p. 42, ¶ 11]. Finally, Article 13 provided that

[the Plaintiff] shall be only responsible for those liabilities as reflected on her financial affidavit in her name solely. [Smith] shall be responsible for all debts on his financial affidavit, as well as all debts in his name for which he could be liable, which are not yet reflected as debts on his financial affidavit, particularly those pertaining to taxes. [Smith] shall hold [the Plaintiff] indemnified and harmless for the debts the court has ordered him liable. This provision is in lieu of additional spousal support and is intended to be non-dischargeable in bankruptcy.

[Id. at p. 45, ¶ 13]. Accordingly, on August 14, 2003, a certified order by the Superior Court conveying all rights and interests in the Property to the Plaintiff was issued pursuant to Conn. Gen. Stat. § 46b-81(a), and was received for record by the Town of Redding on August 20, 2003 and recorded in the land records in volume 294, page 72. [Dkt. 47-8, Plaintiff's Exhibit 5, Certified Order]. By August20, 2003, the Plaintiff received no notice of the assessments made against Smith or the existence of any lien, nor did she receive a certificate of delinquency. [Dkt. 47-2, ¶ 22]. Accordingly, the Plaintiff did not appeal the judgment in her divorce action. [Id. at ¶ 18].

On September 15, 2003, a Notice of Federal Tax Lien was recorded on the Redding land records in volume 296, page 211, against Smith in the amounts of $49,789.92 and $13,508.96 for the tax years 2000 and 2001, respectively, for a total of $63,298.88. [Dkt. 47-4, Plaintiff's Exhibit 6, Notice of Federal Tax Lien]. The notice also lists Smith's residence as 84 N. Salem Rd., Ridgefield, CT 06877, not at the Property. [Id.].

On January 21, 2005, the Plaintiff entered into a mortgage contract with Argent Mortgage Company, LLC ("Argent"), in the principal amount of $359,200, and on January 26, 2005, a Commitment of Title Insurance letter was issued by Connecticut Attorneys Title Insurance Company ("CATIC") to the insured and Argent evidencing clear title to the property. [Dkt. 47-4, Plaintiff's Exhibit 7]. On January 26, 2005, the Argent mortgage was recorded on the Redding land records. [Dkt. 47-6, ¶ 20; Dkt. 48-6, ¶ 20].

The Plaintiff avers that she only became aware of the existence of the lien in July 2009 when she conducted a title search for the Property as study practice for the bar exam. [Dkt. 47-2, ¶ 25]. Yet, on March 12, 2009, CATIC reissued a Commitment for Title Insurance, which included in an attached schedule, the details of the federal tax lien on the Property. [Dkt. 47-4, Plaintiff's Exhibit 9, Commitment for Title Insurance Letter]. The Plaintiff avers that this letter was inresponse to her concern that a lien existed on the Property. She alleges that after discovering the lien, she contacted CATIC and First American Title Insurers to question them regarding the lien, but that both assured her that she had clear title to the Property and that the federal lien did not attach to the Property under Connecticut law. [Dkt. 47-2, ¶¶ 25-26].

Nearly two years later on May 9, 2011, John R. Mikalchus, an IRS staff Attorney wrote an internal memorandum to Donald Angotta, Revenue Officer, regarding whether "a transferee notice of federal tax lien should be filed against property that was transferred to the taxpayer's ex-wife pursuant to the divorce decree." [Dkt. 47-3, Plaintiff's Exhibit 10, IRS Memorandum]. The memorandum cites the relevant history discussed above and also states that "[o]n January 21, 2005, Dyane refinanced the property for $359,200 with Argent Mortgage recording a lien on the property. Dyane's closing attorney informed her that the Connecticut Attorneys Title Insurance Company issued a title insurance policy on the property to the lender indicating that the title was clear." [Id.]. "On May 5, 2010, Mortgagesmith, LLC conveyed the property back to Dyane. Property records indicate that [the Property] has been appraised at $759,200, while www.zillow.com estimates the value at $573,000. In the meantime, the IRS has placed David into currently not collectible status." [Id.]. The memorandum goes on to state that "[t]he revenue officer has determined that, at the time of the transfer, the property was worth approximately $517,000 . . . [and t]he revenue officer has examined all liens recorded against the property and determined that the only encumbrance was a mortgage recorded on April 28, 1997 by Savings Institute bank & Trust inthe amount of $380,000." [Id.]. In a footnote to the provision related to the mortgage amount, the memorandum states that "[w]ith six years of payments on this mortgage, the balance would presumably have been reduced to less than $380,000 at the time of the transfer. A...