Southern Bank of Lauderdale County v. I.R.S.

• Decision Date: 13 September 1985
• Docket Number: MID-STATE,84-7501,Nos. 84-7280,s. 84-7280
• Citation: 770 F.2d 1001
• Parties: -5952, 85-2 USTC P 9670 SOUTHERN BANK OF LAUDERDALE COUNTY, Plaintiff-Appellee, v. INTERNAL REVENUE SERVICE, United States of America, Defendants-Appellants.HOMES, INC., Plaintiff-Appellee, v. UNITED STATES of America, Defendant-Appellant.
• Court: U.S. Court of Appeals — Eleventh Circuit

Page 1001

770 F.2d 1001

56 A.F.T.R.2d 85-5952, 85-2 USTC P 9670

SOUTHERN BANK OF LAUDERDALE COUNTY, Plaintiff-Appellee, v. INTERNAL REVENUE SERVICE, United States of America,

Defendants-Appellants.

MID-STATE HOMES, INC., Plaintiff-Appellee, v. UNITED STATES of America, Defendant-Appellant.

Nos. 84-7280, 84-7501.

United States Court of Appeals, Eleventh Circuit.

Sept. 13, 1985.

Frank W. Donaldson, U.S. Atty., Caryl P. Privett, Asst. U.S. Atty., Birmingham, Ala., Glenn L. Archer, Jr., Michael L. Paup, Wynette J. Hewett, Steven I. Frahm, Asst. Atty. Gen., Tax Div., Dept. of Justice, Washington, D.C., for defendants-appellants.

John E. Higginbotham, Florence, Ala., William B. Tatum, Ford, Caldwell, Ford & Payne, Huntsville, Ala., for Southern Bank of Lauderdale County.

James M. Edwards, Copeland, Franco, Screws & Gill, Montgomery, Ala., for Mid-State Homes, Inc.

Appeals from the United States District Court for the Northern District of Alabama.

Before KRAVITCH and CLARK, Circuit Judges, and WRIGHT ^*, Senior Circuit Judge.

CLARK, Circuit Judge:

These two cases, which were consolidated for oral argument purposes, present questions about the federal tax lien and the notice provisions of 26 U.S.C. Sec. 7425(b). In both cases the district court granted summary judgment in favor of the appellees Southern Bank of Lauderdale County (Southern Bank) and Mid-State Homes, Inc. (Mid-State). For the reasons discussed below, we reverse.

I. FACTS

The facts in both cases are undisputed. The appellees, Southern Bank and Mid-State, obtained their respective interests in the property by either the assignment or execution of mortgages upon which the taxpayers were obligated. ¹ These mortgages were properly recorded. Thereafter, the Internal Revenue Service (IRS) made assessments against the taxpayers for unpaid taxes and properly filed notices of the federal tax liens pursuant to 26 U.S.C. Sec. 6323. ²

The taxpayers defaulted on their mortgages. Thereafter, Southern Bank and Mid-State conducted nonjudicial foreclosure sales in accordance with the power of sale contained in the mortgages. Both Southern Bank and Mid-State admit that they did not provide the United States with notice of the sales as set forth under 26 U.S.C. Sec. 7425. Nor did the United States consent to the sales. ³ Southern Bank and Mid- State were the purchasers of the property at the nonjudicial sales. ⁴

Recognizing that its initial foreclosure was ineffectual against the United States because of its failure to give notice, Mid-State foreclosed on the property approximately eleven months after the first foreclosure sale. ⁵ On this second occasion, however, Mid-State gave proper notice of the foreclosure sale to the United States pursuant to 26 U.S.C. Sec. 7425. Mid-State was the purchaser of the property at this second sale and thereafter recorded its foreclosure deed.

II. PROCEEDINGS IN THE DISTRICT COURT AND ARGUMENTS ON APPEAL

A. Southern Bank

Southern Bank filed its complaint seeking: (1) to quiet title to the property; (2) an injunction prohibiting the IRS from selling the property under its notice of levy; (3) a discharge of the tax lien; and (4) a determination that Southern Bank was the owner of the property with the rights of the IRS or any other interested party to be governed by the redemption provisions of the Code of Alabama. ⁶ Record, No. 84-7280 at 3, 6.

Southern Bank argues that under 26 U.S.C. Sec. 6321 the tax lien only applied to the interest the taxpayer held in the property prior to the foreclosure sale, that state law controlled the legal interest the taxpayer held in the property, and that federal law limited the tax lien to only that property interest. Because Alabama is a "title" state, which means that legal title passes to the mortgagee upon execution of the mortgage, Southern Bank argues that the only interest retained by the taxpayer prior to foreclosure was its equitable right of redemption. Thus, the tax lien only attached to this equitable right of the taxpayer, which was a right the taxpayer had to gain legal title by paying off the note secured by the mortgage. According to Southern Bank, the government's interest in the property, subsequent to the foreclosure sale, was only a statutory right of redemption. ⁷ Southern Bank concedes that because notice of the sale was not given to the IRS, the tax lien remained in effect to that extent.

The United States maintains that due to its lack of notice of the sale, its lien was undisturbed by the foreclosure. Because the sale extinguished Southern Bank's mortgage, the United States contends that its junior lien was automatically elevated to a first lien against the real estate acquired by the purchaser at the sale.

The district court concluded that Southern Bank had a better equitable and legal argument. The court observed:

Thus, the IRS lien could only attach to what the mortgagor had and could not leap ahead of Bank simply because Bank purchased at foreclosure. It would be unfair in the extreme to make a distinction here between foreclosure sales where a third party purchases and where the mortgagee purchases. The court must therefore conclude that, as to IRS, the nonjudicial foreclosure sale conducted by Bank on March 30, 1982 is a nullity. Legal title to the property in issue under the law of Alabama was held by Bank prior to the sale and continues to be held by Bank. The effect of this court's ruling is to place the parties in the same position vis-a-vis each other as they were in just prior to Bank's nonjudicial foreclosure sale. This means, of course, that the court disagrees with the Bank's contention that IRS only has a statutory right to redeem.

Southern Bank, 586 F.Supp. at 14 (emphasis in original).

B. Mid-State

Because the United States levied and seized possession of the subject property, Mid-State filed its complaint alleging that the United States wrongfully levied upon the property. Mid-State argues that 26 U.S.C. Sec. 7425 was unconstitutional as written or applied and that the procedures required under the statute had not been followed. Mid-State sought to enjoin the United States from enforcing its lien and sought to have the subject property returned. Record, No. 84-7501 at 32.

In finding in favor of Mid-State the court stated:

This Court has not changed its mind since it wrote Southern Bank, and therefore believes that Mid-State's second foreclosure was successful in cutting off U.S.A.'s tax lien, leaving U.S.A. with no more than a lien creditor's statutory right to redeem.

....

Based on the conclusions which this Court has reached there is no necessity for expressing an opinion on the question of the constitutionality of 26 U.S.C. Sec. 7425 or an opinion on the alleged failure of U.S.A. to comply with 26 U.S.C. Sec. 6331(a). These issues are mooted by the rationale of this Court.

Record, No. 84-7501 at 113, 114.

C. Arguments on Appeal

The parties raise similar arguments on appeal. The United States essentially argues that the district court erred when it concluded that "where a nonjudicial foreclosure sale was held without notice to the United States, the sale was a nullity insofar as the Government was concerned and the foreclosing mortgagee consequently retained a lien against the property that was superior to the federal tax liens." Appellant's Brief, No. 84-7501 at 8. It further contends that in Mid-State the district court erred when it treated the second sale as effective to extinguish the federal tax lien on the basis of its holding in Southern Bank. The United States takes the position that the court's holdings are contrary to the plain language of the statute, its interpretation by the courts, and its legislative history.

Southern Bank admits in its brief:

A federal tax lien attaches to the taxpayer's interest in property and becomes enforceable against the property whether his interests are extensive or limited. IRS also correctly asserts that state law controls in determining what interest the taxpayer has in the property, and that federal law determines whether a lien attached to the property and the priority of competing liens. Aquilino v. United States, 363 U.S. 509, 80 S.Ct. 1277, 4 L.Ed.2d 1365 (1960); United States v. Brosnan, 363 U.S. 237, 80 S.Ct. 1108, 4 L.Ed.2d 1192 (1960); United States v. Bess, 357 U.S. 51, 78 S.Ct. 1054, 2 L.Ed.2d 1135 (1958). There is no controversy as to these statements of law.

Appellee's Brief, No. 84-7280 at 5.

The appellees argue that 26 U.S.C. Sec. 7425 was only designed to protect the government's interest in property prior to a nonjudicial foreclosure if the I.R.S. was not given notice of the sale and that the protection continued because the I.R.S. lien remained after the sale as a lien junior to that of each appellee's lien. They urge that a failure to give notice should not create a "wind fall" or greater interest in the property than the United States held prior to foreclosure. Mid-State points out that "[t]here is nothing in the language of the statute or the legislative hsitory [sic] to suggest that Congress intended to leapfrog priorities. Instead, the clear directive of the statute is simply that the tax lien continues if notice of foreclosure is not given." Appellee's Brief, No. 84-7501 at 5. Both Mid-State and Southern Bank claim that under Alabama law the taxpayers only held an equitable right of redemption, and that this was the only interest to which the tax lien could attach. Thus, it is argued that to obtain title to the property the IRS must first make payment in full of the prior mortgage indebtedness. The appellees contend that if the government had been given notice before the foreclosure sales, it would have had to purchase the property at foreclosure for the full amount owed to each mortgagee in order to protect the tax lien and obtain any revenue for the government. To change the priorities because of lack of notice, it is urged, would be against the...