gave Great American a deed of trust on the property. The deed of trust was recorded on August 5, 1987. It contained an assignment of rents provision. On or about August 9, 1991, Great American was taken over by the Resolution Trust Corporation ("RTC").
Castor failed to pay taxes due to the government, and on October 21, 1991, the government recorded its notice of federal tax lien.
On November 22, 1991, the RTC filed a complaint for judicial foreclosure of trust deed and for appointment of a receiver against Castor in the Superior Court for the County of Alameda ("Superior Court") for Castor's refusal to make mortgage payments. In paragraph 11 of the complaint, the RTC claimed it was entitled to the appointment of a receiver to take possession of the real property and to collect the rents. It made no attempt to collect the rents before the receiver was appointed.
On December 9, 1991, the Superior Court appointed Susan Uecker, Receiver for the property and authorized her to take possession of the leases and collect the rents. The Receiver managed the property and collected the rents under the City of Oakland lease between December 9, 1991, and October 1993. On June 10, 1993, the Trustee, California General Mortgage Service, Inc., conducted a sale of the property pursuant to the power of sale in the deed of trust. The Agency was the successful bidder at the sale and acquired the property by trustee's deed upon sale on that date. Its successful bid was $ 1,265,315.40; at the time of the foreclosure sale, the outstanding debt was $ 1,590,315.40. Thus, following foreclosure, the Agency was still owed $ 315,000.
On January 4, 1994, the Superior Court discharged the Receiver and ordered that the unexpended rent monies collected by the Receiver be paid over to the Agency. On January 11, 1994, pursuant to the Superior Court's order, $ 397,637.86 remaining from rents collected by the Receiver was paid over to the Agency. On January 28, 1994, the government served a notice of levy on the Agency for funds that the Agency had received on January 11, 1994, from the Receiver that represented the rents paid prior to June 10, 1993. The government claims that this notice of levy was not honored by the Receiver.
The government claims that its lien right in the rent was perfected on October 21, 1991, when a notice of federal tax lien was filed against Castor in Alameda County. It also claims that the beneficiary of the deed of trust did not perfect its rights in the rents until the Receiver was appointed on December 9, 1991, and, thus, after the IRS had perfected its lien.
The Agency moves to dismiss the complaint on the grounds that the government cannot demonstrate any entitlement to the rents that are the subject of this action under the applicable provisions of the Internal Revenue Code ("IRC."). In the alternative, the Agency moves for summary judgment on the above-stated grounds. It claims that it had a perfected security interest under California law to all the rents from the property before the Agency purchased the property on June 10, 1993. The government opposes this motion and moves for partial summary judgment on its claim that the notice of federal tax lien filed October 21, 1991, primes the Agency's interest in the rents, which was not perfected until December 9, 1991.
Rule 56 of the Federal Rules of Civil Procedure provides that a court may grant summary judgment "if the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to a judgment as a matter of law." Fed. R. Civ. P. 56(c).
The Supreme Court's 1986 "trilogy" of Celotex Corp. v. Catrett, 477 U.S. 317, 91 L. Ed. 2d 265, 106 S. Ct. 2548 (1986), Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 91 L. Ed. 2d 202, 106 S. Ct. 2505 (1986), and Matsushita Electric Industrial Co. v. Zenith Radio Corp., 475 U.S. 574, 89 L. Ed. 2d 538, 106 S. Ct. 1348 (1986), requires that a party seeking summary judgment identify evidence that shows the absence of a genuine issue of material fact. Once the moving party has made this showing, the non-moving party must "designate 'specific facts showing that there is a genuine issue for trial.'" Celotex, 477 U.S. at 324 (quoting Fed. R. Civ. P. 56(c)). "When the moving party has carried its burden under Rule 56(c), its opponent must do more than simply show that there is some metaphysical doubt as to the material facts." Matsushita, 475 U.S. at 586. "If the evidence is merely colorable, or is not significantly probative, summary judgment may be granted." Liberty Lobby, 477 U.S. at 249-50 (citations omitted).
The government claims that on September 17, 1991, the IRS assessed Castor for $ 526,397.66 of unpaid employment taxes. When Castor failed to pay these taxes, the assessment became a lien against all property and rights to the property of Castor in existence on September 17, 1991, as well as to any property or rights to property that Castor acquired thereafter. I.R.C. §§ 6321, 6322 (West 1989); Glass City Bank v. United States, 326 U.S. 265, 90 L. Ed. 56, 66 S. Ct. 108 (1945).
The government's claim to the presale proceeds delivered by the Receiver to the Agency is based upon its lien against Castor for unpaid taxes. The authorization for this lien is found at § 6321 of the IRC, which provides:
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. § 6321 (West 1989). A tax lien is analogous to a judgment lien and attaches to the taxpayer's property in the same way. Citizens Nat'l Trust & Say. Bank v. United States, 135 F.2d 527, 528 (9th Cir. 1943). Courts look to state law to determine if and to what extent the taxpayer has an interest in the property subject to a tax lien. United States v. Creamer Indust., Inc., 349 F.2d 625, 628 (5th Cir.), cert. denied, 382 U.S. 957, 15 L. Ed. 2d 361, 86 S. Ct. 434 (1965). When there are competing liens against the taxpayer's property, priority is normally determined on a "first in time, first in right" basis. United States v. McDermott, 507 U.S. 447, 113 S. Ct. 1526, 123 L. Ed. 2d 128 (1993).
Section 6323 of the IRC addresses conflicting liens claims to a taxpayer's property: "The lien imposed by section 6321 shall not be valid as against any purchaser, holder of a security interest, mechanic's lien, or judgment lien creditor until notice thereof which meets the requirements of subsection (f) has been filed by the Secretary." 26 U.S.C. § 6323(a) (West Supp. 1995) (emphasis added). The notice required in subsection (f) was recorded on October 21, 1991.
On September 17, 1991, Castor was the owner of the Alice Street property in Alameda County. He also was the owner of a lease with the City of Oakland on the property and had rights against the City arising from the lease. The government alleges that its lien attached to both the real property and Castor's rights under the lease on October 21, 1991. More particularly, the government argues that the IRS lien attached to Castor's rights to rent collected under the lease prior to the Agency's purchase of the property on June 10, 1993.
The Agency alleges that the deed of trust recorded against the Alice Street property makes clear that the Agency was the holder of a security interest in both the real property and the rents derived therefrom at all times relevant hereto. The IRC defines the term "security interest" as follows:
The term "security interest" means any interest in property acquired by contract for the purpose of securing payment or performance of an obligation . . . . A security interest exists at any time (A) if, at such time, the property is in existence and the interest has become protected under local law against a subsequent judgment lien arising out of an unsecured obligation, and (B) to the extent that, at such time, the holder has parted with money or money's worth.
26 U.S.C. § 6323(h)(1) (Supp. 1995) (emphasis added).
The Agency claims that the assignment of rents section of the deed of trust gives it a priority position under California law to all rents from the property to the extent not actually collected by the debtor or another secured creditor. The Agency states that its security interest was clearly derived by contract (i.e., the deed of trust and related documents) for the purpose of securing payment of an obligation (i.e., the debt reflected by the promissory note). The Agency claims that by recording the deed of trust on August 5, 1987, its interest was perfected against subsequent judgment liens. Cal. Civ. Code §§ 1214, 1215, 2897. The Agency says "money" or "money's worth" was parted with when the loan was made, and the real property and lease from which the rents were derived were in existence at the time the loan was made and security interest perfected.
The Agency also argues that it held a security interest in the lease pursuant to the recorded financing statement. This security interest, it argues, was derived by contract for the purpose of securing payment of Castor's obligation and, upon recordation, the interest was perfected against subsequent judgment liens. Money and money's worth was parted with, the leases pledged as security were in existence at the time of the pledge, and all elements to give priority to the Agency's lien over that of the government's tax lien were present. See 26 U.S.C. § 6323(h)(1). Pursuant to § 6323 of the IRC, a security interest that is perfected under local law before a tax lien is recorded can defeat the priority of a tax lien.
In this case Castor gave Great American a deed of trust on the property when the loan agreement was entered. Deeds of trust commonly contain clauses that provide for an "assignment" of the rents and profits of the mortgaged property to the lender. Randy Rogers, Note, Assignment of Rents Clauses Under California Law and in Bankruptcy: Strategy for the Secured Creditor, 31 Hastings L.J. 1433 (1980). "These clauses are designed to give the lender a lien upon the rents and profits in addition to its lien upon the underlying property." Id. at 1433-34 (footnote omitted). Assignments of rent come in various forms but basically provide an additional source of repayment and security for the underlying obligation.
There are three types of assignment of rent provisions entered into with respect to property in California: (1) absolute assignments; (2) absolute assignments conditional on default; and (3) assignments for security purposes (assignment of postdefault rents as further security). The difference between these three types of assignments relates to when and how the creditor obtains the right to obtain possession of the rents generated by the property. See Witkin, Summary of California Law, Secured Transactions in Real Property, §§ 87-89 (9th ed. 1987) and (Supp. 1994).
Under an absolute assignment, the lender collects the rents and applies them to the debt. Under an absolute assignment conditional on default, the lender collects rents automatically on the happening of a specified event with no further action required. Under an assignment for security purposes, the creditor is not granted an immediate right in and to the rents but may look to the property following default by taking affirmative steps such as having a receiver appointed. See Bernhardt, California Mortgage & Deed of Trust Practice 2d, "Rents and Profits," §§ 5.11, 5.12, pp. 248-250 (1990).
Under § 2938 of the California Civil Code, enacted in 1991, "[a] written assignment of interest in rents, issues, and profits of real property made in connection with a loan secured by real property, stating that it is absolute, shall be deemed to constitute a present transfer of the assignor's interest in existing and future rents, issues, and profits of that real property effective upon the execution and delivery of the assignment by the assignor." Cal. Civ. Code § 2938(a) (Deering 1995) (emphasis added).
The government contends that the deed of trust in this case provided an assignment of rents for security purposes. The Agency contends that the deed of trust provided an absolute assignment. The deed of trust provided as follows with respect to rents from the property:
Trustor . . . grants, transfers and assigns to Trustee, in trust, . . . that real property . . . described as:
[description of property omitted]