Vereyken v. Annie's Place, Inc., 91-1174
| Decision Date | 22 July 1992 |
| Docket Number | No. 91-1174,91-1174 |
| Citation | 964 F.2d 593 |
| Parties | -1421, 92-1 USTC P 50,310 Francis J. VEREYKEN and Patricia M. Vereyken, Plaintiffs-Appellees, v. ANNIE'S PLACE, INC., State of Michigan, Defendants, United States of America, Internal Revenue Service, Defendant-Appellant. |
| Court | U.S. Court of Appeals — Sixth Circuit |
Richard B. Learman (argued and briefed), Bay City, Mich., Richard B. Learman, for plaintiffs-appellees.
Charles M. Greene, Gary R. Allen, Acting Chief (briefed), William S. Estabrook (argued), David A. Hubbert, U.S. Dept. of Justice, Appellate Section Tax Div., Washington, D.C., Michael Hluchaniuk, Asst. U.S. Atty., Office of the U.S. Atty., Bay City, Mich., Peter Sklarew, Trial Atty., Tax Div., U.S. Dept. of Justice, Washington, D.C., for defendant-appellant.
Before: KEITH and NORRIS, Circuit Judges; and JOHNSTONE, District Judge. *
The government appeals the order of the district court granting summary judgment to plaintiffs, Francis J. and Patricia M. Vereyken, in their action to quiet title to their real property as a result of the government's assertion of a federal tax lien against the property.
The Vereykens operated a restaurant in Bay City, Michigan, which in 1984 they sold on land contract to Annie's Place, Inc. The land contract vendee soon experienced financial difficulties and failed to pay employment taxes for the last quarter of 1985 and all of 1986, and federal tax liens were filed against the restaurant property. The vendee also fell behind in its payments under the land contract, and the Vereykens commenced an action in state court for forfeiture of the vendee's interest in the land contract. While they were aware of the federal tax liens, the Vereykens elected not to join the federal government as a party. On May 4, 1987, a "Judgment for Possession After Forfeiture of Land Contract" was entered in the state court by agreement of the Vereykens and Annie's Place. Under the judgment, the vendee was entitled to a ninety-day redemption.
On the last day of the redemption, the vendee filed a Chapter 11 bankruptcy petition in an attempt to reorganize the business. When this attempt failed, and the automatic stay was lifted by the bankruptcy court, the Vereykens obtained from the state court a writ of restitution authorizing them to retake possession of the property.
When the Vereykens failed to obtain from the government a voluntary discharge of tax liens, this action was filed in state court, naming the United States as a party along with Annie's Place and the State of Michigan, which had filed a state tax lien against the restaurant property. When Annie's Place and the State of Michigan failed to appear, default judgments were entered against them, and the government removed the cause to the federal district court. The only issue remaining before the district court, then, concerned the relative claims of the federal government and the Vereykens to the real property. The district court subsequently granted summary judgment to the Vereykens on that issue.
On appeal, the government first argues that the tax liens "attached to the taxpayer's [land contract vendee's] interest in the real property," but that, after the forfeiture of the vendee's land contract interest, the lien remained against the property because the Vereykens' "vendor's lien ... expired." As a general proposition of the law of real property, merger is said to take place when a greater and lesser estate coincide and meet in one person. The government contends that these conditions were met in the instant case.
Federal law governs the priority of a tax lien relative to other claims to property. Aquilino v. United States, 363 U.S. 509, 513-14, 80 S.Ct. 1277, 1280-81, 4 L.Ed.2d 1365 (1960). However, unless Congress has stated otherwise, state law determines what constitutes a property interest to which a federal tax lien may attach. United States v. Brosnan, 363 U.S. 237, 240, 80 S.Ct. 1108, 1110, 4 L.Ed.2d 1192 (1960).
The parties agree that in Michigan the vendor under a land contract for the sale of real property retains legal title to the real property subject to an equitable obligation to convey legal title to the vendee upon full payment of the purchase money. In such a transaction, the vendor retains the legal title as security for payment of the purchase price. The government refers to the vendor's interest as a "vendor's lien," but that is far from accurate since legal title is clearly a much greater estate than a lien:
It is well settled in this State [Michigan] that the vendee in a land contract is vested with the equitable title in the land, and that the legal title remains in the vendor and is held as security for the payment of the purchase price of the land, upon the payment of which the vendee is entitled to a conveyance of the legal title.
Barker v. Klingler, 302 Mich. 282, 4 N.W.2d 596, 599 (1942); see also Gilford v. Watkins, 342 Mich. 632, 70 N.W.2d 695 (1955).
The nature of the vendee's "equitable title" is analogous to the vendor holding the legal title in trust for the vendee pending full payment, and the vendee becoming in equity the owner of the real property to the extent of payments made. A creditor of the vendee can assert a claim against this "equity." But in the absence of the vendee having built up a sizeable equity as the result of substantial payments on the contract, that remedy holds little promise for the creditor, since his claim would be subject to the vendor's legal title. In this case, the government, as creditor of the vendee, found itself in a most unfavorable position because the vendee had failed to build up any equity.
And so, although the government may be correct in saying that its liens attached to the land contract interest of the vendee, the vendee's equitable title was in effect worthless in dollar terms since there was nothing to which the liens attached, except perhaps the vendee's right to a deed upon full payment. The government has never asserted that it was willing to pay off the land contract in order to obtain the vendee's equity of redemption. Undaunted by this apparently fatal weakness in its case, the government argues that its liens attached to the vendor's legal title. How its lien against the vendee's equitable title shifted over to the vendor's legal title is not made clear. Instead, the government asserts that the Vereykens' "vendor's lien" expired with the result that they lost their priority over the tax liens. While this may seem a clever argument at first blush, the fact remains that the government has been unable to establish how its liens attached to the vendor's legal title. Its argument about the competing priorities of its tax liens and a vendor's lien is relevant only to the vendee's equitable title, since that is the estate to which both would have attached. Thus even if we were to say that the Vereykens had a vendor's lien against the vendee's equitable title and that lien expired, that would only leave the government with the senior liens against the vendee's equitable title.
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...priority between competing interests is a question of federal law. Aquilino, supra, 363 U.S. at 514, 80 S.Ct. at 1281; Vereyken v. Annie's Place, Inc., 964 F.2d 593, 594, reh'g denied (6th Cir.1992); Tompkins, supra at 821. The primary rule of priority under federal law is that the first in......
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