United States District Court, S.D. California
October 20, 2005.
CTC REAL ESTATE SERVICES, Petitioner,
ALL CLAIMANTS TO SURPLUS FUNDS AFTER TRUSTEE SALE AT 2225 VICTORIA PARK TERRACE, ALPINE, CALIFORNIA 91901; INCLUDING, BUT NOT LIMITED TO: JAMES LEE JUBY JR., BETTY LOU WOOLMAN, GEORGE PHILLIP WOOLMAN, STATE OF CALIFORNIA FRANCHISE TAX BOARD, NORTHWEST FUNDING GROUP, INTERNAL REVENUE SERVICE, AND DOES 1 THROUGH 20, inclusive, Respondents.
The opinion of the court was delivered by: DANA SABRAW, District Judge
ORDER GRANTING RESPONDENT UNITED STATES' MOTION FOR SUMMARY
JUDGMENT AND DIRECTING INTERPLEADER FUNDS TO BE DISBURSED
This suit arises from an interpleader action in which CTC Real
Estate Services ("CTC") seeks to determine the proper claimants
to the surplus funds from the sale of George and Betty Woolman's
(the "Woolmans") home, located at 2225 Victoria Park Terrace,
Alpine, California 91901 ("Subject Property"). The United States
of America ("United States"), on behalf of the Internal Revenue
Service ("IRS"), now moves for summary judgment, and requests
that the Court direct payment from the surplus proceeds to the
United States, for unpaid federal taxes the IRS assessed against
the Woolmans in 1996. The Woolmans filed an Opposition to the
motion for summary judgment on October 3, 2005. Thereafter, the
United States filed a Reply. The Court finds this matter suitable
for submission without oral argument pursuant to Local Civil Rule 7.1(d)(1). For
the reasons discussed below, the Court grants the United States'
motion for summary judgment.
FACTUAL AND PROCEDURAL BACKGROUND
On June 19, 2001, James L. Juby ("Juby") conveyed his interest
in the Subject Property by quitclaim deed to his mother, Betty
Woolman. Thereafter, on April 4, 2002, Betty Woolman recorded the
deed to the Subject Property in her name as sole owner of the
After Betty Woolman recorded the deed, a dispute arose between
Juby and Betty Woolman as to whether the transfer of interest in
the Subject Property was valid. Notwithstanding the dispute, on
July 2, 2004, Betty Woolman conveyed her interest in the Subject
Property by quitclaim deed to her husband, George Woolman. On
that same day, George Woolman filed for Chapter 7 bankruptcy
protection and the Subject Property was subsequently sold at a
non-judicial trustee's sale.
On November 8, 2004, CTC initiated an interpleader action in
the Superior Court of the State of California in San Diego, to
determine the proper claimants to the surplus funds from the sale
of the Subject Property. CTC deposited a total of $101,504.97 in
the registry of the Superior Court. On December 9, 2004, the
United States removed this action to the District Court pursuant
to 28 U.S.C. §§ 1444 and 2410.*fn1 After removal, four
parties answered the Complaint and claimed a right to the surplus
proceeds from the sale: the Woolmans, the United States, the
California Franchise Tax Board ("FTB"), and Northwest Funding
On May 18, 2005, a portion of the excess proceeds in the amount
of $34,600.00 was released to Northwest pursuant to a stipulation
signed by the parties and subsequently approved by this Court.
Thereafter, Northwest was dismissed from the case. In addition,
after the FTB received the Woolmans' state tax returns for the periods of 1999 to 2001, it
notified the United States Magistrate Judge in this matter that
the only liabilities owed by the Woolmans for the relevant tax
years are not covered by the FTB's liens. Accordingly, the FTB
acknowledged that it no longer has a valid claim to the excess
proceeds. (See Attachment A to the Woolmans' Affidavit in
Support of the Opposition to Motion for Summary Judgment.)
On August 31, 2005, the United States, on behalf of the IRS,
filed a motion for summary judgment, contending that it is
entitled to $52,830.55 of the excess proceeds from the sale of
the Woolmans' home, due to unpaid federal taxes that the IRS
assessed against them in 1996.*fn3 The IRS' assessments of
the Woolmans' federal tax liabilities covered the periods of
1991, 1992, 1994 and 1995. (See Exhibits A, B, C, and D to
United States' Motion for Summary Judgment). All of the IRS'
notices of tax deficiencies were served at the Woolmans' last
known address. (See Opposition to Motion for Summary Judgment at
5.) In addition, a declaration provided by the United States
indicates that on February 2, 1997, a delegate of the Secretary
of the Treasury filed a Notice of Federal Tax Lien against the
Woolmans with the San Diego County Recorder's Office. (See
Exhibit E to United States' Motion for Summary Judgment).
According to the United States, despite being properly notified
of their tax deficiencies, the Woolmans have failed to pay the
taxes assessed. (See United States' Motion for Summary Judgment
On October 3, 2005, the Woolmans filed an Opposition to the
United States' motion for summary judgment, contending that
genuine issues of material fact exist as to the validity of the
federal tax lien. Specifically, the Woolmans raise three
contentions in support of their opposition. First, they contend
there are genuine issues of material fact as to whether the IRS
properly notified them of their tax liabilities, because the
notices of deficiencies were mailed to their last known address
after they were evicted from that residence. (Id.) Second, they
contend the IRS' assessments of their tax liabilities is
incorrect as to the amount owed. (Id. at 5-6.) Finally, the
Woolmans also argue that the principles of equity, justice, and
economy weigh in favor of this Court's denial of the motion for
summary judgment. (Id.) II.
STANDARD OF REVIEW
Summary judgment is appropriate under Rule 56 of the Federal
Rules of Civil Procedure on "all or any part" of a claim where
there is an absence of a genuine issue of material fact and the
moving party is entitled to judgment as a matter of law. See
Fed.R.Civ.P. 56(a) & (c); Celotex Corp. V. Catrett,
477 U.S. 317, 322 (1986). A fact is material when, under the governing
substantive law, it could affect the outcome of the case.
Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248 (1986);
Freeman v. Arpaio, 125 F.3d 732, 735 (9th Cir. 1997). A dispute
about a material fact is genuine if "the evidence is such that a
reasonable jury could return a verdict for the nonmoving party."
Anderson, 477 U.S. at 248.
A party seeking summary judgment bears the initial burden of
establishing the absence of a genuine issue of material fact.
Celotex, 477 U.S. at 323. The moving party can satisfy this
burden in two ways: (1) by presenting evidence to negate an
essential element of the nonmoving party's case; or (2) by
demonstrating that the nonmoving party failed to make a showing
sufficient to establish an element to that party's case on which
that party will bear the burden of proof at trial. Id. at
322-23. If the moving party fails to discharge this initial
burden, summary judgment must be denied and the court need not
consider the nonmoving party's evidence. Adickes v. S.H. Kress &
Co., 398 U.S. 144, 159-60 (1970).
If the moving party meets this initial burden, the nonmoving
party cannot defeat summary judgment by merely demonstrating
"that there is some metaphysical doubt as to the material facts."
Matsushita Elec. Indus. Co. Ltd. v. Zenith Radio Corp.,
475 U.S. 574, 586 (1986); see also Triton Energy Corp. v. Square D.
Co., 68 F.3d 1216, 1221 (9th Cir. 1995) ("The mere existence of
a scintilla of evidence in support of the nonmoving party's
position is not sufficient.") (citing Anderson,
477 U.S. at 252). Rather, the nonmoving party must "go beyond the pleadings
and by [his or] her own affidavits, or by `the depositions,
answers to interrogatories, and admissions on file,' designate
`specific facts showing that there is a genuine issue for
trial.'" Celotex, 477 U.S. at 344 (quoting Fed.R.Civ.P. 56(e)).
"Disputes over irrelevant or unnecessary facts will not preclude
a grant of summary judgment." T.W. Elec. Serv. Inc. v. Pacific
Elec. Contractors Ass'n, 809 F.2d 626, 630 (9th Cir. 1987). Moreover, "the district court may limit its review to
the documents submitted for purposes of summary judgment and
those parts of the record specifically referenced therein."
Carmen v. San Francisco Unified Sch. Dist., 237 F.3d 1026, 1030
(9th Cir. 2001). The Court is not obligated "to scour the records
in search of a genuine issue of triable fact." Keenan v. Allen,
91 F.3d 1275, 1279 (9th Cir. 1996) (citing Richards v. Combined
Ins. Co., 55 F.3d 247, 251 (7th Cir. 1995)).
When making its determination, the Court must view all
inferences drawn from the underlying facts in the light most
favorable to the party opposing the motion. See Matsushita,
475 U.S. at 587. "Credibility determinations, the weighing of
evidence, and the drawing of legitimate inferences from the facts
are jury functions, not those of a judge, [when] he is ruling on
a motion for summary judgment. Anderson, 477 U.S. at 255.
As noted above, the United States moves for summary judgment on
grounds that the federal tax lien is valid, and that the lien
takes priority over all other claims to the surplus funds. The
Woolmans oppose the motion on grounds that genuine issues of
material fact exist as to the validity of the federal tax lien.
Based on the undisputed evidence presented by the parties, the
Court finds that the federal tax lien is valid, and further, the
tax lien has priority over all other claims to the interpled
A. Validity of the Federal Tax Lien
In an interpleader action, each party claiming entitlement to
the interpled funds has the burden of proof, by a preponderance
of the evidence, to show that it is entitled to the funds. See
In re The Kelly Group, Inc., 159 B.R. 472, 476 (Bkrtcy.W.D.Va.
1993); Midland Ins. Co. v. Friedgood, 577 F.Supp. 1407, 1411
(S.D.N.Y. 1984). If that burden is not met, the claimant is
generally not entitled to share in the interpled funds. Midland
Inc. Co., 577 F.Supp. at 1412. In addition, while interpleader
actions are governed by equitable principles, a determination on
the proper distribution of interpled funds must be based on law.
Prudential Ins. Co. of America v. Neal, 768 F.Supp. 195, 200
The Government may impose tax liens against the real or
personal property of any person who neglects or refuses to pay
federal income taxes. 26 U.S.C. § 6321. A tax lien arises at the
time the tax is assessed and continues until the tax liability is satisfied or
is unenforceable due to lapse of time. 26 U.S.C. § 6322. Once a
federal tax lien has attached to a taxpayer's property or rights
to property, federal law determines the priority of the competing
liens asserted against the taxpayer's property. Aquilino v.
United States, 363 U.S. 509, 513-14 (1960). Finally, priority
between competing debts or liens is established by the "first in
time" rule: a tax lien has priority over other debts if it is
first in time. U.S. By and Through I.R.S. v. McDermott,
507 U.S. 447, 449 (1993). Moreover, this is generally the rule even
if the tax lien has not been recorded. Id. at 455.
Here, the United States' interest in the interpled funds arose
from the assessments the IRS made against the Woolmans in 1996.
Thus, pursuant to 26 U.S.C. § 6321, a federal tax lien attached
to the Woolmans' property when the IRS made its tax assessments
against them. 26 U.S.C. §§ 6321, 6322; see In re Berg,
188 B.R. 615 (B.A.P. 9th Cir. 1995). In addition, in their motion for
summary judgment, the United States provides evidence to show
that the IRS filed a notice of tax lien against the property
belonging to the Woolmans with the County Recorder of San Diego
County on February 12, 1997. (See Exhibit E attached to
Maragani Declaration.) Pursuant to 26 U.S.C. § 6322, the federal
tax lien remains attached the Woolmans' property because they
have failed to pay the taxes assessed. 26 U.S.C. § 6322; see
also United States v. Hodes, 355 F.2d 746, 748 (2nd Cir. 1966)
("There is no specific time limitation on the life of an
assessment lien; under I.R.C. § 6322, the lien, once valid,
survives so long as the underlying liability for the tax is
enforceable.") Accordingly, the tax lien attached to the
interpled funds when the Subject Property was sold at the
trustee's sale on July 2, 2004. See Glass City Bank of Jeanette,
Pa., v. United States, 326 U.S. 265, 268 (1945) ("Our conclusion
is that the lien applies to property owned by the delinquent at
any time during the life of the lien."); see also Seaboard Sur.
Co. v. United States, 306 F.2d 855 (9th Cir. 1962) (emphasis
The Woolmans, however, contend there are genuine issues of
material fact as to the validity of the federal tax lien. They
offer three arguments in support of their opposition. First, the
Woolmans argue there are genuine issues of material fact as to
whether the IRS provided adequate notice of their tax
deficiencies. Specifically, the Woolmans allege that the notices
of deficiency were mailed to the their last known address after
they were evicted from that residence. (See Opposition to
Motion for Summary Judgment at 5.) Therefore, they were not aware of any
attempts to personally serve them at that residence. (Id.)
Second, the Woolmans contend the IRS' assessment of their tax
liabilities is incorrect as to the amount they owe. In support,
they attach the affidavit of their tax advisor, Richard Rogers
("Rogers"), as "evidence" that their tax liability may be as low
as $180.00, when their tax returns are reassessed with
consideration given to all relevant deductions. (See Affidavit of
Richard Rogers at 2.) Based on Rogers' calculations, the Woolmans
argue the "IRS' substitute for return assessments will cause them
to pay more" than their actual tax liability for the tax periods
at issue. (See Opposition to Motion for Summary Judgment at 6.)
Finally, the Woolmans contend that principles of equity given
the equitable nature of interpleader actions weigh in favor of
denying the United States' motion for summary judgment. The
Woolmans claim they "were severely harmed by the incompetence of
their prior tax advisors, who failed to take [sic] thousands of
dollars in deductions on their behalf, and miscalculated the
amount of tax they were to pay . . ." and that "[t]he
incompetence of their fiduciaries caused the deficiencies in the
Woolmans' tax payments and caused this action to be filed."
(See Opposition to Motion for Summary Judgment at 3.) In
addition, the Woolmans allege they "were advised by their
fiduciaries during the years in questions that the amounts they
were paying for taxes were the correct amounts." (Id.) In light
of the alleged incompetence of their prior fiduciaries, as well
as the projected reassessments of the tax statements for the
relevant periods from their current tax advisor, the Woolmans
argue summary judgment should be denied so they can present
evidence to the IRS of the amount actually owed, and engage in
settlement discussions prior to any judgment in this action.
(Id. at 7)
With respect to the first contention, the Woolmans admit the
IRS mailed the notices of deficiency to their last known address.
They claim, however, that the IRS failed to comply with proper
notice requirements because they "were not aware of any attempts
to personally serve them at this residence." (See Opposition to
Motion for Summary Judgment at 5.) This claim lacks merit. Under
26 U.S.C. § 6303(a), the IRS is required only to send notices of
deficiency to the taxpayer's last known address.
26 U.S.C. § 6303(a); see Williams v. C.I.R., 935 F.2d 1066, 1067 (9th Cir.
1991). Moreover, as the Ninth Circuit has held, such notice is valid even if the taxpayer
does not receive it. See Hansen v. United States, 7 F.3d 137
(9th Cir. 1993); United States v. Zolla, 724 F.2d 808, 810 (9th
Cir. 1984), cert. denied, 469 U.S. 830 (1984). The Court
therefore finds that the United States complied with applicable
notice requirements by sending the notices of deficiencies to the
Woolmans' last known address.
Next, the Woolmans contend the IRS' assessment of their tax
liabilities is incorrect. Here, the Woolmans claim that their
current tax advisor's recalculated assessments of their tax
liabilities "provide evidence that the IRS substitute for return
assessments will cause the Woolmans to pay more than they
actually owe to the federal government for their taxes in the
years of 1991, 1992, 1994, and 1995." (See Opposition to Motion
for Summary Judgment at 6.) In essence, the Woolmans challenge
the validity of federal tax lien as to the amount of the IRS'
assessments. However, in cases where the United States is a named
defendant pursuant to 28 U.S.C. § 2410, as is the case here, the
Ninth Circuit has held that a taxpayer may not use a § 2410
action to collaterally attack the merits of a tax
assessment.*fn4 Hughes v. United States, 953 F.2d 531, 538
(9th Cir. 1992). The Woolmans' evidence regarding their prior
fiduciaries' alleged incompetence, as well as the projected
reassessments of their tax liabilities, challenges the merits of
the IRS' assessments. Because the United States was joined in
this action pursuant to 28 U.S.C. § 2410, the Woolmans may not in
this proceeding challenge the validity of the IRS' assessments.
Finally, the Woolmans' contend that the principles of equity
preclude granting the United States' motion for summary judgment.
While the Woolmans correctly note that an interpleader action is
equitable in nature, a determination regarding the proper
distribution of interpled funds is one based on law, not equity.
See Prudential Ins. Co. of America, 768 F.Supp. at 195
("District court is not free, even when sitting in equity, to
disregard applicable federal statutes and case law.") A federal
tax lien is a statutory lien. 11 U.S.C. § 101(53). Moreover, as
noted above, a tax lien in favor of the United States arises by
operation of law if a person is unable to pay a tax liability
after demand for payment is made. 26 U.S.C. § 6321. Therefore, as applied to the
case at bar, this Court is not free to disregard the United
States' claim to the excess funds, which arises from a properly
recorded and served tax lien. Accordingly, this argument provides
no relief for the Woolmans.
In sum, the Court finds that the United States has established
that the subject federal tax lien is valid. The Woolmans fail to
raise genuine issues of material fact which controvert the
validity of the federal lien. Fed.R.Civ.P. 56(e) ("When a motion
for summary judgment is made and supported as provided in this
rule, an adverse party may not rest upon the mere allegations or
denials of the adverse party's pleading, but the adverse party's
response, by affidavits or as otherwise provided in this rule,
must set forth specific facts showing that there is a genuine
issue for trial."); see Homestead Title of Pinellas, Inc. V.
United States, 2005 WL 1221865 (M.D.Fla. 2005). Therefore, the
Court concludes that no material questions of fact exists
regarding the validity of the federal tax lien and its attachment
to surplus proceeds upon the sale of the house in question.
B. Priority of the Lien
As noted, once a federal tax lien has attached to a taxpayer's
property or rights to property, federal law determines the
priority of the competing liens asserted against the taxpayer's
property. Aquilino, 363 U.S. at 513-14. As such, the general
rule of "first in time" applies; a tax lien has priority over
other debts if it is first in time. McDermott, 507 U.S. at 449
(1993). Here, the Woolmans do not raise any arguments, or
otherwise offer any evidence, to establish that their claim to
surplus funds takes priority over that of the United States. In
addition, all other claimants to the surplus proceeds have been
dismissed, or have acknowledged they no longer have a valid claim
to the surplus proceeds. It is evident, therefore, that the
federal tax lien takes priority over all other claims, and the
Court so holds.
CONCLUSION AND ORDER
For the reasons discussed above, the Court GRANTS the United
States' motion for summary judgment. The Clerk of the Court is
directed to enter judgment in favor of the United States and to
disburse $52,830.55, plus any interest, penalties, and other
statutory additions that have accrued since the dates of
assessment, from the interpled funds to the "United States
Treasury." Pursuant to Local Civ.R. 67.1, the Clerk is authorized to deduct a fee for the
handling of all funds deposited with the Court and held in
interest-bearing accounts or instruments.
IT IS SO ORDERED.
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