Yarmouth Commons Ass'n v. Pamela Norwood & United States

• Decision Date: 08 December 2017
• Docket Number: Case Number 16–12342
• Citation: 299 F.Supp.3d 862
• Parties: YARMOUTH COMMONS ASSOCIATION, Plaintiff, v. Pamela NORWOOD and United States of America, Internal Revenue Service, Defendants, and United States of America, Cross-claimant, v. Pamela Norwood, Cross-defendant, and United States of America, Counter-claimant, v. Pamela Norwood and Yarmouth Commons Association, Counter-defendants.
• Court: U.S. District Court — Eastern District of Michigan

299 F.Supp.3d 862

YARMOUTH COMMONS ASSOCIATION, Plaintiff,

v.Pamela NORWOOD and United States of America, Internal Revenue Service, Defendants,andUnited States of America, Cross-claimant,

v.Pamela Norwood, Cross-defendant,andUnited States of America, Counter-claimant,

v.Pamela Norwood and Yarmouth Commons Association, Counter-defendants.

Case Number 16–12342

United States District Court, E.D. Michigan, Southern Division.

Signed December 8, 2017

Benjamin J. Henry, Makower Abbate Guerra Wegner Vollmer PLLC, Farmington Hills, MI, John A. Stevens, Matheson, Parr, Troy, MI, for Plaintiff.

Pingping Zhang, Washington, DC, Kevin R. Erskine, U.S. Department of Justice, Detroit, MI, for Defendants.

OPINION AND ORDER GRANTING IN PART AND DENYING IN PART CROSS MOTIONS FOR SUMMARY JUDGMENT

DAVID M. LAWSON, United States District Judge

Under the Internal Revenue Code, the government is allowed to assert a lien against the property of a delinquent taxpayer, and sell that property to satisfy the unpaid tax obligation. The tax lien is perfected at the time it is assessed, and, with a few exceptions, no formal filing requirement is necessary for the government to obtain priority over other interests. This case presents the question whether the plaintiff condominium association's lien against the unit of a taxpayer-owner for unpaid condominium assessments satisfies one of those exceptions. The plain language of the Internal Revenue Code compels an affirmative answer, but only as to the amount of the assessments recorded when the IRS filed its public notice of the tax lien. The association's assessment lien will take priority over the tax lien for the amount of the assessment recorded, but not for related costs and attorney's fees, which had not been fixed at the time the IRS's tax lien notice was made part of the public record.

I.

The basic facts of the case are undisputed. Defendant Pamela Norwood bought a condominium unit, which was part of the Yarmouth Commons Condominiums. Her unit was conveyed to her by a warranty deed on March 29, 2015. That deed described the unit by reference to the "Restated Master Deed" for the condominium property, which was recorded on November 19, 2003. That master deed memorializes an agreement by "two-thirds of the co-owners and mortgagees of record" that "Yarmouth Commons Condominium...shall be held, conveyed,... encumbered,...or in any other manner utilized, subject to the provisions of the [Michigan Condominium Act], and to the covenants, conditions, restrictions, uses, limitations, and affirmative obligations set forth in this Master Deed and Exhibits ‘A’ and ‘B’ hereto."

Among other things, Exhibit A, the association's bylaws, memorialized the consent of the co-owners to provisions stating that "the Association may enforce collection of delinquent assessments by a suit at law for a money judgment or by foreclosure of the statutory lien that secures payment of assessments." Another provision states that "[e]ach Co-owner, and every other person who from time to time has any interest in the Project, shall be deemed to have granted to the Association the unqualified right to elect to foreclose the lien securing payment of assessments either by judicial action or by advertisement."

On September 1, 2015, plaintiff Yarmouth Commons Association assessed condominium association fees due from Norwood that added up to $1,490. Those amounts constituted expenses of the association and late fees from September 1, 2015 to January 10, 2016. On January 28, 2016, the Association recorded a notice of lien with the Register of Deeds for Macomb County, Michigan. The notice stated that the lien was in the amount of $1,490 for "unpaid assessments," but that amount was "exclusive of interest, costs, attorney fees and any future assessments which may become due."

On April 6, 2015, the IRS made an assessment of past due income taxes against Norwood for the 2009 tax year that Norwood failed to pay. However, notice of that assessment was not made public until February 8, 2016, when the IRS recorded a Notice of Federal Tax Lien with the Macomb County Register of Deeds against the property of Pamela Norwood for her federal income tax liability for 2009. That notice stated the amount of back taxes then due as $67,340.88.

There appears to have been some pre-suit contact between counsel for the parties about lien priorities. Included in those discussions was the Macomb County treasurer, to whom property taxes on the unit also were owed. However, they were unable to resolve that question, presumably because Norwood's equity in the unit was less than the total amount of the liens. The plaintiff then put the question to the test by filing suit in state court.

The government removed the case to this Court and filed a counter-claim against the condominium association, and a cross-claim against Norwood for payment of the past due taxes. Norwood failed to respond to the complaint, and the Court granted the government's motion for a default judgment on its cross-claim. The parties, except Norwood, stipulated that the assessment by Macomb County for unpaid property taxes had priority over the interests of the condominium association and the IRS, and the County was dismissed from the case. After a brief period of discovery, the parties filed their cross motions for summary judgment.

II.

The fact that the parties have filed cross motions for summary judgment does not automatically justify the conclusion that there are no facts in dispute. Parks v. LaFace Records , 329 F.3d 437, 444 (6th Cir. 2003) ("The fact that the parties have filed cross-motions for summary judgment does not mean, of course, that summary judgment for one side or the other is necessarily appropriate."). However, summary judgment is appropriate "if the movant shows that there is no genuine dispute as to any material fact and the movant is entitled to judgment as a matter of law." Fed. R. Civ. P. 56(a). A trial is required only when "there are any genuine factual issues that properly can be resolved only by a finder of fact because they may reasonably be resolved in favor of either party." Anderson v. Liberty Lobby, Inc. , 477 U.S. 242, 250, 106 S.Ct. 2505, 91 L.Ed.2d 202 (1986). The parties have not seriously contested the basic facts of the case on the question of priority. Where, as here, the material facts are mostly settled, and the question before the court is purely a legal one, the summary judgment procedure is well suited for resolution of the case. See Cincom Sys., Inc. v. Novelis Corp. , 581 F.3d 431, 435 (6th Cir. 2009).

A.

A person who fails to pay her taxes after the government makes a demand will have the amount of the tax become " ‘a lien in favor of the United States upon all property and rights to property, whether real or personal, belonging to such person.’ " Blachy v. Butcher , 221 F.3d 896, 905 (6th Cir. 2000) (quoting 26 U.S.C. § 6321 ). The property interests to which the tax lien attaches are created by state law, but " ‘federal law determines whether and to what extent those interests will be taxed.’ " Ibid. (quoting United States v. Irvine , 511 U.S. 224, 238, 114 S.Ct. 1473, 128 L.Ed.2d 168 (1994) ).

Moreover, "[t]he priority of a federal tax lien against competing claims is governed by federal law." Ibid. ; see also United States v. Dishman Indep. Oil, Inc. , 46 F.3d 523, 526 (6th Cir. 1995). And "[w]hen there is a competition between a federal tax lien and a state law lien, priority is determined by the general rule that ‘the first in time is the first in right.’ " In re Terwilliger's Catering Plus, Inc. , 911 F.2d 1168, 1176 (6th Cir. 1990) (quoting United States v. City of New Britain , 347 U.S. 81, 85, 74 S.Ct. 367, 98 L.Ed. 520 (1954) ).

Another general rule is that a "federal tax lien need not be filed to gain priority over other interests; it is perfected at the time the lien is assessed." Ibid. (citing 26 U.S.C. § 6322 ). However, the IRC creates an exception to that general rule, stating that a tax lien "shall not be valid as against any purchaser, holder of a security interest , mechanic's lienor, or judgment lien creditor until notice thereof which meets the requirements of subsection (f) has been filed by the Secretary." 26 U.S.C. § 6323(a) (emphasis added).

Section 6323(h) defines the term "security interest" as "any interest in property acquired by contract for the purpose of securing payment or performance of an obligation or indemnifying against loss or liability," and it then expands on that definition with the following criteria:

"A security interest exists at any time (A) if, at such time, the property is in existence and the interest has become protected under local law against a subsequent judgment lien arising out of an unsecured obligation, and (B) to the extent that, at such time, the holder has parted with money or money's worth."

26 U.S.C. § 6323(h)(1). Courts agree that a creditor relying on the security interest exception "must establish that its interest satisfies four conditions: (1) that the security interest was acquired by contract for the purpose of securing payment or performance of an obligation or indemnifying against loss; (2) that the property to which the security interest was to attach was in existence at the time the tax lien was filed; (3) that the security interest was, at the time of the tax lien filing, protected under state law against a judgment lien arising out of an unsecured obligation; and (4) that the holder of the security interest parted with money or money's worth." Litton Indus. Automation Sys., Inc. v. Nationwide Power Corp. , 106 F.3d 366, 368 (11th Cir. 1997) (quoting Haas v. Internal Revenue Serv. (In re Haas) , 31 F.3d 1081, 1085 (11th Cir. 1994) ).

Yarmouth Commons argues that (1) its lien is a "security interest" as defined in 26 U.S.C. § 6323(a), because it arose from a contractual agreement to pay assessments imposed on all condominium owners by the recorded master deed and the...