Opinion
CASE NO. 00-75597
December 30, 2003
OPINION AND ORDER GRANTING THE UNITED STATES' MOTION FOR SUMMARY JUDGMENT
Presently before the Court is the United States' Motion for Summary Judgment (Docket Entry 37).
BACKGROUND ;
On May 18, 1992, Gregory Russell executed a will providing for certain dispositions of his assets upon his death. Gregory Russell had incurred federal tax liabilities for the years of 1984 and 1985. On October 23, 1993, Gregory Russell executed a Form 900 Collection Waiver, which extended the collection period on his 1984 and 1985 federal tax debts until December 31, 2000. The Internal Revenue Service ("IRS") filed Notices of Federal Tax Liens against Gregory Russell in connection with these liabilities. The last days for re-filing the Notices were March 14, 1998 and September 22, 1999, respectively. Gregory Russell also incurred a federal tax liability for the year 1995. The IRS did not file a Notice of Federal Tax Lien for this liability.
In February, 1997, Gregory Russell and Defendant Diane Russell were married. Ten months later, on December 26, 1997, Gregory Russell died. Gregory Russell's will designated William and Geneva Bailey, his aunt and uncle, as the executor and executrix of his estate, The Baileys refused to serve as executors of the estate; instead, they designated the Defendant to serve as the independent personal representative in their place. On June 17, 1998, Gregory Russell's will was admitted to probate in that State of Michigan Probate Court for the County of Oakland. The probate court also appointed Defendant as the personal representative of the estate.
The estate of Gregory Russell was insolvent. The sole asset of the estate was a condominium located at 26675 Evergreen Meadows Court, Southfield, Michigan, Gregory Russell purchased the condominium via land sale contract from David and Sarah Blomberg on November 4, 1986. On October 27, 1997, Mr., Russell executed an Amendment to Land Contract, whereby he agreed that the principal balance due on the land contract would be $14,019,90, with monthly payments of $458,99 due beginning November 4, 1997. Defendant was not included as a party to the amendment, and Gregory Russell maintained the property in his own name. Defendant originally moved into the condominium in May, 1994. Defendant paid Gregory Russell $350.00 per month in rent up to the date of his death.
On March 2, 2000, the IRS sent a letter to Defendant, informing her that there were outstanding federal income tax liabilities for the years 1984, 1985, and 1995. The letter indicated that Gregory Russell executed the Form 900 Waiver. This was the first time Defendant became aware of the Form 900 Waiver. On June 6, 2000, Defendant sent her Letters of Authority to the IRS, informing the IRS that Louise Dorothy and Bruce Pelger were assisting her with this matter, and that she had given them her consent to discuss the case with the IRS. On June 22, 2000, Louise Dorothy sent a letter to the IRS detailing the actions taken by Defendant to preserve the sole asset of the estate. The letter also stated that Defendant wanted to purchase the condominium from the estate in her own name.
During this time, Defendant paid the remaining payments due under the land contract. The total of these payments was $15,604.68. Thereafter, Defendant wished to refinance the condominium. Pursuant to Defendant's request, on June 30, 2000, David and Sarah Blomberg executed a warranty deed transferring the condominium to Defendant. On September 11, 2000, Defendant executed a quitclaim deed transferring the property from herself, as the personal representative of the estate, to herself, as a single woman. On the same date, Defendant obtained a mortgage with Third Financial Service Corporation for $75,000. Prior to obtaining the mortgage, Defendant contends that she made the following payments in connection with the administration of the estate:
Funeral Expenses $1,980.00 Probate Attorney's fees $12,301.20 Tax Consultants: Dorothy $3,560.00 Drisko $662.00 Federal Income Tax for 1995 $5,344.81 Tax Counsel fees $12,579.75
Bank One Mortgage $9,409.98 Condominium association fees $4,390.00 Special condo assessment $813.00 Monthly Condo 6/00-8/00 $420.00 1997 Property taxes $1,202.56 Land contract payments 1/98-6/00 $ 15,604,68 Total $68,267.48
The total amount of the settlement charges from the Third Financial mortgage totaled $37,959.93, of which $32,383.95 was used to pay delinquent city and county taxes, and a Bank One equity line of credit, which had been secured by the land contract. The settlement statement also provided Defendant with $37,040.07 in cash. Defendant deposited this check into her own personal account. Defendant testified at her deposition that she "used finances to maintain the condominium. And I did take some of the funds for myself to pay myself back for all the money that I put out personally for the estate/' (Russell Dep., p. 81).
The United States' initial complaint in this case sought to reduce to judgment the unpaid federal income tax assessments made by the IRS against Gregory Russell for the years 1984 and 1985. On March 26, 2002 the Court entered a Stipulated Judgment and Agreed Order entering judgment in favor of the United States and against Defendant, in her capacity as personal representative of the Russell estate. On August 22, 2002, the Court granted the United States' Motion for Leave to Amend the Complaint to add a count against Defendant personally, pursuant to 31 U.S.C. § 3173(b). On April 1, 2003, the United States filed the present motion for summary judgment. Following a string of orders granting Defendant additional time to respond, on November 10, 2003, Defendant filed her Response. On December 3, 2003, oral argument was heard on the motion, During oral argument the Court requested that the United States file a supplemental brief addressing the issue of priority of the condominium association fees. On December 12, 2003, the United States filed its supplemental brief.
ANALYSIS
A. Standard for Summary Judgment
Pursuant to Federal Rule of Civil Procedure 56, a party against whom a claim, counterclaim, or cross-claim is asserted may "at any time, move with or without supporting affidavits, for a summary judgment in the party's favor as to all or any part thereof" Fed.R.Civ.P. 56(b), Summary judgment is appropriate where the moving party demonstrates that there is no genuine issue of material fact as to the existence of an essential element of the nonmoving party's case on which the nonmoving party would bear the burden of proof at trial. Celotex Corp. v. Catrett, 477 U.S. 317, 322 (1986).
Of course, [the moving party] always bears the initial responsibility of informing the district court of the basis for its motion, and identifying those portions of "the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any," which it believes demonstrate the absence of a genuine issue of material fact.Id. at 323; Gutierrcz v. Lynch, 826 F.2d 1534, 1536 (6th Cir. 1987),
A fact is "material" for purposes of a motion for summary judgment where proof of that fact "would have [the] effect of establishing or refuting one of the essential elements of a cause of action or defense asserted by the parties." Kendall v. Hoover Co., 751 F.2d 171, 174 (6th Cir. 1984) (quoting Black's Law Dictionary 881 (6th ed. 1979)) (citations omitted). A dispute over a material fact is genuine "if the evidence is such that a reasonable jury could return a verdict for the nonmoving party," Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 247-48 (1986). Conversely, where a reasonable jury could not find for the nonmoving party, there is no genuine issue of material fact for trial. Id.; Feliciano v. City of Cleveland, 988 F.2d 649, 654 (6th Cir. 1993). In making this evaluation, the court must examine the evidence and draw all reasonable inferences in favor of the non-moving party. Bender v. Southland Corp., 749 F.2d 1205, 1210-1211 (6th Cir. 1984).
If this burden is met by the moving party, the non-moving party's failure to make a showing that is "sufficient to establish the existence of an element essential to that party's case, and on which that party will bear the burden of proof at trial" will mandate the entry of summary judgment, Celotex, 477 U.S. at 322-23, The non-moving party may not rest upon the mere allegations or denials of his pleadings, but the response, by affidavits or as otherwise provided in Rule 56, must set forth specific facts which demonstrate that there is a genuine issue for trial. Fed.R.Civ.P. 56(e). The rule requires that non-moving party to introduce "evidence of evidentiary quality" demonstrating the existence of a material fact. Bailey v. Floyd County Bd. of Educ., 106 F.3d 135, 145 (6th Cir. 1997); see also Anderson, 477 U.S. at 252 (holding that the non-moving party must produce more than a scintilla of evidence to survive summary judgment).
B. The Federal Insolvency Statute (FIS)
The FIS states that:
(a)(1) A claim of the United States Government shall be paid first when —
(A) a person indebted to the Government is insolvent and —
(i) the debtor without enough property to pay all debts makes a voluntary assignment of property;
(ii) property of the debtor, if absent, is attached; or
(iii) an act of bankruptcy is committed; or
(B) the estate of a deceased debtor, in the custody of the executor or administrator, is not enough to pay all debts of the debtor,
(2) This subsection does not apply to a case under title 11,
(b) A representative of a person or an estate (except a trustee acting under title 11) paying any part of a debt of the person or estate before paying a claim of the Government is liable to the extent of the payment for unpaid claims of the Government.31 U.S.C. § 3713. Courts have given a liberal construction to the FIS, "so as not to frustrate its purpose in securing sufficient revenue for the payments of public debts," United States v. Moore, 423 U.S. 77, 81-86 (1975); United States v. Key, 397 U.S. 322, 324 (1970); United States v. Moriarty, 8 F.3d 329 (6th Cir. 1993) (citing Bramwell v. United States Fidelity Guar. Co., 269 U.S. 483 (1926); United States v. State Bank of N.C., 31 U.S. (6 Pet) 29 (1832).
On several occasions, however, the Supreme Court of the United States has concluded that a specific policy embodied in a later federal statute should control over the FIS, even though it had not been expressly amended. United States v. Romani, 523 U.S. 517, 530-31 (1998) (citing Cook County Nat. Bank v. United States, 107 U.S. 445, 448-451, 27 L.Ed. 537, 2 S.Ct. 561 (1883); United States v. Guaranty Trust Co. of N.Y., 280 U.S. 478, 485, 74 L.Ed. 556, 50 So. Ct. 212 (1930)). In Romani, the Supreme Court concluded that the specific provisions of the Tax Lien Act of 1966 should control when the government is claiming a preference in the insolvent estate of a delinquent taxpayer. 523 U.S. at 532, "[T]he Tax Lien Act is the later statute, the more specific statute, and its provisions are comprehensive, reflecting an obvious attempt to accommodate the strong policy objections to the enforcement of secret liens." Id.
The Tax Lien Act 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.
Defendant in this case argues that "[o]nce the IRS filed a Notice of Federal Tax Lien and subsequently a Revocation of Certificate of Release of Federal Tax Lien, it could no longer seek to rely on the provisions of the [FIS], but was required to rely on the Tax Lien Act of 1966 and its priority thereunder." (Defendant's Response, p. 7).
Defendant ignores this Court's earlier ruling that the FIS "applies to creditors other than the four classes of creditors specifically addressed in § 6323(a), In other words, the Government is entitled to priority over other creditors except `purchaser[s], holder[s] of a security interest, mechanic's lienor[s], or judgment lien creditor[s]' and those others listed in § 6323(b)." (Opinion and Order (1) Granting Plaintiffs Objections to the Magistrate Judge's Order Denying Plaintiffs Motion to for Leave to Amend the Complaint, (2) Reversing the Magistrate Judge's Order, and (3) Reopening the Case, Dated August 22, 2002, p, 6). § 6323(b) provides:
Protection for certain interests even though notice filed. Even though notice of a lien imposed by section 6321 has been filed, such lien shall not be valid —
(1) Securities, With respect to a security (as defined in subsection (h)(4)) —
(A) as against a purchaser of such security who at the time of purchase did not have actual notice or knowledge of the existence of such lien; and
(B) as against a holder of a security interest in such security who, at the time such interest came into existence, did not have actual notice or knowledge of the existence of such lien.
(2) Motor vehicles. With respect to a motor vehicle (as defined in subsection (h)(3)), as against a purchaser of such motor vehicle, if —
(A) at the time of the purchase such purchaser did not have actual notice or knowledge of the existence of such lien, and
(B) before the purchaser obtains such notice or knowledge, he has acquired possession of such motor vehicle and has not thereafter relinquished possession of such motor vehicle to the seller or his agent.
(3) Personal property purchased at retail. With respect to tangible personal property purchased at retail, as against a purchaser in the ordinary course of the seller's trade or business, unless at the time of such purchase such purchaser intends such purchase to (or knows such purchase will) hinder, evade, or defeat the collection of any tax under this title.
(4) Personal property purchased in casual sale . . . for provision that, for calendar year 2003, a federal tax lien is not valid against certain purchasers under this paragraph that purchased personal property in a casual sale for less than $1,150. With respect to household goods, personal effects, or other tangible personal property described in section 6334(a) purchased (not for resale) in a casual sale for less than $1.000, as against the purchaser, but only if such purchaser does not have actual notice or knowledge (A) of the existence of such lien, or (B) that this sale is one of a series of sales.
(5) Personal property subject to possessory lien, With respect to tangible personal property subject to a lien under local law securing the reasonable price of the repair or improvement of such property, as against a holder of such a lien, if such holder is, and has been, continuously in possession of such property from the time such lien arose.
(6) Real property tax and special assessment liens. With respect to real property, as against a holder of a lien upon such property, if such lien is entitled under local law to priority over security interests in such property which are prior in time, and such lien secures payment of —
(A) a tax of general application levied by any taxing authority based upon the value of such property;
(B) a special assessment imposed directly upon such property by any taxing authority, if such assessment is imposed for the purpose of defraying the cost of any public improvement; or
(C) charges for utilities or public services furnished to such property by the United States, a State or political subdivision thereof, or an instrumentality of any one or more of the foregoing,
(7) Residential property subject to a mechanic's lien for certain repairs and improvements . . . for provision that, for calendar year 2003, a federal tax lien is not valid against a mechanic's lienor under this paragraph that repaired or improved certain residential property if the contract price with the owner is not more than $ 5,750.]. With respect to real property subject to a lien for repair or improvement of a personal residence (containing not more than four dwelling units) occupied by the owner of such residence, as against a mechanic's lienor, but only if the contract price on the contract with the owner is not more than $ 5,000.
(8) Attorneys' liens. With respect to a judgment or other amount in settlement of a claim or of a cause of action, as against an attorney who, under local law, holds a lien upon or a contract enforcible against such judgment or amount, to the extent of his reasonable compensation for obtaining such judgment or procuring such settlement, except that this paragraph shall not apply to any judgment or amount in settlement of a claim or of a cause of action against the United States to the extent that the United States offsets such judgment or amount against any liability of the taxpayer to the United States.
(9) Certain insurance contracts. With respect to a life insurance, endowment, or annuity contract, as against the organization which is the insurer under such contract, at any time —
(A) before such organization had actual notice or knowledge of the existence of such lien;
(B) after such organization had such notice or knowledge, with respect to advances required to be made automatically to maintain such contract in force under an agreement entered into before such organization had such notice or knowledge; or
(C) after satisfaction of a levy pursuant to section 6332(b), unless and until the Secretary delivers to such organization a notice, executed after the date of such satisfaction, of the existence of such lien.
(10) Deposit-secured loans. With respect to a savings deposit, share, or other account with an institution described in section 581 or 591, to the extent of any loan made by such institution without actual notice or knowledge of the existence of such lien, as against such institution, if such loan is secured by such account.26 U.S.C. § 6323(b). The analysis must therefore turn to whether the government has established that Defendant made payments to creditors other than the four classes of creditors listed in § 6323(a). If the United States establishes this, then it must show that those payments were in violation of the FIS.
The FIS makes a representative of an estate personally liable for taxes, penalties, and interest if the government proves three things: (1) the personal representative distributed assets of the estate; (2) the distribution rendered the estate insolvent; and (3) the distribution took place after the personal representative had notice of the government's claim. United States v. Coppola, 85 F.3d 1015, 1020 (2nd Cir. 1996). The United States argues that all three elements are proven here. "The IRS . . . sent a letter to the defendant in March 2000, which stated that there were valid income tax liabilities for each of the tax years 1984, 1985 and 1995. Despite having knowledge of the debts owed to the United States, the defendant transferred the sole remaining asset of the estate from herself, as the personal representative of the estate of Gregory Russell, to herself, a single woman, by quit claim deed dated September 11, 2000. As a result of this transfer, the estate was bereft of any assets from which it could pay its creditors, and rendered the estate insolvent." (United States' Brief, p, 14) (internal citations to the record omitted).
Defendant argues that the "costs of administration of an estate are clearly a priority over the claims of the government and are entitled to payment ahead of the federal taxes." (Defendant's Response, p. 7). The United States does not dispute this contention. Instead, the United States alleges that the transfer of the condominium, not the payments of administrative expenses, is the violation in this case. Defendant also argues that she did not disburse with a knowing disregard of the taxes because she "engaged a professional tax consultant and relied upon her advice that the liens for 1984 and 1985 were expired and no longer enforceable prior to refinancing the Condominium." ( Id., p. 8). Defendant cites no authority for this contention.
The Court finds that the United States has met its burden of proving that no genuine issue of material fact exists with regard to the alleged violation of the FIS. Defendant clearly had notice of the government's claim, transferred the sole asset of the estate to herself, and thereby rendered the estate insolvent. Defendant's unsupported assertion that she is excused because she relied on the advice of a tax consultant should be denied.
During oral argument on the motion, Defendant contended that if the United States succeeded on its claim, Defendant's liability should not exceed $25,065.18. Defendant argued that this is so because the condominium association fees and assessments have priority over the United States' claim. The Court rejects this contention for two reasons, First, had Defendant not violated the FIS by transferring the condominium to herself rather than selling the condominium to pay the expenses of the estate, the condominium fees would not have arisen. Second, as noted by the United States in its supplemental brief: "The Michigan Condominium Acts states:
Sums assessed to a co-owner by the association of co-owners that are unpaid together with interest on such sums, collection and late charges, . . ., constitute a lien upon the unit or units in the project owned by the co-owner at the time of the assessment before other liens, except tax liens on the condominium unit in favor of any state or federal taxing authority . . . "
(United States' Supplemental Brief, p. 2 (quoting M.C.L. § 559.208(1)) (emphasis provided by Plaintiff)). The language clearly creates an exception to the priority given to condominium fees for federal tax liens.
CONCLUSION
For the reasons stated above, the Court GRANTS the motion. Defendant's liability shall be limited to payments made to persons other than the four classes of creditors specifically addressed in § 6323(a), and those others listed in § 6323(b).
SO ORDERED.