Whelco Indus., Ltd. v. U.S., 3:05CV7141.

• Decision Date: 10 December 2007
• Docket Number: No. 3:05CV7141.,3:05CV7141.
• Citation: 526 F.Supp.2d 819
• Parties: WHELCO INDUSTRIAL, LTD., Plaintiff, v. UNITED STATES of America, Defendant.
• Court: U.S. District Court — Northern District of Ohio

526 F.Supp.2d 819

WHELCO INDUSTRIAL, LTD., Plaintiff, v. UNITED STATES of America, Defendant.

No. 3:05CV7141.

United States District Court, N.D. Ohio, Western Division.

December 10, 2007.

H. Buswell Roberts, Jr., Shumaker, Loop & Kendrick, Toledo, OH, for Plaintiff.

Holly Taft Sydlow, Office of the U.S. Attorney, Toledo, OH, Lydia Bottome Turanchik, Thomas P. Cole, United States Department, of Justice, Washington, DC, for Defendant.

ORDER

JAMES G. CARR, Chief Judge.

This is a quiet title action in which the plaintiff, Whelco Industrial, Inc. [Whelco] seeks to remove or invalidate several federal tax liens filed by the Internal Revenue Service. Whelco contends that the government's liens did not, have not, and cannot attach to its assets, and that it otherwise cannot be held accountable for the Whitney Electric Corporation's [Whitney] tax obligations. In making this argument Whelco has relied on Ohio law relating to successor corporations.

In response, the government principally claims that federal common law, not state law, controls the determination of whether Whelco is a successor to Whitney. As such, Whelco is responsible for Whitney's tax liabilities. The government also asserts that its notice of liens against Whitney could not be undone by a state court receivership because it was not a party to that proceeding.

I tried the case without a jury. Following submission of post-trial briefs, I found for the government [Doc. 39]. I based my decision, in which I accepted the government's assertion that federal common law rather that Ohio law controlled, in considerable part on my understanding of the importance of a uniformly operating system of federal tax collection.

Whelco has filed a motion to alter or amend the judgment and stay this court's execution of the judgment [Does. 41, 42]. In its motion to alter or amend, Whelco focuses primarily on precedents in which courts: 1) held that state law controlled issues related to quiet title actions, and 2) rejected uniformity as a significant policy interest warranting creation of federal common law.

For the reasons that follow, I grant plaintiffs motion to alter or amend. Nonetheless, reaching an issue that I did not have to reach in my earlier decision, I decide that issue in favor of the government and thus confirm entry of judgment in its favor.

Background

For several years Whitney repaired "electric motors, gear boxes, pumps, things that are used in heavy industry to create motion" in the Toledo, Ohio, and Fort Wayne, Indiana, areas. (Tr. at 113:2-4.) During the period pertinent to this suit, attorney Richard Farrar [Richard] was Whitney's sole owner and President.

National City Bank [National City] filed a financing statement perfecting its interest in Whitney's collateral on November 13, 2001. National City's lien extended to Whitney's accounts receivable, inventory, machinery, and equipment. Greenfield Commercial Credit, LLC [Greenfield], a factoring company, also filed a financing statement on March 13, 2002, thereby also perfecting its interest in Whitney's accounts and inventory.

On July 31, 2002, the IRS filed a notice of federal tax lien against Whitney for unpaid employment taxes for the fourth quarter of 2001 and first quarter of 2002; the first quarter of 2002 obligation remains unpaid. Additional notices followed on December 18, 2002, February 18, 2003, and January 20, 2004. When the IRS filed its liens, Whitney owed National City, a first lien holder, upwards of $550,000. Greenfield concurrently had a lien on all of Whitney's accounts receivable.

In August, 2002, an attorney from National City spoke with Michael Farrar [Michael], Richard's son, who was active in Whitney's management, about whether Michael would be interested in purchasing Whitney's assets. Michael expressed interest in such a purpose and in growing the business.

On September 30, 2002, Whitney ceased operations. Whelco, which Richard had incorporated shortly before that date, began operations on October 1, 2002. Michael was the President and owner of Whelco.

Also on October 1, 2002, Whelco entered into a lease with Whitney, whereby Whelco could use Whitney's machines, equipment, and other personal property. The lease imposed no obligation on Whelco to assume Whitney's debts or claim the proceeds of any of Whitney's uncollected accounts receivable. Whelco continued in essentially the same business as Whitney, and operated that business from the same premises and with the same employees. Though Michael opened a new bank account and instituted other changes, the business, in terms of where it was done, what was done, how it was done, why it was done, and who was doing it, remained substantially unaltered.

On October 11, 2002, National City filed a cognovit complaint in the Lucas County, Ohio, Court of Common Pleas against Whitney; the complaint asked the court to appoint a receiver for both Whitney and the 3607 Company, a real estate holding company (owned by Richard) which owned the building in which Whelco (and previously, Whitney) had its operations.

The Common Pleas Court entered cognovit judgment that day. It concurrently appointed attorney Ralph DeNune as receiver.

During the course of the receivership, DeNune had conversations with Gregory Yurich, an IRS representative. They discussed the possible sale of Whitney's assets and National City's lien priority. Though the IRS was not made and did not become a party to subsequent proceedings in the receivership action, it was aware of a potential sale of Whitney's assets.

On November 20, 2003, Michael entered into an agreement with DeNune to purchase Whitney's assets for $555,228.85. The price was set by National City. As a result of this transaction, National City's lien was discharged. In addition, Greenfield received $325,565.48 from Whitney's accounts receivable.¹

To finance the purchase, Michael received a $150,000 loan from George Ballas.² He also obtained financing from Crestmark Bank, for which he provided his personal guarantee and mortgaged the family residence. In the Asset Purchase Agreement, Michael specifically declined to assume any of Whitney's obligations or liabilities.

The Court of Common Pleas approved the sale in January, 2004. The Motion Confirming Sale provides that the "assets were sold free and clear of all liens and encumbrances."

On April 14, 2004, the IRS filed two notices of federal tax liens against Whelco as the alter ego/fraudulent transferee/nominee of Whitney. The IRS filed additional nominee liens against Whelco on April 27, 2004 and August 5, 2004. These led to the Service's collection of upwards of $105,000 of Whelco's receivables.

In, response to these actions, Whelco brought a quiet title action, which the government removed from the Lucas County Court of Common Pleas to this court. Whelco sought a declaration that the tax liens against Whitney could not attach to the assets Whelco purchased at the receivership sale, while the government aimed to show that Whelco was Whitney's successor/alter ego and as such was responsible for its unpaid taxes.

Following a nonjury trial and post-trial briefing, I entered judgment in favor of the United States. Because inconsistent state laws could lead to different collection outcomes in different states, I held that the federal "continuity of operations" test—rather than Ohio's "continuity of ownership" test—controlled. As a result, I held that the defendant's knowledge of the government's potential claim, coupled with the substantial continuity of the business's operations before and after the sale, made Whelco a successor to Whitney for the purposes of Whitney's tax liability. Whelco Indus., Ltd. v. U.S., 503 F.Supp.2d 906 (N.D.Ohio 2007).

On September 13, 2007, plaintiff filed its pending motion to alter or amend judgment and stay execution of the judgment. Although I conclude that plaintiff is correct that state law, not federal law, controls, I also conclude that the government correctly argues that its notice of liens against Whitney could not be undone by the state court receivership. Not having had to address that issue in my first opinion, I again find for the government and hold that the liens on assets formerly owned by Whitney remain in effect.

Discussion

Three situations justify altering or amending a judgment under Rule 59(e): "(1) a clear error of law; (2) newly discovered evidence; (3) an intervening change in controlling law; or (4) a need to prevent manifest injustice." Intera Corp. v. Henderson, 428 F.3d 605, 620 (6th Cir. 2005). A party must file a 59(e) motion within ten days of the court issuing its judgment. Id. at 611; Fed. R. Civ, Pro. 59(e).

Nine days after I issued my order denying Whelco's motion to quiet title, Whelco submitted the instant motion arguing that a clear error of law or a manifest injustice would result if I enforced the aforementioned order. Employing a slight change in tactics, Whelco now Argues that, because state law often controls actions to quiet title pursuant to 28 U.S.C. § 2410, state law should wholly control this case and that uniformity cannot justify the application of federal common law.

1. Application of State Law or Federal Common Law

A. Lien Cases

Part of Whelco's new arguments focuses on lien cases. The plaintiff now points to numerous situations in which state law decides whether the court should quiet title under 28 U.S.C. § 2410. First and foremost, plaintiff relies on the Supreme Court's decision in U.S. v. Brosnan, 363 U.S. 237, 80 S.Ct. 1108, 4 L.Ed.2d 1192 (1960). In that case, the Court held that state law governed the divestiture of federal tax liens, explaining that "the need for uniformity in this instance is outweighed by the severe dislocation to local property relationships which would result from our disregarding state procedures." Id. at 242, 80 S.Ct. 1108.

This holding, however, does not control the current case because the state law in question...