Opinion
Case No: 01-945-CIV-GOLD
September 6, 2002
ORDER GRANTING UNITED STATES'S MOTION FOR SUMMARY JUDGMENT
THIS CAUSE is before the court upon defendant United States's ("United States") motion for summary judgment (D.E. #92). The plaintiff, Deborah Menotte ("Trustee"), has filed an interpleader complaint against the United States, Rafaela V. Landron ("Landron"), and Angel Mario Garcia and Margarita Lourdes Landron Garcia ("Garcias") for Declaratory Relief. The Trustee, as stakeholder, seeks a declaratory judgment as to who is entitled to disputed funds in the amount of $83,000, calculated in a bankruptcy proceeding in the United States Bankruptcy Court for the Southern District of Florida. The Trustee also seeks an award of costs and attorney's fees. Co-defendants Landron and the Garcias have responded to the United States's motion, (DE #94) and (DE #95) respectively. The Trustee has also filed a limited opposition to the United States's motion with a cross-motion for summary judgment (DE #96). The court has subject matter jurisdiction pursuant to 28 U.S.C. § 1335 because this is an interpleader action with two or more claimants of diverse citizenship. The court also has subject matter jurisdiction pursuant to 28 U.S.C. § 1331, and 28 U.S.C. § 1340 in so far as this matter involves claims that come under this court's federal question jurisdiction.
In re Angel Mario Garcia Margarita Lourdes Landron Garcia, Case No. 97-11159-BKC-RAM.
On August 30, 2002, the court heard oral argument on the United States's motion and the Trustee's cross-motion. After carefully considering the motions, evidence, and arguments of counsel, the court grants the United States's motion for summary judgment.
The Undisputed Facts
In support of its motion for summary judgment, the United States has filed a statement of material facts pursuant to Southern District of Florida Local Rule 7.5. In addition, the United States has submitted several exhibits, including depositions and documentary evidence. The co-defendants dispute and/or supplement some of the allegations contained in the United States's statement with its own Local Rule 7.5, along with depositions and documentary evidence, including several pleadings and orders issued by the bankruptcy court in the Chapter 7 Proceedings. The following facts are derived from the United States's Local Rule 7.5 statement, and any factual disputes between the parties are noted.
On February 18, 1997, the Garcias filed a petition for relief under Chapter 7 of the Bankruptcy Code in the United States Bankruptcy Court for the Southern District of Florida. (U.S. Mot. SJ at 3). On April 17, 1997, the Garcias entered into a balloon mortgage agreement with Landron as mortgagee for one of the Garcias's real property at the time, a home at 2 Tahiti Beach Island Road, Coral Gables, Florida. (U.S. Ex. #3). The Garcias, in accordance with the mortgage agreement with Landron, were to pay Landron $69,000 by April 17, 1998. Landron had borrowed the funds loaned to the Garcias from a company in the Dominican Republic, which paid the borrowed funds directly to the Garcias. (Landron Depo. at 9). Landron has not made any payments to the lender in the Dominican Republic. (Landron Depo. at 16). When the Garcias failed to make any payment on the April 17, 1997 loan, a new mortgage was executed on April 17, 1998. (U.S. Ex. #1). This new mortgage was recorded on August 2, 1999. (U.S. Mot. SJ at 4). Landron denies any knowledge of the bankruptcy proceeding when she entered the agreement with the Garcias. (See Landron Resp. to Mot. SJ at 4).
On Schedule A of their bankruptcy schedules, the Garcias listed their interest in the property and on Schedule C of the bankruptcy schedules, claimed that the property was exempt from any tax liens under Article X, Section 4 of the Florida Constitution (homestead property). (U.S. Mot. SJ at 3). The Trustee objected to the exemption because the property was in a municipality and exceeded 1/2 acre. (U.S. Mot. SJ at 4). The bankruptcy court sustained the objection and calculated the monies owed to the Trustee and the Garcias and issued an order that the remaining funds ($83,000) from the proceeds of the sale of the property was due the Garcias. (U.S. Ex. 6). The court further ordered, however, that the amount due was subject to the satisfaction of the recorded lien by Landron.
On September 8, 2000, before the bankruptcy court's Order Determining Debtors' Interest in Sale Proceeds, the Internal Revenue Service of the United States had served a Notice of Levy on the Trustee. (U.S. Ex. 5). The Notice of Levy noticed the Trustee that the Garcias allegedly owed income taxes for the years 1992, 1994, 1995, and 1996, totaling over $200,000. The United States made a claim to the entire $83,000 allegedly due the Garcias based on the federal tax liabilities. Pursuant to the Notice of Levy, the Trustee requested that the bankruptcy court reconsider its September 26, 2000 Order. (U.S. Mot. SJ at 5). The bankruptcy court denied the motion to reconsider and directed the Trustee to either follow its Order or to file an interpleader action in this court if she wished to resolve the dispute over the $83,000, because the bankruptcy court lacked jurisdiction over the funds derived from exempt property. (U.S. Ex. 7).
Introduction
This matter involves a dispute over funds originally assessed in the bankruptcy court. The United States, citing In re Wesche, 178 B.R. 542 (Bankr. M.D. Fla. 1995) and In re Graziadei, 32 F.3d 1408 (9th Cir. 1994), argues that the bankruptcy court did not have jurisdiction to order the distribution of the disputed funds because the funds were exempt property no longer within the jurisdiction of the bankruptcy court. Based on a review of the applicable statutes and case law, this court concludes that the bankruptcy court did not have jurisdiction over the distribution of exempt property. See Novak v. O'Neal, 201 F.2d 227, 231 (5th Cir. 1953) ("As to assets of the bankrupt exempt by State laws, the court of bankruptcy exercises jurisdiction only to the extent necessary to segregate and set aside the property or money as so exempt by the bankrupt . . . . [The] adjudication of claims thereto by creditors or lienees therefore can not be properly be made by the court of bankruptcy.").
The Eleventh Circuit adopted as binding precedent all cases decided by the former Fifth Circuit prior to the close of business on September 30, 1981. See Bonner v. Prichard, 661 F.2d 1206, 1209 (11th Cir. 1981).
This court has jurisdiction over the matter because it involves a federal question, namely the priority of federal tax liens. The applicable provision is 28 U.S.C. § 1340, which provides that "district courts shall have original jurisdiction of any civil action arising under any Act of Congress providing for internal revenue." The Eleventh Circuit has noted that once a federal tax lien arises, "federal law governs the priority of competing liens asserted against a taxpayer's property." Griswold v. United States, 59 F.3d 1571, 1575 (11th Cir. 1995). Accordingly, this court concludes that its subject matter jurisdiction over this matter has been established.
Summary Judgment Standard
Rule 56(c) of the Federal Rules of Civil Procedure authorizes summary judgment when the pleadings and supporting materials show that there is no genuine issue as to any material fact and that the moving party is entitled to judgment as a matter of law. See Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248, 106 S.Ct. 2505, 2510 (1986). The court's focus in reviewing a motion for summary judgment is "whether the evidence presents a sufficient disagreement to require submission to a jury or whether it is so one-sided that one party must prevail as a matter of law." Allen v. Tyson Foods, Inc., 121 F.3d 642, 646 (11th Cir. 1997). The moving party has the burden to establish the absence of a genuine issue as to any material fact. See Adickes v. S.H. Kress Co., 398 U.S. 144, 157, 90 S.Ct. 1598, 1608 (1970); Tyson Foods, Inc., 121 F.3d at 646. Once the moving party has established the absence of a genuine issue of material fact, to which the nonmoving party bears the burden at trial, it is up to the nonmoving party to go beyond the pleadings and designate "specific facts showing that there is a genuine issue for trial." Celotex v. Catrett, 477 U.S. 317, 324, 106 S.Ct. 2548, 2553 (1986). Issues of fact are genuine only if a reasonable jury, considering the evidence presented could find for the nonmoving party. See Anderson, 477 U.S. at 247-51, 106 S.Ct. at 2510-11. In determining whether to grant summary judgment, the district court must remember that, "credibility determinations, the weighing of the evidence, and the drawing of legitimate inferences from the facts are jury functions, not those of a judge." Id. 477 U.S. at 255, 106 S.Ct. at 2513.
Analysis
Three issues must be resolved in this case. First, this court must determine if the Garcias' property is exempt from the federal tax lien because of its classification as homestead property. Second, if the property is not exempt from the federal tax lien, then this court must rule on who has priority over the disputed funds, Landron or the United States. Finally, this court must decide if the Trustee is entitled to costs and attorney's fees for bringing this interpleader action.
A. Homestead Exemption and Federal Tax Liens
The Garcias argue that their property and the sale proceeds that came from it should not be subject to a federal tax lien because, according to the Florida constitution, the property is homestead property. The United States argues, citing United States v. Mitchell, 403 U.S. 190 (1971) and Weitzner v. United States, 309 F.2d 45 (5th Cir. 1962), that federal tax liens preempt state exemption statutes. This court agrees with the United States that the law is clear, as discussed below, that the Florida state exemption statute for homestead property does not avoid a federal tax lien.
As noted in the United States's summary judgment motion, the applicable statute authorizing the United States to issue a levy is 26 U.S.C. § 6331. Section 6331 indicates that 26 U.S.C. § 6334 outlines the circumstances under which certain property are exempt from a federal tax lien. Homestead state exempt property is not among the property listed as being exempt from levy. See 26 U.S.C. § 6334. Additionally, in United States v. Rodgers, 461 U.S. 677, 683, 103 S.Ct. 2132, 2137 (1982), the U.S. Supreme Court noted that "it has long been an axiom of our tax collection scheme that, although the definition of underlying property interests is left to state law, the consequences that attach to those interests is a matter left to federal law." (citations omitted). In Rodgers, the Court held that the Texas homestead exemption did not exempt the disputed property from the federal tax lien. See id. at 701, 2146.
"If any person liable to pay any tax neglects or refuses to pay the same within 10 days after notice and demand, it shall be lawful for the Secretary to collect such tax (and such further sum as shall be sufficient to cover the expenses of the levy) by levy upon all property and rights to property (except such property as is exempt under section 6334) belonging to such person or on which there is a lien provided in this chapter for the payment of such tax." 26 U.S.C. § 6331 (a).
Other cases have made clear that homestead property is not exempt from federal tax liens. See United States v. Estes, 450 F.2d 62, 65 (5th Cir. 1971) ("Even though the homestead might be exempt under state law from the claims of private creditors, `no provisions of a state law may exempt property or rights to property from levy for the collection of' federal taxes owed.") (citing Treas. Reg. on Proc. and Admin. § 301.6334-1(c) and United States v. Bess, 357 U.S. 51, 56-57, 78 S.Ct. 1054, 2 L.Ed.2d 1135 (1958)); Weitzner, 309 F.2d at 48 ("It follows that the tax liens of the United States were and are valid and enforceable against the property claimed as homestead."). These cases in conjunction with the applicable statute compels this court's conclusion that Florida's homestead exemption does not immunize homestead property from federal tax liens.
B. United States's Levy and Landron's Mortgage
1. Does Landron have a recognized interest?
The United States claims that it is entitled to the disputed funds because of the superiority of the federal tax lien to the Landron mortgage. Before reaching the federal inquiry regarding priority, however, this court must determine if Landron's mortgage is a valid interest in "property or rights to property." Haas v. Internal Revenue Service, 31 F.3d 1081, 1084 (11th Cir. 1994) (citations omitted). This determination is essential to this court's analysis because the federal statutes involved in this action do not create property rights; they simply define federal consequences to those rights. See United States v. National Bank of Commerce, 472 U.S. 713, 722, 105 S.Ct. 2919, 2925, 86 L.Ed.2d 565 (1985) (citing Bess, 357 U.S. at 55, 78 S.Ct. at 1057, 2 L.Ed.2d 1135); see also Mitchell, 403 U.S. at 197, 91 S.Ct. at 1768 ("In the determination of ownership, state law controls. `The state law creates legal interests but the federal statute determines when and how they shall be taxed.'") (citations omitted). Technically, Landron's mortgage became presumptively protected by Florida law when it was recorded on August 2, 1999. See FLA. STAT. ch. 695.01; see also People's Bank of Jacksonville v. Arbuckle, 82 Fla. 479, 487, 90 So. 458, 460 (Fla. 1921) ("The due record of a mortgage is statutory notice of the contract lien, binding all who deal with reference to liens upon the property."). The United States does not dispute whether Landron's mortgage is valid under Florida law; it questions the mortgage's validity as a security interest under federal law for tax lien purposes. Thus, this court concludes that Landron's mortgage is a valid property interest under Florida law, but as the cases cited above assert, federal law determines if it is a "security interest" for tax lien purposes.
A federal tax lien is created by operation of law pursuant to 26 U.S.C. § 6321, and 26 U.S.C. § 6322 indicates that the lien is imposed at the date of assessment: "Unless another date is specifically fixed by law, 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 (or a judgment against the taxpayer arising out of such liability) is satisfied or becomes unenforceable by reason of lapse of time." Despite the fact that the United States's tax lien is assessed at the time liability is determined, Landron might have a protected security interest if she falls into a certain category and notice of the federal tax lien has not been filed.
"If any person liable to pay any tax neglects or refuses to pay the same after demand, the amount (including any interest, additional amount, addition to tax, or assessable penalty, together with any costs that may accrue in addition thereto) 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."
26 U.S.C. § 6323 (a) outlines the four circumstances under which the federal tax lien would not be effective against Landron:
(a) Purchasers, holders of security interests, mechanic's lienors, and judgment lien creditors. — The 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 which meets the requirements of subsection (f) has been filed by the Secretary.
Based on the definition of each term in the above statute, Landron is not a purchaser, mechanic's lienor, or a judgment lien creditor. Thus, Landron's mortgage would most qualify as a holder of a security interest, which means "any interest in property acquired by contract for the purpose of securing payment or performance of an obligation or indemnifying against loss or liability. 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 subsequent judgement 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). Landron must establish all conditions of Section 6323(h)(1) in order to be protected by Section 6323(a). See Haas, 31 F.3d at 1085. The United States argues that Landron's interest does not qualify under the statute because she has not parted with money or with money's worth. Landron has stated during oral argument as well as in her deposition that she did not pay the Garcias the $69,000 directly, nor has she paid back the loan received from the company in the Dominican Republic (See Landron. Depo. at 16).
In holding that a bank had not parted with money or money's worth, the Fourth Circuit, quoting Treas. Reg. § 301.6323(h)-1(a)(3) (1989) [26 C.F.R.], defined money or money's worth as "money, a security . . ., tangible or intangible property, services, and other consideration reducible to a money value. Money or money's worth also includes any consideration . . . which was parted with before the security interest would otherwise exist if, under local law, past consideration is sufficient to support an agreement giving rise to a security interest . . . . [A]ny other consideration not reducible to a money value [is not] consideration in money or money's worth." United States v. 3809 Grain Ltd. P'ship, 884 F.2d 138, 142 (4th Cir. 1989). Based on the definition of money or money's worth, Landron has failed to provide any evidence that she has parted with money's worth and she has already admitted that she has not actually parted with money. In addition, she does not have any documentation of any agreement with the company in the Dominican Republic that sent the $69,000 to the Garcias.
Accordingly, this court concludes that Landron does not possess a security interest that may compete with the federal tax lien. The United States has filed a Declaration of Jacqueline Kelly, an employee of the Internal Revenue Service, which states that as of September 3, 2002, the Garcias owe over $200,000 in federal taxes. Therefore the United States is entitled to the full $83,000 of interpled funds pursuant to 26 U.S.C. § 6331 (a), unless Landron has a priority over the United States or the Trustee is entitled to attorney's fees. As indicated below, neither situation applies. See United States v. Ruff, 99 F.3d 1559, 1563 (11th Cir. 1996) ("The IRS is empowered to levy on the property or rights to property of a delinquent taxpayer in the hands of a third party.").
2. Does Landron's interest have a priority over the United States's interest?
If Landron had provided evidence that she had parted with money or money's worth with reference to the mortgage, the priority of liens would not be so clear. The United States argues that Landron's claim to the disputed funds is inferior to its claims because, citing 26 U.S.C. § 6321, Landron's interest in the property arose after the tax assessments because Landron's mortgage was not recorded until August, 2, 1999, while the Garcia tax liabilities date from November 1993 to September 1997. The United States is incorrect, however, with the dates it is using to determine the priority of interests in the Garcia property.
According to the Eleventh Circuit, in Litton Industrial Automation Systems, Inc. v. Nationwide Power Corp., 106 F.3d 366, 368 (11th Cir. 1997), "any `security interest' which arises prior to the proper filing of a federal tax lien takes priority over the tax lien." (citing United States v. McDermott, 507 U.S. 447, 449, 113 S.Ct. 1526, 1528, 123 L.Ed.2d 128 (1993)). The Litton court also noted that federal law, as opposed to state law, governs a priority question between a security interest and a federal tax lien. Id. at 371 (citing Haas, 31 F.3d at 1084-85). Proper filing of notice of the federal tax lien is usually essential in the answer to a priority contest. Based on Litton and the applicable statute, the determining factor is the filing of notice, not the date that the federal tax liability was incurred or assessed, as the United States asserts, unless the dates coincide. The Haas court noted: "The filing requirement is critical: even a holder of a security interest who has actual knowledge of an unfiled tax lien will prevail over the government." Haas, 31 F.3d at 1084. The United States has admitted during oral argument that no notice has been filed in the appropriate office in the state. The United States stated that they are relying solely on the statutory lien that automatically applies when tax liability is assessed. See Texas Oil Gas Corp. v. United States, 466 F.2d 1040, 1052 (5th Cir. 1972) (citing 26 U.S.C.A. § 6322). This statutory lien may alert the individuals who owe federal taxes, but it fails to alert others who may have a security interest in property owned by the delinquent taxpayers.
The Litton court further provided: "Under the Internal Revenue Code, a tax lien arises at the time of assessment, 26 U.S.C. § 6322, on `all property and rights of property, whether real or personal, belonging to' a delinquent taxpayer, [26 U.S.C.] § 6321. The FTLA provides, however, that the tax lien `shall not be valid as against any . . . holder of a security interest . . . until notice thereof which meets the requirements of subsection (f) has been filed." (citing 26 U.S.C. § 6323 (a).
The relevant statute that outlines how the United States is supposed to file a proper notice is 26 U.S.C. § 6323 (f). Section 6323(f)(1)(A)(i) indicates that the notice shall be filed according to state law an in "the case of real property, in one office within the State (or the county, or other governmental subdivision), as designated by the laws of such State, in which the property subject to the lien is situated; and" section 6323(f)(1)(B), in "the office of the clerk of the United States district court for the judicial district in which the property subject to the lien is situated, whenever the State has not by law designated one office which meets the requirements of subparagraph (A)." Thus, according to the statute, the United States must make another step to protect itself against other security interest holders. See Haas, 31 F.3d at 1084 ("Thus, section 6323 mandates that notice of the taxing authority's lien `shall be filed' in the public records before it operates as notice effective against any holder of a security interest as that term is defined by section 6323.").
Because the United States has admitted to failing to file the proper notice as required by the applicable statute, the Landron's mortgage should prevail over the federal tax lien. The mortgage falls short of priority, however, because, as discussed above, it does not meet all four conditions of a security interest as defined by section 6323. All four conditions must be met before a security interest can be valid and therefore compete with a federal tax lien. See Litton, 106 F.3d at 368; Haas, 31 F.3d at 1085. This court therefore concludes that since Landron failed to meet all four requirements, the fact that the United States failed to properly record the federal tax lien is irrelevant; the United States prevails by default since it is not competing against a valid security interest and the federal tax lien is otherwise valid.
C. Trustee's Entitlement to Attorney's Fees
The United States argues that the trustee is not entitled to attorney's fees, citing Cable Atlanta, Inc. v. Project, Inc. et al, 749 F.2d 626 (11th Cir. 1984) and Spinks v. Jones, 499 F.2d 339 (5th Cir. 1974), because the interpled funds are insufficient to cover the government's tax liens. The Trustee responds that she is entitled to attorney's fees because the interpled funds exceed the federal tax obligations by more than $20,000. In its reply, the United States points out that the federal tax liens actually total over $200,000. Based on Eleventh Circuit case law discussed below, this court concludes that the trustee is not entitled to attorney's fees in this case.
The Eleventh Circuit has noted that "[n]ormally a stakeholder who brings an interpleader action to determine which of two claimants is entitled to a fund which it holds, but does not claim, is entitled to have attorneys fees it incurs in bringing the action paid out of the fund. No such fees can be paid from the fund, however, when it goes to satisfy a tax lien." Cable Atlanta, 749 F.2d at 626. Additionally, in Katsaris v. United States, 684 F.2d 758 (11th Cir. 1982), a sheriff brought an interpleader action as a disinterested stakeholder regarding seized money. The Eleventh Circuit in that case pointed out that "Florida courts have found proper the award of reasonable attorney's fees and costs in an interpleader action where the party brining the action is disinterested in the stake held and has not acted to cause the conflicting claims." Katsaris, 684 F.2d at 763 (citing Drummond Title Company v. Weinroth, 77 So.2d 606 (Fla. 1955); Ellison v. Riddle, 166 So.2d 840 (Fla.App. 1964)). But the Eleventh Circuit further held that "once the government is successful in establishing a federal tax lien upon the funds in question, the judicial prerogative to award fees must give way to the supremacy of the federal tax lien whenever a fee award would encroach upon the fund subject to the tax lien." Katsaris, 684 F.2d at 763 (citing Spinks).
The court went on to note: "The rationale of this decision is that the provisions of the Internal Revenue Code which establishes the lien, 26 U.S.C.A. §§ 6321, 6322, prohibit an award of attorney's fees when the effect of such award would diminish the amount recovered by the United States under its prior tax lien." Cable Atlanta, 749 F.2d at 627.
The Trustee contended during oral argument that relevant Eleventh Circuit case law regarding attorney's fees for a plaintiff bringing an interpleader action always applied to debtors and not disinterested stakeholders, but Katsaris involves a sheriff who as in fact a disinterested stakeholder, and the court still held that attorney's fees could not be awarded if it would encroach on the amount of the federal tax lien. The United States has submitted documentation that the Garcias still owe more than $200,000 in federal taxes. Because an award of attorney's fees to the Trustee would encroach on the funds subject the tax lien (as only $83,000 are in dispute in this case), this court concludes that the Trustee is not entitled to attorney's fees.
Conclusion
This court concludes that the United States is entitled to the $83,000 of disputed funds because the Garcias' homestead property is not immune to a federal tax lien. In addition, Landron's mortgage, although a valid interest under Florida law, does not prevail over the federal tax lien because it fails to meet one of the requirements of a security interest (parting with money or money's worth) according to the applicable federal statute. Finally, the Trustee is not entitled to attorney's fees because the $83,000 of interpled funds do not satisfy fully the Garcias' federal tax liabilities.
It is hereby:
ORDERED AND ADJUDGED THAT:
1. The United States's motion for summary judgment [DE #92] is GRANTED.
2. The Trustee's cross-motion for summary judgment [DE #96] is DENIED.
3. All pending motions are DENIED AS MOOT.
4. This case is hereby DISMISSED WITH PREJUDICE and CLOSED.