April 9, 2009
LOUIS MAURO AND DARLENE MAURO, PLAINTIFFS-RESPONDENTS,
BARRY MARK AND ANN MARK, DEFENDANTS-APPELLANTS.
On appeal from the Superior Court of New Jersey, Law Division, Monmouth County, Docket No. L-2374-05.
NOT FOR PUBLICATION WITHOUT THE APPROVAL OF THE APPELLATE DIVISION
Argued October 20, 2008
Before Judges Carchman, Sabatino and Simonelli.
Defendants Barry Mark (Barry) and Ann Mark (Ann) appeal from a December 7, 2007 order of the Law Division entering judgment in favor of plaintiff Darlene Mauro (Darlene) for $71,937.50. That sum represented one-half of the $143,375 collectively sought by Darlene and plaintiff Louis Mauro (Louis) in their Law Division action. The order was premised on the motion judge's conclusion that Darlene was entitled to one-half of monies paid by Barry to the Internal Revenue Service (IRS)*fn1 on account of an IRS levy against Louis. We reverse. We conclude that under the unique facts presented here, Barry's payment of funds to the IRS in response to the levy was reasonable, and under federal law, he was immune from the liability imposed upon him by the order of the Law Division.
We briefly relate the relevant facts. Plaintiffs and defendants were one-time friends and neighbors. Apparently in 1994, Louis was suffering from financial problems, and Louis and Darlene's residence was the subject of a foreclosure proceeding. To assist their friends, Barry and Ann purchased the property at the foreclosure sale. Thereafter, the parties entered into a lease, signed on May 1, 1994, for the rental of the property --- plaintiffs' marital residence located at 8 Precedent Place, Manalapan. The lease provided for a base rental of $2,020 per month. The lease also granted to plaintiffs an option to repurchase the property for $404,000. Paragraph twenty-three of the lease provided that plaintiffs, as tenants, would pay certain sums in addition to the rent, ranging from $4,000 to $10,000 per month during the term of the lease. Defendants agreed to deposit these additional sums into an escrow account with a six percent interest rate. Paragraph twenty-seven of the lease, the purchase option provision, provided that in the event the balance on the escrow account reached $404,000, defendants could deed the property back to plaintiffs, and plaintiffs would be credited with the money in the escrow account as payment for the premises.
This unusual transaction did not go unnoticed as Barry subsequently became involved in an investigation by the IRS and was "accused of conspiring with Louis Mauro to hide money from the IRS" because Louis "owed back taxes."*fn2 Barry "pled guilty to a lesser charge, and spent five months in a halfway house, five months under house arrest, and one year on probation."
Thereafter, plaintiffs exercised the option contained in the lease, and they purchased the house on April 28, 2005. At the time of the closing, the escrow account, now representing the consideration for the transfer, was presumed to approximate $460,000. However, according to plaintiffs, Barry had improperly removed $143,875 from the escrow account and used it to pay the legal fees incurred in his defense of the IRS investigation. Plaintiffs filed a complaint seeking return of this amount. On October 9, 2007, at a settlement conference prior to the commencement of trial, the parties agreed to settle the escrow dispute for $125,000. The consent judgment provided that the $125,000 settlement payment was:
2. [T]o be made by certified, or bank teller or cashier's, check made payable to Louis Mauro, Darlene Mauro and Drazin and Warshaw, PC, which check is to be delivered to the offices of Drazin and Warshaw, 25 Reckless Place, Red Bank, New Jersey 07701, on or before November 9, 2007;
3. In the event that such check is not delivered to the offices of Drazin and Warshaw, PC on or before November 9, 2007, the plaintiffs may, upon serving a notice of motion on counsel for the defendants, petition the Court for judgment against the defendants in the amount of $143,875.00, plus interest . . . at the per annum rate of six percent, and running from June 1, 2001 through the date on which defendants make payment of such amount to plaintiffs.
Defendants contend that due to the previous IRS investigation and charges "[Barry] became concerned about paying money to Louis Mauro when [Barry] knew that [Louis] had a large IRS lien against him." Barry contacted the criminal attorney who had represented him in the earlier criminal proceeding, gave him a copy of the civil order of judgment, and asked for advice. Counsel advised defendant that "he would contact the IRS investigator in [the] prior matter."
The contact was made, because on October 12, 2007, Barry received an IRS Notice of Levy to collect money owed by Louis. In response to the levy, on October 17, 2007, Barry sent $125,000, the entire settlement amount, to the IRS. On October 19, 2007, plaintiffs received an envelope containing a copy of the Notice of Levy with a handwritten notation stating, "paid 10/18/07 $125,000."*fn3
On October 29, 2007, upon being notified of Barry's actions, plaintiffs' counsel wrote a letter to the IRS seeking $83,333.333, claiming that the sum represented Darlene's and the law firm's combined share of the settlement amount.
The payment to the IRS prompted plaintiffs to move in the Law Division to enter judgment seeking the entire $143,875 demanded under the original complaint. In a certification in support of the motion, counsel asserted that the payment of $125,000 had not been made in accordance with the settlement agreement and that the monies paid to the IRS included monies that rightfully belonged to Darlene and plaintiffs' counsel's law firm. Counsel also asserted, without substantiation, that his firm was entitled to $25,000 and Darlene was entitled to $50,000. The motion judge entered an order awarding Darlene $71,937.50 plus interest. The judge did not address counsel's claimed interest in the funds. In his decision, the motion judge concluded that the burden of recovering any sums improperly paid to the IRS rested with Barry.
On appeal, defendants assert that upon payment of monies to the IRS in response to the levy: (1) Barry was discharged from any obligation or liability to plaintiffs; (2) jurisdiction in this matter was properly in the federal court rather than the Superior Court; and (3) the motion judge failed to make adequate findings of fact or conclusions of law.
As the issues presented on this appeal require analysis of the motion judge's application of the applicable federal statutory provisions, we consider the standard of review that we must apply. When we review a motion judge's interpretation of the law, the standard of review is de novo. See State v. Harris, 181 N.J. 391, 419 (2004), cert. denied, 545 U.S. 1145, 125 S.Ct. 2973, 149 L.Ed. 2d 1034 (2005); Fiderne Mgmt Co. v. Barett, 402 N.J. Super. 546, 573 (App. Div. 2008). We owe no deference to the statutory interpretation of the motion judge. State v. Drury, 190 N.J. 197, 209 (2007) (citing Manalapan Realty, L.P. v. Twp. Comm. of Manalapan, 140 N.J. 366, 378 (1995)).
The facts adduced in the record must be considered against the statutory construct governing an IRS levy. Two provisions of the statute are particularly relevant. 26 U.S.C.A. § 6332(a) provides:
Except as otherwise provided in this section, any person in possession of (or obligated with respect to) property or rights to property subject to levy upon which a levy has been made shall, upon demand of the Secretary [of the Treasury], surrender such property or rights (or discharge such obligation) to the Secretary, except such part of the property or rights as is, at the time of such demand, subject to an attachment or execution under any judicial process [(Emphasis added).]
26 U.S.C.A. § 6332(e) additionally provides: Any person in possession of (or obligated with respect to) property or rights to property subject to levy upon which a levy has been made who, upon demand by the Secretary, surrenders such property or rights to property (or discharges such obligation) to the Secretary (or who pays a liability under subsection (d)(1)) shall be discharged from any obligation or liability to the delinquent taxpayer and any other person with respect to such property or rights to property arising from such surrender or payment. [(Emphasis added).]
Additionally, if the possessor of the property or rights to property subject to a levy refuses to honor a levy, he incurs liability to the Government for his refusal. 26 U.S.C.A. § 6332(d). There are two defenses for failure to comply with a levy: (1) the party is "not in possession of" nor "obligated with respect to" property or rights to property belonging to the taxpayer; or (2) the taxpayer's property is "subject to prior judicial attachment or execution." United States v. Nat'l Bank of Commerce, 472 U.S. 713, 721-22, 105 S.Ct. 2919, 2925, 86 L.Ed. 2d 565, 575 (1985). "Under the second defense, even if others claim an interest in the property and the taxpayer's interest may be quantified as but a modicum, the property remains subject to attachment by the levy and must be surrendered until ultimate ownership can be resolved." Weissman v. United States Postal Serv., 19 F. Supp. 2d 254, 260 (D.N.J. 1998) (quoting Congress Talcott Corp. v. Gruber, 993 F.2d 315, 319 (3d Cir. 1993)).
However, under IRS regulations, a person in possession of property who mistakenly surrenders property in which the taxpayer has no "apparent" interest is not immune from suit by a third person who has an interest in the property unless the surrender was made in good faith. 26 C.F.R. § 301.6332-1(c)(2) (2008) states:
Any person who surrenders to the Internal Revenue Service property or rights to property not properly subject to levy in which the delinquent taxpayer has no apparent interest is not relieved of liability to a third party who has an interest in the property. However, if the delinquent taxpayer has an apparent interest in property or rights to property, a person who makes a good faith determination that such property or rights to property in his or her possession has been levied upon by the Internal Revenue Service and who surrenders the property to the United States in response to the levy is relived of liability to a third party who has an interest in the property or rights to property, even if it is subsequently determined that the property was not properly subject to levy. [(Emphasis added.)]
Defendants argue that the trial court erred in finding that Barry had the obligation to challenge the levy or determine what property rights plaintiffs had to the settlement proceeds. Although the record is devoid of any indicia of Barry's affirmative steps to ascertain the rights of Louis, Darlene or plaintiffs' counsel, we cannot view the facts in a vacuum.
These parties had a history with one another, including the transaction that gave rise to the disputed funds; moreover, Barry correctly contends that he need not "be conversant with the New Jersey law regarding husband and wife ownership and rights regarding jointly held personal property, and the IRS regulations regarding [the] property."
Although not addressed by the judge, plaintiffs' counsel was also claiming an interest in the funds, and we inquire, rhetorically, whether Barry had any affirmative obligation to delve into the attorney-client or fee arrangement between plaintiffs and their counsel. Nor did Barry have an obligation to ascertain respective interests in property that may have been held jointly. See Nat'l Bank of Commerce, supra, 472 U.S. at 728-33, 105 S.Ct. at 2928-31, 86 L.Ed. 2d at 578-82, (holding that the IRS has a right to levy on joint accounts for delinquent federal income taxes owed by only one of the persons in whose names the joint accounts stand). As we have noted, these parties have a history together. Plaintiffs were co-tenants on the former leasehold estate and the recipients of a deed upon reconveyance after exercising their option. The prior relationship between the parties cannot be disregarded in determining issues such as marital status and contributions to the funds in dispute.
Weissman, supra, 19 F. Supp. 2d at 254, is particularly instructive. In Weissman, defendant United States Postal Service entered into a lease agreement with Bernard Weissman, his wife Roberta Weissman, and his parents Charles and Pauline Weissman, trading as Frelin Company. Subsequently, the ownership interest of the property changed several times. Until 1994, all rental payments were made to Bernard Weissman. It was not until March 1997, that it was clearly established that Roberta Weissman was the sole owner of the premises. However, throughout this period the name of the lessors in the lease agreement had never been changed. Meanwhile, in 1996, the defendant received a notice of levy from the IRS for Bernard Weissman. Consequently, the defendant had made all subsequent rental payments to the IRS. Roberta Weissman then sued the defendant, claiming that Bernard Weissman had no apparent interest in the property, and defendant should not have been making payments to the IRS. The District Court for the District of New Jersey disagreed. The District Court found that "[a]t the time the IRS issued the levy in September 1996 . . . [d]efendant held a lease, which had never been reformed, naming Bernard Weissman as a lessor, and a 1976 deed by which Frelin Company had conveyed its interest in the premises to Mr. Weissman." Id. at 261. The District Court held that "[t]hese documents establish at least the 'apparent' or 'modicum' of interest in the rent required by § 6332 and the implementing regulations" which granted defendant immunity from liability. Ibid.
Judge Simandle noted in language particularly appropriate here:
Congress did not wish to place the burden of making a correct determination of ownership or priority upon innocent third-parties such as the USPS. See Farr v. United States, 990 F.2d 451, 456 (9th Cir. 1993) (noting that Congress enacted § 6332(e) to prevent third-parties served with a levy from "being forced to negotiate between the Scylla of IRS fury and the Charybdis of taxpayer vengeance every time a levy is made"); Kane v. Capital Guardian Trust Co., 953 F. Supp. 1200, 1206-07 (D. Kan. 1997) (same), aff'd, 145 F.3d 1218 (10th Cir. 1998); Allstate Financial Corp. v. United States, 860 F. Supp. 653, 657 (D. Minn. 1994) (even where property is erroneously or mistakenly surrendered pursuant to IRS levy, § 6332(e) protects the surrendering party from any liability). Instead, the purpose of the levy is to safeguard the property until such claims can be resolved. United States v. National Bank of Commerce, 472 U.S. 713, 721, 105 S.Ct. 2919, [86 L.Ed. 2d 565] (1985). [Ibid. (emphasis added).]
On appeal, plaintiffs now contend that they were not "acting jointly or as tenants by the entirety"; that "Louis Mauro and Darlene Mauro  owned a separate and severable interest in and to the settlement proceeds"; and that the lease, which forms the basis of the dispute contains "no indication that [plaintiffs]  enter[ed] into the lease as married persons." The various interests ascribed to Darlene are measured by state law, as the Supreme Court of the United States has noted that "[in] the application of a federal revenue act, state law controls in determining the nature of the legal interest which the taxpayer had in the property." Aquilino v. United States, 363 U.S. 509, 513, 80 S.Ct. 1277, 1280, 4 L.Ed. 2d 1365, 1368 (1960) (quoting Morgan v. Commissioner, 309 U.S. 78, 82, 60 S.Ct. 424, 426, 84 L.Ed. 2d 585, 589 (1940)). This is because "the federal statute 'creates no property rights but merely attaches consequences, federally defined, to rights created under state law.'" Nat'l Bank of Commerce, supra, 472 U.S. at 722, 105 S.Ct. at 2925, 86 L.Ed. 2d at 575 (quoting United States v. Bess, 357 U.S. 51, 55, 78 S.Ct. 1054, 1057, 2 L.Ed. 2d 1135, 1140 (1958)). "'[Once] it has been determined that state law creates sufficient interests in the [taxpayer] to satisfy the requirements of [the statute], state law is inoperative,' and the tax consequences thenceforth are dictated by federal law." Nat'l Bank of Commerce, supra, 472 U.S. at 722, 105 S.Ct. at 2925, 86 L.Ed. 2d at 575, (quoting Bess, supra, 357 U.S. at 56-7, 78 S.Ct. at 1057, 2 L.Ed. 2d at 1141).
Critically important here is that nothing in the record supports plaintiffs' assertions as to the fact and extent of Darlene's interest in the property. Plaintiffs did not file an affidavit or certification confirming these factual claims except for a hearsay certification of counsel. See R. 1:6-6. This does not suffice to substantiate any colorable claim in Darlene's independent interest in the property. Nothing in the record before us supports plaintiffs' claims or the motion judge's conclusion that Darlene had "an independent concern from [Louis] and she had an independent deserve [sic] for that money."
Most important, nothing in this record supports the conclusion that Darlene is or was entitled to fifty percent of the funds in question. In fact, the very order that compelled the payment of funds in settlement of the underlying dispute casts a modicum of doubt on that assertion. Barry was obligated to make the check "payable to Louis Mauro, Darlene Mauro and Drazin and Warshaw, PC." Nothing suggests an independent or severable fifty percent interest in Darlene. We reject plaintiffs' suggestion that "a simple phone call" by Barry to plaintiffs' counsel would have advised him that Darlene had a severable fifty percent interest in the funds. Plaintiffs' submissions are to the contrary. The certification filed by plaintiffs' counsel in the Law Division urged that Darlene, instead, had approximately a forty percent interest in the property, i.e., $50,000, arrived at by the deduction from the $143,875 of $25,000 counsel fee. We perceive that a party served with an IRS levy exposing that individual to personal liability cannot be subjected to the vagaries of the relationships between counsel and clients.
Lastly, plaintiffs' reliance on Popky v. Popky, 419 F.3d 242 (3d Cir. 2005), is misplaced. Popky addressed interests in tenancy by the entireties under Pennsylvania law while the interests here related to personalty in the form of escrow funds arising out of the unique tenancy arrangement between the parties. Id. at 245.
Weissman informs us that the immunity provisions of 26 U.S.C.A. § 6332(e) are to be "interpreted generously." Weissman, supra, 19 F. Supp. 2d at 260, (citing Farr v. United States, 990 F.2d 451, 456 (9th Cir. 1993)). "[C]courts have held it applies whether or not the underlying levy is valid." Weissman, supra, 19 F. Supp. 2d at 260, (citing Moore v. General Motors Pension Plans, 91 F.3d 848, 851 (7th Cir. 1996)). The stakes for an individual who fails to respond to a levy are substantial. "Failure to surrender the property ... will render the party personally liable to the Government for the value of the property as well as additional penalties." Weissman, supra, 19 F. Supp. 2d at 260, (citing 26 U.S.C.A. § 6332(d) and Congress Talcott Corp. v. Gruber, 993 F. 2d 315, 318 (3d. Cir. 1993)). We conclude that on the record before the motion judge, there were insufficient proofs to conclude that Barry surrendered property to the IRS in which Louis did not have an "apparent" interest.
Plaintiffs are not without a remedy to explore fully and determine the issues in dispute. The statutory scheme governing tax liens provides an appropriate remedy in the event monies were improperly surrendered to the IRS pursuant to the levy.
Generally, "taxpayers and third parties who have an interest in property surrendered in response to a levy may secure from the Internal Revenue Service the administrative relief provided for in [26 U.S.C.A. § 6343(b)] or may bring suit to recover the property under [26 U.S.C.A. § 7426]." 26 C.F.R. § 301.6332-1(c)(3) (2008). Jurisdiction is vested in the federal judiciary to adjudicate such disputes. Specifically, 26 U.S.C.A. § 7426 provides in pertinent part:
(a) Actions permitted.
(1) Wrongful levy. If a levy has been made on property or property has been sold pursuant to a levy, any person (other than the person against whom is assessed the tax out of which such levy arose) who claims an interest in or lien on such property and that such property was wrongfully levied upon may bring a civil action against the United States in a district court of the United States. Such action may be brought without regard to whether such property has been surrendered to or sold by the Secretary.
If the IRS determines that the property is not subject to the levy, it may be returned. 26 U.S.C.A. § 6343 provides in pertinent part:
(b) Return of property. If the Secretary determines that property has been wrongfully levied upon, it shall be lawful for the Secretary to return ---
(1) the specific property levied upon,
(2) an amount of money equal to the amount of money levied upon, or
(3) an amount of money equal to the amount of money received by the United States from a sale of such property.
As the Supreme Court of the United States has explained,
[T]he administrative levy, as has been noted, is only a provisional remedy. "The final judgment in [a levy] action settles no rights in the property subject to seizure." United States v. New England Merchants National Bank, 465 F. Supp. 83, 87 (Mass. 1979). Other claimants, if they have rights, may assert them. Congress recognized this when the Code's summary-collection procedures were enacted, S. Rep. No. 1708, 89th Cong., 2d Sess., 29 (1966), and when it provided in § 7426 of the Code, 26 U.S.C. § 7426, that one claiming an interest in property seized for another's taxes may bring a civil action against the United States to have the property or the proceeds of its sale returned. Congress also has provided, by § 6343(b), an effective and inexpensive administrative remedy for the return of the property. See Treas. Reg. § 301.6343-1(b)(2), 26 C.F.R. § 301.6343-1(b)(2) (1984). [Nat'l Bank of Commerce, supra, 472 U.S. at 728-729, 105 S.Ct. at 2928, 86 L.Ed. 2d at 578.]
Since we are of the view that, given the limited record before the motion judge, a finding that Darlene retained a fifty percent interest in the property was not supported by the record and, on the same record, Barry's surrender of the $125,000 was based on Louis' apparent interest in the property, we need not address defendants' claim that exclusive jurisdiction rests in the federal court.*fn4
We are left with a number of options. We decline to remand to the Law Division to develop a more expansive record, as the parties may proceed in the federal court to explore fully all of the issues in this case, save one -- whether Barry's surrender of the proceeds to the IRS triggers the default provisions of the consent judgment requiring payment of $143,875 rather than $125,000. Our conclusion that Louis had an apparent interest in the entire settlement amount compels a result that Barry's surrender of the proceeds to the IRS was pursuant to a federal mandate, and he is protected by the immunity provisions of 26 U.S.C.A. § 6332(e). That conclusion likewise requires a finding that the default provision in the settlement agreement cannot be invoked or enforced by such a lawful action. Our decision here obviates any further need for the state action.
We reverse and remand for the entry of an order dismissing plaintiffs' complaint without prejudice to plaintiffs seeking relief in the appropriate federal forum.