Opinion
Case No. 4:21-cv-00073-SMR-SHL
2022-04-29
UNITED STATES of America, United States, v. Alan M. DAUT, as Administrator of the Estate of Levi M. Miller and Estate of Clara V. Miller, James L. Miller, as Trustee of MFL Trust, and Virgil Lynn Slabaugh, as Trustee of Zion Trust and Trustee of Jubilee Trust, Defendants.
LaQuita Taylor-Phillips, U.S. Dept. of Justice Tax Division, Washington, DC, for United States of America. Alan M. Daut, Attorney at Law, Alan M. Daut, Altoona, IA, for Defendant Alan M. Daut.
LaQuita Taylor-Phillips, U.S. Dept. of Justice Tax Division, Washington, DC, for United States of America.
Alan M. Daut, Attorney at Law, Alan M. Daut, Altoona, IA, for Defendant Alan M. Daut.
ORDER ON PLAINTIFF'S MOTION FOR DEFAULT JUDGMENT
STEPHANIE M. ROSE, CHIEF JUDGE
Before the Court is a Motion for Default Judgment by the United States of America. The United States brought this suit to reduce to judgment the delinquent federal income taxes owed by Levi M. Miller and Clara V. Miller, both now deceased , and to enforce federal tax liens on certain real properties to enable collection of the delinquent taxes. James L. Miller and Virgil Lynn Slabaugh are named Defendants because they are trustees of purported trusts which hold legal title to the properties but the United States alleges the trust are only nominees of the Millers.
This Order will refer to both decedents and their respective estates as the "Millers."
The Clerk of Court entered default against Defendants Miller and Slabaugh on January 27, 2022, and the United States now moves for default judgment pursuant to Federal Rule of Civil Procedure 55.
The facts are drawn from the Complaint and supporting materials. For the purposes of the Motion for Default Judgment, "the factual allegations of a complaint (except those relating to the amount of damages) are taken as true." Murray v. Lene , 595 F.3d 868, 871 (8th Cir. 2010) ; see also Marshall v. Baggett , 616 F.3d 849, 852 (8th Cir. 2010).
Levi Miller died on November 6, 2016 and Clara Miller died on June 7, 2016. [ECF No. 1 ¶ 1]. The United States commenced this suit on March 4, 2021 alleging the Millers owe past due federal income taxes. It seeks a judicial order to execute a federal tax lien and authorize the sale of three properties described in the Complaint.
Defendant Slabaugh is named in the Complaint under Count III and Count V in his capacity as the trustee of two purported trusts, the Zion Trust and the Jubilee Trust. Id. ¶ 8. He is named because those trusts hold legal title to the properties identified in the Complaint as Property A and Property C. Id. ¶¶ 8; 28; 31; 64; 67. Defendant Miller is named in Count IV as the trustee of purported MFL Trust, which may have claimed an interested in property described in the Complaint as Property B. Id. ¶¶ 7; 47; 49.
Both Defendants were properly served. Defendant Slabaugh was served a summons and copy of the Complaint on March 20, 2021. See [ECF No. 3]. Defendant Miller was served by publication after the Court granted leave to do so because the United States had been unable to serve him personally. [ECF Nos. 20; 23; 29]. Defendant Slabaugh filed a document in response to the Complaint but, upon the United States’ motion, the Court struck it from the record pursuant to Federal Rule of Civil Procedure 12(f) as immaterial, impertinent, and frivolous. [ECF Nos. 6; 17]. Defendant Miller did not file any document with the Court but after service by publication, served documents on the United States with the same or similar notation Defendant Slabaugh has included on his documents.
The filing by Defendant Miller read:
" ‘Void Where Prohibited By Law’
[DATE].
The presentment above and below is dishonored. I [name] has [sic ] reserved all of his common law rights under the Uniform Commercial Code at UCC 1–308 without prejudice.
[Signature]."
[ECF No. 32 at 5].
United States Magistrate Judge Stephen Locher granted a motion by the United States ordering that the responses from both Defendants were nullities and without legal effect. [ECF No. 36]. Neither Defendant filed an answer and the Clerk of Court entered defaults against each of them on January 27, 2022. [ECF Nos. 44; 45]. The United States moved for a consent judgment with Defendant Alan M. Daut, the Administrator of the Estate of Levi Miller on March 14, 2022, which the Court granted. [ECF Nos. 47; 49]. It now moves for a default judgment against Defendants Miller and Slabaugh. [ECF No. 51].
II. LEGAL STANDARD
Federal Rule of Civil Procedure 55 governs default judgments. Obtaining a default judgment is a two-step process. First, under Rule 55(a), "the party seeking a default judgment must have the clerk enter the default by submitting the required proof that the opposing party has failed to plead or otherwise defend." Dahl v. Kanawha Inv. Holding Co. , 161 F.R.D. 673, 683 (N.D. Iowa 1995). Second, under Rule 55(b), "the moving party may seek entry of judgment on the default under either" Rule 55(b)(1) or (b)(2). Id. These rules allow for entry of default judgment by the Clerk of Court or the Court itself, respectively. See Fed. R. Civ. P. 55(b)(1)–(2). Once default has been entered, as it has been here, "it remains for the court to consider whether the unchallenged facts constitute a legitimate cause of action." Murray , 595 F.3d at 871 (citations omitted). Indeed, a party is required to "admit or deny every allegation asserted against it by an opposing party," Fed. R. Civ. P. 8(b)(1)(B), and "[a]n allegation—other than one relating to the amount of damages—is admitted if a responsive pleading is required and the allegation is not denied." Fed. R. Civ. P. 8(b)(6). Once the Court finds a party is entitled to default judgment, it must ascertain the amount of damages and determine other appropriate relief. See Hagen v. Sisseton-Wahpeton Cmty. Coll. , 205 F.3d 1040, 1042 (8th Cir. 2000) (noting that "a default judgment cannot be entered until the amount of damages has been ascertained" (citation omitted)).
III. ANALYSIS
The United States seeks two forms of relief against Defendants. First, it seeks a default judgment based on the unpaid tax assessments. Second, it requests an order permitting enforcement of the tax liens on the subject properties to satisfy the Millers’ federal tax liabilities. Defendant Alan Daut, the Administrator of both of the Millers’ estates, does not oppose the Motion for Default Judgment and also consents to the enforcement of the tax liens on the properties.
A. Subject Properties
All three properties are located in Kalona, Iowa. The Complaint designates them as Property A, Property B, and Property C and includes a legal description of each. See [ECF No. 1 ¶¶ 28; 47; 64]. Prior to the federal income tax assessments, the Millers acquired Property A and Property B, while Levi Miller acquired Property C. Id. ¶¶ 15; 22; 28; 47; 64. All of the properties were later transferred to a trust.
Property A was transferred by the Millers to the LCM Trust and then conveyed to the MFL Trust. Id. ¶¶ 29–30. It was then conveyed to the Jubilee Trust, by Defendant James Miller and Levi Miller as trustees, for no consideration. Id. ¶ 33. Defendant Slabaugh is trustee of the Jubilee Trust.
Property B was conveyed to LCM Trust by the Millers. Id. ¶¶ 48–49. The Millers then transferred bare legal title to Property B to MFL Trust, again without any consideration. Id. ¶ 52. The trustee of MFL Trust is Defendant James Miller, as was Levi Miller prior to his death. Id. ¶ 31.
Finally, Property C was conveyed to the LCM Trust by the Millers. Then the Millers, in their capacity as trustees of LCM Trust, transferred legal title to Property C to the MFL Trust. Id. ¶¶ 65; 66. Legal title to Property C was then transferred by the MFL Trust to the Zion Trust, also for no consideration. Id. ¶¶ 67; 70.
Currently, the Jubilee Trust holds title to Property A, MFL Trust holds title to Property B, and Zion Trust holds title to Property C. Id. ¶¶ 31; 33; 49; 52. No consideration was provided from these trusts in exchange for title. Id. ¶¶ 67; 70. The Complaint alleges, based on facts now deemed admitted on default, that the trusts are nominees of the Millers holding only bare legal title. [ECF No. 52 at 8]. The Millers maintained and used the property for their beneficial enjoyment, paid expenses to maintain the properties, held themselves out as owners of the properties, and controlled the properties. [ECF No. 1 ¶¶ 32; 34–37; 50; 52–56; 69; 71–75].
B. Whether the Undisputed Facts Establish a Claim
A party in default admits all well-pled factual allegations. Murray , 595 F.3d at 871 ("Upon default, the factual allegations of a complaint ... are taken as true."). However, the Court is obligated to ensure that the non-defaulting party is "entitled to the relief sought in its complaint." Martinizing Int'l LLC v. BC Cleaners, LLC , 855 F.3d 847, 850 (8th Cir. 2017).
1. Federal Tax Liens
The Internal Revenue Code authorizes the United States to enforce federal tax laws through tax liens. A taxpayer is first given notice of a tax assessment and demand for payment of the assessment. 26 U.S.C. § 6303. If the taxpayer fails to pay the assessment by the assessment date, a lien automatically attaches to all property belonging to the taxpayer. Id. §§ 6321; 6322; Pagonis v. United States , 575 F.3d 809, 812 (8th Cir. 2009) ("If the taxpayer does not pay the amount assessed, then the amount automatically becomes a tax lien on all property belonging to the taxpayer, and the IRS may proceed with further collection actions."). This lien continues until the taxpayer's liability "is satisfied or becomes unenforceable by reason of lapse of time." Id. § 6322. The broad language in Section 6321 is "meant to reach every interest in property that a taxpayer might have." United States v. Nat'l Bank of Com. , 472 U.S. 713, 719–20, 105 S.Ct. 2919, 86 L.Ed.2d 565 (1985). A tax lien pursuant to Section 6321 "is not self-executing ... [a]ffirmative action by the IRS is required to enforce collection of the unpaid taxes." Id. at 720, 105 S.Ct. 2919. One of the tools provided by the Internal Revenue Code to enforce a tax assessment is through a lien-foreclosure suit. See 26 U.S.C. § 7403(a) (authorizing a civil suit in a United States district court to enforce a tax lien).
The United States seeks to enforce the income tax assessments against the Millers pursuant to Section 7403. Although the Millers do not hold legal title to the properties in question, a federal tax lien also attaches to a taxpayer's equitable or beneficial interests in property. See In re Orr , 180 F.3d 656, 662 (5th Cir. 1999) (collecting cases).
"[S]tate law controls in determining the nature of the legal interest which the taxpayer had in the property." Nat'l Bank of Com. , 472 U.S. at 722, 105 S.Ct. 2919 (quoting Aquilino v. United States , 363 U.S. 509, 513, 80 S.Ct. 1277, 4 L.Ed.2d 1365 (1960) ). This is because no property rights are created by the Internal Revenue Code, which "merely attaches consequences" that are defined by federal law. Id. (quoting Bess v. U.S ., 357 U.S. 51, 55,78 S.Ct. 1054, 2 L.Ed.2d 1135 (1958) ). Under Iowa law, an individual may have equitable or beneficial ownership of property even if legal title is held in another's name. Moser v. Thorp Sales Corp. , 256 N.W.2d 900, 910 (Iowa 1977) ("All had notice of Mosers’ equitable ownership of the property pursuant to a valid sales contract.").
A federal tax lien may properly attach to a taxpayer's equitable or beneficial interests in property when legal title is being held in the name of a nominee or alter ego. Scoville v. United States , 250 F.3d 1198, 1202 (8th Cir. 2001) ("[L]evy power extends to property held in the name of persons or entities other than the delinquent taxpayer, to the extent that the taxpayer has an interest in such property."). Here, the United States alleges that the three trusts holding the subject properties are merely nominees of the Millers. The determination whether an entity or person is a nominee or an alter ego is a legal determination, not a fact deemed admitted upon default. Therefore, the Court must analyze whether in fact these three trusts were nominees of the Millers, but the analysis is based on the alleged facts which are deemed admitted due to the default.
2. Existence of a Nominee Relationship
The United States alleges the three trusts are "nominees" of the Millers’ and seeks execution of the liens on the properties under that theory rather than an alter ego theory. It cites to two federal district court cases applying Iowa law, both of which analyze "nominee" and "alter ego" as essentially synonymous. See United States v. McKenzie , No. 3:08-cv-00069-JAJ, 2011 WL 1873982, at *3–5 (S.D. Iowa Feb. 17, 2011) ; United States v. Engels , No. C98-2096 MJM, 2001 WL 1346652, at *6 (N.D. Iowa Sept. 24, 2001). The United States urges the Court that the concepts are distinct, and that a nominee theory is an independent basis to enforce a federal tax lien apart from any alter ego determination. [ECF No. 52 at 13 n. 35] (citing Oxford Cap. Corp. v. United States , 211 F.3d 280, 284 (5th Cir. 2000)) ("While related, the concepts of ‘nominee,’ ‘transferee,’ and ‘alter ego’ are independent bases for attaching the property of a third party in satisfaction of a delinquent taxpayer's liability. A nominee theory involves the determination of the true beneficial ownership of property. An alter ego theory focuses more on those facts associated with a ‘piercing the corporate veil’ analysis."). The application of a federal tax lien based on a nominee theory has been applied by other Circuit courts as well. See, e.g., Berkshire Bank v. Town of Ludlow, Mass. , 708 F.3d 249, 251 (1st Cir. 2013) ; United States v. Bogart , 715 Fed. App'x 161, 166 (3d Cir. 2017) ; May v. United States , No. 07-10531, 2007 WL 3287513, at *2 (11th Cir. Nov. 8, 2007). The Court will thus analyze the relationship between the Millers’ and the trusts under a "nominee" framework.
"A nominee is one who holds bare legal title to property for the benefit of another." Scoville , 250 F.3d at 1202 (citation omitted). Although it does not appear the Iowa Supreme Court has established a test to determine whether an entity is a nominee, courts around the country weigh similar factors in assessing whether such a relationship exists. Among the factors considered by courts are: (1) adequacy of consideration paid by the title holders; (2) whether conveyance was executed in anticipation of legal liability; (3) whether the taxpayer exercises control or retains possession after the transfer; (4) existence of familial or other close relationship between taxpayer and alleged nominee; (5) whether taxpayers enjoys benefits or profits from the property after transfer; (6) whether expenses and maintenance costs of property is paid by the taxpayer after transfer. Spotts v. United States , 429 F.3d 248, 253 n.2 (6th Cir. 2005) ; Fourth Inv. LP v. United States , 720 F.3d 1058, 1070 (9th Cir. 2013) ; United States v. Sabby , 2014 WL 988459, at *5 (D. Minn. Mar. 13, 2014). It is clear from the caselaw that "no single factor is dispositive" and "[v]irtually without exception, courts focus on the totality of the circumstances." Fourth Inv. LP , 720 F.3d at 1070.
The facts alleged by the United States support the determination of a nominee relationship between the Millers and the trusts. The Complaint alleges that the Millers: (1) maintained and used the parcels for their beneficial enjoyment, and earned a profit from them; (2) paid the expenses to maintain and operate those properties; (3) held themselves out as the owners of the properties; (4) were the equitable and beneficial owners of the properties; and (5) controlled the properties. [ECF No. 1 ¶¶ 34–37; 52–56; 71–75]. Furthermore, no consideration was paid by any of the trusts for the three properties. Id. ¶¶ 33; 52; 70. Taking those facts as true, the United States has demonstrated that the trusts were nominees of the Millers, and it may enforce the tax liens against those properties in order to satisfy the delinquent tax liabilities for years 2004–2008.
C. Whether Entry of Default Judgment is Appropriate
The Court must next determine is whether entry of a default judgment is appropriate. The decision to enter a default judgment is within the sound discretion of the trial court." F.T.C. v. Packers Brand Meats, Inc. , 562 F.2d 9, 10 (8th Cir. 1977) (per curiam) (citations omitted). Default judgments are disfavored and should be rare. See Belcourt Pub. Sch. Dist. v. Davis , 786 F.3d 653, 661 (8th Cir. 2015). The factors for a court to consider before entering a default judgment include: (1) whether material disputes of fact are at issue; (2) the amount of money that may be involved; (3) if the default is largely technical; (4) whether the plaintiff has been substantially prejudiced by the delay caused; (5) whether the grounds for default are clearly established or in doubt; (6) the harshness of the effect of the default judgment; and (7) if the default was the result of a good-faith mistake or excusable or inexcusable neglect by the defendant. Id.
The factors delineated above weigh in favor of entry of default judgment against both Defendants. Neither has filed an appearance through an attorney despite being properly served. They have demonstrated actual knowledge of the proceedings, as they have filed papers responses on the docket, and to the United States, although they were appropriately struck by Judge Locher as nullities with no legal effect.
Defendants may not represent themselves in this case because they are sued in their capacity as trustees. See Ackra Direct Mkgt. Corp. v. Fingerhut Corp. , 86 F.3d 852, 857 (8th Cir. 1996) ("[T]he law does not allow [a legal entity] to proceed pro se.").
The delinquent federal tax liabilities total $273,027.48. Defendants’ defaults are not technical but constitute a complete failure to meaningfully participate in the legal system. There is nothing in the record to support that either Defendant has acted in good-faith or has any basis for an argument for excusable neglect. An entry of default judgment will allow the United States to collect the delinquent tax amounts and it is proper for the Court to enter default judgment against Defendants Miller and Slabaugh.
As of April 6, 2022, the filing of the Motion for Default Judgment. [ECF No. 52 at 19]. Statutory interest and penalties accrue until fully paid. See 26 U.S.C. § 6601(a).
IV. CONCLUSION
For the above-described reasons, the Motion for Default Judgment is GRANTED. [ECF No. 51]. It is DECREED that the tax liens on Property A, Property B, and Property C, as described in paragraphs 28, 47, and 64 of the Complaint, shall be enforced to satisfy the federal tax liabilities of Levi M. Miller and Clara V. Miller. The United States shall submit a proposed final judgment in this case within 30 days of this Order.
IT IS SO ORDERED.