Opposition Brief — Mid-State Homes, Inc. v. United States

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No. 85-1546 Y 15 1988

CLERK a 3

In the Supreme Court of the Anited States

Octoser TERM, 1985

Mip-STaTE Homes, INC., PETITIONER

V.

UNITED STATES OF AMERICA

ON PETITION FOR A WRIT OF CERTIORARI TO

THE UNITED STATES COURT OF APPEALS FOR

THE ELEVENTH CIRCUIT

MEMORANDUM FOR THE UNITED STATES

IN OPPOSITION

CHARLES FRIED

Solicior General

Department of Justice

Washington, D.C. 20530

(202) 633-2217

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TABLE OF AUTHORITIES

Cases:

Baidwin County S&L Ass'n v. United

States, 81-2 U.S. Tax Cas. (CCH)

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Baum vy. United States, 76-1 U.S.

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Gilliland vy. United States, 47

A.F.T.R.2d (P-H) ¢ 81-589 ...........

Little vy. United States, 709 F.2d

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Mobley v. Brundidge Banking Co.,

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Muscle Shoals Nat’ Bank vy. Hallmark,

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Myers v. United States, 647 F.2d 591

Oden v. King, 216 Ala. 504, 113 So. 609

Puls vy. United States, 387 F. Supp. 760

Trauner v. Lowrey, 369 So.2d 531 .......

United States vy. Brosnan, 363 U.S. 237

Statutes:

Federal Tax Lien Act of 1966, Pub.

L. No. 89-719, § 109, 80 Stat.

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Statutes—Continued:

Interna! Revenue Code of 1954 (26 U.S.C.):

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Miscellaneous:

H.R. Rep. 1884, 89th Cong., 2d Sess.

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In the Supreme Court of the United States

OCTOBER TERM, 1985

No. 85-1546

MID-STATE HomEs, INC., PETITIONER

V.

UNITED STATES OF AMERICA

ON PETITION FOR A WRIT OF CERTIORARI TO

THE UNITED STATES COURT OF APPEALS FOR

THE ELEVENTH CIRCUIT

‘

MEMORANDUM FOR THE UNITED STATES

IN OPPOSITION

Petitioner challenges the court of appeals’ holding that its

interest as a purchaser at a nonjudicial foreclosure sale heid

without notice to tne United States is subject to a federal tax

lien. The decision below is correct. Petitioner does not

allege, nor is there, a conflict among the circuits on the

question presented. There is no basis for further review.

1. in October 1972, taxpayers Manuel Ferguson and his

wife executed a mortgage on Alabama realty (Pet. App.

A6). The mortgage was later assigned to petitioner Mid-

State Homes (id. at A7). In November 1979, the IRS made

an asssessment of unpaid taxes against the Fergusons in the

amount of $8,580 (ibid.). The IRS properly filed, on July

17, 1980, a notice of tax lien in that amount against the

Fergusons’ property (ibid.).

(1)

2

The Fergusons subsequently defaulted on their mort-

gage. On December 30, 1981, in accordance with the power

of sale contained in the mortgage, petitioner conducted a

nonjudicial foreclosure sale of the property (Pet. App. C6).

Petitioner, however, failed to give the United States notice

of the sale, as required by Section 7425(c)(1) of the Internal

Revenue Code.! That Section provides that notice of a

nonjudicial sale of property on which the IRS has a tax lien

“shall be given * * * in writing * * * not less than 25 days

prior to such sale, to the Secretary [of the Treasury].”

Section 7425(b)(1) in turn provides that, if the IRS is not

properly notified of a nonjudicial foreclosure sale, the sale

“shall * * * be made subject to and without disturbing such

lien.” Petitioner purchased the Fergusons’ property at the

foreclosure sale for $12,543 (Pet. App. C7 & n.4).

Apparently recognizing that its foreclosure sale was in-

effectual against.the United States because of its failure to

give the notice required by Section 7425, petitioner con-

ducted another foreclosure sale of the same property about

11 monihs later (Pet. App. C7 & n.5). This time, petitioner

gave notice of the sale to the United States. Petitioner once

again purchased the property at the foreclosure sale (id. at

A7-A8).

Section 633 1({a) of the Code authorizes the IRS to collect

an unpaid tax “by levy upon ali property and rights to

property * * * on which there is alien * * * forthe payment

of such tax.” On April 22, 1983, the IRS endeavored to

collect the Fergusons’ unpaid tax by levying on the property

that petitioner had purchased at the foreclosure sale (Pet.

App. A8). After the IRS took possession of the realty,

petitioner brought this wrongful levy action in the district

‘Unless otherwise noted, all statutory references are to the Internal

Revenue Code of 1954 (26 U.S.C.), as amended (the Code or I.R.C.).

3

court, seeking return of the property and contending inter

alia that Section 7425 was unconstitutional (Pet. App.

C12).

The district court entered summary judgment for peti-

tioner (Pet. App. Al-A14). It held that “Mid-State’s second

foreclosure was successful in cutting off [the government’s]

tax lien, leaving [the government] with no more than a lien

creditor’s statutory right to redeem” (id. at A9). The court

gave the government 30 days either to redeem the property

or to relinquish possession (id. at A14).

The court of appeals unanimously reversed (Pet. App.

C1-C42). It held that, since petitioner failed to notify the

IRS of the first foreclosure sale, the plain language of

the statute dictated that the sale was “made subject to

and without disturbing” the federal tax lien (I.R.C.

§ 7425(b)(1)). Under Alabama law, the court continued

(Pet. App. C25-C29), the result of petitioner’s purchase of

the property at the first foreclosure sale was to extinguish

both the Fergusons’ mortgage indebtedness and petitioner’s

mortgage lien, in effect “merging” the equity of redemption

(previously held by the Fergusons) and the legal title (pre-

viously held by petitioner). By virtue of this “complete

merger of title” (id. at C28), the first foreciosure sale vested

petitioner with “fee simple title to the property,” title that

was “superior to ail liens except those not extinguished,

such as * * * [the] federal tax lien,” which survived as a

claim against the property on account of petitioner’s non-

compliance with Section 7425(b)(1). Since petitioner

_ acquired a fee simple interest by virtue of the first fore-

closure sale, the court concluded, “it was impossible for

[petitioner} to conduct a second correcting foreclosure

sale,” and thus extinguish the federal tax lien, by purporting

to sell to itself, some 11 months later, property that it

already owned (Pet. App. C29).

4

The court of appeals acknowledged that the effect of its

holding was to elevate the federal tax lien from its junior

status and make it a senior claim against the property (Pet.

App. C29). The court explained, however, that this was the

natural and inevitable result of petitioner’s failure to notify

the IRS of the sale, as required by Section 7425, and the

merger of title under Alabama law, under which the fore-

closure sale extinguished petitioner’s senior lien and con-

verted that lien into a fee simple interest. The court rejected

petitioner’s argument that this result was “harsh and that it

violate[d] principles of equity” (Pet. App. C29), pointing

out that petitioner, as mortgagee, was “in the best position

to provide notice to the government” and thereby to extin-

guish the tax lien (id. at C34). The court noted that, if an

innocent third party had purchased the property at the first

foreclosure sale, that third party would have taken the

property “subject to” the federal tax lien by virtue of peti-

tioner’s noncompliance with Section 7425(b)(1). “[E]xpe-

rienced mortgagees” like petitioner, the court concluded,

“certainly should not receive different treatment” when they

purchase foreclosed-upon property themselves (Pet. App.

C34-C35).

2. The court of appeals’ decision is correct and is in

accord with the decisions of every other court of appeals

that has considered the question. Congress enacted Section

7425 in 1966 (Federal Tax Lien Act of 1966, Pub. L. No.

89-719, $ 109, 80 Stat. 1141) in response to this Court’s

opinion in United States v. Brosnan, 363 U.S. 237 (1960).

The Court there held that, if state law permitted it, a senior

lienor could extinguish a junior federal tax lien by conduct-

ing a nonjudicial foreclosure sale without notifying the

United States. Believing that the government’s interests

were not adequately protected in such circumstances, Con-

gress enacted Section 7425 to govern the discharge of junior

federal] tax liens. Section 7425(b){1) provides that, when

5

notice of a nonjudicial sale is not provided to the IRS, the

sale shall “be made subject to and without disturbing [the

federal tax] lien.” The legislative history confirms that, in

the absence of notice, the government may enforce its lien

against the property in the hands of the person who pur-

chases it at the foreclosure sale. See H.R. Rep. 1884, 89th

Cong., 2d Sess. 72 (1966).

Now that the Eleventh Circuit has reversed the district

court’s judgment in this case, judicial authority is once

again uniform as to the proper interpretation of Section

7425. That uniform view is that, if the United States is not

given notice of a nonjudicial sale, the federal tax lien

encumbers the property in the hands of the purchaser and,

as between the purchaser and the United States, the United

States comes first. E.g., Myers v. United States, 647 F.2d

591 (Sth Cir. 1981); Baldwin County S&L Ass'n v. United

States, 81-2 U.S. Tax Cas. (CCH) ¥ 9619 (S.D. Ala. 1981);

Puls vy. United States, 387 F. Supp. 760 (N.D. Cal. 1974);

Gilliland v. United States, 47 A.F.T.R.2d (P-H) § 81-589

(M.D. Tenn. 1981). See Little v. United States, 709 F.2d

517 (9th Cir. 1983); Baum v. United States, 76-1 U.S. Tax

Cas. (CCH) § 9208 (2d Cir. 1975). And this is so regardless

of whether the purchaser at the foreclosure sale is an inno-

cent third party (as in Myers v. United States, supra) or a

former mortgagee of the property (as in the instant case and

Baldwin County S&L Ass'n v. United States, supra). While

arguing that the court of appeals’ interpretation of Section

7425 is wrong (Pet. 12, 23-24), petitioner fails to address the

uniform line of judicial authority in support of the decision

below. Indeed, petitioner makes no claim that there is a

conflict among the circuits on the question presented.

3. In challenging the correctness of the decision below,

petitioner appears to have abandoned the argument on

which the district court relied in granting it summary

judgment—i.e., that the “second foreclosure was successful

6

in cutting off [the government’s] tax lien” (Pet. App. A9).

Petitioner, in other words, seems to accept the court of

appeals’ conclusion that it would be “impossible for [peti-

tioner] to conduct a second correcting foreclosure sale” (id.

at C29) by purporting to buy property that it already

owned. Petitioner challenges the decision below, rather, on

the broader ground that the effect of its failure to notify the

IRS of the first foreclosure was to render that sale “ineffec-

tual and invalid” (Pet. 25), thereby returning petitioner and

the IRS to their status quo ante the sale. Since the IRS’s tax

lien before the sale attached only to the Fergusons’ equity of

redemption, petitioner argues, the effect of its failure to

notify the IRS under Section 7425 was not to subject peti-

tioner’s fee interest in the property to the govermment’s tax

lien, but was merely to cause “the [glovernment’s equity of

redemption [to] continue[] after foreclosure” (Pet. 24-26

(emphasis in original)).

Petitioner’s argument is squarely at odds with the plain

language of the statute, with the uniform line of judicial

decisions discussed above, and with the pertinent provi-

sions of Alabama !aw as interpreted by the court of appeals.

Section 7425 does not say that failure to notify the IRS

nullifies a nonjudicial sale; the statute says, rather, that the

nonjudicial sale in such circumstances “shall * * * be made

subject to and without disturbing [the tax] lien” (1.R.C.

$ 7425(b)(1)). As we have noted, the courts of appeals have

uniformly construed this statutory language to mean that

the effect of a mortgagee’s failure to notify the IRS is that

the tax lien survives and encumbers the property in the

hands of the purchaser—precisely the conclusion reached

by the court of appeals here. And petitioner’s argument that

the effect of noncompliance with Section 7425 is merely to

have “the [glovernment’s equity of redemption continuef]

after foreclosure” (Pet. 25) ignores the pertinent provisions

of state law. As the court of appeals held (Pet. App. C26-

C29). a foreclosure sale under Alabama law results in a

7

complete merger of title; there accordingly exists no “equity

of redemption” that could “continue after foreclosure.” To

the contrary, a foreclosure sale under Alabama law “vest[s]

the fee simple title to the property in the mortgagee[],” and

it is to that fee simple interest that the surviving federal tax

lien must necessarily attach. Petitioner acknowledges, as it

must,’ that merger of title is “a generalized concept in

Alabama” (Pet. 16), but argues somewhat confusingly that

the court of appeals nevertheless “misinterpret[ed] the

weight of the law with respect to the doctrine of merger as

applied to cases similar to the present [case]” and so “mis-

applied Alabama law” (Pet. 17). That contention would not

merit this Court’s review even if it were correct, which ii is

not.

It is therefore respectfully submitted that the petition for

a writ of certiorari should be denied.

CHARLES FRIED

Solicitor Genera!

May 1986

See, e.g., Baldwin County S&L Ass'n v. United States, 81-2 U.S.

Tax Cas. (CCH) at 88,065; Muscle Shoals Nat'l Bank v. Hallmark, 399

So.2d 297 (Ala. 1981); Trauner v. Lowrey, 369 So.2d 531, 534 (Ala.

1979); Mobley v. Brundidge Banking Co., 347 So.2d 1347, 1352 (Ala.

1977); Oden v. King, 216 Ala. 504, 508-509, 113 So. 609, 612 (1927).

DOJ-i986-05