United States v. Boyd, 16537.

• Decision Date: 28 June 1957
• Docket Number: No. 16537.,16537.
• Citation: 246 F.2d 477
• Parties: UNITED STATES of America, Appellant, v. W. W. BOYD, Jr., et al., Appellees.
• Court: U.S. Court of Appeals — Fifth Circuit

246 F.2d 477 (1957)

UNITED STATES of America, Appellant, v. W. W. BOYD, Jr., et al., Appellees.

No. 16537.

United States Court of Appeals Fifth Circuit.

June 28, 1957.

Robert Coe, Lee A. Jackson, Frederic G. Rita, Ellis N. Slack, Attys., Dept. of Justice, Washington, D. C., Charles K. Rice, Asst. Atty. Gen., Thomas R. Ethridge, U. S. Atty., Euple Dozier, Asst. U. S. Atty., Oxford, Miss., for appellant.

Richard B. Booth, Aberdeen, Miss., Hugh A. Hopper, Corinth, Miss., for appellees.

Before BORAH, RIVES and BROWN, Circuit Judges.

JOHN R. BROWN, Circuit Judge.

The matter here presented concerns the extent and circumstances under which a non-judicial sale under a valid power to foreclose a mortgage lien superior to a Federal tax lien extinguishes or affects the Government lien or its rights to a Federal Court foreclosure or other protective decree.

The case was presented wholly on the pleadings and extended argument of counsel which there and here reduces the pertinent facts for our problem to this simple undisputed summary:

Boyd (Taxpayer) was the owner of the real property in Aberdeen, Mississippi. On December 1, 1952, there was filed for record a valid first mortgage deed of trust in favor of Prudential Life Insurance Company of America (Mortgagee) securing a debt of $9,000. Subsequently, on various dates between January 19, 1953 and October 22, 1953, assessment lists were received by the Collector which fixed the date of the Government's lien, Section 3671 of the 1939 Code, 26 U.S. C.A. § 3671 (see from 1954 Code, 26 U.S.C.A. § 6322), then applicable. And, on various dates between May 1, 1953 and April 7, 1954, Notices of Federal Tax Lien were filed for record for taxes, interest and penalties totaling $10,278.04. Nothing¹ further was apparently done to enforce its lien by the Government until the present action was filed May 28, 1956, under Section 7403, 1954 Code, 26 U.S. C.A. § 7403, then applicable (Section 3678 of 1939 Code), seeking foreclosure.

In this Government suit for foreclosure, all persons claiming liens were made parties, and the complaint prayed² that the Government liens be determined, enforced, and foreclosed as prior and paramount except — here very important — as to the lien of Prudential (Mortgagee).

The Mortgagee, in its answer filed June 21, 1956, set forth the fact, accepted by all parties, that the mortgage "* * * deed of trust is and was at the time of the filing of this suit in the process of being foreclosed, the date of the foreclosure sale having been set for June 22, 1956 * * *." It asserted what was acknowledged by the Government's prayer "that said deed of trust constitutes a prior lien to that lien claimed by * * *" the Government and then claimed further that the Mortgagee has "* * * every right to proceed with the foreclosure of said deed of trust * * * and it * * * will pay into court any surplus funds resulting from said foreclosure sale to await the further orders of this court."

Subsequently, by supplemental answer, September 21, 1956, the Mortgagee set forth the admitted fact that on June 22, 1956, the property was sold to Purchaser (Bradley Lumber) for $11,029.80, from which, after deducting principal, interest, and all charges, the balance remaining of $739.41 was paid into the registry of the Court for distribution by it.

The Court, by judgment entered October 22, 1956, decreed that the Government's liens were thereby recognized, enforced and impressed upon the property as prior and paramount to the interest of all parties other than Mortgagee and that the Government was authorized and permitted to redeem the property. While some language of the decretal findings³ would indicate that the Government now has lien superior to all, including the Purchaser at the non-judicial foreclosure sale, it is plain, from the express reservation of a right to redeem that the Court did, and meant to, hold that the mortgage foreclosure sale otherwise extinguished the Government's lien.

In the principal attack here that the Court erred in not decreeing a foreclosure and judicial sale, the Government asserts in its two-page argument, that the foreclosure of the mortgage did not affect⁴ the Government's liens in any manner as the United States was not a party to it and the buyer at the mortgage foreclosure sale took title subject to the lien which can be removed only as Federal laws permit. Receding somewhat from the extreme position that the Court must at all odds decree a foreclosure, the Government then asserts that if the cases urged⁵ are sound, there must at least have been a finding on evidence that the value of the equity over and above prior liens was not sufficient to realize anything of value for junior liens. It insists that the District Court's recognition of a right of redemption is no real substitute for the asserted statutory right of foreclosure since "the amount paid would have to be appropriated by Congress, obviously a cumbersome and troublesome business."

The Government, in brief and on argument, is vague as to just what the interest of the United States is in this property, or what would be sold or purchased at a Federal Court judicial foreclosure sale. It acknowledges, as it has to, both that the Mortgagee's lien is superior since first recorded,⁶ and that superiority is a naked empty thing unless those succeeding to the mortgagee by assignment, transfer, sale or foreclosure, likewise have an ownership superior to the inferior Federal Tax lien. But if, as apparently now contended, the Court was absolutely required to foreclose and order a judicial sale, there would be no "property and rights to property," Section 6321, of Taxpayer in this real estate unless it were first held that the Mortgagee's foreclosure under power of sale did not wipe out the mortgagor's (Taxpayer) interest as well as that of junior encumbrancers.

The Government meets this headon and takes the awesome position that when the Government files a Section⁷ 7403 suit to foreclose, the Court is inexorably compelled to foreclose, has no flexible equity power of adaptation and all procedures, valid under state law for judicial or non-judicial foreclosure of mortgages, fall under the weight of the National Sovereign's insatiable, relentless pursuit of its tax collection.

But we decline to accept what is thus in substance the major premise of the Government. For, as in the case of comparable actions brought by private persons to quiet title under 28 U.S.C.A. § 2410, we believe that, whatever procedural complexities there may be in invoking one or the other of these routes,⁸ once the matter is before the Court, Congress intended that the Court function with the full traditional flexibility of the Chancellor, United States v. Morrison, 5 Cir., 247 F.2d 285.

Indeed, broader language could hardly be suggested since the Court, Section 7403(c), is required to "* * * proceed to adjudicate all matters involved therein and finally determine the merits of all claims to and liens upon the property * * *." As though this were not enough, Congress, presumably conscious of the purpose of the change, amended the Act, 49 Stat. 1648, Sec. 802, to substitute the word "may" for "shall" in the predecessor to Section 7403, so that it now reads, note 7, supra, "* * * in all cases where a claim or interest of the United States therein is established, the Court may decree a sale of such property * * * and a distribution of the proceeds * * *."

Merely because the statute speaks in terms of foreclosure does not compel the court to use that remedy. If under controlling legal principles, the lien does not exist, if it has been lost, if the property is not that of the taxpayer, if the Federal tax lien is junior to undisputed prior liens which will exhaust the full value of the property, a decree of foreclosure would be neither appropriate nor effective. A court required by the express terms of the statute to adjudicate all matters, the merits of all claims to and liens upon the property and, in the event of a sale, distribute the proceeds in accordance with the findings respecting the interests of all parties and the United States (Section 7403(c), note 7, supra) has the full capacity, and corresponding duty, to assure that the liens and interests are effectually respected in accordance with the court's determination of validity, rank and priority.

Intertwined in the mistaken insistence that the procedural mechanics of Section 7403 compel a mandatory foreclosure, is the assertion that since the lien of the Government can be extinguished only by the means prescribed, a court is powerless to do anything except foreclose. This springs from Metropolitan Life Insurance Company v. United States, 6 Cir., 107 F.2d 311, certiorari denied 310 U.S. 630, 60 S.Ct. 978, 84 L.Ed. 1400. There, starting from the unsound premise that an action by a property owner to quiet title either under the predecessor of 28 U.S.C.A. § 2410 or the somewhat comparable provisions there pursued (Section 3679 of the 1939 Code now Section 7424) is one to extinguish the lien of the United States, rather than what it really is — a determination that a tax lien does not exist, has been extinguished, or is inferior in rank, the Sixth Circuit, by a divided court, affirmed the decree for want of jurisdiction to do anything except foreclose. The anomaly was that as purchasers from mortgagees of a prior recorded mortgage, the plaintiffs seeking relief by removal of the cloud on their title were held remediless while, at the same time, as a substantive matter, it was extremely doubtful that the Government had any real enforceable lien, certainly not prior to that of the assignor mortgagees. Add to that the fact that since, on such reasoning, the court is powerless to "extinquish" a Government lien — i. e., hold it inferior to another — the inevitable consequence is that with the court compelled to take a hands off attitude, the Government's tax...