Wadsworth v. Talmage
| Decision Date | 27 December 2018 |
| Docket Number | No. 17-35805,17-35805 |
| Citation | 911 F.3d 994 |
| Parties | John WADSWORTH, Individually and as Trustee for RBT Victim Recovery Trust; RBT Victim Recovery Trust, Plaintiffs-Appellants, v. Ronald B. TALMAGE and Annette C. Talmage, In Default as of 8/31/2017; RiverCliff Farm, Inc., an Oregon Corporation - In Default as of 1/26/2017; New Century Properties Ltd., In Default as of 8/31/2017, Defendants, and United States of America, Defendant-Appellee. |
| Court | U.S. Court of Appeals — Ninth Circuit |
William B. Ingram and Alan R. Houston, Strong & Hanni, Salt Lake City, Utah, for Plaintiffs-Appellants.
Randolph L. Hutter and Thomas J. Clark, Attorneys; Richard E. Zuckerman, Principal Deputy Assistant Attorney General; Tax Division, United States Department of Justice, Washington, D.C.; for Defendant-Appellee.
Before: William A. Fletcher, Jay S. Bybee, and Paul J. Watford, Circuit Judges.
ORDER CERTIFYING QUESTION TO THE SUPREME COURT OF OREGON
Pursuant to Oregon Revised Statute § 28.200, we respectfully certify the following question to the Oregon Supreme Court:
Under Oregon law, does a constructive trust arise at the moment of purchase of a property using fraudulently-obtained funds, or does it arise when a court orders that a constructive trust be imposed as a remedy?
We respectfully ask the Oregon Supreme Court to exercise its discretionary authority under Oregon's Uniform Certification of Questions of Law Act to accept and decide this question. See Or. Rev. Stat. §§ 28.200 – .255. The certified question of law would be determinative of a cause now pending in this court and it appears to this court that there is no controlling precedent in the decisions of the Oregon Supreme Court or the Oregon Court of Appeals. Id. § 28.200.
We begin by setting forth a "statement of all facts relevant to the question[ ] certified" to show "fully the nature of the controversy in which the question[ ] arose." Or. Rev. Stat. § 28.210(2).
The underlying case arises out of competing claims to real property known as the RiverCliff Property ("RiverCliff") in Corbett, Oregon, located in Multnomah County. Because this case was resolved in federal district court on a motion to dismiss, the factual background is based on the allegations in the complaint, which we assume to be true.
John Wadsworth and other members of the RBT Victim Recovery Trust (collectively, "the Trust") allege that Ronald Talmage, an investment manager, began fraudulently diverting his clients' funds in the 1990s as part of a Ponzi scheme. Members of the Trust entrusted Talmage with "over $55 million" between 2002 and 2015.
In 1997, Talmage and his first wife purchased RiverCliff for almost $1 million. The property was purchased with the proceeds of Talmage's Ponzi scheme. From 1998 to 2008, Talmage spent over $12.5 million of entirely stolen funds to improve the property. Talmage paid his first wife $1.5 million dollars in 2005 using money "stolen ... from ... Trust beneficiaries" to purchase her half-interest in RiverCliff after the couple divorced. Throughout this time, Talmage resided at RiverCliff.
Talmage and his current wife failed to pay federal income taxes for the tax years of 1998–2005 and 2007. The Internal Revenue Service filed notices of federal tax liens in Multnomah County on September 17, 2008; November 28, 2008; May 20, 2013; and January 31, 2014. The federal government ("Government") then brought an action in U.S. District Court in Oregon seeking "to foreclose its tax liens on" RiverCliff. United States v. RiverCliff Farm, Inc. , No. 3:16-cv-1248-SI, 2017 WL 3388172, at *2 (D. Or. Aug. 7, 2017). The Trust sought to intervene in the Government's foreclosure action, but intervention was denied. See United States v. River Cliff Farm, Inc. , No. 3:16-cv-1248-SI, 2016 WL 4582048, at *1 (D. Or. Sept. 2, 2016), reconsideration denied , 2016 WL 6662696 (Nov. 10, 2016).
The Trust then brought the present action to quiet title to RiverCliff as to the Government. The Trust's complaint contends that because Talmage "used wholly stolen funds" to obtain and improve RiverCliff, "he did not hold an enforceable or legitimate property interest" in the property. The Trust contends that the Government's federal tax liens therefore could not attach to RiverCliff under 26 U.S.C. § 6321, which authorizes liens on "all property and rights to property ... belonging to" a person who owes "back taxes." The Trust contends that it has either an exclusive or superior interest in RiverCliff under Oregon law as a resulting trust, as a constructive trust, or based on other equitable relief.
The Government moved to dismiss the quiet title claim under Federal Rule of Civil Procedure 12(b)(6) for failure to state a claim on which relief can be granted. The Government argued that Talmage had the property rights of any deed-holder in RiverCliff, including, for example, the right to exclude trespassers. It further argued that even assuming Talmage should be treated as holding voidable title based on the Trust's constructive trust, Talmage had the right to transfer the property to a bona fide purchaser under Or. Rev. Stat. § 72.4030(1). The Government argued that RiverCliff therefore "belonged" to Talmage within the meaning of 26 U.S.C. § 6321, and that a federal tax lien could attach. It argued that the Trust had, "at most," a claim that did not become choate until after the federal tax liens had attached. The Government argued its tax liens were therefore superior to any claims the Trust might have.
On August 1, 2017, the district court granted the Government's motion to dismiss under Rule 12(b)(6). It held that "the Trust's allegations do not show that the Trust's beneficiaries currently own the RiverCliff Property in either constructive or resulting trust under Oregon law." The court held that Talmage, by contrast, had acquired rights in RiverCliff under Oregon law because he "acquired title" and thereafter resided at RiverCliff, asserting "substantial control" over the property. The court concluded that under Oregon law even an embezzler subject to a constructive trust can transfer title to a bona fide purchaser (citing Tupper v. Roan , 349 Or. 211, 223, 243 P.3d 50 (2010) ) and can encumber the property (citing Evergreen W. Bus. Ctr., LLC v. Emmert , 354 Or. 790, 792, 805, 323 P.3d 250 (2014) ). Finally, the court held that even if a constructive trust existed or would exist in the future, the federal tax liens would still take priority because they had already attached to Talmage's interest in RiverCliff, while any claim to a trust had not. The Trust appealed.
The question in this case is whether federal tax liens could attach to Talmage's interest in RiverCliff while it was subject to a constructive trust. The answer turns on Oregon state law regarding constructive trusts. Under 26 U.S.C. § 6321 :
If any person liable to pay any tax neglects or refuses to pay the same after demand, the amount ... shall be a lien in favor of the United States upon all property and rights to property, whether real or personal, belonging to such person.
To determine whether property "belongs" to someone within the meaning of § 6321, a federal court must, first, "look ... to state law to determine what rights the taxpayer has in the property the Government seeks to reach," and then, second, "determine whether the taxpayer's state-delineated rights qualify as ‘property’ or ‘right to property’ within the compass of" 26 U.S.C. § 6321. Drye v. United States , 528 U.S. 49, 58, 120 S.Ct. 474, 145 L.Ed.2d 466 (1999). Section 6321 does not create property rights, "but merely attaches consequences, federally defined, to rights created under state law." United States v. Craft , 535 U.S. 274, 278, 122 S.Ct. 1414, 152 L.Ed.2d 437 (2002). "[I]n determining whether a federal taxpayer's state-law rights constitute ‘property’ or ‘rights to property,’ the important consideration is the breadth of the control the taxpayer could exercise over the property." Drye , 528 U.S. at 61, 120 S.Ct. 474 (internal alterations and citation omitted).
The Trust argues that its constructive trust in RiverCliff prevents the Government from obtaining a lien against the property. To prove a constructive trust under Oregon law, a plaintiff must show:
(1) "that property or a property interest that rightfully belongs to her was taken or obtained by someone else under circumstances that in some sense were wrongful or inequitable;" (2) "that the person who now possesses the property is not a bona fide purchaser for value and without notice;" and (3) by "strong, clear and convincing evidence, that the property in the hands of that person, i.e., the property upon which she seeks to impose a constructive trust, in fact is the very property that rightfully belongs to her, or is a product of or substitute for that property."
Tupper v. Roan , 349 Or. 211, 243 P.3d 50, 58 (2010) (en banc) (internal quotations omitted). Here, the Trust has plausibly pleaded that RiverCliff is the "product" of funds that rightfully belong to Trust members but that were taken by Talmage under "wrongful" circumstances. The Trust has thus plausibly pleaded that RiverCliff is subject to a constructive trust under Oregon law, with the Trust members as beneficiaries. The issue in this case becomes, then, what rights Oregon law affords to the beneficiary of a constructive trust in a case where the property is subject to a federal tax lien.
The rights of the legal title-holder, and of lienors such as the Government, depend on when the constructive trust arises. Under the laws of the several states, a constructive trust can arise either at the moment a purchase is made with the fraudulently-obtained funds, or at the moment a court imposes the trust as an equitable remedy. Under the majority rule, a trust arises automatically at the moment of purchase. See In re Leitner , 236...
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