NOT RECOMMENDED FOR PUBLICATION File Name: 21a0011n.06
Case Nos. 19-1947/2458/2459
UNITED STATES COURT OF APPEALS FOR THE SIXTH CIRCUIT FILED Jan 06, 2021 DEBORAH S. HUNT, Clerk UNITED STATES OF AMERICA, ) ) Plaintiff-Appellee, ) ON APPEAL FROM THE ) UNITED STATES DISTRICT v. ) COURT FOR THE EASTERN ) DISTRICT OF MICHIGAN PATRICE L. HAROLD and SWEWAT, LLC, ) ) Defendants-Appellants. ) OPINION
BEFORE: SUTTON, BUSH, and MURPHY, Circuit Judges.
JOHN K. BUSH, Circuit Judge. Dr. Patrice Harold failed to fully pay her taxes from
2004 to 2012, then again in 2014. So the Internal Revenue Service placed liens on her property
for the more than $400,000 she owed, then sued to enforce its liens against a house in which she
had more than $225,000 in equity. But just before the district court granted summary judgment
against Harold, she sold the house to a real estate company, SWEWAT, for only $42,000. The
district court promptly joined SWEWAT as a party and appointed a receiver to sell the property
on the IRS’s behalf. Harold and SWEWAT challenge that decision on a number of grounds.
Because none has merit, we affirm. Case Nos. 19-1947/2458/2459, United States v. Harold et al.
I.
In 2005, Harold agreed to pay $625,000 over eight years to purchase the house at issue.
Until she completed the payments, Harold would hold equitable title to the house and the seller
would retain legal title. See Cardinal v. United States, 26 F.3d 48, 49 (6th Cir. 1994). Eight years
later, after Harold had paid only $223,590 on the original contract, the parties amended the contract
to extend its term for an additional nine years.
This suit began when the United States sought to sell Harold’s equitable title to recover
some of the more than $400,000 in tax liabilities she owed. When the government sought summary
judgment, Harold conceded almost all issues. She argued only that the IRS had misapplied past
tax refunds to pay her husband’s outstanding tax liabilities, and that as such the IRS owed her
enough to nearly cover the amount she owed it. The district court granted the government
summary judgment, concluding that the statute of limitations and the doctrine of laches barred
Harold’s arguments. That grant of summary judgment gave rise to the first appeal in this case.
Unbeknownst to the government and the district court, and after the government moved for
summary judgment, Harold sold the house to SWEWAT. Then, six days after the district court
granted summary judgment, she recorded the deed giving SWEWAT the property. Although
SWEWAT nominally paid $220,000, Harold subtracted most of that sum in tax and insurance
credits and other costs. She ultimately received only $42,937.28 from the sale. Three days later,
she entered into a contract to lease the house from SWEWAT for $4100 per month. That sum is
only $200 more than her original payment obligations under the land-sale contract, but it is a
staggering $2300 more than the rent that the district court ordered when it appointed a receiver.
After Harold informed the district court that she had sold the house, the government filed
an emergency motion to bring SWEWAT into the case. Concerned that the property might be sold
-2- Case Nos. 19-1947/2458/2459, United States v. Harold et al.
again without notice to the court, the district court granted the emergency motion before
SWEWAT could be served. Then SWEWAT and Harold jointly moved to vacate the order
appointing a receiver, arguing that the sale of the house had stripped the government’s liens from
the property. The district court denied the motion because SWEWAT had both record and actual
notice of the liens, so a “straightforward application of long-accepted lien principles makes clear
that SWEWAT took” the property subject to the government’s liens. That decision, and the district
court’s decision to join SWEWAT in the first place, gave rise to the other two appeals.
II.
On appeal, Harold and SWEWAT offer an array of challenges to the district court’s grant
of summary judgment and its denial of their motion for relief from the appointment of a receiver.
First, Harold argues that the district court should have granted her motion to file a sur-reply to
challenge the government’s statute of limitations argument based on an equitable recoupment
theory, and that if we apply that theory we should reverse the district court. Second, Harold and
SWEWAT argue that the liens did not remain with Harold’s property interest after she sold it to
SWEWAT. And third, they argue that the district court’s order joining SWEWAT was both
substantively and procedurally improper. All three arguments prove unavailing.
A. Summary Judgment
Before the district court, Harold preserved only one ground to oppose summary judgment:
that the IRS owed her almost enough money to cover the amount she owed. At no point before
this suit did Harold contact the IRS about the almost $45,000 she claims it misplaced (and the
interest that she says increases that sum to just over $377,000). When she raised those contentions
before the district court, they amounted to an affirmative counterclaim to recover the amount that
she says the IRS owes her and apply that sum against her liabilities. The district court found that
-3- Case Nos. 19-1947/2458/2459, United States v. Harold et al.
her arguments to that effect were barred by the statute of limitations and the doctrine of laches.
We review that decision de novo. Kenney v. Aspen Techs., Inc., 965 F.3d 443, 447–48 (6th Cir.
2020).
Harold identifies two years (1993 and 1995) where the IRS took a refund for which she
would have been eligible and applied it to her husband’s past tax liabilities, and one year (1998)
where the IRS says it paid her a refund that she now claims to have never received, all before the
turn of the millennium. Given that the longest statute of limitations that could apply to her claims
is the Tucker Act’s six-year limit, her claims are time barred. 28 U.S.C. § 2401.
To overcome that bar, Harold sought to invoke the doctrine of equitable recoupment in a
sur-reply brief before the district court. We need not decide whether the district court abused its
discretion by denying her leave to file that sur-reply because, in any event, her equitable
recoupment argument is unpersuasive.
Equitable recoupment is a judge-made doctrine that, in narrow circumstances, allows a
litigant to duck a statute of limitations to avoid an unjust windfall to the taxpayer or the
government. See United States v. Dalm, 494 U.S. 596, 602–05 (1990) (describing the doctrine’s
origins in Bull v. United States, 295 U.S. 247 (1935)). It applies when “a single transaction or
taxable event ha[s] been subjected to two taxes on inconsistent legal theories.” Zack v. Comm’r,
291 F.3d 407, 414 (6th Cir. 2002) (quoting Rothensies v. Elec.
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NOT RECOMMENDED FOR PUBLICATION File Name: 21a0011n.06
Case Nos. 19-1947/2458/2459
UNITED STATES COURT OF APPEALS FOR THE SIXTH CIRCUIT FILED Jan 06, 2021 DEBORAH S. HUNT, Clerk UNITED STATES OF AMERICA, ) ) Plaintiff-Appellee, ) ON APPEAL FROM THE ) UNITED STATES DISTRICT v. ) COURT FOR THE EASTERN ) DISTRICT OF MICHIGAN PATRICE L. HAROLD and SWEWAT, LLC, ) ) Defendants-Appellants. ) OPINION
BEFORE: SUTTON, BUSH, and MURPHY, Circuit Judges.
JOHN K. BUSH, Circuit Judge. Dr. Patrice Harold failed to fully pay her taxes from
2004 to 2012, then again in 2014. So the Internal Revenue Service placed liens on her property
for the more than $400,000 she owed, then sued to enforce its liens against a house in which she
had more than $225,000 in equity. But just before the district court granted summary judgment
against Harold, she sold the house to a real estate company, SWEWAT, for only $42,000. The
district court promptly joined SWEWAT as a party and appointed a receiver to sell the property
on the IRS’s behalf. Harold and SWEWAT challenge that decision on a number of grounds.
Because none has merit, we affirm. Case Nos. 19-1947/2458/2459, United States v. Harold et al.
I.
In 2005, Harold agreed to pay $625,000 over eight years to purchase the house at issue.
Until she completed the payments, Harold would hold equitable title to the house and the seller
would retain legal title. See Cardinal v. United States, 26 F.3d 48, 49 (6th Cir. 1994). Eight years
later, after Harold had paid only $223,590 on the original contract, the parties amended the contract
to extend its term for an additional nine years.
This suit began when the United States sought to sell Harold’s equitable title to recover
some of the more than $400,000 in tax liabilities she owed. When the government sought summary
judgment, Harold conceded almost all issues. She argued only that the IRS had misapplied past
tax refunds to pay her husband’s outstanding tax liabilities, and that as such the IRS owed her
enough to nearly cover the amount she owed it. The district court granted the government
summary judgment, concluding that the statute of limitations and the doctrine of laches barred
Harold’s arguments. That grant of summary judgment gave rise to the first appeal in this case.
Unbeknownst to the government and the district court, and after the government moved for
summary judgment, Harold sold the house to SWEWAT. Then, six days after the district court
granted summary judgment, she recorded the deed giving SWEWAT the property. Although
SWEWAT nominally paid $220,000, Harold subtracted most of that sum in tax and insurance
credits and other costs. She ultimately received only $42,937.28 from the sale. Three days later,
she entered into a contract to lease the house from SWEWAT for $4100 per month. That sum is
only $200 more than her original payment obligations under the land-sale contract, but it is a
staggering $2300 more than the rent that the district court ordered when it appointed a receiver.
After Harold informed the district court that she had sold the house, the government filed
an emergency motion to bring SWEWAT into the case. Concerned that the property might be sold
-2- Case Nos. 19-1947/2458/2459, United States v. Harold et al.
again without notice to the court, the district court granted the emergency motion before
SWEWAT could be served. Then SWEWAT and Harold jointly moved to vacate the order
appointing a receiver, arguing that the sale of the house had stripped the government’s liens from
the property. The district court denied the motion because SWEWAT had both record and actual
notice of the liens, so a “straightforward application of long-accepted lien principles makes clear
that SWEWAT took” the property subject to the government’s liens. That decision, and the district
court’s decision to join SWEWAT in the first place, gave rise to the other two appeals.
II.
On appeal, Harold and SWEWAT offer an array of challenges to the district court’s grant
of summary judgment and its denial of their motion for relief from the appointment of a receiver.
First, Harold argues that the district court should have granted her motion to file a sur-reply to
challenge the government’s statute of limitations argument based on an equitable recoupment
theory, and that if we apply that theory we should reverse the district court. Second, Harold and
SWEWAT argue that the liens did not remain with Harold’s property interest after she sold it to
SWEWAT. And third, they argue that the district court’s order joining SWEWAT was both
substantively and procedurally improper. All three arguments prove unavailing.
A. Summary Judgment
Before the district court, Harold preserved only one ground to oppose summary judgment:
that the IRS owed her almost enough money to cover the amount she owed. At no point before
this suit did Harold contact the IRS about the almost $45,000 she claims it misplaced (and the
interest that she says increases that sum to just over $377,000). When she raised those contentions
before the district court, they amounted to an affirmative counterclaim to recover the amount that
she says the IRS owes her and apply that sum against her liabilities. The district court found that
-3- Case Nos. 19-1947/2458/2459, United States v. Harold et al.
her arguments to that effect were barred by the statute of limitations and the doctrine of laches.
We review that decision de novo. Kenney v. Aspen Techs., Inc., 965 F.3d 443, 447–48 (6th Cir.
2020).
Harold identifies two years (1993 and 1995) where the IRS took a refund for which she
would have been eligible and applied it to her husband’s past tax liabilities, and one year (1998)
where the IRS says it paid her a refund that she now claims to have never received, all before the
turn of the millennium. Given that the longest statute of limitations that could apply to her claims
is the Tucker Act’s six-year limit, her claims are time barred. 28 U.S.C. § 2401.
To overcome that bar, Harold sought to invoke the doctrine of equitable recoupment in a
sur-reply brief before the district court. We need not decide whether the district court abused its
discretion by denying her leave to file that sur-reply because, in any event, her equitable
recoupment argument is unpersuasive.
Equitable recoupment is a judge-made doctrine that, in narrow circumstances, allows a
litigant to duck a statute of limitations to avoid an unjust windfall to the taxpayer or the
government. See United States v. Dalm, 494 U.S. 596, 602–05 (1990) (describing the doctrine’s
origins in Bull v. United States, 295 U.S. 247 (1935)). It applies when “a single transaction or
taxable event ha[s] been subjected to two taxes on inconsistent legal theories.” Zack v. Comm’r,
291 F.3d 407, 414 (6th Cir. 2002) (quoting Rothensies v. Elec. Storage Battery Co., 329 U.S. 296,
300 (1946)). That such an occurrence is exceedingly rare is clear from the paucity of case law in
this court applying the doctrine, and the fact that most such cases end in failure for the party
seeking to invoke its protection. See, e.g., id.; Estate of Mueller v. Comm’r, 153 F.3d 302, 307
(6th Cir. 1998). Here, Harold’s sole argument for why distinct tax years spanning decades all
consist of a single taxable event is that all of them affected her, and when taken together they could
-4- Case Nos. 19-1947/2458/2459, United States v. Harold et al.
alter the amount she owes. But the fact that the refunds and liabilities all affect Harold does not
make them a single transaction. As such, her equitable recoupment argument fails.1
B. The Liens
It is black letter law that when a property is subject to a lien, “no matter into whose hands
the property goes, it passes” encumbered by the lien. United States v. Bank of Celina, 721 F.2d
163, 167 (6th Cir. 1983) (quoting United States v. Bess, 357 U.S. 51, 57 (1958)). Despite that
basic principle, Harold and SWEWAT argue that after Harold sold the house to SWEWAT, the
government’s liens applied only to the sale proceeds, not the house itself. They are incorrect.
They base their argument on Phelps v. United States, 421 U.S. 330 (1975). The parties in
that case agreed that the IRS’s lien on a property applied only to the proceeds of a sale to a good-
faith purchaser who had no notice of the lien. Id. at 334 & n.4. So when the IRS prevailed, it
could only enforce its lien against those proceeds. Id. at 334. Harold and SWEWAT rely on that
fact in an attempt to argue that Phelps created a rule that when property subject to a lien is sold,
the IRS can only recover against the proceeds. But Phelps itself contradicts their argument that a
lien reattaches only to the proceeds of the sale. 421 U.S. at 334–35 (noting that “the lien reattaches
to the thing and to whatever is substituted for it” unless the original thing passes into the hands of
a good-faith purchaser without notice (quoting Sheppard v. Taylor, 30 U.S. (5 Pet.) 675, 710
(1831))). So it certainly did not upset the basic rule that a property encumbered by a lien retains
the lien after sale. Bank of Celina, 721 F.3d at 169. Here, the IRS had filed its lien notices, so
SWEWAT had constructive notice, which suffices for the property to remain encumbered by the
lien. What’s more, SWEWAT even noted the liens in its land-sale contract, so it had actual notice.
Thus, it purchased the house subject to the liens.
1 Because Harold’s claims are time barred, the district court’s evidentiary rulings are irrelevant.
-5- Case Nos. 19-1947/2458/2459, United States v. Harold et al.
C. Joinder
Appellants offer two reasons that the district court should not have joined SWEWAT.
Substantively, they argue that the district court erred in concluding that SWEWAT should be
bound by the grant of summary judgment. Procedurally, they argue that the district court’s
decision to join SWEWAT before it could be served violates Federal Rule of Civil Procedure 25.
We review a district court’s decision to join a party under Rule 25 for abuse of discretion. See
Bamerilease Capital Corp. v. Nearburg, 958 F.2d 150, 154 (6th Cir. 1992).
As to the substantive argument, “[p]ersons acquiring an interest in property that is a subject
of litigation are bound by, or entitled to the benefit of, a subsequent judgment, despite a lack of
knowledge.” Golden State Bottling Co. v. NLRB, 414 U.S. 168, 179 (1973). After all, if a party
to litigation over property could sell it without the purchaser being bound, it would enable
unscrupulous litigants to pass the property from hand to hand to ensure that “a final decree bearing
fruit could never be reached.” G. & C. Merriam Co. v. Saalfield, 190 F. 927, 932 (6th Cir. 1911).
Our logic over a century ago in Saalfield applies with equal force today. Thus, Harold and
SWEWAT cannot use their last-second sale to keep the IRS from enforcing its liens.
On procedure, the district court acknowledged that it joined SWEWAT before it could be
served with process, violating Rule 25(c). It did so soon after Harold had sold the property without
notice to the government or court “to preserve the assets in the face of shifting interests.” After
joining SWEWAT, the district court offered the company ample opportunity to challenge the
joinder in three separate filings and a hearing. It heard those challenges, and it concluded that
SWEWAT was properly joined under Rule 25(c) as the recipient of the interest at issue in the
action. Fed. R. Civ. P. 25(c). That decision was correct. Rule 25 allows a court to join the recipient
of a transferred property interest, which SWEWAT certainly was. And here, the district court was
-6- Case Nos. 19-1947/2458/2459, United States v. Harold et al.
further guided by the Internal Revenue Code’s command that anyone “claiming any interest in the
property involved in” an action to enforce a federal lien “shall be made” a party to the action. 26
U.S.C. § 7403(b). So joining SWEWAT was proper. In light of that fact, declining to dismiss
SWEWAT, re-serve it, then re-join it was a proper application of Federal Rule of Civil Procedure
61’s requirement that “[a]t every stage of the proceeding, the court must disregard all errors and
defects that do not affect any party’s substantial rights.”
III.
For those reasons, we affirm both the district court’s grant of summary judgment and its
denial of SWEWAT and Harold’s motion to vacate the order appointing a receiver.
-7-