Opinion
No. 4:00CV00945 SWW
August 13, 2001
MEMORANDUM OPINION AND ORDER
Plaintiff, Wilson Associates, P.L.L.C., as agent for California Mortgage Service, filed a complaint for interpleader in the Chancery Court of Pulaski County, Arkansas, and defendant United States Internal Revenue Service ("IRS") removed the case to this Court. Now before the Court is the motion of defendant "IRS" for summary judgment [docket no. 17]. Defendant Dyanne Jackson Kenward ("Kenward") has filed a response [docket no. 20] in opposition. Plaintiff Wilson Associates, P.L.L.C., has filed a response [docket no. 22] stating that the motion of the IRS for summary judgment should be granted. Defendant Michael R. Leach has filed a response [docket no. 23] asserting his right of homestead and stating that the motion of the IRS for summary judgment should be granted. The time for responding has passed, and defendants Kim H. Leach and the Department of Finance and Administration of the State of Arkansas ("Arkansas DFA") have not responded. The IRS has filed a reply brief [docket no. 25].
After careful consideration, and for the reasons stated below, the Court determines that the motion of the IRS must be granted.
I. Background
The undisputed facts establish the following. At a foreclosure sale on August 22, 2000, property located in Pulaski County, Arkansas, and owned by Michael R. Leach and Kim H. Leach, was sold to a third-party purchaser for $120,000.00. Prior to the foreclosure, Michael R. Leach and Leshe Leach lived at the subject property. Singleton Mortgage Corporation originally held a first mortgage on the subject property based on a mortgage recorded in Pulaski County, Arkansas, on April 8, 1985. The mortgage was assigned to the California Mortgage Service on November 15, 1990. From the foreclosure sale proceeds, $94,269.74 was applied to satisfy the debt on this mortgage. A balance of $25,730.26 in proceeds remained after the mortgage was paid. This balance is now available for distribution.
Four potential claimants are identified in the complaint for interpleader: Michael R. Leach and Kim H. Leach, Kenward, the IRS, and the Arkansas DFA. Michael R. Leach's claim is based on his ownership of the property sold. Kim H. Leach does not claim any interest in the subject property. On January 8, 1996, the IRS filed a Notice of Federal Tax Lien in Pulaski County, Arkansas, against Michael R. Leach and Leshe Leach for 1992, 1993, and 1994 federal income taxes in the amount of $28,809.73. The 1992, 1993, and 1994 taxes were assessed on June 6, 1994; March 20, 1995; and August 7, 1995, respectively. As of March 1, 2001, the account balances for those years was $33,276.56. The Arkansas DFA filed Certificate of Indebtedness for taxes in the amounts of $3,270.51 and $4,216.88 on March 22, 1996, and July 1, 1999, respectively. Michael R. Leach and Leshe M. Leach filed a Chapter 7 bankruptcy petition on August 30, 2000, and received a discharge on December 12, 2000.
The Court notes that the response of Michael R. Leach [docket no. 23] indicates that the Chapter 7 bankruptcy discharge order was obtained on December 15, 2001, but further notes that this discrepancy between dates is irrelevant for purposes of this Order.
Kenward obtained a consent judgment in the Circuit Court of Lincoln County, Arkansas, against Michael R. Leach, Leshe Leach, and MLR, Inc., for the sum of $25,000.00, on March 1, 1993, which was filed with the Circuit County Clerk of Pulaski County on March 30, 1995.
See docket no. 19, exhibit 3.
The IRS now seeks summary judgment in its favor with respect to its priority over the foreclosure sale proceeds. In response, Kenward asserts that she is entitled to priority. This legal issue, whether the IRS or Kenward is entitled to priority, is the only remaining dispute in this case.
Because the Arkansas DFA and Wilson Associates, P.L.L.C., in essence concede that the IRS has priority, it is not necessary for the Court to address their standing in the order of priority. Further, Kim H. Leach does not claim any interest in proceeds, see docket no. 19, exhibit 2. Therefore, the Court limits its discussion to the priority standing of the IRS and Kenward.
II. Standard of Review
Summary judgment is appropriate when "the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to judgment as a matter of law." Fed. R Civ. P. 56(c). As a prerequisite to summary judgment, a moving party must demonstrate "an absence of evidence to support the non-moving party's case." Celotex Corp. v. Catrett, 477 U.S. 317, 325 (1986). Once the moving party has properly supported its motion for summary judgment, the non-moving party must "do more than simply show there is some metaphysical doubt as to the material facts." Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 586 (1986). The non-moving party may not rest on mere allegations or denials of his pleading but must "come forward with `specific facts showing that there is a genuine issue for trial.'" Id. at 587 (quoting Fed.R.Civ.P. 56(e))."[A] genuine issue of material fact exists if: (1) there is a dispute of fact; (2) the disputed fact is material to the outcome of the case; and (3) the dispute is genuine, that is, a reasonable jury could return a verdict for either party." RSBI Aerospace, Inc. v. Affiliated FM Ins. Co., 49 F.3d 399, 401 (8th Cir. 1995). The inferences to be drawn from the underlying facts must be viewed in the light most favorable to the party opposing the motion. Matsushita, 475 U.S. at 587 (citations omitted). Further, summary judgment is particularly appropriate where an unresolved issue is primarily legal, rather than factual. Mansker v. TMG Life Ins. Co., 54 F.3d 1322, 1326 (8th Cir. 1995).
III. Discussion
The IRS seeks summary judgment in its favor with respect to its priority over the foreclosure proceeds, arguing that the IRS has valid Notices of Federal Tax Lien on file, the taxes remain unpaid, and that no other potential claimant is entitled to priority.
The Internal Revenue Code, at 26 U.S.C. § 6321, provides that a tax lien on a taxpayer's property and rights to property arises where the taxpayer neglects or refuses to pay taxes due after demand has been made. The federal tax lien arises as of the assessment date. As previously stated in the undisputed facts, the IRS made assessments for unpaid federal taxes against Michael R. Leach and Leshe Leach on June 6, 1994; March 20, 1995; and August 7, 1995. Following the assessments, on January 8, 1996, the IRS filed a Notice of Federal Tax Lien in Pulaski County, Arkansas, against Michael R. Leach and Leshe Leach for 1992, 1993, and 1994 federal income taxes in the amount of $28,809.56, thus complying with the notice provisions of § 6323(f). When these assessments were made, federal tax liens arose against the Leaches' property and rights to property. See 26 U.S.C. § 6321.
As relevant to the remaining issue in this case, the IRS asserts that although Kenward's judgment-filing date is earlier than the federal tax assessment dates, Kenward does not have a judgment lien with priority over the federal tax liens. Specifically, the IRS notes that a judgment lien, such as Kenward's, cannot attach to Arkansas homestead property. See Ark. Code Ann. § 16-66-210; Ark. Const. Art. 9, § 3. Thus, the IRS argues, Kenward's judgment lien did not attach to the foreclosed property, and Kenward has no claim to the proceeds. By comparison, federal tax liens are not subject to state-created restrictions on foreclosure against homestead property. See United States v. Rodgers, 461 U.S. 677, 701-02 (1983).
Citing Arkansas v. Grimmett, 731 S.W.2d 592 (Ark. 1987); Arkansas Savings Loan Assoc. v. Hays, 637 S.W.2d 592 (Ark. 1982); and Barnhart v. Gorman, 198 S.W. 880 (Ark. 1917), Kenward argues that the homestead privilege is a personal right which can only be (and has not been) asserted by the Leaches, and further that this right can be waived. Michael R. Leach, however, asserts his right of homestead in his response filed July 20, 2001, to the IRS's motion for summary judgment. In an affidavit attached to Michael R. Leach's response, Leshe Leach also asserts her right of homestead. Therefore, because the Leaches have now asserted their homestead rights in the proceeds of the foreclosure sale, Kenward's judgment lien does not attach to the homestead property. See Ark. Code Ann. § 16-66-210; Ark. Const. Art. 9, § 3.
See docket no. 23, exhibits I (Affidavit of Michael R. Leach), 2 (Affidavit of Leshe Leach), and 3 (Schedule of Property). Under Arkansas law, by occupying a property as a homestead, a debtor gains the right to claim a homestead exemption against a judgment creditor. See Arkansas Savings Loan Ass'n v. Hayes, 637 S.W.2d 592, 594 (Ark. 1982). A debtor may wait until suit is brought before asserting his exemption. Id. Specifically, Arkansas Code Annotated § 16-66-212 provides that "a debtor's right of homestead shall not be lost or forfeited by his omission to select and claim it as exempt before the sale thereof on execution, nor by his failure to file a description or schedule of the homestead in the recorder's or clerk's office." Proceeds from a forced sale of homestead property are exempt from execution for a reasonable period of time to allow a person to purchase a new homestead. See Exchange Bank Trust Co. v. Mathews, 591 S.W2d 354 (Ark. 1979).
"When a homestead is sold at a forced sale, as distinguished from a voluntary sale, the debtor's share of the proceeds is exempt if he intends to use it to acquire another homestead." Sims v. McFadden, 233 S.W.2d 375, 377 (Ark. 1950). It can be reasonably inferred, in accordance with Arkansas law, that the Leaches would intend to use the proceeds to acquire another homestead; however, because federal tax liens are not subject to state-created restrictions on foreclosure against homestead property, the proceeds will be diverted to satisfy the federal tax liens.
Kenward also argues that the homestead exemption can be waived, and that the Leaches waived that privilege in Paragraph 22 of their March 26, 1985 mortgage, which states: "Borrower waives all rights of homestead exemption in, and statutory redemption of, the Property and all right of appraisement of the Property and relinquishes all rights of curtesy and dower in the property." However, by executing this waiver as to the mortgage company, the Leaches did not abandon their right to a homestead exemption in that property in relation to other creditors. See Northwestern Nat'l Ins. Co. v. Sulcer, 588 S.W.2d 442 (Ark. 1979); Lee v. Mercantile First Nat'l Bank, 765 S.W.2d 17 (Ark.Ct.App. 1989) ("The mortgage executed by appellants was, of course, a waiver of their homestead exemption as to the debt secured by that mortgage."); Flask v. Tindall, 39 Ark. 571 (1882) ("[O]wners of homesteads may incumber [sic] them as their judgment may dictate, but they do not thereby abandon them to their general creditors . . .
See docket no. 20, exhibit B.
In summary, because the Leaches have asserted the homestead exemption as to the proceeds of the sale of their foreclosed property, Kenward's judgment lien cannot attach to that property. Further, the Leaches have not waived their homestead exemption in a manner applicable to Kenward. Accordingly, because the IRS has valid Notices of Federal Tax Lien on file, those taxes remain unpaid, and Kenward is not entitled to priority, judgment shall be entered in favor of the IRS.
IV. Conclusion
THEREFORE, the motion of the IRS for summary judgment [docket no. 17] is hereby GRANTED; the relief sought by the IRS is hereby GRANTED. Judgment shall be entered accordingly . . .
In its brief in support of motion for summary judgment, the IRS states: "Additionally, Wilson Associates is not entitled to an award of attorney fees and costs. The federal tax liens attached to the property before this interpleader action and therefore have priority over any inchoate claim for attorney fees or costs arising out of the action." See docket no. 18, page 6. The Court assumes Wilson Associates has abandoned any claim for attorney fees and costs, previously requested in the complaint for interpleader, by its one sentence response to the motion: "[T]he United States' Motion for Summary Judgment should be granted." See docket no. 22.