Plaintiff brought suit to quiet title to a parcel of property for which plaintiff holds a judicial deed and defendants hold a subsequent United States tax deed. The circuit court granted summary disposition to plaintiff and entered an order voiding the tax deed and declaring plaintiff the owner of the subject property in fee simple. Defendants appeal as of right. We reverse and remand.
On February 4, 1970, plaintiff’s late husband, Arthur Byerlein, held a recorded first mortgage on a parcel of property owned by Theodore and Celestine Graham. Between April 4, 1979, and May 16, 1985, the Internal Revenue Service filed and recorded several federal tax liens against the Grahams’ interest in the subject property.
In June, 1983, plaintiff sued to foreclose, not joining the irs as a party and also failing to give the irs actual notice of the foreclosure proceedings. On June 11, 1984, a judgment of foreclosure was entered in plaintiff’s favor. The foreclosure sale followed on November 20, 1984, at which time
On June 24, 1985, the irs gave notice of a public auction, offering for sale the interest of the Grahams in the subject property. Plaintiff received written notice of the auction from the irs by mail as evidenced by a copy of said notice attached to plaintiffs complaint in the present action. The auction was held on July 22, 1985, and defendants purchased the interest in the property and received a tax deed.
On July 6, 1987, plaintiff sued to quiet title. She subsequently moved for summary disposition. A hearing was held on March 25, 1988, and plaintiffs motion was granted. At that time the circuit court signed the motion praecipe. However, plaintiff apparently felt that a more detailed order was necessary and filed a proposed written order under the seven-day rule. Defendants responded with objections, claiming that plaintiffs proposed order went beyond the court’s original decision. On May 20, 1988, plaintiff filed her motion for entry of judgment. Argument on the motion was heard on June 10, 1988, and the circuit court entered a written order on June 20, 1988, expressly declaring defendants’ tax deed void and recognizing plaintiff as owner in fee simple. On July 11, 1988, defendants filed the present appeal.
As a threshold matter, plaintiff argues that this Court lacks jurisdiction due to defendants’ failure to timely file their appeal. However, the record indicates that the circuit court entered its written order on June 20, 1988, and defendants filed their claim of appeal on July 11, within the twenty-one-
With respect to defendants’ contention that the circuit court erred as a matter of law when it set aside defendants’ tax deed, we must agree. Defendants correctly argue that the federal tax liens had not been extinguished following the foreclosure sale through which plaintiff had taken title.
Under Michigan law, a purchaser at a judicial sale takes the property subject to all prior defects, liens and encumbrances of which he has notice or of which he could obtain knowledge under his duty to inform himself.
Janower v F M Sibley Lumber Co,
Discharge of federal tax liens is governed by federal law, except to the extent that federal law makes state law controlling.
Berlin v United States,
The Federal Tax Lien Act, 26 USC 7425, was
26 USC 7425 states in pertinent part:
(a) Judicial proceedings. If the United States is not joined as a party, a judgment in any civil action or suit described in subsection (a) of section 2410 of title 28 of the United States Code, or a judicial sale pursuant to such a judgment, with respect to property on which the United States has or claims a lien under the provisions of this title—
(1) shall be made subject to and without disturbing the lien of the United States, if notice of such lien has been filed in the place provided by law for such filing at the time such action or suit is commenced, ...
If a judicial sale of property pursuant to a judgment in any civil action or suit to which the United States is not a party discharges a lien of the United States arising under the provisions of this title, the United States may claim, with the same priority as its lien had against the property sold, the proceeds (exclusive of costs) of such sale at any time before the distribution of such proceeds is ordered.
While plaintiff argues that subsection (b) of the statute is also applicable to this action, that subsection, by its express terms, applies only to nonjudicial proceedings. Section 7425(a) makes it clear that foreclosure and sale pursuant to judicial proceedings will discharge an inferior federal tax lien only if the United States is named as a party to the judicial foreclosure proceedings, the federal tax lien is not filed in accordance with the provisions of local laws at the time the foreclosure
Since the irs had properly filed notice of its tax liens prior to plaintiffs initiation of judicial foreclosure proceedings, and since plaintiff failed to give the irs notice or join it as a party to those proceedings, plaintiff took title through the judicial deed subject to the perfected tax liens and the possibility of foreclosure on the basis of those liens. As noted by the Myers court:
Under § 6331, the United States is authorized to collect delinquent taxes "by levy upon all property and rights to property ... on which there is a lien provided in this chapter for the payment of such tax.” 26 USC 6331(a). The term "levy” as used in the Act includes "the power of distraint and seizure by any means.” 26 USC 6331(b). And, where levy is proper, the United States may seize and sell the property levied upon. Id. Such levy and seizure need not be accomplished while the property is in the hands of the taxpayer; so long as the property is subject to a valid federal tax lien, it may be seized in the hands of any subsequent purchaser. Treas Reg § 301.6331-l(a)(l) (1979); Mertens [Federal Income Taxation:] Code Commentary, § 6331:1 [1980]; W Plumb & L Wright, Federal Tax Liens 201 (2d ed, 1969). [647 F2d 601. Emphasis added.]
In addition, the record indicates that plaintiff received notice of the irs public auction, pursuant to 26 USC 6335, but failed either to bid at the auction or redeem the property either before the auction for the amount of the taxes owed plus expenses if any, as provided under 26 USC 6337(a), or within 180 days after the auction for the amount of the purchase price plus interest, as provided under 26 USC 6337(b). Furthermore, plaintiff did not claim any irregularity or impropriety in the irs foreclosure proceedings.
A purchaser at a tax auction takes title to the property subject to any liens with priority over the federal tax liens,
Streule v Gulf Finance Corp,
As stated in United States v State of Colorado, 872 F2d 338, 339-340 (CA 10, 1989):
Federal law governs the priority of a tax lien against other claims to property. Aquilino v United States,363 US 509 , 513-514;80 S Ct 1277 , 1280-1281;4 L Ed 2d 1365 [1368-1369] (1960); United States v Wingfield, 822 F2d 1466, 1473 (CA 10, 1987), cert dis — US —;108 S Ct 1762 ;100 L Ed 2d 222 (1988); see IRC §§6321-6323. Unless Congress has stated otherwise, however, we look to state law in determining what constitutes a property interest or right to property to which a federal tax lien may attach. United States v Brosnan,363 US 237 , 240-242;80 S Ct 1108 , 1110-1112;4 L Ed 2d 1192 [1195-1196] (1960); see Bigheart Pipeline Corp v United States, 835 F2d 766, 767 (CA 10, 1987). Accordingly, whether merger applies in this case must be answered by reference to state law. See First American Title Ins Co v United States, 848 F2d 969, 971 (CA 9, 1988) (applying California law of merger); United States v Polk,822 F2d 871, 874 (CA 9, 1987) (applying Arizona law of merger); Southern Bank v IRS, 770 F2d 1001, 1007 (CA 11, 1985) (applying Alabama law of merger), cert den 476 US 1169 ;106 S Ct 2890 ;90 L Ed 2d 977 (1986). [Emphasis added.]
In First American Title Ins Co v United States, 848 F2d 969, 971 (CA 9, 1988), the ninth circuit court of appeals determined:
Under California law, the general rule is that a mortgagee’s lien is extinguished when the mortgagee purchases the property to which his or her lien was attached. . . . The theory is that the mortgagee’s lesser interest (the lien) has "merged” into the greater interest (the fee). . . .
[However,] California law recognizes an equitable exception to the rule: "Equity will prevent or permit a merger as will best subserve the purposes of justice and the actual and just intent of the parties. ... In the absence of an expression of intention, if the interest of the person in whom the several estates have united, as shown from all the circumstances, would be best subserved by keeping them separate, the intent to do so will ordinarily be implied.”
The court also noted:
Granting equitable relief to [plaintiff mortgagee] would not undermine Congress’s intent. If [plaintiff’s] lien survives the sale, the government’s junior liens still are unaffected by the sale, and the government can protect its interest in having a fair sale in the future when [plaintiff] sells the property or when the government forecloses on it. Granting equitable relief also will not discourage senior lienors such as [plaintiff] from notifying the government of future sales. Senior lienors have a strong incentive to notify the government because doing so will extinguish the government’s junior liens when the property is sold. See 26 USC7425(b)(2) and Sohn v California Pacific Title Ins Co, 124 Cal App 2d 757 [767]; 269 P2d 223 , 230 (1954). If notice is not given, the government’s liens survive the sale, leaving an encumbrance on the property. We believe that this is the penalty that Congress intended to impose on senior lienors such as [plaintiff]. [848 F2d 972-973.]
In Michigan, the equitable rule regarding merger is much the same as that in California:
There is no doubt about the general rule that when the holder of a real estate mortgage becomes the owner of the fee, the former estate is merged in the latter. This rule is, however, subject to the exception that when it is to the interest of the mortgagee and is his intention to keep the mortgage alive, there is no merger, unless the rights of the mortgagor or third persons are affected thereby. [Anderson v Thompson,225 Mich 155 , 159;195 NW 689 (1923).]
Further:
The intention is controlling. It is either expressed or is implied from the circumstances of the transaction. If it is to the interest of the mortgagee to keep the mortgage alive, the intention to do so will be implied; for. it is presumed that a man intends to do that which is to his advantage. But if the intention to merge the estates is expressed, the fact that it is to his benefit to keep the mortgage alive is immaterial. [First National Bank of Utica v Ramm,256 Mich 573 , 575;240 NW 32 (1932).]
See also
Vollmer v Coenis,
Furthermore, the rights of defendants would not be prejudiced by a finding that plaintiffs mortgage lien survived. As noted previously, and indeed as expressly stated in the irs Notice of Public Auction Sale, the purchaser takes title "subject to any prior valid outstanding mortgages, encumbrances, or other liens in favor of third parties against the taxpayer that are superior to -the lien of the United States.”
Therefore, we remand this case to the trial court for a finding of fact as to whether from the circumstances of the November 20, 1984, foreclosure sale plaintiff expressly intended that her mortgage lien would merge with the fee. If the court finds that such an expressed intent existed, the court shall enter judgment quieting title in defendants. If, on the other hand, the court finds that no such expressed intent existed, then defendants take title subject to plaintiffs lien on the property and any remedies under the law plaintiff may have as a senior lienholder.
Reversed and remanded. We do not retain jurisdiction.