U.S. Bank v. U.S. Internal Revenue Serv.
| Decision Date | 01 March 2013 |
| Docket Number | CV 12-78-M-DWM |
| Parties | U.S. BANK, Plaintiff, v. UNITED STATES INTERNAL REVENUE SERVICE, Defendant. UNITED STATES INTERNAL REVENUE SERVICE, Counterclaim Plaintiff, v. U.S. BANK, RANDY C. HOLLAND, a/k/a R. C. HOLLAND, and DONNA L. HOLLAND, Counterclaim Defendants. |
| Court | U.S. District Court — District of Montana |
This is a declaratory judgment action initiated by U.S. Bank to establish priority of lien on a single-family residence located at 212 Fawn Trail in Flathead County (approximately five miles south of Whitefish). The United States, properparty defendant on behalf of the United States Internal Revenue Service, answered, contesting the priority of U.S. Bank's lien, and brought counterclaims against U.S. Bank, Randy Holland, Donna Holland, and American Homestead Mortgage (American Homestead), asserting priority of lien, fraudulent transfer, and right to judgment and foreclosure. The Court set the matter on an expedited trial calendar and the parties cross-moved for summary judgment. Those motions (docs. 50, 69), Ms. Holland's motions to dismiss the counterclaim (docs. 30, 48), and a motion for default judgment against American Homestead (doc. 68) are now pending before the Court.
In February 1999, Randy and Donna Holland purchased the subject property when they moved to the Flathead from Billings. In December 2003, the couple filed a declaration of homestead on the subject property. In early 2004, Mr. Holland filed for bankruptcy with Ms. Holland listed as a joint debtor. Mr. Holland filed for bankruptcy because he was having trouble with bills and it was difficult for the couple to make ends meet. The Holland's bankruptcy was eventually dismissed because it was determined they could take care of their debts without discharge in bankruptcy.
The Hollands' financial woes continued after their bankruptcy petition wasdismissed, however. After moving to the Flathead, Mr. Holland started We Care Cleanup Services, a clean-up and contracting business for which he acted as sole proprietor. Mr. Holland fell behind on his business tax liabilities beginning with the payment due for the third-quarter of 2005, and the IRS assessed the unpaid amount. Mr. Holland's business taxes remained in arrears, resulting in seven additional assessments by the IRS. Mr. Holland also fell behind on his personal income taxes, which led to three further assessments against him by the IRS.
The IRS attached liens to the subject property to notify other creditors of Mr. Holland's debts. In compliance with statute, the IRS recorded a Notice of Federal Tax Lien with the Clerk and Recorder for Flathead County for each of its assessments against Mr. Holland. One such lien was unique in that it named the taxpayer as "Donna L. Holland as nominee for Randy C. Holland." All others name "R. C. Holland" or "Randy C. Holland" as the taxpayer subject to the lien.
Ms. Holland first realized Mr. Holland's tax problems in 2005 when he began to receive tax notices in the mail. The couple cased filing joint personal income tax returns in 2005 out of concern over Mr. Holland's tax issues. The IRS levied on Ms. Holland's bank account in 2007 because of Mr. Holland's delinquent taxes.
The Hollands, with the assistance of a local attorney, executed a plan toattempt to insulate Ms. Holland's interest in the subject property from Mr. Holland's tax problems.1 On March 27, 2007, Mr. Holland transferred his interest in the subject property to Ms. Holland via quitclaim deed. At the same time, the Hollands executed a real estate agreement. The agreement specified Ms. Holland would pay Mr. Holland $10 immediately for his interest in the subject property, coupled with her promise to sell the property to a third-party and remit half of the net proceeds to Mr. Holland by April 2, 2012 or appraise the property and pay half the value to Mr. Holland by that date. Under the agreement, Ms. Holland assumed responsibility for the mortgage and taxes and gained title to full use and occupancy of the subject property. The agreement further specified Mr. Holland may continue to use and occupy the subject property at Ms. Holland's discretion so long as he paid rent to Ms. Holland, equal to one-half the cost of utilities, repairs, improvements, and the monthly mortgage payment.
When Mr. Holland quitclaimed his interest to Ms. Holland, she actually paid him $10 for his interest in the subject property, pursuant to the agreement. Ms. Holland never sold the subject property or fulfilled her promise to pay per theagreement, however. Mr. Holland and Ms. Holland lived together on the subject property from the time of the agreement until October 1, 2010, when they separated and Ms. Holland left the property. The couple's divorce was finalized and the marriage dissolved September 8, 2011. Mr. Holland remained on the property until June 1, 2012, on which date he vacated and Ms. Holland moved back in.
While living together on the property, Mr. Holland paid expenses associated with the subject property. Mr. Holland continued to live on the property and operate his business there until June 2012. An IRS investigation revealed Mr. Holland ran his business on the subject property and paid utility bills and rent for the property while he lived there.
In 2010 the Hollands decided to refinance the property to get a better interest rate on their mortgage. They first approached American Homestead2 and were declined because the lender and title company discovered tax liens on the property. The Hollands tried again with the same company, and on January 25, 2010, the Hollands successfully refinanced the subject property with a loan from American Homestead in the amount of $191,928.00. The loan was secured via adeed of trust filed January 29, 2010. The deed of trust was signed and notarized by both Randy and Donna Holland.
At the time of the 2010 refinancing, the subject property was appraised at a value of $223,000. The approximate balance of the refinanced mortgage on the subject property is $183,000. Approximately $30,000 in equity proceeds from the refinance were paid to the Hollands. Ms. Holland attempted to discharge the tax liens but was unsuccessful, so she and Mr. Holland reinvested the equity proceeds in renovations to the subject property. As of December 31, 2012, Mr. Holland's total balance of outstanding federal tax liabilities, including penalties and interest, was $129,012.95.
The IRS and Mr. Holland have filed a stipulation to judgment. (Doc. 59.) The stipulation declares judgment is proper as to Mr. Holland's debt to the United States in the amount of $130,790.50, less credits subject to proof, plus interest and other statutory additions that have accrued since December 31, 2012. U.S. Bank does not dispute reducing Mr. Holland's tax liability to judgment. Other than entry of this stipulation, Mr. Holland has failed to appear and defaulted.
A court examines the contents of a stipulation and considers the nature of the case before determining its force and effect. Vuitton et Fils, S.A. v. J. YoungEnterprises, Inc., 609 F.2d 1335, 1337 (9th Cir. 1979). Because all parties with interests adverse to Mr. Holland consent to the entry of judgment, the Court determines and adjudges he is indebted to the United States in the amount of $129,012.953, less any additional credits according to proof, plus interest and other statutory additions that have accrued since December 31, 2012.
American Homestead is a subsidiary of U.S. Bank. Because of its failure to plead or otherwise defend, the Clerk of Court entered notice of default against American Homestead. The government then moved the Court for default judgment against American Homestead. Before resolution of the government's motion, American Homestead stipulated to entry of judgment. (Doc. 80.)
"The . . . decision whether to enter a default judgment is a discretionary one." Aldabe v. Aldabe, 616 F.2d 1089, 1092 (9th Cir. 1980). Under Fed. R. Civ. P. 55(b), once the Clerk of Court has entered default as to a party, the party seeking relief may move to enter default judgment. Entry of default judgment is only appropriate where "the adversary process has been halted because of anessentially unresponsive party." H.F. Livermore Corp. v. Aktiengesellschaft Gebruder Loepfe, 432 F.2d 689, 691 (D.C. Cir. 1970). Here, American Homestead and the United States are not adversaries. American Homestead transferred to U.S. Bank all of its interest in the subject property prior to the start of this litigation. U.S. Bank purchased the Hollands' refinanced mortgage from American Homestead on January 27, 2010 and began servicing the loan March 1, 2010.
The government argues default judgment is warranted in consideration of the factors the Ninth Circuit identified in Eitel v. McCool. 782 F.2d 1470 (9th Cir. 1986). These factors are:
(1) the possibility of prejudice to the plaintiff; (2) the merits of plaintiff's substantive claim; (3) the sufficiency of the complaint; (4) the sum of money at stake in the action; (5) the possibility of a dispute concerning material facts; (6) whether the default was due to excusable neglect; and (7) the strong policy underlying the Federal Rules of Civil Procedure favoring decision on the merits.
Id. at 1471-72. Even in light of these factors and the consent to entry of judgment against American Homestead, default judgment against American Homestead is not warranted. The United States' contentions applying the Eitel factors are stated in a conclusory manner. The government fails to identify an adverse relationship between the parties giving rise to grounds for judgment. The government arguesAmerican Homestead is "a potential lienholder" but does not explain that conclusion, given the transfer of all of their interest in the subject property prior to the start of this litigation.
Indeed, without an...
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