On Appeal from the United States District Court for the District of New Jersey
(D.C. Civil Action No. 91-5662)
BEFORE: GREENBERG, ALITO, and McKEE, Circuit Judges
GREENBERG, Circuit Judge.
In this case we must determine whether the government's tax lien in real property is limited to a taxpayer's equity when he conveyed the property subject to the lien or whether the lien also attaches to the appreciation in the value of the property after the conveyance. Since nothing in the relevant statutes suggests that the government lien should be limited to the value of the taxpayer's equity in the property at the time of the conveyance and since the conveyance cannot affect the lien, we will reverse the district court's order based on its contrary conclusion. In addition, we find that determination of the property interest to which the lien attaches will depend on the relative longevities of Herbert and Frances Sylvester, who were the married owners of the property when the lien attached, and that James D. Diemer and Julia Diemer, the second purchasers of the property subject to the lien, properly can claim the benefits of equitable subrogation to encumbrances against the property with priority over the government lien.
A. FACTUAL BACKGROUND AND PROCEDURAL HISTORY
The germane facts are not disputed. On November 5, 1979, the Internal Revenue Service made an assessment against Herbert Sylvester (but not against Frances Sylvester) in the amount of $62,523.21 pursuant to 26 U.S.C. Section(s) 6672. App. 14. Mr. Sylvester did not pay the assessment so a tax lien arose pursuant to 26 U.S.C. Section(s) 6321 and attached to all his property, including his interest in the real property involved in this case located at 500 Ridgeland Terrace, Leonia, Bergen County, New Jersey, which he and his wife owned as tenants by the entireties. App. 13-14. On June 26, 1980, the Internal Revenue Service
filed a Notice of Federal Tax Lien against Mr. Sylvester (but not against Mrs. Sylvester) in Bergen County, New Jersey, for the above liability. App. 14.
Mr. Sylvester did not satisfy the lien in whole or in part. Rather, he divested himself of any interest in the property on October 3, 1980, when he conveyed it to Mrs. Sylvester for less than $100. App. 15. At that time, the property was worth $155,000 but was encumbered by liens with priority over the federal tax lien in the total amount of $154,318. These liens were: (1) mortgages held by Midlantic National Bank in the total amount of $100,566.26; (2) a mortgage held by Daniel Segal in the amount of $12,000; (3) a judgment in favor of Howard Strauss against Mr. Sylvester in the amount of $15,000; and (4) a judgment in favor of United Jersey Bank against Mr. Sylvester in the amount of $26,751.74. App. 104-05. The Internal Revenue Service refiled its lien on June 4, 1985.On December 19, 1986, the Sylvesters were divorced, and Mrs. Sylvester took the property under the terms of their property settlement agreement. The agreement required Mrs. Sylvester to sell the property and to pay the balance due on various liens against the property, including the federal tax lien, from the proceeds of the sale. *fn1
On April 18, 1989, Mrs. Sylvester sold the property for $580,000 to Fred Avila and Molly Avila who secured title insurance through Ticor Title Insurance Company. Ticor was aware of the IRS lien, but omitted it from its list of exceptions to title in the mistaken belief that the 1980 lien had expired and that the refiled 1985 lien was a new lien that had arisen after Mr. Sylvester no longer had an interest in the property. Thus, notwithstanding the settlement agreement, Mrs. Sylvester did not pay off the federal tax lien with the proceeds of the sale.
On December 27, 1991, the United States filed a complaint in the district court against the Avilas and Security Pacific National Trust Company, their mortgagee, seeking to foreclose the tax lien on the property. App. 7-11. On January 29, 1993, the Avilas sold the property to James D. Diemer and Julia Diemer for $480,000, following which, on November 3, 1993, the United States filed an amended complaint joining the Diemers and their mortgagee, Citizens First National Bank of New Jersey, as foreclosure defendants. The government also sued Mrs. Sylvester for damages in the amended complaint asserting that it was a third-party beneficiary of her settlement agreement with her husband and that she had breached her duty under the agreement to pay the debt secured by its lien that Mr. Sylvester owed to it.
On February 2, 1994, the Diemers filed a motion for partial summary judgment. They argued that the IRS lien attached to Mr. Sylvester's undivided one-half interest in the property subject to his wife's right to survivorship, and that the government's interest in the property never could exceed such an interest. They further argued that they were entitled to be equitably subrogated to the liens with priority over the IRS lien that were satisfied when the Avilas acquired the property and to that extent had a priority over the government lien. On or about February 25, 1994, the United States filed a motion for partial summary judgment, arguing that Mrs. Sylvester's sale of the property to the Avilas had destroyed the right of survivorship and that the IRS lien therefore was attached to a one-half interest in the property unencumbered by Mrs. Sylvester's right of survivorship.
On August 1, 1994, the district court denied the United States' motion for partial summary judgment and granted the Diemers' and Citizens First National Bank of New Jersey's motion for partial summary judgment. United States v. Diemer, 859 F. Supp. 126 (D.N.J. 1994). The court held that the IRS lien attached only to Mr. Sylvester's undivided one-half interest in the property and that the value of the lien was fixed at the time Mr. Sylvester transferred his interest to his wife on October 3, 1980. Thus, the court held that the government could not benefit from the property's subsequent appreciation in value. The district court further held that while the Avilas could equitably subrogate to the four liens senior to the government lien, the Diemers could not subrogate because there was no subrogation agreement, the Avilas' conveyance to the Diemers did not include the Avilas' subrogation rights, and the Diemers had not satisfied those liens to protect their rights and interests in the property. Id. at 136. On August 3, 1994, the court entered an order in accordance with its opinion.
On February 17, 1995, the United States stipulated to dismissal of its action as to Mrs. Sylvester. App. 86. On March 30, 1995, the district court entered judgment for the Diemers and Citizens First National Bank of New Jersey because the parties agreed that the value of the property on October 3, 1980, $155,000, was only marginally above the value of the liens on the property with priority over the IRS lien, i.e. $154,318. *fn2 App. 90-91. Thus, the IRS lien was viewed as having no value. However, the March 30, 1995 order did not end the litigation because Mrs. Sylvester had filed a third-party complaint against Ticor and Chicago Title Insurance Company and a cross-claim against the other defendants, the Avilas and the Diemers. Mrs. Sylvester sued Chicago Title because she alleged that it was either the successor to or agent of Ticor.
On March 7, 1995, the district court entered an order, amended by an order entered on April 3, 1995, staying and administratively terminating Mrs. Sylvester's third-party complaint and cross-claims until the completion of an appeal in a related case then pending before the Superior Court of New Jersey, Appellate Division. App. 87-89, 92-94. In the state court the Avilas sought an order compelling Mrs. Sylvester to satisfy the IRS lien or to obtain its release. While the Avilas had been successful in the trial court, on appeal the Appellate Division held that the Avilas waived their right to insist that Mrs. Sylvester satisfy the IRS lien inasmuch as they took the title with an awareness of the lien and thus voluntarily and affirmatively relinquished their right to have it satisfied or released. The Appellate Division held that Ticor's mistake regarding the validity of the lien did not dictate a different result. Avila v. Sylvester, No. A-3391-91T5 (N.J. Super. Ct. App. Div. July 12, 1993), certif. denied, 636 A.2d 522 (N.J. 1993).
The United States moved on May 17, 1995, for a certification under Fed. R. Civ. P. 54(b) and entry of a final appealable judgment with respect to its claims against the Diemers and Citizens First National Bank of New Jersey. App. 95-101. On May 31, 1995, the District Court granted the motion and entered a judgment in favor of the Diemers and the Citizens First National Bank of New Jersey in the foreclosure action and certified the case for immediate appeal. App. 102. The district court had jurisdiction pursuant to 28 U.S.C. Section(s) 1340 and 1345 and ...