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United States v. Balice

United States District Court, D. New Jersey

July 10, 2015

UNITED STATES OF AMERICA, Plaintiff,
v.
MICHAEL BALICE, Defendant.

OPINION

KEVIN McNULTY, District Judge.

The United States believes that Michael Balice has failed to pay certain federal tax liabilities. It has filed suit seeking two forms of relief: First, it wishes to reduce to judgment Balice's tax liability for several years; second, it wishes to foreclose on a property at 70 Maple Avenue in Metuchen, New Jersey. Also named as defendants are five parties that may have an interest in the Maple Avenue property: two banks that hold mortgages and three judgment creditors.

Now before the Court are three sets of motions, some sixteen in all.

First, one of the banks, Amboy, has moved for summary judgment, arguing that its lien on the Maple Avenue property has priority over the federal government's tax lien. (Dkt. No. 33) Amboy's motion will be denied, because the record is undeveloped. Nevertheless, some useful legal principles may be stated to guide the progress of the case. Amboy's lien has priority over the tax lien of the United States to the extent of the outstanding balance on the home equity line of credit as of July 12, 2005, plus any additional sums advanced thereafter, but before August 27, 2005. The amount of the lien, however, cannot be determined on summary judgment, and may require additional discovery. Ultimately, the dollar amount will depend on such issues as the outstanding loan disbursements before August 27, 2005, reduction of that balance by repayment, and interest and fees. ( See Part I, infra. )

Second, Balice has filed motions to dismiss on the basis of res judicata (Dkt. No. 6), and the United States' alleged lack of constitutional authority to collect income taxes. (Dkt. Nos. 7, 8, 26, 27, 36, 47, 49) He has also filed a motion for "due process" (Dkt. No. 14), requesting that the prison where he is incarcerated grant him additional telephone access to aid him in defending this case. He has moved for what he describes as a default judgment against the United States. (Dkt. Nos. 47, 49) He has objected (Dkt. No. 66) to the assignment of a Magistrate Judge to this case. He has objected (Dkt. Nos. 68 & 70) to what he describes as the government's motion for time to submit a motion for summary judgment. And he has objected (Dkt. No. 69) to what he characterizes as ex parte communications between the government and other defendants. All of Balice's motions will be denied. ( See Parts II-VII, infra. )

Third, the United States has moved for a default judgment against three non-responsive defendants. (Dkt. No. 52) That motion will be granted as to defendants Richard Tiedemann and Medical Care Management System, but denied as to The Rosewater Trust. Balice's related objection to the Clerk's entry of defaults (Dkt. No. 58) is denied. ( See Part VIII, infra. )

Background

The United States alleges that the defendant, Michael Balice, owes some $359, 752 in unpaid federal taxes and penalties. That total includes:

1. $95, 003.74 for the tax period ending December 31, 1998 (Compl.[1], ¶¶ 17, 20)
2. $16, 948.98 for the tax period ending December 31, 2005 (Compl., ¶¶ 22, 25)
3. $247, 799.04 for the tax years 1992, 1993, 1996, and 2001. (Compl., ¶ 40, 46)

For tax periods 1998 and 2005 (i.e., paragraphs 1 and 2, supra ), the government seeks to reduce the tax assessments to judgment. (Compl., Counts I and II) For tax periods 1992, 1993, 1996, and 2001 (i.e., paragraph 3, supra ), the government had already obtained judgments against Balice before filing this action. (Compl., ¶¶ 41 and 43)

To satisfy the existing and anticipated judgments, the government seeks to foreclose on a property at 70 Maple Avenue in Metuchen, New Jersey. That Maple Avenue property was once owned by Michael Balice and his then-wife, Marion Balice.[2] In 1994, the Balices transferred ownership of the Maple Avenue property to a trust called The Rosewater Trust; the government alleges that they did so for no consideration, in an attempt to frustrate creditors. The government therefore asks this court to either hold that the Trust is an alter ego of Michael Balice (Count III) or deem the transfer to be a fraudulent conveyance or a fraud on the United States (Count IV). In any case, the government wishes to foreclose on the Maple Avenue property in satisfaction of Balice's tax obligations. (Count V).

Two defendants-Investors Bank and Amboy Bank-hold mortgages on the Maple Avenue property. (Compl., ¶¶ 8, 9)

Three other defendants-Medical Care Management Systems, Barclays Bank Delaware, and Richard Tiedemann-are creditors who had previously recorded judgments against Balice. (Compl., ¶¶ 10-12). Barclays has filed a stipulation indicating that it has no interest in the property. (Dkt. No. 45) Medical Care and Tiedemann have not appeared.

Also named as a defendant is Balice's former wife, Marion Balice (now Marion Meyer). She has entered into a consent judgment and is no longer a party. (Dkt. No. 55)

I. Amboy Bank motion for summary judgment (Dkt no. 33)

a. Background and summary

On March 2, 1991, Amboy Bank issued a home equity line of credit ("HELOC")[3] to Michael and Marion Balice. (Credit Agrmt., 1) The line of credit had a limit of $35, 000. (Credit Agrmt., 1) As security for the line of credit, the Balices executed and delivered to Amboy a mortgage on their Maple Avenue property. Amboy's mortgage was recorded on March 12, 1991. (Mortgage, 1)

Fourteen years later, on July 12, 2005, the federal government filed its first notice of a tax lien on the Maple Avenue property. (Compl., ¶ 45)

The question that Amboy's summary judgment motion raises is this: If the government succeeds in foreclosing on the Maple Avenue property, will Amboy's lien take priority over the federal tax lien? Amboy's position is a maximalist one, founded on New Jersey law: It believes that its lien was perfected, in the full amount of $35, 000, in 1991; that any amounts advanced on the HELOC at any time thereafter relate back to 1991; and that Amboy's lien therefore primes the government's 2005 tax lien.

I understand the law of priority differently. Amboy's lien will take priority to the federal tax lien only to the extent that Amboy disbursed funds to the Balices prior to the 46th day following the filing of the notice of a tax lien. The amount of Amboy's lien that will take priority would therefore include: 1) the amount of cash disbursed to the Balices before the cutoff date, 2) plus any interest or fees attributable to that balance. In a proper case, the United States may argue that the amount of the lien should subtract 3) any repayment of the pre-cutoff-date debt.

To determine what portion of the amount that the Balices owe to Amboy Bank meets these criteria, discovery will be required. Summary judgment is therefore not appropriate at this juncture. My reasoning follows; although summary judgment is denied, I believe the case will benefit from a clear statement of the priority ground rules.

b. Priority standards

1. Federal standards govern the priority of federal tax liens

To a great extent, the dispute between Amboy and the government comes down to a choice of law issue. Amboy says that New Jersey law determines the order of priority of liens; the United States says that federal standards control. On that narrow question, the United States is correct. While state law governs the parties' underlying property rights, federal law governs the priority between a federal tax lien and a competing lien. See Cong. Talcott Corp. v. Gruber, 993 F.2d 315, 319 (3d Cir. 1993) ("Courts must apply state law to determine what interest, if any, the taxpayer has in levied property. Although state law governs this issue, as we have noted, federal law assigns consequences to rights created by local law.").

Aquilino v. United States, 363 U.S. 509 (1960) illustrates the distinction. There, the government filed a tax lien against all of a taxpayer's property. Aquilino, 363 U.S. at 510. Ten days later, a subcontractor filed a mechanic's lien on the same property to secure a fee of $2, 200. Id. The Supreme Court explained that the subcontractor's interest in the $2, 200 was governed by state law. Likewise, state law governed the taxpayer's ownership interest in the property. Id. at 512-13 ("it has long been the rule 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 sought to be reached by the statute.")

Federal law, in contrast, governs the priority as between a tax lien and other liens: "[O]nce the tax lien has attached to the taxpayer's state-created interests, we enter the province of federal law, which we have consistently held determines the priority of competing liens asserted against the taxpayer's property or rights to property." Aquilino, 363 U.S. at 513-14. See also In re Wind Mach. Sales & Serv., Inc., 161 B.R. 1000, 1010 (Bankr. E.D. Cal. 1993) ("While state law determines the nature of property rights, federal law determines issues of priorities in relation to competing claims.").

It follows that, in a federal tax case, federal law regarding the priority of liens trumps state priority law. See U.S. By & Through I.R.S. v. McDermott, 507 U.S. 447, 449 (1993) (applying federal rules of priority to determine whether a federal tax lien took priority over a private lien that predated the tax lien); Aquilino, 363 U.S. at 510 (holding that federal law is used to determine whether a competing lien has priority over a federal tax lien); Monica Fuel, Inc. v. I.R.S., 56 F.3d 508 (3d Cir. 1995) (applying federal law of priority to determine whether a state tax lien or a federal tax lien would enjoy priority); In re B & B Printing Co., Inc., 164 B.R. 273, 276 (Bankr. S.D. Ohio 1993) ("The case before the Court involves competing liens of the federal government and a private party asserting rights under state law. Federal law, decided in New Britain, Pioneer American, and McDermott, is controlling.").

Under federal law, priority is determined according to the familiar principle that first in time is first in right. McDermott, 507 U.S. at 449 ("Federal tax liens do not automatically have priority over all other liens. Absent provision to the contrary, priority for purposes of federal law is governed by the common-law principle that the first in time is the first in right.") (internal quotations omitted); Monica Fuel, 56 F.3d 508. But the federal statute is a bit more specific than that. Under 26 U.S.C. § 6321, a tax lien arises when tax is assessed. Such a tax lien is not valid as against a competing "security interest, " however, until notice of the tax lien is given-generally, by recordation with the county clerk. See 26 U.S.C. § 6323(f). As of the date of the tax lien's recordation (subject to a 45-day grace period, discussed below), only an earlier "security interest" will be given priority.

To the extent the Amboy lien is prior in time to the federal tax lien, then, it is prior in right. The date of a lien sounds like a simple, ascertainable fact, and it often is-but not always. I next discuss, under federal priority standards, the priority date of the Amboy lien in relation to the federal tax lien.

2. The priority date of the Amboy lien

I next consider the priority date of the competing Amboy lien, in order to ascertain whether it was earlier than the tax lien. Amboy takes the maximalist position that, under New Jersey state law, its lien in connection with the HELOC gained priority as of March 12, 1991, [4] when Amboy recorded it. That priority date, says Amboy, applies irrespective of any amounts that were or were not disbursed and outstanding at any later time. See Amboy Mot., 7. Because the federal tax lien was not recorded until fourteen years later, on July 12, 2005, it is second in time, and in right.

Were this an ordinary home mortgage, Amboy's simple approach would be the correct one: Homebuyer obtains a purchase money mortgage for $100, 000, and the funds are immediately disbursed; Mortgagee bank records the $100, 000 mortgage on January 1, 2000; January 1, 2000, becomes the priority date for the mortgagee's lien on the property.

Not so straightforward in the case of a HELOC. There, the lien floats, in the sense that it secures whatever sums may be disbursed and outstanding from time to time on the credit line. The homeowner may never draw on the line of credit at all; the homeowner may draw on it temporarily but pay off the balance; or the homeowner may owe on the line of credit at the time the government's tax lien is filed. It is difficult to say that a HELOC loan (or the corresponding lien) has a fixed amount, or any amount, except in reference to a particular date.

The short answer to Amboy's maximalist position is that it rests on New Jersey State priority law, which does not apply.[5] As established above, priorities with respect to a federal tax lien are governed by federal law. And federal law supplies an answer to the question of whether, when, and to what extent Amboy's lien has priority. That answer is clear, if somewhat convoluted, but it ultimately depends on facts not before this Court.

Under applicable federal law, the priority date of a competing lien is the date that it becomes specific and perfected. That means that "the identity of the lienor, the property subject to the lien, and the amount of the lien [must be] established." McDermott, 507 U.S. at 449. Thus a lien is perfected, for purposes of its priority vis-à-vis a federal tax lien, when there is "nothing more to be done":

As against a record federal tax lien, the relative priority of a state lien is determined by the rule "first in time is the first in right, " which in turn hinges upon whether, on the date the federal lien was recorded, the state lien was specific and perfected. A state lien is specific and perfected when there is nothing more to be done-when [1] the identity of the lienor, [2] the property subject to the lien, and [3] the amount of the lien are established.

United States v. Equitable Life Assur. Soc. of U.S., 384 U.S. 323, 327-28 (1966) (bracketed [numbers] added for clarity). Accord Monica Fuel, 56 F.3d at 511.

As to Amboy's lien, "[1] the identity of the lienor" and "[2] the property subject to the lien" were indeed established as of March 12, 1991, when the lien was filed. But "[3] the amount of the lien" was contingent on future events. Amboy's HELOC gave the Balices the option to withdraw up to $35, 000.[6] (Credit Agrmt., 1) Unless and until the Balices actually did so, the "amount of the lien" was effectively zero.[7] There was no debt for the mortgage to secure. But if, for example, the Balices borrowed $10, 000 on the HELOC, that amount would be secured by the equity in their home. In short, the amount of the lien, at any given time, was equal to the amount disbursed and outstanding on the line of credit. In 1991, there was no way to know if there would ever be any outstanding balance-let alone the amount of that balance at any particular time in the future. Until the Balices borrowed on the HELOC, the amount owed was uncertain; there was still something "more to be done"; the lien was not perfected for priority purposes. See Equitable Life Assur. Soc., 384 U.S. at 327-28. Under a home equity line of credit, then, the amount of the debt does not become certain, and the accompanying lien does not become perfected, until the balance is known as of a particular date.[8]

So "perfection" of the lien is one lens through which to view the question. Another such lens is the statutory definition of a "security interest." That alternative form of scrutiny yields the same answer.

Where, as here, a loan is disbursed over time, the issue of the priority date and the issue of the lien's dollar amount are intertwined. Section 6323(d), quoted above, provides that a tax lien shall not be valid as against "a security interest" that is prior in time. The same section defines a "security interest":

The term "security interest" means any interest in property acquired by contract for the purpose of securing payment or performance of an obligation or indemnifying against loss or liability. A security interest exists at any time (A) if, at such time the property is in existence and the interest has become protected under local law against a subsequent judgment lien arising out of any unsecured ...

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