Progressive v. United States
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Progressive v. United States, (1st Cir. 1996).
Opinion
USCA1 Opinion
UNITED STATES COURT OF APPEALS UNITED STATES COURT OF APPEALS
FOR THE FIRST CIRCUIT FOR THE FIRST CIRCUIT
____________________
No. 95-1712
PROGRESSIVE CONSUMERS FEDERAL CREDIT UNION,
Plaintiff, Appellant,
v.
UNITED STATES OF AMERICA,
Defendant, Appellee.
____________________
APPEAL FROM THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF MASSACHUSETTS
[Hon. Reginald C. Lindsay, U.S. District Judge] ___________________
____________________
Before
Boudin, Circuit Judge, _____________
Bownes, Senior Circuit Judge, ____________________
and Stahl, Circuit Judge. _____________
____________________
Stephen M. Sheehy, with whom Kaye, Fialkow, Richmond & ___________________ ___________________________
Rothstein were on brief for appellant. _________
Kevin M. Brown, Attorney, with whom Donald K. Stern, United ______________ _______________
States Attorney, Loretta C. Argrett, Assistant Attorney General, __________________
Gary R. Allen, and William S. Estabrook, Attorneys, Tax Division, _____________ ____________________
Department of Justice, were on brief for appellee.
____________________
March 19, 1996
____________________
BOWNES, Senior Circuit Judge. On October 8, BOWNES, Senior Circuit Judge. ____________________
1993, Progressive Consumer Federal Credit Union
("Progressive"), plaintiff-appellant, filed a complaint
against the Internal Revenue Service ("the government"),
defendant-appellee, in the Land Court Department of the Trial
Court of Plymouth County, Commonwealth of Massachusetts.
Progressive sought a declaration that its mortgage had
priority over properly recorded federal tax liens. The
government filed a notice of removal pursuant to 28 U.S.C.
1444, removing the action to the United States District Court
for the District of Massachusetts. The district court
entered a memorandum and order granting the cross-motion of
the United States for summary judgment on May 26, 1995,
holding that Progressive's mortgage was not entitled to
priority over the federal tax liens under the Massachusetts
common law doctrines of equitable subrogation or unjust
enrichment.
The mortgage at issue is secured by real property
located in Marshfield, Massachusetts. In 1987, as owners of
the property, Jeremiah and Deborah Folkard ("the Folkards")
executed a $150,000.00 mortgage note which was properly
recorded in favor of the Miles Standish Federal Credit Union
("MSFCU"). Between 1988 and 1990, the government recorded
six notices of tax liens on the Folkards' property for unpaid
federal taxes. The total amount of the liens, exclusive of
-2- 2
interest accrued since recording, was $94,560.93. In 1990,
the Folkards refinanced their mortgage debt, then
$130,905.55, with MSFCU, executing a new note and mortgage to
secure a debt of $142,000.00. At the time of this
transaction, MSFCU was presumably unaware of the existing tax
liens. The 1987 mortgage was discharged at the moment the
new mortgage was recorded on November 26, 1990. This
resulted in priority of the federal tax liens, because of
their recording dates, over the new mortgage. On October 19,
1992, MSFCU assigned its interest in the 1990 note and
mortgage to Progressive. The record does not reflect when
Progressive became aware of the record priority of the
federal tax liens over its mortgage. I. JURISDICTION I. JURISDICTION ____________
The threshold issue to be decided in this case,
whether the district court properly exercised subject-matter
jurisdiction over Progressive's claim, was raised for the
first time on appeal. The government argues that the
district court lacked jurisdiction on two grounds: (1) the
government has not waived its sovereign immunity and
therefore cannot be sued; and (2) the Declaratory Judgment
Act, 28 U.S.C. 2201(a), specifically bars the relief
requested.1 Lack of subject-matter jurisdiction can be
____________________
1. The district court had prima facie jurisdiction to hear _____ _____
Progressive's claim because it involves issues of federal tax
liens and taxation. See 28 U.S.C. 1331, 1340; see also ___ ___ ____
United States v. Brosnan, 363 U.S. 237, 240 (1960); United _________________________ ______
States v. Coson, 286 F.2d 453, 455-56 (9th Cir. 1961). _______________
-3- 3
raised at any point during litigation. There can be no doubt
of our power and duty to decide the issue. See Bender v. ___ _________
Williamsport Area School Dist., 475 U.S. 534
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USCA1 Opinion
UNITED STATES COURT OF APPEALS UNITED STATES COURT OF APPEALS
FOR THE FIRST CIRCUIT FOR THE FIRST CIRCUIT
____________________
No. 95-1712
PROGRESSIVE CONSUMERS FEDERAL CREDIT UNION,
Plaintiff, Appellant,
v.
UNITED STATES OF AMERICA,
Defendant, Appellee.
____________________
APPEAL FROM THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF MASSACHUSETTS
[Hon. Reginald C. Lindsay, U.S. District Judge] ___________________
____________________
Before
Boudin, Circuit Judge, _____________
Bownes, Senior Circuit Judge, ____________________
and Stahl, Circuit Judge. _____________
____________________
Stephen M. Sheehy, with whom Kaye, Fialkow, Richmond & ___________________ ___________________________
Rothstein were on brief for appellant. _________
Kevin M. Brown, Attorney, with whom Donald K. Stern, United ______________ _______________
States Attorney, Loretta C. Argrett, Assistant Attorney General, __________________
Gary R. Allen, and William S. Estabrook, Attorneys, Tax Division, _____________ ____________________
Department of Justice, were on brief for appellee.
____________________
March 19, 1996
____________________
BOWNES, Senior Circuit Judge. On October 8, BOWNES, Senior Circuit Judge. ____________________
1993, Progressive Consumer Federal Credit Union
("Progressive"), plaintiff-appellant, filed a complaint
against the Internal Revenue Service ("the government"),
defendant-appellee, in the Land Court Department of the Trial
Court of Plymouth County, Commonwealth of Massachusetts.
Progressive sought a declaration that its mortgage had
priority over properly recorded federal tax liens. The
government filed a notice of removal pursuant to 28 U.S.C.
1444, removing the action to the United States District Court
for the District of Massachusetts. The district court
entered a memorandum and order granting the cross-motion of
the United States for summary judgment on May 26, 1995,
holding that Progressive's mortgage was not entitled to
priority over the federal tax liens under the Massachusetts
common law doctrines of equitable subrogation or unjust
enrichment.
The mortgage at issue is secured by real property
located in Marshfield, Massachusetts. In 1987, as owners of
the property, Jeremiah and Deborah Folkard ("the Folkards")
executed a $150,000.00 mortgage note which was properly
recorded in favor of the Miles Standish Federal Credit Union
("MSFCU"). Between 1988 and 1990, the government recorded
six notices of tax liens on the Folkards' property for unpaid
federal taxes. The total amount of the liens, exclusive of
-2- 2
interest accrued since recording, was $94,560.93. In 1990,
the Folkards refinanced their mortgage debt, then
$130,905.55, with MSFCU, executing a new note and mortgage to
secure a debt of $142,000.00. At the time of this
transaction, MSFCU was presumably unaware of the existing tax
liens. The 1987 mortgage was discharged at the moment the
new mortgage was recorded on November 26, 1990. This
resulted in priority of the federal tax liens, because of
their recording dates, over the new mortgage. On October 19,
1992, MSFCU assigned its interest in the 1990 note and
mortgage to Progressive. The record does not reflect when
Progressive became aware of the record priority of the
federal tax liens over its mortgage. I. JURISDICTION I. JURISDICTION ____________
The threshold issue to be decided in this case,
whether the district court properly exercised subject-matter
jurisdiction over Progressive's claim, was raised for the
first time on appeal. The government argues that the
district court lacked jurisdiction on two grounds: (1) the
government has not waived its sovereign immunity and
therefore cannot be sued; and (2) the Declaratory Judgment
Act, 28 U.S.C. 2201(a), specifically bars the relief
requested.1 Lack of subject-matter jurisdiction can be
____________________
1. The district court had prima facie jurisdiction to hear _____ _____
Progressive's claim because it involves issues of federal tax
liens and taxation. See 28 U.S.C. 1331, 1340; see also ___ ___ ____
United States v. Brosnan, 363 U.S. 237, 240 (1960); United _________________________ ______
States v. Coson, 286 F.2d 453, 455-56 (9th Cir. 1961). _______________
-3- 3
raised at any point during litigation. There can be no doubt
of our power and duty to decide the issue. See Bender v. ___ _________
Williamsport Area School Dist., 475 U.S. 534, 541 (1986); ________________________________
Wells Real Estate v. Greater Lowell Bd. of Realtors, 850 F.2d ___________________________________________________
803, 813 (1st Cir. 1988).
A. Waiver of Sovereign Immunity A. Waiver of Sovereign Immunity ____________________________
It has long been established that the United States
is not subject to suit without a waiver of sovereign
immunity, and that any such waiver is to be strictly
construed. Nickerson v. United States, 513 F.2d 31, 32-33 ___________________________
(1st Cir. 1975). The government correctly argues that
Progressive wrongly relies on the Declaratory Judgment Act
("the Act"), 28 U.S.C. 2201(a), to constitute a waiver of
sovereign immunity because the Act "neither provides nor
denies a jurisdictional basis for actions under federal law,
but merely defines the scope of available declaratory
relief." McCarthy v. Marshall, 723 F.2d 1034, 1037 (1st Cir. ____________________
1983). Title 28 U.S.C. 2410(a)(1) provides the only basis
for finding a waiver of sovereign immunity in this case.2
____________________
2. In relevant part, 28 U.S.C. 2410 provides:
2410. Actions affecting property on
which United States has lien
(a) Under the conditions prescribed in
this section and section 1444 of this
title for the protection of the United
States, the United States may be named a
party in any civil action or suit in any
district court, or in any State court
-4- 4
Under section 2410, the government waives its
sovereign immunity in both quiet title and foreclosure
actions. See 28 U.S.C. 2410(a)(1), (2). A party ___
bringing a fore-closure under this section, however, must
seek a judicial sale of the underlying property. 28 U.S.C.
2410(c). We begin by discussing whether Progressive's claim
of priority constitutes a quiet title action within the
meaning of 28 U.S.C. 2410(a)(1).
The Scope of Quiet Title Actions Under The Scope of Quiet Title Actions Under _______________________________________
28 U.S.C. 2410(a)(1) 28 U.S.C. 2410(a)(1) ______________________
The government contends that Progressive's claim
does not fall within the coverage of section 2410(a)(1)
because its claim of priority is not a quiet title action
within the meaning of the statute. It follows, argues the
government, that because no judicial sale has taken place,
there can be no waiver of sovereign immunity and hence
Progressive cannot maintain its cause of action. We disagree
for the reasons that follow.
____________________
having jurisdiction of the subject mat-
ter--
(1) to quiet title to,
. . .
real or personal property on which the
United States has or claims a mortgage or
other lien.
-5- 5
Section 2410(a)(1) has never been read to
incorporate the formalistic distinctions state law pleading
rules. United States v. Coson, 286 F.2d 453, 457 (9th Cir. _______________________
1961). In Coson, the Ninth Circuit held that "[i]t is plain _____
that the words 'quiet title' . . . are not intended to refer
to a suit to quiet title in the limited sense in which that
term is sometimes used . . . but that as used in the section
here referred to it comprehends a suit to remove a cloud upon
the title of a plaintiff." Id. Both the text and the ___
history of section 2410 support this view. The quiet title
provision was inserted by amendment to the predecessor
statute, following a recommendation by the Attorney General
of the United States (future Justice Jackson). The heart of
the recommendation stated:
[U]nder existing law there is no
provision whereby the owner of real
estate may clear his title to such real
estate of the cloud of a Government
mortgage or lien . . . . In many
instances persons acting in good faith
have purchased real estate without
knowledge of the Government lien or in
the belief that the lien had been
extinguished . . . . It appears that
justice and fair dealing would require
that a method be provided to clear real
estate titles of questionable or
valueless Government liens.
H.R. Rep. No. 1191, 77th Cong., 1st Sess. 2 (1941); S. Rep.
No. 1646, 77th Cong., 2d Sess. 2 (1942).
The government points out that, under Massachusetts
law, a plaintiff must have both actual possession and legal
-6- 6
title to maintain a quiet title action, see MacNeil Bros. Co. ___ _________________
v. Realty Co. of Boston, Inc., 131 N.E.2d 178 (Mass. 1956 _______________________________
(citing cases)), and suggests that the contours of the state
law cause of action should guide our interpretation of
section 2410(a)(1), particularly where the state law is
consistent with federal common law (as the government argues
it is here). That is, the government argues that Congress
intended to waive sovereign immunity only in those cases that
would traditionally have been termed "quiet title" actions;
because Progressive did not bring and could not have brought
such an action,3 we should deem this case to be outside the
scope of section 2410(a)(1).
If, in substance, the relief the plaintiff sought
here--a declaration of the priority of Progressive's mortgage
over the government's tax lien--is congruent with the relief
available in a quiet title suit, it would frustrate
congressional intent to block plaintiff's access to relief.
Congress, after all, was concerned not with the niceties of
common law pleading, but with practical problems facing
owners whose property was encumbered by government liens.
What label the state has attached to the cause of action is a
helpful but not determinative guide to the proper
____________________
3. As mortgagee, Progressive holds legal title to the
property, see J&W Wall Sys., Inc. v. Shawmut First Bank & ___ _______________________________________________
Trust Co., 594 N.E.2d 859, 860 (Mass. 1992), but it is not in _________
possession.
-7- 7
interpretation of the federal statute. See Harrell v. United ___ _________________
States, 13 F.3d 232, 235 (7th Cir. 1993). ______
The government, however, contends that the relief
that Progressive seeks would not have been available in a
quiet title action. Progressive does not seek to remove the
government's lien as invalid, but rather to establish the
priority of its own mortgage over the concededly valid
federal tax lien. Such relief would not have been available
in a traditional quiet title action, only in a foreclosure
action, where valid but junior liens are extinguished in
favor of a senior lien. It follows, argues the government,
that because no judicial sale has taken place, see 2410(c), ___
there can be no waiver of sovereign immunity.
A careful reading of the authorities, however, does
not support the government's narrow portrayal of the relief
available to quiet title plaintiffs. The government
principally relies on Kadson v. G.W. Zierden Landscaping, _____________________________________
Inc., 541 F. Supp. 991 (D. Md. 1982), aff'd sub nom. Kadson ____ ______________ ______
v. United States, 707 F.2d 820 (4th Cir. 1983). In Kadson, _________________ ______
suits were brought by tax sale purchasers to foreclose all
equities of redemption in properties on which the United
States held tax liens. The district court held that the
suits were more properly characterized as foreclosure actions
than quiet title actions and that judicial sale was required
-8- 8
in order for sovereign immunity to be waived. Id. at 995- __
96.
Unlike the plaintiffs in Kadson, Progressive seeks ______
only a determination of priority between competing liens; it
never initiated a foreclosure action and did not seek to
extinguish the federal lien. The Kadson court cited United ______ ______
States v. Morrison, 247 F.2d 285, 289 (5th Cir. 1957), for ___________________
the proposition that "priorities among valid interests are
the subject of foreclosure suits," whereas "the alleged
invalidity of adverse interests are the subjects of quiet
title actions." Kadson, 541 F. Supp. at 995. This, however, ______
does not tell the whole story of the Morrison opinion, in ________
which the Fifth Circuit explained that the "relief sought [in
section 2410(a)(1) claims], as traditional to equity as the
woolsack, is the judicial determination of the validity and ____________
rank of the competing liens." Id. (emphasis added). The ____________________________ ___
court pointed out that it was an "unsound premise" to hold
that a quiet title action "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." Id. (emphasis added). ______________________ ___
Similarly, in Estate of Johnson, 836 F.2d 940 (5th Cir. __________________
1988), the court rejected the government's contention that
foreclosure is the only relief available where lien
priorities are in dispute. It explained:
-9- 9
[W]e think that section 2410, an integral
part of the Judicial Code rather than an
administrative mechanism of the tax
structure, establishes a specific
jurisdiction for these suits as bills to
quiet title or for foreclosure of the
private lien. The jurisdiction does not
depend on the specific relief sought,
[e.g.] foreclosure. Rather it rests on
the existence of the traditional
controversy in which a private party
asserts an ownership [interest] which is
superior to the claimed lien of the
United States government. (Quoting United ______
States ______
v. Morrison, 247 F.2d 285 (5th Cir. ____________
1957).
836 F.2d at 945.
Other courts have adopted this logic. In
Brightwell v. United States, 805 F. Supp. 1464 (S.D. Ind. ____________________________
1992), the court reasoned:
[While] [t]raditionally, actions to quiet
title have sought determinations of who
owns particular property, . . . [u]nder
federal law, the definition is somewhat
broader; a party may maintain a quiet
title action against the United States
when the government asserts that a
federal tax lien exists against the
property, 28 U.S.C. 2410(a), and thus
lien priority disputes have been
considered "quiet title" actions [for the
purposes of section 2410].
805 F. Supp. at 1469 (citing McEndree v. Wilson, 774 F. Supp. __________________
1292, 1295-96 (D. Colo. 1991)). Moreover, while a priority
claim of the sort raised by Progressive has not yet been
decided by this Circuit, we have held and reaffirm today that
section 2410(a)(1) controversies encompass disputes
concerning both the "validity and priority of liens," as
-10- 10
distinguished from actions seeking "their extinguishment in a
manner not permitted by the statutes." Remis v. United _________________
States, 273 F.2d 293, 294 (1st Cir. 1960). ______
These cases undercut the government's contention
that a quiet title action is appropriate under section
2410(a)(1) only where the plaintiff seeks a decree that the
government's lien is defective or invalid and seeks to have
the cloud removed from his title. In support of its
position, the government primarily relies on Raulerson v. _____________
United States, 786 F.2d 1090 (11th Cir. 1986), where the ______________
court held that "section 2410 waives sovereign immunity only
in actual quiet title actions, not suits analogous to quiet ______
title actions." 786 F.2d at 1091. The court concluded that
plaintiff Raulerson's complaint was not an action to quiet
title because he had already forfeited title to his property
and had waived his property interest by the terms of a plea
agreement. Id. The instant case is not like Raulerson ___ _________
because Progressive has title to the Folkards' property and
has not waived its ownership interest. Furthermore,
Progressive merely seeks a determination regarding the
priority of its ownership interest. The Raulerson plaintiff, _________
in contrast, sought a declaration that the IRS's claim had
priority over the valid claims of other branches of
government to ensure that the IRS's jeopardy assessment would
not be satisfied from his other assets. Id. at 1091-92. ___
-11- 11
Consistent with the broad construction accorded section
2410's quiet title provision by a number of other
jurisdictions, we hold that Progressive's claim falls within
the meaning and scope of the statute.
The Declaratory Judgment Act and Section 2410 The Declaratory Judgment Act and Section 2410 _____________________________________________
In the alternative, the government argues that even
if we were to hold that the district court has jurisdiction
to hear Progressive's claim, the Declaratory Judgment Act
("the Act"), 28 U.S.C. 2201(a), nonetheless bars the court
from granting the relief requested. The Act provides, inter _____
alia, that a federal district court has the authority to ____
grant declaratory relief "[i]n a case of actual controversy
within its jurisdiction, except with respect to Federal taxes
. . . ." 28 U.S.C. 2201(a). A claim challenging the power
of the IRS to assess and collect taxes is barred by the Act.
McCarthy v. Marshall, 723 F.2d 1034, 1037 (1st Cir. 1983). ____________________
Similarly, "[w]hen a federal tax lien is
involved,
. . . an action pursuant to section 2410(a) will not lie if
its sole purpose is to challenge the validity of the
underlying assessment." Johnson v. United States, 990 F.2d _________________________
41, 42 (2d Cir. 1993). This is because the purpose of
section 2410 is "to waive the government's immunity from suit
so as to permit a court of proper jurisdiction to determine
the relative position of government liens on property as
-12- 12
against other lienors -- not to permit a collateral attack on
the tax assessment." Broadwell v. United States, 234 F. ____________________________
Supp. 17, 18 (E.D.N.C. 1964), aff'd 343 F.2d 470 (4th Cir.), _____
cert. denied, 382 U.S. 825 (1965); accord, McMillen v. United _____ ______ ______ __________________
States Dep't of Treasury, 960 F.2d 187, 189 (1st Cir. 1991); _________________________
Falik v. United States, 343 F.2d. 38, 41 (2d Cir. 1965); ________________________
Remis v. United States, 172 F. Supp. 732, 733 (D. Mass. ________________________
1959), aff'd, 273 F.2d 293 (1st Cir. 1960). Congress thus _____
did not intend section 2410(a)(1) to extend a new remedy by
which a plaintiff, whether taxpayer or third party, could
contest the government's assessment of taxes.4 Where a
plaintiff does not challenge the underlying tax assessment,
however, section 2410(a) has been recognized as a vehicle for
determining lien priority. See Estate of Johnson, 836 F.2d ___ __________________
____________________
4. Congress did intend section 2410(a)(1) to be a basis for
taxpayer challenges to the procedural validity of tax liens.
See Robinson v. United States, 920 F.2d 1157, 1161 (3d Cir. ___ __________________________
1990)(where IRS failed to send notice of deficiency to
taxpayer when lien filed); Rodriguez v. United States, 629 F. __________________________
Supp. 333, 336 (N.D. Ill. 1986) (where IRS failed to send
notice of deficiency when levied on property); Ringer v. __________
Basile, 645 F. Supp. 1517, 1525-26 (D. Colo. 1986)(where IRS ______
violated own procedures when seized property). Likewise,
with regard to third party nontaxpayer plaintiffs, courts
have adopted the view that "[t]he validity of a lien,
depending upon compliance or noncompliance with statutory
requirements, or the priority of a lien validly filed is
quite a far cry from permitting a third party to attack the
tax assessment upon which a properly filed lien is based."
Pipola v. Chicco, 169 F. Supp 229, 232 (S.D.N.Y. 1959), _________________
modified, 274 F.2d 909 (2d Cir. 1960). Progressive does not ________
challenge the procedural validity of the tax liens. It is a
matter of record that the liens were properly filed with the
Plymouth County (Massachusetts) Registry of Deeds.
-13- 13
at 945 (executor's claim of priority of estate interest in
estate over federal tax lien constitutes quiet title action
where it does not contest merits of assessment); Morrison, ________
247 F.2d at 290-91 (property seller's claim of priority of
vendor's lien over federal lien constitutes quiet title
action where no hazard posed to revenues); First of America ________________
Bank - West Michigan v. United States, 848 F. Supp. 1343, _______________________________________
1349 (W.D. Mich. 1993) (nontaxpayer third party has standing
under section 2410 to "merely . . . assert the priority of
its lien over the federal tax lien"); McEndree, 774 F. Supp. ________
at 1296 (vendor of property eligible to maintain quiet title
action alleging priority of equitable mortgage over federal
tax liens where no challenge to tax assessment itself).
Progressive's claim in no way contests the
legitimacy of the government's tax assessment or the
taxpayers' liability. It follows that "[s]ince the quiet
title action specifically mandated by section 2410 is in
substance a suit for a declaratory judgment," the Declaratory
Judgment Act will not operate as a wrench to deprive the
district court of its jurisdiction in this case. Aqua Bar & __________
Lounge Inc., 539 F.2d at 940; see also McEndree, 774 F. Supp. ___________ ___ ____ ________
at 1297 (Section 2410(a) provides an exception to the
Declaratory Judgment Act, as plaintiff's remedies are limited
to declaratory relief).
-14- 14
In summary, because we conclude that the government
waives its sovereign immunity under 28 U.S.C. 2410(a)(1),
and that the Declaratory Judgment Act poses no bar to the
relief sought, we accordingly hold that the district court
properly exercised subject-matter jurisdiction over
Progressive's claim.
II. THE MERITS II. THE MERITS __________
We now turn to the substantive issue on appeal:
whether Massachusetts law entitles Progressive's mortgage
priority over the federal tax liens.
Because the decision to grant summary judgment
calls a legal standard into play we review the district
court's order granting summary judgment for the United States
de novo. In re Varrasso, 37 F.3d 760, 763 (1st Cir. 1994); __ ____ _______________
Maldonado-Denis v. Castillo-Rodriguez, 23 F.3d 576, 581 (1st _____________________________________
Cir. 1994); Quaker State Oil Refining Corp. v. Garrity Oil _________________________________________________
Co., 884 F.2d 1510, 1513 (1st Cir. 1989). Summary judgment ___
is appropriate only when "there is no genuine issue as to any
material fact and . . . the moving party is entitled to a
judgment as a matter of law." Fed. R. Civ. P. 56(c). The
district court held and we agree that because there are no
disputed material issues of fact summary judgment is
appropriate.
As our discussion of jurisdiction relates, it is
well-settled that federal law determines the priority of
-15- 15
competing federal and state created liens. See United ___ ______
States v. Rodgers, 461 U.S. 677, 683 (1983); Brosnan, 363 __________________ _______
U.S. at 240-41. Section 6321 of the Internal Revenue Code
("the Code") authorizes the government to assert liens upon
"all property and rights to property" belonging to the
taxpayer for delinquent taxes. 26 U.S.C. 6321. Section
6322 of the Code further provides that "the lien imposed by
section 6321 shall arise at the time the assessment is made
and shall continue until the liability for the amount so
assessed . . . is satisfied or becomes unenforceable by
reason of lapse of time." 26 U.S.C. 6322.
These provisions do not, however, grant federal tax
liens automatic priority over all other liens. I.R.S. v. _________
McDermott, -- U.S. --, 113 S. Ct. 1526, 1528 (1993). The _________
determination of priority is governed by the rule of "first
in time, first in right." Id. at 1527. A federal lien which ___
attaches first is thus senior, so long as notice is properly
filed.5 In order for a state created lien to take priority
over a later assessed federal lien it must be "choate" or
"perfected" so that "the identity of the lienor, the property
subject to the lien, and the amount of the lien are
established" prior to the filing of the subsequent federal
____________________
5. The Code provides that "[t]he lien imposed by section
6321 shall not be valid as against any purchaser, holder of a
security interest, mechanic's lienor, or judgment lien
creditor until notice thereof . . .." 26 U.S.C. 6323(a).
-16- 16
lien. United States v. New Britain, 347 U.S. 81, 84 (1954); ____________________________
United States v. Pioneer Am. Ins. Co., 374 U.S. 84, 88 _________________________________________
(1963); see also Baybank Middlesex v. Elec. Fabricators Inc., ___ ____ ___________________________________________
751 F. Supp. 304, 310 (D. Mass. 1990); United States v. _________________
Rahar's Inn, Inc., 243 F. Supp. 459, 460 (D. Mass. 1965). _________________
Choateness of a state created lien is a matter of federal law
and mirrors the standard applicable to liens asserted by the
government under sections 6321 and 6322 of the Code. United ______
States v. First Nat'l Bank and Trust Co., 386 F.2d 646, 647- ________________________________________
48 (8th Cir. 1967)(citing United States v. Vermont, 377 U.S. _________________________
351, 354 (1964)). State recording statutes are relevant
"only insofar as controlling federal authority dictates or
sound federal policy counsels" their application. United ______
States v. Lebanon Woolen Mills Corp., 241 F. Supp. 393, 398 _____________________________________
(D.N.H. 1964). Section 6323(i)(2) of the Code authorizes
application of the common law doctrine of equitable
subrogation where provided by state law.6
Just as federal law governs the issue of priority,
it is equally well-settled that "in the application of a
federal revenue act, state law controls in determining the
nature of the legal interest . . . in the property . . . to
be reached by the statute." Aquilino v. United States, 363 __________________________
____________________
6. "Where, under local law, one person is subrogated to the
rights of another with respect to a lien or interest, such
person shall be subrogated to such rights for purposes of any
lien imposed by section 6321 or 6324." 26 U.S.C. 6323
(i)(2).
-17- 17
U.S. 509, 513 (1960)(quoting Morgan v. Commissioner, 309 U.S. ______________________
78, 82 (1940)); see also Maryland v. Louis, 451 U.S. 725, 746 ___ ____ _________________
(1981)(courts must proceed from "the basic assumption that
Congress did not intend to displace state law"). "The point
at which a state created security interest attaches is a
matter of state law." ICM Mortg. Corp. v. Herring, 758 F. ____________________________
Supp. 1425, 1426 (D. Colo 1991)(citing Sec. Pac. Mortg. Corp. ______________________
v. Choate, 897 F.2d 1057, 1058-59 (10th Cir. 1990)). Federal _________
revenue statutes "creat[e] no property rights but merely
atta[ch] consequences, federally defined, to rights created
under state law." United States v. Bess, 357 U.S. 51, 55 _______________________
(1958). For this reason, "it is critical to determine when
competing state created liens come into existence or become
valid." Matter of Fisher, 7 B.R. 490, 494 (W.D. Pa. __________________
1980)(citing Pioneer Am. Ins. Co., 374 U.S. 84, 87 (1963)); ____________________
see also; Aquilino, 363 U.S. at 514 (Reconciliation of state ___ ____ ________
law defining when a state created lien becomes effective and
federal law governing priority between competing liens
"strikes a proper balance between the legitimate and
traditional interest which the State has in creating and
defining the property interest of its citizens, and the
necessity for a uniform administration of the federal revenue
statutes").
The government argues that because section
6323(i)(2) explicitly authorizes the application of local
-18- 18
laws of subrogation and is silent as to the application of
the doctrine of unjust enrichment, the district court was
correct in deeming the latter doctrine inapplicable to
Progressive's claim. We disagree. While the court was
correct in stating that Congress gave an "explicit directive
with respect to determining the priority of federal tax
liens," it was incorrect in holding that "there is no basis
upon which to presume the applicability of a common law
doctrine" not expressly provided for by the statute. To
essentially translate a directive for a federal scheme of
priority into a preemption of state law governing the nature
and extent of state created liens was unwarranted. To the
contrary, federal courts should presume applicability of
state common law doctrines in determining the status of state
created liens. Such determinations do not contravene federal
law simply because they ultimately bear on the federal issue
of who was first in time in determining priority.
Before addressing the status of Progressive's
current mortgage, we briefly review its history. In 1987,
MSFCU financed the Folkards' first mortgage in the amount of
$150,000.00. Between 1988 and 1990, the IRS filed six tax
liens on the property, totalling $94,560.93. In 1990, MSFCU
refinanced the Folkards' first mortgage debt, then
$130,905.55, by executing a new note to secure a debt of
$142,000.00. The recording of the 1990 mortgage discharged
-19- 19
the 1987 mortgage, rendering the tax liens senior to MSFCU's
second mortgage on the record title to the property. In
1992, MSFCU assigned its mortgage to Progressive.
Progressive argues that under the doctrine of unjust
enrichment, MSFCU should be reinstated to its initial 1987
mortgage position and that Progressive is entitled to
effectively occupy MSFCU's reinstated position. We agree.
A. Massachusetts Common Law Doctrine A. Massachusetts Common Law Doctrine _________________________________
of Unjust Enrichment of Unjust Enrichment ____________________
Under Massachusetts law, the doctrine of unjust
enrichment provides that "where a mortgage has been
discharged by mistake, equity will set the discharge aside
and reinstate the mortgage to the position which the parties
intended it to occupy, if the rights of the intervening
lienholders have not been affected." North Easton Co-op Bank _______________________
v. MacLean, 15 N.E.2d 241, 245 (Mass. 1938)(second mortgagee __________
not prejudiced by reinstatement of first mortgage where first
mortgage had been discharged by mistake upon first
mortgagee's acceptance of new note without knowledge of
intervening lien)(citations omitted); see also Provident Co- ________ _____________
Operative Bank v. Talcott, Inc., 260 N.E.2d 903, 909 (Mass. ________________________________
1970)(assignee of first mortgagee declared holder of first
mortgage to prevent unjust enrichment of second mortgagee
where first mortgagee discharged mortgage through
inadvertence and second mortgagee's position not adversely
affected by acts of first mortgagee); Piea Realty v. ________________
-20- 20
Papuzynski, 172 N.E.2d 841, 846 (Mass. 1961)(exchange of new __________
mortgage notes for old ones did not constitute discharge of
old mortgage where parties had no intent to alter substance
or priority of old notes and mortgagor's grantees did not
show adverse change of position in reliance upon
transaction).
The government maintains that no "mistake" was made
because MSFCU intended to refinance the Folkards' first
mortgage, and so by law must have intended the consequences
of its actions -- i.e. the extinguishment of its original
security interests. Massachusetts law, however, clearly
contemplates situations where the intention to renew is not
tantamount to the intention to extinguish existing security
interests upon refinancing a mortgage. See North Easton Co- ___ ________________
op Bank, 15 N.E.2d at 245; Provident, 260 N.E.2d at 909; Piea _______ _________ ____
Realty, 172 N.E.2d. at 846; see also Financial Acceptance ______ ___ ____ ____________________
Corp. v. Garvey, 380 N.E.2d 1332, 1335 (Mass. 1978)("Under ________________
Massachusetts law the renewal of a note in a different form
does not operate to discharge a mortgage where the debt
itself has not been paid . . . . even where the new note
includes a new debt"); Worcester N. Sav. Inst. v. Farwell, ____________________________________
198 N.E. 897, 899 (Mass. 1935)(where bank, due to negligence
of its counsel, failed to discover later mortgage on property
and discharged first mortgage upon refinancing, first
priority restored to bank because bank did not intend for
-21- 21
discharge of interest); compare ICM Mortg. Corp., 758 F. _______ _________________
Supp. at 1427 (where refinancing of deed of trust not
intended to extinguish security interest, second deed of
trust renewed prior obligation, resulting in priority of
state created lien over federal tax lien); see generally 33 ___ _________
A.L.R. 149 ("It is a general rule that the cancellation of a
mortgage on the record is not conclusive as to its discharge
. . . . [a]nd where the holder of a senior mortgage
discharges it of record, and contemporaneously therewith
takes a new mortgage, he will not, in the absence of
paramount equities, be held to have subordinated his security
to intervening lien unless the circumstances of the
transaction indicate this to have been his intention . . . .
"). We are thus convinced that an action based on the
failure to discover a properly recorded lien is precisely the
type of inadvertence the Massachusetts doctrine of unjust
enrichment aims to rectify. Furthermore, we are persuaded,
in accord with Progressive's view, that no reasonable lender
in MSFCU's position would have intended, upon refinancing, to
replace a first mortgage bearing the attachment of junior tax
liens with a second mortgage bearing the attachment of senior
tax liens, thereby relinquishing its senior interest on the
property.
The district court held that reliance on the
Massachusetts line of unjust enrichment cases was misplaced
-22- 22
because such cases do not concern federal tax liens.
Although it is true that Massachusetts case law does not
address reinstatement of a state created lien to a position
of priority over a federal government lien, we are not
persuaded by the district court's reasoning. We think that
cases involving the reinstatement of mortgages which have
been inadvertently discharged to the advantage of unintended
and unexpected beneficiaries are sufficiently analogous to
Progressive's claim to warrant applicability. Whether or not
federal tax liens are involved in such cases, to us, seems
immaterial. This is mainly because the unjust enrichment
doctrine operates only to restore a state created lien to the
position it occupied prior to the inadvertent discharge.
Reestablishing the party's position, of itself, does not
disturb the status of competing liens -- whether those of a
private lienor or the federal government -- in terms of their
effective dates of attachment for the determination of
priority. It equitably determines the effective date of the
state created lien independent of other existing liens.
Federal law remains intact to determine both the choateness
of the state created lien and its order of priority in
relation to any competing federal liens.
Moreover, while Massachusetts courts have not had
occasion to apply the doctrine of unjust enrichment to the
federal government under this set of circumstances, federal
-23- 23
courts have held that the doctrine is applicable where the
federal government is concerned; and in several instances,
have restored state created liens to their intended positions
without regard for the United States' potential loss of
priority under federal law. See United States v. McCombs, 30 ___ ________________________
F.3d 310, 333 (2d Cir. 1994)(holding that where government
ran afoul of notice requirements of federal statute governing
priority between federal tax liens and interests of
subsequent purchasers, to deny subsequent holder of security
interest priority over tax lien would allow government to
"leap frog" the interests vested in two prior mortgage liens
and would represent "a classic example of unjust
enrichment"); Dietrich Indus., Inc. v. United States, 988 ________________________________________
F.2d 568, 573 (5th Cir. 1993)(holding that where purchaser
who paid vendor's senior mortgage debt as part of purchase
transaction with expectation that property was free of
additional encumbrances, to deny equitable subrogation remedy
"would give the government an unearned windfall in that it
would elevate the government's liens for no good reason");
Han v. United States, 944 F.2d 526, 530 n.3 (9th Cir. _______________________
1991)(holding that where purchasers of residential property
paid off and discharged priority position lender unaware that
additional federal tax lien attached to property, to require
the purchasers to pay a portion of the taxpayer's delinquent
-24- 24
taxes would "unjustly enrich" and "produce a windfall" in
favor of the United States).
Finally, we note that no rights of the government
are impaired by MSFCU's mortgage reinstatement. The
government argues that the IRS is unlike a private creditor
in that it does not bargain for interest rates and thus can
never be unjustly enriched where valid liens have attached
for unpaid taxes. But Progressive does not argue, nor do we
suggest, that the government would be unjustly enriched by
the ultimate satisfaction of its legitimate tax liens. The
point is that the government could not have anticipated its
current priority status because from the outset its 1988-1990
liens were clearly junior to MSFCU's 1987 mortgage lien.
Absent the inadvertent discharge of MSFCU's mortgage in 1990,
the government would not have gained serendipitous priority
over MSFCU's second mortgage lien in 1990. This resulted in
the government's unjust enrichment at the expense of MSFCU in
1990, and ultimately of Progressive in 1992. We hold that
because MSFCU extinguished its initial 1987 mortgage interest
by mistake upon refinancing the Folkards' second mortgage in
1990, it should be equitably restored to its original 1987
lien position.
The government argues that the equities in favor of
MSFCU may not apply to Progressive because there is no
evidence that Progressive was unaware of the earlier
-25- 25
government lien when it took the assignment of the mortgage
from MSFCU. But it is hornbook law that the assignee of a
mortgage succeeds to all of the assignor's rights power and
equities; and Massachusetts has applied this rule in a
situation very like this case. Provident Co-operative Bank, ___________________________
260 N.E.2d at 908 ("By virtue of her purchase from Provident,
Mrs. Hutchinson succeeded to all of Provident's rights in
relation to the mortgage assigned, including the right to a
judicial determination whether it was a first mortgage or a
second mortgage."). Thus Progressive may assert any
equitable rights and defenses that MSFCU could have asserted
before it assigned the mortgage.
C. Conclusion C. Conclusion __________
The parties do not dispute that MSFCU's mortgage
lien was choate as of its original recording in 1987. It
identified the lienor as MSFCU, described the Folkards'
property, and established the amount of the lien so that
nothing more needed to be done for the lien to be
"perfected." New Britain, 347 U.S. at 89. MSFCU was thus a ___________
holder of a security interest in the Folkards' property that
attached before the filing of the federal tax liens
between 1988-1990. See 26 U.S.C. 6323(h)(1). ___
Because we hold that MSFCU should be restored to its
original mortgage lien position and that Progressive should
be subrogated to that same position, it follows that under
-26- 26
the federal rule of priority, Progressive's mortgage is first
in time and hence first in right over the tax liens asserted
by the government.
We reverse the district court's decision and vacate We reverse the district court's decision and vacate ___________________________________________________
its entry of summary judgment in favor of the United States. its entry of summary judgment in favor of the United States. _____________________________________________________________
Summary judgment shall be entered in favor of Progressive and Summary judgment shall be entered in favor of Progressive and _____________________________________________________________
an appropriate declaratory judgment order shall be entered. an appropriate declaratory judgment order shall be entered. _____________________________________________________________
Costs awarded to Progressive. Costs awarded to Progressive. _____________________________
-27- 27
Related
Sergeant's Lessee v. Biddle
17 U.S. 508 (Supreme Court, 1819)
United States v. City of New Britain
347 U.S. 81 (Supreme Court, 1954)
United States v. Bess
357 U.S. 51 (Supreme Court, 1958)
United States v. Brosnan
363 U.S. 237 (Supreme Court, 1960)
United States v. Pioneer American Insurance
374 U.S. 84 (Supreme Court, 1963)
Maryland v. Louisiana
451 U.S. 725 (Supreme Court, 1981)
United States v. Rodgers
461 U.S. 677 (Supreme Court, 1983)
Bender v. Williamsport Area School District
475 U.S. 534 (Supreme Court, 1986)
United States Ex Rel. Internal Revenue Service v. McDermott
507 U.S. 447 (Supreme Court, 1993)
Maldonado-Denis v. Castillo-Rodriguez
23 F.3d 576 (First Circuit, 1994)
Desmond v. Varrasso (In Re Varrasso)
37 F.3d 760 (First Circuit, 1994)
United States v. O. E. Morrison and R. E. Morrison
247 F.2d 285 (Fifth Circuit, 1957)
David Remis v. United States
273 F.2d 293 (First Circuit, 1960)
Paul Pipola and Julia Pipola v. Mae Chicco and Yorkville Savings and Loan Association, and United States of America
274 F.2d 909 (Second Circuit, 1960)
United States v. James R. Coson
286 F.2d 453 (Ninth Circuit, 1961)
Rena Falik v. The United States of America
343 F.2d 38 (Second Circuit, 1965)
Eric C. Nickerson v. United States
513 F.2d 31 (First Circuit, 1975)
William J. McCarthy v. F. Ray Marshall, Secretary of the United States Department of Labor
723 F.2d 1034 (First Circuit, 1983)
Donald E. Raulerson v. United States of America, Commissioner of Internal Revenue, Department of Justice
786 F.2d 1090 (Eleventh Circuit, 1986)
In the Estate of Norman L. Johnson, Deceased. Melvin M. Engel, of the Estate of Norman L. Johnson, Deceased v. United States
836 F.2d 940 (Fifth Circuit, 1988)
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