U.S. v. Rotherham

• Decision Date: 11 January 1988
• Docket Number: No. 87-1796,87-1796
• Citation: 836 F.2d 359
• Parties: -485, 88-1 USTC P 9135, 5 UCC Rep.Serv.2d 745 UNITED STATES of America, Plaintiff-Appellee, v. Patrick D. ROTHERHAM, Defendant-Appellant.
• Court: U.S. Court of Appeals — Seventh Circuit

Page 359

836 F.2d 359

61 A.F.T.R.2d 88-485, 88-1 USTC P 9135, 5

UCC Rep.Serv.2d 745

UNITED STATES of America, Plaintiff-Appellee, v. Patrick D. ROTHERHAM, Defendant-Appellant.

No. 87-1796.

United States Court of Appeals Seventh Circuit.

Argued Dec. 7, 1987.

Decided Jan. 11, 1988.

Mariann Rogge-Strubing, Pogge-Strubing Law Office, Springfield, Ill., for defendant-appellant.

Kenneth W. Rosenberg, Appellate Sec., Tax Div., Dept. of Justice, Washington, D.C., for plaintiff-appellee.

Before CUMMINGS, CUDAHY and MANION, Circuit Judges.

CUDAHY, Circuit Judge.

This appeal involves competing claims to a 1979 Excalibur automobile. Appellant Patrick Rotherham claims he has a security interest in the car that should have priority over the government's tax liens. The Internal Revenue Service (the "IRS"), not surprisingly, disagrees. The district court found for the government. We affirm.

I.

The factual setting is rather complex. We will only discuss those facts relevant to this appeal. The central character is Robert Edwards. In 1973, Edwards' mother conveyed some farmland to her son, retaining a life estate. In 1977, Mrs. Edwards passed away; Robert thereafter owned the land in fee simple. In 1980, the land was sold for $375,000. In December 1980, Edwards used $38,353 of the proceeds to buy a 1979 silver and black Excalibur automobile, the heart of this litigation. He placed title in the name of Bryan Briggs as trustee.

Unfortunately for Edwards, his mother's estate owed federal estate taxes of over $70,000. The estate failed to pay the tax when due. Under 26 U.S.C. Sec. 6324(a)(2) (1982), ¹ the tax was owed by Edwards and a lien automatically attached to the land. When the land was sold, a "like lien" attached to all Edwards' remaining property so, he could not avoid the estate tax simply by transferring the land. Id.

Meanwhile, Edwards was running into more tax trouble on another front. In June 1981, the IRS assessed federal income tax, interest and penalties against Edwards. The IRS alleged an unpaid balance of almost $8,000 in 1978, 1979 and 1980 income taxes. On January 12, 1982, the government mailed Edwards notice of a federal income tax lien under 26 U.S.C. Sec. 6321 (1982). ² On January 24, the IRS filed notice of the lien with the Coles County Recorder of Deeds, pursuant to 26 U.S.C. Sec. 6323 (1982). ³

On February 12, Edwards, realizing his precious automobile was threatened by these liens, had Briggs transfer title to Edith Henry, Edwards' companion and roommate. Henry paid nothing for the vehicle; in fact, she did not consider herself owner of the car. Edwards retained possession and held the only set of keys. Edwards remained the principal user of the vehicle. He also continued to insure the car. The only incident of ownership not in Edwards was the title.

At this point Rotherham, the appellant, entered the picture. Some time prior to May 12, 1982, Rotherham was contacted by Mervin Beal, an attorney who had represented Edwards in obtaining several loans in the past. Beal was a longtime acquaintance of Rotherham. On May 12, Rotherham met with Edwards, Henry and Beal, and Rotherham made an $8,000 loan. Although Henry initially received the cash, she apparently passed it on to Edwards and never knew the amount of the loan. Rotherham believed he was making a loan to both Edwards and Henry.

In exchange for the money, Rotherham attempted to take a security interest in the Excalibur. Henry signed a blank piece of paper, which was later filled in to resemble a promissory note. ⁴ She also assigned title to Rotherham to secure the debt. Rotherham did not immediately file any record of this assignment with the Illinois Secretary of State.

On August 12, 1982, the IRS seized the car from Edwards. On August 13, Rotherham contacted the government and demanded release of the car to him. The IRS declined his request because he presented no evidence that he owned the car. Only at that point, the day after the seizure, did Rotherham file notice of his interest in the Excalibur with the Secretary of State. He applied for transfer of title to him as "owner" of the vehicle. The transfer was approved on August 24, twelve days after the seizure.

In 1984, the government brought this action asking the court to order foreclosure of the tax liens. Rotherham, still claiming an interest in the car, was named a defendant. After hearing testimony from the principal players, the district court found for the IRS, holding that notice of the income tax lien was adequate to bind Rotherham and that, in any event, the government prevailed with respect to both liens because Rotherham perfected his security interest, if at all, only after the IRS seized the car. We agree on both points and therefore affirm.

II.

The mechanics of the statutes governing income tax liens and estate tax "like liens" differ slightly. For clarity's sake, we discuss each item in turn, even though much of the income tax lien analysis applies equally to the estate tax lien.

The priority system of the federal income tax lien provisions is fairly simple. Section 6321 gives the government a lien against "all property and rights to property ... belonging to" the taxpayer. 26 U.S.C. Sec. 6321; see supra p. 361 n. 2. The lien attaches to "every interest in property that a taxpayer might have." United States v. National Bank of Commerce, 472 U.S. 713, 720, 105 S.Ct. 2919, 2924, 86 L.Ed.2d 565 (1985). We look to state law to determine the extent of the taxpayer's property interest. See United States v. Rodgers, 461 U.S. 677, 683, 103 S.Ct. 2132, 2137, 76 L.Ed.2d 236 (1983); United States v. Bess, 357 U.S. 51, 55, 78 S.Ct. 1054, 1057, 2 L.Ed.2d 1135 (1958); see also Avco Delta Corp. Canada Ltd. v. United States, 459 F.2d 436, 440 (7th Cir.1972).

Once state law determines the taxpayer's property interest, federal law governs the consequences of that determination. Specifically, under section 6323(a), the IRS must file notice of the tax lien or its interest may be defeated by the "holder of a security interest." 26 U.S.C. Sec. 6323(a); see supra p. 361 n. 3. For purposes of both income tax liens and estate tax liens, the "holder of a security interest" is defined as one who has a prior choate security interest protected under local law against a subsequent judgment lien. 26 U.S.C. Sec. 6323(h)(1) (1982). ⁵ It is worth noting that where the taxpayer has an interest in the property and the government files notice that complies, in form and content, with section 6323's requirements, that notice "shall be valid notwithstanding any other provision of law regarding form or content of a notice of lien." 26 U.S.C. Sec. 6323(f)(3) (1982).

The IRS filed its notice of tax lien on January 23, 1982. Rotherham's security interest attached, if at all, on May 12, 1982, almost four months later. Assuming the security interest attached, ⁶ and accepting for the moment appellant's argument that under Illinois law only attachment is necessary to prevail over a subsequent judgment lienholder, ⁷ appellant still loses if the car belonged to Edwards and the form and content of the notice met the statutory requirements.

Understanding this, appellant argues that the car belonged to Henry. The district court disagreed, and we will only reverse its factual findings if they are clearly erroneous. Fed.R.Civ.P. 52(a); see Anderson v. City of Bessemer City, 470 U.S. 564, 573, 105 S.Ct. 1504, 1511, 84 L.Ed.2d 518 (1985); Bartsh v. Northwest Airlines, Inc., 831 F.2d 1297, 1306 (7th Cir.1987). Under Illinois law, title is prima facie evidence of ownership. Ill.Rev.Stat. ch. 95 1/2, para. 3-107(c) (1985). The district court found that there was sufficient evidence to override that presumption. United States v. Edwards, No. 84-2055, slip op. at 6 (C.D.Ill. Apr. 9, 1987). Edwards paid for the car, insured the car, had the only keys to the car, retained possession of the car at all relevant times and transferred title to Henry for no consideration shortly after receiving notice of the tax lien. Edwards testified that he transferred title to Henry because "there was tax problems; and Brian Briggs said I should kick this title around at the time." Record at 21. In fact, Henry specifically disclaimed any ownership interest in the car. Record at 53-54. These facts are uncontroverted. They more than amply support the court's finding that Edwards owned the car.

Rotherham, however, argues that he never had notice that Edwards was the car's true owner. There are two answers to this contention. First, under section 6323(f)(3), where notice is properly filed it is valid "notwithstanding any other provision of law" governing the adequacy of notice. In other words, a filing that meets the tax lien statute's requirements is sufficient constructive notice regardless of any actual notice problems. Whether the filing gave actual notice to Rotherham is irrelevant; he is still bound by the tax lien.

Further, the district court found that "Rotherham had enough information to tie Edwards to the car." Edwards, slip op. at 7. This conclusion is based on weighing the credibility of conflicting testimony. We will not reject the finding unless clearly erroneous. "Where there are two permissible views of the evidence, the factfinder's choice between them cannot be clearly erroneous." Anderson, 470 U.S. at 574, 105 S.Ct. at 1512. The district court's conclusion finds support in the record. Rotherham entered into this transaction after being contacted by Edwards' attorney, Mervin Beal. Rotherham knew that Edwards, as well as Henry, wanted the money. Presumably Rotherham and Edwards set the amount of the loan, since Henry never knew the exact terms of the deal. Rotherham was present when Henry signed blank pieces of paper to be filled in by Edwards' attorney. He may have known Edwards insured the car. See Record at 92. Finally, he testified that when payment was overdue, he attempted to contact Edwards. Record at 107....