U.S. v. Bierbrauer, 90-5298

• Decision Date: 19 June 1991
• Docket Number: No. 90-5298,90-5298
• Citation: 936 F.2d 373
• Parties: -5050, 91-2 USTC P 50,331 UNITED STATES of America, Appellant, v. Cecil BIERBRAUER and Judy Bierbrauer, Appellees.
• Court: U.S. Court of Appeals — Eighth Circuit

Page 373

936 F.2d 373

68 A.F.T.R.2d 91-5050, 91-2 USTC P 50,331

UNITED STATES of America, Appellant, v. Cecil BIERBRAUER and Judy Bierbrauer, Appellees.

No. 90-5298.

United States Court of Appeals Eighth Circuit.

Submitted Feb. 11, 1991.

Decided June 19, 1991.

William Estabrook, Dept. of Justice, Washington, D.C. (Shirley Peterson, Asst. U.S. Atty. Gen., Gary Allen, Charles Brookhart and Rosemary Schrauth, Dept. of Justice, Washington, D.C., on brief), for appellant.

Stanley Mosio, St. Paul, for appellees.

Before LAY, Chief Judge and McMILLIAN and ARNOLD, Circuit Judges.

ARNOLD, Circuit Judge.

This appeal involves the United States' efforts to force the sale of a house occupied by a Minnesota couple in order to satisfy a tax debt owed by the husband. Title to the house, located at 17370 Hiawatha Beach Drive, Wyoming, Minnesota, is currently in the name of Judy Bierbrauer. However, in 1977, when Cecil Bierbrauer's tax delinquency accrued, ¹ the house was owned by both husband and wife as joint tenants. The question presented in this appeal is whether the District Court erred when it granted summary judgment in favor of the Bierbrauers in the government's foreclosure suit. We hold that it did; accordingly, we reverse and remand to the District Court with instructions to enter judgment in favor of the United States.

Section 7403 of the Internal Revenue Code authorizes a federal district court to order a sale of property in which a delinquent taxpayer has an interest in order to satisfy that taxpayer's debt. A district court may do so even though an innocent third party also has an interest in the property, so long as the third party receives compensation. 26 U.S.C. Sec. 7403(c); United States v. Rodgers, 461 U.S. 677, 693-94, 103 S.Ct. 2132, 2142-43, 76 L.Ed.2d 236 (1983).

It is of no help to the Bierbrauers that a conveyance on January 30, 1978, left the property solely in the name of Judy Bierbrauer. That conveyance, through a straw for nominal consideration, rendered Cecil Bierbrauer insolvent, by his own admission. A. 60. The transaction would normally be a fraudulent conveyance under Minnesota law. See Minn.Stat.Ann. Secs. 513.21, 513.23 (1945) (amended 1987 with no material change in substance, see Minn.Stat.Ann. Sec. 513.41 et seq. (1990)). In the government's cross-motion for summary judgment, it sought to have the conveyance set aside as fraudulent, returning title in the property to the status quo ante--a house and lot owned jointly by Cecil and Judy Bierbrauer.

The District Court assumed but did not decide that the conveyance was in fact fraudulent. Our resolution of the case requires that we do more. It is clear on the record before us that the conveyance was fraudulent as a matter of Minnesota law. The consideration for the conveyance was only one dollar. A. 53. Cecil Bierbrauer admitted that the conveyance left him with no significant assets. A. 60, 62. At the time of the transaction, the Bierbrauer Construction Corporation had failed to pay federal employment taxes for the last three quarters of 1977, a liability of $14,526.33. Thus, when Cecil relinquished his interest in the house, he became insolvent: "the present fair salable value of his assets [was] less than the amount ... required to pay his probable liability on his existing debts as they [became] absolute and matured." Minn.Stat.Ann. Sec. 513.21 (1945).

The District Court noted that under the Minnesota Homestead Statute, Minn.Stat.Ann. Sec. 510.01 et seq. (1990), the 1978 conveyance could not be set aside as fraudulent by ordinary creditors. Nonetheless, it continued, the Supreme Court in United States v. Rodgers, supra, and this Court in United States v. Pilla, 711 F.2d 94 (1983), made clear that federal law is superior to Minnesota's homestead law. The 1978 conveyance may be disregarded to satisfy the United States' tax lien, even if it could not be set aside by other creditors. Civil No. 4-87-946, Order at 3-4 (D.Minn. February 7, 1990). This statement of the law is clearly correct. In the words of the Supreme Court, "the use of the power granted by Sec. 7403 is not the act of an ordinary creditor, but the exercise of a sovereign prerogative, ... ultimately grounded in the constitutional mandate to 'lay and collect taxes.' " United States v. Rodgers, 461 U.S. at 697, 103 S.Ct. at 2144.

We disagree, however, with the next step of the District Court's analysis. The Court decided not to allow the government to satisfy its tax lien by foreclosing on the Bierbrauers' home, believing that its equitable discretion should be exercised in favor of Judy Bierbrauer, the non-delinquent co-owner: "[T]he government's interest in satisfying this particular tax lien is outweighed by the likely prejudice to Judy Bierbrauer, both in personal dislocation costs and the inherent indignity and inequity of being removed from one's home." Order at 6. Although it is true that district courts have some equitable discretion in Sec. 7403 proceedings, the Rodgers case restricts the exercise of that discretion to a "fairly limited set of considerations." 461 U.S. at 709-10, 103 S.Ct. at 2150-51. We think the District Court erred as a matter of law in its application of the Rodgers factors to the Bierbrauers' situation.

In Rodgers, the Supreme Court listed four factors to be considered in Sec. 7403 proceedings involving property held jointly by a delinquent taxpayer and a non-liable third party. First, a court should consider "the extent to which the Government's financial interests would be prejudiced if it were relegated to a forced sale of the partial interest actually liable for the delinquent taxes." Sale of the partial interest may be practically impossible. Or sale of the partial interest may net far less than the market value of the interest if the property were sold as a whole--so much less that the government would be unable to satisfy its tax lien. In either of these situations, the government has a considerable interest in a forced sale of the entire property. Second, a court should consider whether the third party has a "legally recognized expectation" (leaving aside the Sec. 7403 proceeding) that the third party's separate property would not be subject to a forced sale by the delinquent taxpayer or that person's creditors. Third, a court should consider the possibility of undercompensation to the third party, as well as the extent of personal dislocation costs. Finally, a court should compare the character and value of the interests in the property. Whether or not a third party has a possessory interest merits some consideration. And if the non-liable third party has a greater possessory or fee interest than the delinquent taxpayer, so that a forced sale would net the government only a fraction of the value of the property, there may be little reason to allow the sale. 461 U.S. at 710-11, 103...