Wadsworth et al v. Talmage et al

Motion to Dismiss for Failure to State a Claim

D. Or.May 9, 2017

US Mot. to Dismiss 2d Amended Complaint Case No. 3:16-cv-2082-SI 1 DAVID A. HUBBERT Acting Assistant Attorney General LINDSAY L. CLAYTON JENNIFER Y. GOLDEN ALEX HALVERSON Trial Attorneys, Tax Division U.S. Department of Justice P.O. Box 683 Washington, D.C. 20044 202-307-2956 (Clayton) 202-307-0054 (f) Lindsay.L.Clayton@usdoj.gov Of Counsel: BILLY J. WILLIAMS United States Attorney Attorneys for the United States of America UNITED STATES DISTRICT COURT DISTRICT OF OREGON PORTLAND DIVISION JOHN WADSWORTH, as trustee for the RBT VICTIM RECOVERY TRUST, Plaintiff, v. RONALD B. TALMAGE, ANNETTE C. TALMAGE, RIVERCLIFF FARM, INC., NEW CENTURY PROPERTIES LTD., UNITED STATES OF AMERICA, and MULTNOMAH COUNTY, Defendants. _______________________________________ Case No.: 3:16-cv-2082-SI United States’ MOTION TO DISMISS SECOND AMENDED COMPLAINT Request for Oral Argument The United States of America, by and through its undersigned counsel, moves to dismiss the Second Amended Complaint (Dkt. # 39) filed by John Wadsworth, individually and as trustee for the RBT Victim Recovery Trust (the “VRT”) as to the United States under Fed. R. Case 3:16-cv-02082-SI Document 44 Filed 05/09/17 Page 1 of 26 US Mot. to Dismiss 2d Amended Complaint Case No. 3:16-cv-2082-SI 2 Civ. P. 12(b)(6) for failure to state a claim on which relief may be granted.1 In support of this motion, the United States pleads as follows: TABLE OF CONTENTS TABLE OF CONTENTS ................................................................................................................ 2 CERTIFICATION OF CONFERRAL UNDER LR 7-1 ................................................................ 3 BACKGROUND ............................................................................................................................ 3 ARGUMENT .................................................................................................................................. 5 1. Though the VRT has not established standing, the Court may wish to accept that it would be able to establish standing in a future suit and dismiss this case on the merits. ...................... 6 2. The United States’ federal tax liens attached to the River Cliff Property. .......................... 7 A. Ronald Talmage had property rights in the River Cliff Property under Oregon law. .. 8 B. The federal tax liens attached notwithstanding the fact that title to the River Cliff Property was held by RFI. ...................................................................................................... 9 C. Outdated cases from other jurisdictions do not refute the basic conclusion that the federal tax liens attached to the River Cliff Property. .......................................................... 11 3. Plaintiffs cannot establish a superior interest in the River Cliff Property. ........................ 13 A. Plaintiffs’ claims were inchoate when the tax liens were filed and are therefore inferior under controlling Ninth Circuit precedent. .............................................................. 13 B. The United States’ claim is superior according to statute. ......................................... 15 C. No express or constructive trust yet exists; therefore, Plaintiffs cannot establish a superior interest on either of these theories. ......................................................................... 16 D. Plaintiffs have not sufficiently established a claim for “other equitable relief.” ........ 18 E. The United States’ supposed “knowledge” of the Ponzi scheme is irrelevant. .......... 22 F. Subrogation to an inchoate interest of prior investors does not entitle Plaintiffs to priority over the United States. ............................................................................................. 23 4. Plaintiffs are not entitled to costs and fees under 28 U.S.C. § 2412. ................................. 23 CONCLUSION ............................................................................................................................. 25 1 The United States only seeks to dismiss the VRT’s claim against it, not those against Ronald Talmage. Without this claim, however, the entire complaint may be subject to dismissal. The original civil cover sheet hinges jurisdiction on the ability to sue the United States under 26 U.S.C. § 2410. [Dkt. # 1-1]. It also inaccurately lists the county of residence of Ronald and Annette Talmage as Multnomah County, Oregon. Id. Wadsworth is well aware that the Talmages do not reside in Oregon, as he pursued eviction proceedings against them in Utah. See generally, Western Land & Livestock, LLC v. Liu Hsiu Chen and Ronald B. Talmage, Case No. 160906081 (2d Judicial District Court, Weber County, Utah). Accordingly, as a practical matter, resolution of this motion may require the Court to dismiss the entire suit for lack of jurisdiction. Case 3:16-cv-02082-SI Document 44 Filed 05/09/17 Page 2 of 26 US Mot. to Dismiss 2d Amended Complaint Case No. 3:16-cv-2082-SI 3 CERTIFICATION OF CONFERRAL UNDER LR 7-1 The United States certified that counsel for the United States conferred with counsel for Plaintiffs by telephone conference on April 28, 2017. The parties discussed each claim, defense, or issue that is the subject of this motion. The parties made a good faith effort to resolve this dispute, but were unable to do so. BACKGROUND Movant John Wadsworth has made various claims to the real property located at 35701 N.E. Chamberlain Road, Corbett, Oregon 97019 (the “River Cliff Property”). He first sought to assert those claims extra-judicially. See generally, TRO Proceedings [Dkt. # 6, 11, 16, 17, 23, 24] in United States v. Rivercliff Farm, Inc., Case No. 3:16-cv-01248-SI (D. Or.). Next, he and fifteen unidentified “Doe” plaintiffs who claim to be foreign investors wronged by Ronald Talmage sought to intervene in a separate foreclosure action filed by the United States. Id. at [Dkt. # 20]. When those efforts failed, Mr. Wadsworth and the (still anonymous) “investors” filed the present case. On a motion to dismiss, the Court presumes that the well-pleaded material facts alleged in the complaint are true and construes them in the light most favorable to the non-moving party. Wilson v. Hewlett-Packard Co., 668 F.3d 1136, 1140 (9th Cir. 2012) (citations omitted). In order to be presumed true, the factual allegations in the complaint may not “simply recite the elements of a cause of action, but must contain sufficient allegations of underlying facts to give fair notice and to enable the opposing party to defend itself effectively.” Starr v. Baca, 652 F.3d 1202, 1216 (9th Cir. 2011). Legal conclusions couched as factual allegations, however, do not bind the Court. Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009). For the purposes of this motion, then, the United States takes the following alleged material facts as true. Plaintiff, the VRT, is an entity whose beneficiaries include John Wadsworth (also the Trustee and a plaintiff in his individual capacity) and an unknown number Case 3:16-cv-02082-SI Document 44 Filed 05/09/17 Page 3 of 26 US Mot. to Dismiss 2d Amended Complaint Case No. 3:16-cv-2082-SI 4 of Japanese citizens. [Dkt. # 39] at ¶ 1. At some point in time,2 the VRT beneficiaries assigned the claims brought in this lawsuit to the VRT. Id. Ronald Talmage embezzled money from Wadsworth and the other VRT beneficiaries in a Ponzi scheme. Id. Though Talmage had “[t]wo investor clients. . . .during the mid-1990s and prior to 2002,” he did not receive any funds from Wadsworth or any of the VRT beneficiaries until 2002. Id. at ¶¶ 15, 17. VRT beneficiary funds were used, in part, to reimburse pre-2002 investors. Id. Talmage made fraudulent representations to the VRT beneficiaries concerning his investment background. Id. at ¶¶ 21-22. He also made false representations about what he would do with money obtained from the VRT beneficiaries. Id. at ¶¶ 22-24. Talmage’s representations collectively induced Wadsworth and the other VRT beneficiaries to provide Talmage with “over $55,000,000” of their money. Id. at ¶ 25. The VRT beneficiaries expected that Talmage would invest their money as he had promised; they did not intend for him to accept their money as his own. Id. at ¶¶ 27-29. On March 13, 2017, the VRT beneficiaries obtained a judgment against Talmage in Utah, and subsequently registered it in Multnomah County, Oregon. Id. at ¶¶ 30-32. Talmage purchased the River Cliff Property with his then-wife Kumiko for $903,000 in November of 1997. Id. at ¶ 16. The purchase was funded with embezzled funds, but none of the funds used for the initial purchase came from any VRT beneficiaries.3 Id. at ¶ ¶ 16-17. When Talmage divorced Kumiko in 2001, she agreed to forfeit her interest in the River Cliff Property in exchange for $1.4 million. Id. at ¶ 18. Later, in January 2005, VRT beneficiary funds were used to make a $1.5 million payment to Kumiko. Id. VRT beneficiary funds were also used to make significant improvements to the River Cliff Property over time (including “a new home, stables, a Japanese teahouse, and a tennis court”). Id. at ¶ 17. On June 30, 2005, Talmage 2 Like the prior complaint, the second amended complaint is sometimes unclear about what occurred when, arguably failing the pleading standards set forth in Fed. R. Civ. P. 8(a) and 9(b). 3 Though the second amended complaint states that the property was purchased with funds “stolen from Talmage’s investor clients,” it does not allege that any portion came from the VRT beneficiaries. [Dkt. # 39] at ¶ 16. Case 3:16-cv-02082-SI Document 44 Filed 05/09/17 Page 4 of 26 US Mot. to Dismiss 2d Amended Complaint Case No. 3:16-cv-2082-SI 5 transferred title to the River Cliff Property to RiverCliff Farm, Inc. (“RFI”). Id. at ¶ 19. RFI was not a bona fide purchaser for value. Id. At all material times, Talmage controlled RFI. Id. In addition, notwithstanding the transfer of title, Talmage continued to “reside and use the River Cliff Property as his own.” Id. The IRS filed notices of federal tax lien against Talmage on September 17, 2008, November 28, 2009, May 20, 2013, and January 31, 2014. Id. at ¶ 33. At the time the IRS filed notice of its liens, the government had notice4 of Talmage’s Ponzi scheme. Id. The Talmages are liable for the taxes described in the lien notices. Id. at ¶ 35. The following “facts,” which are really legal conclusions couched as fact, need not be accepted as true: Talmage “did not hold an enforceable or legitimate property interest” in the River Cliff Property and “never had valid title” to it; there is a “resulting trust” on the River Cliff Property in favor of the VRT beneficiaries; there is a “constructive trust” on the River Cliff Property in favor of the VRT beneficiaries; the VRT beneficiaries are “entitled to subrogation to the position of. . . .prior victims,” and the federal tax liens “never attached to the River Cliff Property” or are otherwise a cloud on the VRT beneficiaries’ title to the River Cliff Property. Id. at ¶¶ 15, 18, 37-38, 40(c), 43(c). ARGUMENT The second amended complaint should be dismissed because it fails to state a claim for relief. Dismissal is appropriate under Rule 12(b)(6) if there is “no cognizable legal theory or an absence of sufficient facts alleged to support a cognizable legal theory.” Shroyer v. New Cingular Wireless Services, Inc., 622 F.3d 1035, 1041 (9th Cir. 2010) (citations omitted). To survive a motion to dismiss, a complaint must “contain sufficient factual matter to state a facially 4 The United States is required to accept this allegation as true for the purposes of this motion. It is unclear what evidence Plaintiffs believe supports this. Fed. R. Civ. P. 11(b). Counsel for the United States has seen no evidence whatsoever to suggest that the government was somehow on notice of a Ponzi scheme that was not even discovered by its victims until 2016. In any event, as described later in this motion, the government’s knowledge is irrelevant. Case 3:16-cv-02082-SI Document 44 Filed 05/09/17 Page 5 of 26 US Mot. to Dismiss 2d Amended Complaint Case No. 3:16-cv-2082-SI 6 plausible claim to relief.” Id. Here, there is no cognizable legal theory that would allow Mr. Wadsworth or the VRT to prevail on their claims against the United States, even assuming the alleged material facts are true. Therefore, the complaint fails to set forth a plausible claim to relief. First, Plaintiffs misconstrue the law concerning the “property and rights to property” to which a federal tax lien attaches. On the facts alleged in the complaint, the federal tax liens attached to the River Cliff Property when they arose against Talmage. Next, the second amended complaint distorts the law concerning equitable remedies, which cannot provide Plaintiffs with the relief they seek. Plaintiffs’ had no choate interest in the River Cliff Property under federal law until, at the earliest, when they filed their separate Utah judgment in Multnomah County, Oregon. This could not have occurred before the judgment was issued on March 13, 2017. Meanwhile, the United States’ federal tax liens against Talmage were choate and perfected as of the dates notices were filed, the latest of which was January 31, 2014. Thus, Loanstar remains dispositive: to allow this case to proceed, the Court would explicitly have to disagree with its conclusions. Loanstar Mortgagee Services, LLC v. Barker, 282 Fed.Appx. 572 (9th Cir. 2008).5 Because the United States’ federal tax liens are prior in time and superior in right to any right that could be possessed by Plaintiffs, this case must be dismissed. Each of these issues is discussed in turn, below. 1. Though the VRT has not established standing, the Court may wish to accept that it would be able to establish standing in a future suit and dismiss this case on the merits. The United States previously argued that the VRT had failed to establish standing. See [Dkt. # 19, 30]. While the second amended complaint attempts to remedy this error, it does not go far enough as to the VRT, because it fails to state when the VRT beneficiaries assigned their claims. The baseline rule, with limited exceptions, is that standing must exist at the time an 5 While Loanstar is “unpublished,” it may still be cited for persuasive value. Fed. R. App. P. 32.1; Ninth Cir. Rule 36-3(a), (b). Given that Loanstar represents the Ninth Circuit’s most closely analogous case, the Court should find it persuasive here. Case 3:16-cv-02082-SI Document 44 Filed 05/09/17 Page 6 of 26 US Mot. to Dismiss 2d Amended Complaint Case No. 3:16-cv-2082-SI 7 action is filed. E.g., Skaff v. Meridien North America Beverly Hills, LLC, 506 F.3d 832, 838 (9th Cir. 2007). Though the VRT now alleges that it is vested with the right to bring this suit, it does not set forth sufficient allegations to establish that it was property vested with these rights at the time this suit was filed. The VRT’s failure to establish the temporal element of standing is arguably grounds for the Court to dismiss its claims for lack of subject matter jurisdiction under Fed. R. Civ. P. 12(b)(1). However, since the VRT might be able to simply re-file the case or substitute parties to cure these issues, dismissal on these grounds would only kick the proverbial can further down the road. E.g., Northstar Financial Advisors, Inc. v. Schwab Investments, 779 F.3d 1036, 1043- 1044 (9th Cir. 2015); Fed. R. Civ. P. 17(a) (allowing amendment to substitute real party in interest). Any future lawsuit based on the second amended complaint’s allegations would be futile for the reasons set forth elsewhere in this brief. Moreover, the second amended complaint now makes clear that Mr. Wadsworth is also suing in his own right, and there are no similar standing concerns as to Mr. Wadsworth. 2. The United States’ federal tax liens attached to the River Cliff Property. Under 26 U.S.C. § 6321, a lien arises in favor of the United States “upon all property and rights to property, whether real or personal,” belonging to a taxpayer who has refused or neglected to pay tax after demand. The Supreme Court has articulated a broad interpretation of the property rights to which a federal tax lien attaches. United States v. Craft, 535 U.S. 274 (2002). The Craft decision found that a federal tax lien attached to a husband’s interest in property held with his wife as tenants by the entirety. Even though the husband could not unilaterally alienate the property, the Supreme Court found that his rights in the property constituted “property” or “rights to property” under 26 U.S.C. §6321. Id. In so holding, the Supreme Court analogized a taxpayer’s property rights to the classic “bundle of sticks” and explained that “[s]tate law determines only which sticks are in a person’s bundle. Whether those sticks qualify as ‘property’ for purposes of the federal tax lien statute is a question of federal law.” Id. at 278-279. Furthermore, in looking to state law, a court must take care to examine the Case 3:16-cv-02082-SI Document 44 Filed 05/09/17 Page 7 of 26 US Mot. to Dismiss 2d Amended Complaint Case No. 3:16-cv-2082-SI 8 “substance of the rights state law provides, not merely the labels the State gives these rights or the conclusions it draws from them.” Id. at 279. A. Ronald Talmage had property rights in the River Cliff Property under Oregon law. Under Craft, a federal tax lien will attach to the right to alienate or encumber property, even where that right is not held unilaterally. Id. at 284-285. In this case, even assuming Plaintiffs are entitled to some kind of equitable remedy, Ronald Talmage possessed those rights, along with myriad other rights associated with property ownership. First, Oregon law allowed Talmage to alienate the property by transferring it to a “bona fide purchaser” for value. Tupper v. Roan, 243 P.3d 50, 58 (Or. 2010) (explaining that “a purchaser of [fraudulently obtained property] in good faith and without notice acquires a higher right, and takes the property relieved from the constructive trust.”) (citations omitted). Second, Talmage could encumber the River Cliff Property. See, e.g., Evergreen West Business Center, LLC v. Emmert, 323 P.3d 250, 259 (Or. 2014) (acknowledging that defendant, who had fraudulently obtained real estate, had “encumbered the property with a $900,000 loan” that would have to be paid back out of sale proceeds). Third, Talmage could and did live at the River Cliff Property, adapting it to his personal preferences and desires. It is hard to imagine a broader level of “control” over property than that admittedly wielded by Talmage over the River Cliff Property; such “breadth of control” is a strong indicator of property rights to which federal tax liens attach. E.g., Drye v. United States, 528 U.S. 49, 61 (1999). Indeed, it is unclear what substantive property rights Talmage did not possess in the River Cliff Property. Rather than acknowledge these rights, the second amended complaint invokes only legal conclusions Plaintiffs claim state law could draw from remedies that this Court might impose. Such an analysis is incorrect under Supreme Court case law, which requires this Court to look to the substance of Talmage’s state rights when the federal tax liens attached, not the conclusions that Oregon law might draw from them sometime in the future. The second amended complaint fails to allege facts sufficient to establish that Talmage lacked “property or rights to property” in Case 3:16-cv-02082-SI Document 44 Filed 05/09/17 Page 8 of 26 US Mot. to Dismiss 2d Amended Complaint Case No. 3:16-cv-2082-SI 9 the River Cliff Property. Accordingly, Plaintiffs cannot divest the River Cliff Property of the federal tax liens on their amended claims, even assuming all of the facts set forth are true. B. The federal tax liens attached notwithstanding the fact that title to the River Cliff Property was held by RFI. Under the allegations in the second amended complaint, the fact that title was held by RFI and not Talmage directly is irrelevant to the above analysis. As the second amended complaint states, RFI was not a bona fide purchaser for value. At all material times, Talmage controlled RFI, and he continued to reside at and use the River Cliff Property as his own. These are classic facts supporting RFI’s status as Talmage’s nominee. Federal tax liens attach not only to property held by a taxpayer in his own name, but also to property titled to that taxpayer’s nominees or alter-egos. E.g., Fourth Inv. LP v. United States, 720 F.3d 1058, 1066-69 (9th Cir. 2013); United States v. Black, 482 Fed. Appx. 241, 244 (9th Cir. 2012). In Oregon, this Court has conducted that analysis through the nominee factors identified in Towe Antique Ford v. IRS, 791 F. Supp. 1450, 1454 (D.Mon.1992), aff’d, 999 F.2d 1387 (9th Cir.1993) (affirming on alter ego issue, but declining to reach nominee issue). 911 Management, LLC v. United States, 657 F. Supp. 2d 1186, 1193 (D. Or. 2009); The Colby B. Foundation v. United States, 1997 WL 1046002, at *20 (D. Or. 1997). The Towe factors are: 1) Whether the nominee paid no or inadequate consideration; 2) Whether the property was placed in the name of the nominee in anticipation of litigation or liabilities; 3) Whether there is a close relationship between the transferor and the nominee; 4) Whether the parties to the transfer failed to record the conveyance; 5) Whether the transferor retained possession; and 6) Whether the transferor continues to enjoy the benefits of the transferred property. Towe, 791 F. Supp. at 1454. In Colby B., the court added four additional factors relevant to the nominee analysis: (1) the source of the funds used to purchase the property; (2) the taxpayer’s continued use of the property without payment of fair rental value; (3) the taxpayer’s continued payment of maintenance charges and real estate taxes; and (4) the taxpayer’s acts of holding himself out as Case 3:16-cv-02082-SI Document 44 Filed 05/09/17 Page 9 of 26 US Mot. to Dismiss 2d Amended Complaint Case No. 3:16-cv-2082-SI 10 the owner of the property. Colby B., 1997 WL 1046002, at *20; see also, 911 Management, LLC, 657 F. Supp. 2d at 1194. Each of the above factors is aimed at the same general standard: “a business holds an asset as a nominee for a taxpayer when the taxpayer maintains a beneficial interest and exerts control over the asset.” 911 Management, LLC, 657 F.Supp.2d at 1194 (citing LiButti v. United States, 107 F.3d 110, 119 (2d Cir.1997)). The court should “consider the totality of the circumstances rather than single out the presence or absence of one particular factor.” Id. (citing Turk v. IRS, 127 F.Supp.2d 1165, 1167 (D.Mont.2000) (“No factor can dispose of the issue itself, and no factor is necessarily required in order to find nominee status.”)). Here, accepting Plaintiffs’ allegations as true, there is only one conclusion: RFI was Talmage’s nominee. RFI was not a bona fide purchaser, and therefore paid no or inadequate consideration for the River Cliff Property. There was a close relationship between Talmage and RFI, because he controlled it at all material times. Talmage retained possession of the River Cliff Property, and continued to enjoy the benefits of living there and using it as his own. The original source of funds to purchase the River Cliff Property was money that Talmage controlled, not money that had anything to do with RFI (we accept for these purposes that the funds came from defrauded investors, which is irrelevant to the question of whether RFI was Talmage’s nominee). Talmage similarly used funds he controlled to maintain and improve the property. Though the remaining factors are not addressed directly, the second amended complaint sets forth no allegation that would refute a nominee finding. (For instance, there is no allegation that Talmage titled the River Cliff Property to RFI for any legitimate purpose or ever paid fair market rent to RFI). Thus, the allegations in the second amended complaint, taken as true, support the conclusion that RFI was Talmage’s nominee. The fact that title was held by RFI is no impediment to the attachment of the federal tax liens. E.g., Fourth Inv. LP, 720 F.3d at 1066-69; Black, 482 Fed. Appx. at 244. Case 3:16-cv-02082-SI Document 44 Filed 05/09/17 Page 10 of 26 US Mot. to Dismiss 2d Amended Complaint Case No. 3:16-cv-2082-SI 11 C. Outdated cases from other jurisdictions do not refute the basic conclusion that the federal tax liens attached to the River Cliff Property. Though not cited in the complaint, in prior filings Plaintiffs have sought to rely on a smattering of cases from outside of Oregon in an attempt to defeat the reasoning set forth above. See, [Dkt. # 47] in United States v. RiverCliff Farm, Inc., Case No. 3:16-cv-1248-SI (D. Or. Oct. 28. 2016) citing S.E.C. v. Credit Bancorp, Ltd., 138 F.Supp2d 512 (S.D.N.Y. 2001), rev’d in part, 297 F.3d 127 (2d Cir. 2002); FTC v. Crittenden, 823 F. Supp. 699 (C.D. Cal. 1993) aff’d in part 19 F.3d 26 (9th Cir. 1994)6; Atlas, Inc. v. United States, 459 F.Supp. 1000 (D.N.D. 1978); First Nat. Bank of Cartersville v. Hill, 412 F.Supp. 422 (N.D. Ga. 1976).7 The Court should discount those decisions for several reasons. First, all of these cases were decided before the Supreme Court decided Craft, which clearly set forth the principle that state law property interests, which are germane to the federal tax lien analysis, are not the same as the consequences that state law might attach to those interests, which are not. Accordingly, to the extent the result of any of these cases conflicts with that premise, it has arguably been abrogated by the Supreme Court’s subsequent guidance. (And, in any event, Craft controls). Second, none of the decisions cited by the VRT beneficiaries are controlling here. Significantly, none of the cases relies on or interprets Oregon law, which the VRT concedes must dictate Talmage’s substantive property rights to the River Cliff Property. Those cases from within Oregon and the Ninth Circuit that do apply are consistent with the United States’ analysis, not the VRT’s. E.g., Loanstar, 282 Fed.Appx. at 574 (finding that constructive trust under state 6 The United States did not appeal the District Court’s finding; therefore, the Ninth Circuit did not address the attachment of the IRS’s lien on appeal. In any event, the decision was unpublished and issued pre-2007, therefore it cannot properly be cited for persuasive value in the Ninth Circuit. Fed. R. App. P. 32.1; Ninth Cir. Rule 36-2(c). 7 There are a handful of other similar cases that were not cited. See, e.g., Carter v. United States, 1981 WL 1953 (N.D.Ca. Mar. 27, 1981); Dennis v. United States, 372 F.Supp. 563 (E.D. Va. 1974). However, the cases located by the United States are all distinguishable for the same reasons articulated in this brief. Specifically, the United States has been unable to locate any case decided on Oregon law or decided since Craft that would support the VRT’s claims. Case 3:16-cv-02082-SI Document 44 Filed 05/09/17 Page 11 of 26 US Mot. to Dismiss 2d Amended Complaint Case No. 3:16-cv-2082-SI 12 law could not defeat a previously perfected federal tax lien); Evergreen West Business Center, LLC, 323 P.3d at 259; Tupper, 243 P.3d at 58. And, the United States’ analysis is the better reasoning under Supreme Court case law. Third, the specifics of the cited cases do not actually support the conclusion the second amended complaint asks this Court to reach, for the following reasons: Credit Bancorp in fact acknowledged that a constructive trust is an equitable remedy, not a property right, in that its imposition “does not mean that the beneficiary of the trust actually owns the stolen property.” 138 F.Supp.2d. at 532. Further, the Court noted that the United States had not challenged the subordination of its lien, and explicitly stated that “this opinion does not purport to decide whether there are circumstances in which the United States would be able to assert its rights even in the face of a constructive trust.” Id. at 533, fn26. Accordingly, the Credit Bancorp decision does not resolve the question that this Court must address. Crittenden, meanwhile, did not deal with the fact pattern before this Court. 823 F.Supp. at 700. Rather, that case deals with funds that had been obtained from customers who “purchased goods at inflated prices.” Id. at 703. The funds were just that: funds. They had not been converted into any other property. Accordingly, the Crittenden decision stands only for the proposition that a federal tax lien may not attach to stolen money in the hands of the person who stole it. It does not stand for the proposition that a federal tax lien cannot attach to property that is later purchased with those funds. These concepts are discussed further below. Finally, both Atlas and Hill are distinguishable because they were decided in different statutory environments. The Atlas decision explicitly relied on a North Dakota statute that has since been repealed and appears to have no parallel in Oregon. See, 459 F.Supp. at 1005 (citing former N.S.C.C. § 59-01-06); N.D.C.C. § 59-09-02(2)(o) (2016) (indicating that North Dakota trust statutes no longer apply to resulting or constructive trusts). Thus, at the time the case was decided, the defrauded party could claim a statutory right to an implied trust that the VRT cannot claim to have here. It is not clear that Atlas would be decided the same way in North Dakota today, much less in Oregon. Similarly, the Hill decision was based on Georgia law, which had Case 3:16-cv-02082-SI Document 44 Filed 05/09/17 Page 12 of 26 US Mot. to Dismiss 2d Amended Complaint Case No. 3:16-cv-2082-SI 13 (and still has) a similar statute. First Nat. Bank of Cartersville v. Hill, 406 F.Supp. 351, 352 (N.D. Ga. 1975) (discussing Ga. Code Ann. § 108-106(2), which provided statutory right to implied trust)); See also, Ga. Code Ann. § 53-12-132 (2016) (present-day statute). In sum, the law that the VRT beneficiaries have cited elsewhere does not support their claim that the United States’ federal tax liens did not attach to the River Cliff Property. Applying the Supreme Court and Oregon case law that does apply demands the opposite conclusion: Ronald Talmage had valuable state rights, which qualify as “property or rights to property” under federal law. The United States’ federal tax liens attached to that property, and that attachment cannot be defeated by equitable tracing or the “relation back” of a constructive trust. 3. Plaintiffs cannot establish a superior interest in the River Cliff Property. Based on the facts alleged in the second amended complaint, Plaintiffs have, at most, claims that did not become choate against the River Cliff Property until sometime after March 13, 2017 when they filed a judgment in Multnomah County, Oregon. Plaintiffs do not actually make any substantive claims centering on their potential judgment lien, but instead rely entirely on equitable theories that have yet to be proven. In any event, the filing of the judgment lien would not entitle them to priority over the United States, because the federal tax liens were perfected first. Plaintiffs nonetheless seek to vault their interest ahead of the United States by advancing several state law equitable theories. All are flawed, as discussed below. A. Plaintiffs’ claims were inchoate when the tax liens were filed and are therefore inferior under controlling Ninth Circuit precedent. Federal law controls in priority contests involving federal tax liens. E.g., United States v. Equitable Life Assur. Soc. of United States, 384 U.S. 323, 330 (1966). Under federal law, Plaintiffs’ claimed interest in the River Cliff Property is necessarily inferior to the federal tax liens. This is so because of the well-established principle that, when a federal tax lien competes with a state law lien, the contest is determined under the common law rule that the first in time is first in right. United States v. Pioneer American Ins. Co., 374 U.S. 84, 87 (1963) (citing United States v. New Britain, 347 U.S. 81, 85-86 (1954)). Subject to 26 U.S.C. § 6323(a), an interest Case 3:16-cv-02082-SI Document 44 Filed 05/09/17 Page 13 of 26 US Mot. to Dismiss 2d Amended Complaint Case No. 3:16-cv-2082-SI 14 created by state law can only defeat a federal tax lien when it has attached to the property at issue and has become choate. Id. (citations omitted). Choateness is a matter of federal law, which dictates that a lien becomes choate when “there is nothing more to be done” - i.e., “when the identity of the lienor, the property subject to the lien, and the amount of the lien are established.” Id. (citations omitted). State law “relation back” doctrines do not operate to subordinate federal tax liens. United States v. Security Trust & Savings Bank of San Diego, 340 U.S. 47, 50 (1950). There is no interpretation of the facts in the second amended complaint that would allow the Court to conclude that Plaintiffs’ claim to the River Cliff Property is superior to the claim of the United States. This is so because, at the time the federal tax liens were perfected, there remained much “to be done” to establish the identity of the lienor, the property subject to the lien, and the amount of the lien: the VRT needed to litigate its case against Ronald Talmage to conclusion and prevail. Pioneer American Ins. Co., 374 U.S. at 87; Loanstar, 282 Fed.Appx. at 573-574 (finding that state law interest was not choate until there was a judicial determination); Blachy v. Butcher, 221 F.3d 896 (6th Cir. 2000). Though Plaintiffs now allege that they have a recorded judgment, that judgment is inferior to the United States’ liens because it was not recorded until this year - well after the last of the federal tax liens was perfected. (And, curiously, the second amended complaint does not directly claim a lien in the River Cliff Property based on recording this judgment). Plaintiffs’ claims to various equitable remedies make no difference: until Plaintiffs establish their entitlement to one of those remedies, those are nothing more than inchoate claims. Loanstar, 282 Fed.Appx. at 574 (citing In re Advent Management Corp., 178 B.R. 480, 488 (9th Cir. 1995) for the proposition that “[a] constructive trust is a remedy; as such, it is inchoate until its existence is established by court order.”). This analysis is fatal to Plaintiffs’ attempts to assert a quiet title claim against the United States. There is no question that the United States had perfected federal tax liens against the River Cliff Property prior to Plaintiffs’ entrance on the scene. [Dkt. # 39] at ¶ 33 (admitting that the United States filed notice of its federal tax liens on September 17, 2008, November 28, 2008, May 20, 2013, and January 31, 2014). And, as stated above, Plaintiffs’ claims to equitable Case 3:16-cv-02082-SI Document 44 Filed 05/09/17 Page 14 of 26 US Mot. to Dismiss 2d Amended Complaint Case No. 3:16-cv-2082-SI 15 remedies have yet to be reduced to judgment. Therefore, even if some sort of equitable remedy is appropriate and this Court ultimately decides to impose it, the United States’ lien was perfected first and will remain superior. Security Trust & Savings, 340 U.S. at 50; Loanstar, 282 Fed.Appx. at 574; Blachy, 221 F.3d at 906 (finding that “a judicially-created equitable remedy cannot be applied retroactively to defeat a choate federal tax lien.”). B. The United States’ claim is superior according to statute. This result is also required by 26 U.S.C. § 6323, which makes no provision for a claimant of a state law equitable remedy to assert superpriority over a federal tax lien, notice of which has been properly filed. This rule is part of the Federal Tax Lien Act of 1966, which was enacted over fifty years ago to elevate certain state law claims notwithstanding the baseline “first-in- time” choateness rule set forth above. See, e.g., Pub. L. No. 89-719, 80 Stat. 1125; United States v. Kimbell Foods, 440 U.S. 715, 738 (1979) (describing genesis of Federal Tax Lien Act of 1966). Congress knew how to modify the “first-in-time” rule when it wanted to: the Act elevates claims such as real property taxes (26 U.S.C. § 6323(b)(6)(A)), certain mechanic’s liens (26 U.S.C. § 6323(b)(7)), and certain real property financing arrangements (26 U.S.C. § 6323(c)(1)(A)(ii)). Notably absent is any rule whatsoever elevating claims like Plaintiffs’. Applying the statute by its terms, Plaintiffs’ only established interest in the River Cliff Property is their newly recorded judgment lien. This lien is explicitly inferior to the United States’ claims under 26 U.S.C. § 6323(a), which allows a judgment lien to take ahead of a federal tax lien only if the judgment lien is created before the federal tax lien is perfected. Here, the federal tax liens were perfected before the judgment lien came into existence, so the federal tax liens have priority. No other provision in 26 U.S.C. § 6323 applies to Plaintiffs, so the statute supports the conclusion that Plaintiffs cannot establish a superior interest in the River Cliff Property. Congress could have elevated equitable claims like Plaintiffs’ ahead of perfected federal tax liens. It did not. As a result, the United States’ interest is superior. Case 3:16-cv-02082-SI Document 44 Filed 05/09/17 Page 15 of 26 US Mot. to Dismiss 2d Amended Complaint Case No. 3:16-cv-2082-SI 16 C. No express or constructive trust yet exists; therefore, Plaintiffs cannot establish a superior interest on either of these theories. The second amended complaint primarily argues that Plaintiffs are entitled to either a “resulting trust” or a “constructive trust” under Oregon law. See, [Dkt. # 39] at ¶ ¶ 39-44. On the facts presented, neither of these theories establishes that Plaintiffs have a superior interest to the United States. Oregon statute provides that no property interest in real property, including a property interest held through a trust, can be created except “by operation of law” or through a written instrument. Or. Rev. Stat. § 93.020. The law has not yet “operated” to create a property interest for Plaintiffs on either of their theories, nor is there any written instrument conveying an interest in the River Cliff Property to them. Therefore, Plaintiffs’ equitable claims remain inchoate even today. The theories set forth in the complaint cannot overcome this conclusion. Each of these theories will be addressed in turn. Resulting Trust. Plaintiffs cannot establish that they are entitled to a resulting trust on their allegations. Under Oregon law, a court must examine the “facts and circumstances” at the time title to the property in question was transferred: a trustee relationship must exist between the parties at that time in order to establish a resulting trust over the property. Certified Mortgage Co. v. Shepherd, 838 P.2d 1082, 1086 (Or. App. 1992). Plaintiffs did not provide funds to Talmage prior to 2002. Thus, Plaintiffs had no relationship at all with Talmage when he first purchased the River Cliff Property five years earlier, in 1997. Under no reading of Shepherd can Plaintiffs establish a resulting trust against property that Talmage acquired before they gave him any money, because a resulting trust requires that the trustee relationship exist at the time the property was purchased. Furthermore, a resulting trust arises only where the circumstances “give rise to an inference that the person who makes the transfer or causes it to be made, does not intend the transferee to take beneficial interest in the property.” Shipe v. Hillman, 292 P.2d 123, 126-127 (Or. 1955); see also, Hybertsen v. Oldright, 350 P.2d 419, 420 (Or. 1960) (holding that resulting trust arises “when one makes payment for property and takes the title in another’s name or where one, with the consent of another, purchases property with the money of such other and takes the Case 3:16-cv-02082-SI Document 44 Filed 05/09/17 Page 16 of 26 US Mot. to Dismiss 2d Amended Complaint Case No. 3:16-cv-2082-SI 17 title in his own name”). Here, Plaintiffs have another problem in that they had no intention that Talmage go out and purchase real estate, much less the River Cliff Property, for their benefit. Rather, they allege that he “stole” their money and used it “fraudulently” for his own benefit. [Dkt. # 39] at ¶ 13-15. These are not the types of circumstances where a resulting trust would be applicable. In sum, Plaintiffs cannot establish a resulting trust on the facts alleged. Constructive Trust. Nor can Plaintiffs rely on Oregon law concerning the equitable remedy of “constructive trust” to establish a superior property interest in the River Cliff Property. Constructive trust “does not stand on its own as a substantive claim, but exists solely as an equitable remedy.” Evergreen West Business Center, LLC, 323 P.3d at 255; Tupper, 243 P.3d at 56-57; see also, Barnes v. Eastern & Western Lumber Co., 287 P.2d 929, 949 (Or. 1955) (explaining that “a constructive trust is simply a procedural device [that] does not create in the party favored by it any new substantive rights.”). Plaintiffs cite no judgment imposing a constructive trust, and appear to admit that they have none by virtue of the fact that the second amended complaint seeks precisely that relief. [Dkt. # 39] at ¶ ¶ 42-44. This very case is presumably the cause of action that could give rise to a constructive trust remedy, if Plaintiffs prevail. But they have not prevailed yet, and therefore only had a speculative claim to the River Cliff Property when the federal tax liens were perfected. Under Loanstar, this is not enough to defeat the United States’ federal tax liens. Plaintiffs’ second amended complaint reveals another problem with their constructive trust theory: they cannot establish that they are entitled to one in the first place. One of the elements that is required to establish a constructive trust under Oregon law is that “the property in the hands of [the wrongdoer], i.e., the property upon which the plaintiff seeks to impose a constructive trust, in fact is the very property that rightfully belongs to the plaintiff, or is a product of or substitute for that property.” Evergreen West Business Center, LLC, 323 P.3d at 255. Plaintiffs cannot establish this element on the facts alleged in their complaint for two reasons. Case 3:16-cv-02082-SI Document 44 Filed 05/09/17 Page 17 of 26 US Mot. to Dismiss 2d Amended Complaint Case No. 3:16-cv-2082-SI 18 First, as with their resulting trust claim, Plaintiffs have a timing problem. Oregon law does not support imposing a constructive trust where there was no relationship between the beneficiary and the wrongdoer at the time the property was acquired. E.g., Shipe, 292 P.2d at 129; Chance v. Graham, 148 P. 63, 64-65 (Or. 1915) (holding that constructive trust must arise “at the time of the conveyance” and cannot be “created or established by subsequent acts of any of the participants.”); Barger v. Barger, 47 P. 702, 703 (Or. 1897) (requiring putative constructive trust beneficiary to establish that “fiduciary or trust relation” existed “at the time of the purchase of the lands” to be subjected to trust). Second, Plaintiffs have a tracing problem. It was not Plaintiffs’ money that originally purchased the River Cliff Property. That money came from other investors who are not parties to this case. Thus, the “identity is lost” and the “trust escapes.” Hughes v. Helzer, 185 P.2d 537, 547 (Or. 1947). Plaintiffs’ argument that they subsequently paid off Kumiko Talmage or paid for improvements to the property cannot rescue their claims. At most, Plaintiffs might be entitled to an equitable lien, not a constructive trust. Id. (stating that “the entire ownership” of the property must be established to support a constructive trust instead of an equitable lien). In sum, Plaintiffs are not entitled to either form of equitable relief specifically pleaded in the second amended complaint, even assuming all the facts they allege are true. Because Plaintiffs themselves did not advance the purchase price of the River Cliff Property, they cannot be entitled to either a constructive or resulting trust. And even if they could overcome this obstacle (they can’t), the second amended complaint would still fail to establish a superior interest because Plaintiffs’ claims for equitable relief were not choate prior to the time the federal tax liens were perfected. The claims should be dismissed. D. Plaintiffs have not sufficiently established a claim for “other equitable relief.” Though Plaintiffs have seemingly abandoned their prior claim that they can equitably trace their funds to the River Cliff Property, they do continue to allege entitlement to some speculative equitable relief based on whatever “terms that the court deems are just.” [Dkt. # 39] at ¶ 46. The United States has been unable to identify any other “equitable relief” Plaintiffs Case 3:16-cv-02082-SI Document 44 Filed 05/09/17 Page 18 of 26 US Mot. to Dismiss 2d Amended Complaint Case No. 3:16-cv-2082-SI 19 might be entitled to, and the second amended complaint, as written, is insufficient to establish a claim to other unspecified relief. Under Fed. R. Civ. P. 8(a)(2), a pleading must contain “a short and plain statement of the claim showing that the pleader is entitled to relief.” The pleading must set forth a plausible claim with enough “factual content” to allow the court “to draw the reasonable inference that the defendant is liable for the misconduct alleged.” Iqbal, 556 U.S. at 678. “Naked assertions devoid of further factual enhancement,” along with “‘labels and conclusions’ or ‘a formulaic recitation of the elements of a cause of action’” are insufficient. Id. (citing Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 555-557 (2007)). Plaintiffs’ catch-all pleading provides no specifics whatsoever about what “other” relief Plaintiffs feel they should receive. This alone is enough to reject Plaintiffs’ arguments. Extrapolating from Plaintiffs’ prior filings, the United States can only guess that Plaintiffs are attempting to keep alive some version of their prior equitable tracing and “invalid title” arguments. But as the United States previously explained, equitable tracing is unavailable to Plaintiffs due to Talmage’s commingling of funds. E.g., Cunningham v. Brown, 265 U.S. 1, 12-13 (1924) (finding, in the original Ponzi scheme case, that applying a theory of equitable tracing would run the fiction “into the ground” and carry it “to a fantastic conclusion.”); United States v. Real Property Located at 13328 and 13324 State Highway 75 North, Blaine County, Idaho, 89 F.3d 551, 553-554 (9th Cir. 1996) (finding that “tracing fictions should not be utilized under circumstances involving multiple victims and commingled funds.”); SEC v. Sunwest Management, Inc., 2009 WL 3245879, *9 (D. Or. 2009) (same, and indicating that “any commingling is enough to warrant treating all the funds as tainted.”). Even if equitable tracing were allowed in the circumstances of this case, it would fail. When a “bona fide purchaser” intervenes in the chain, it cuts off tracing rights. Mattson v. Commercial Credit Business Loans, Inc., 723 P.2d 996, 1001 (Or. 1986); Lane County Escrow Service, Inc. v. Smith, 560 P.2d 608, 615 (Or. 1977). Under Oregon law “a third party who takes stolen money in good faith and for consideration” is treated like a bona fide purchaser and “will prevail over the unfortunate victim of the thief.” City of Portland v. Berry, 739 P.2d 1041, 1044 Case 3:16-cv-02082-SI Document 44 Filed 05/09/17 Page 19 of 26 US Mot. to Dismiss 2d Amended Complaint Case No. 3:16-cv-2082-SI 20 (Or. Ct. App. 1987). This rule recognizes the necessity that money pass freely in commercial transactions, without requiring an inquiry into its source. Id. At that point, the only remedy available to the theft victim is imposition of a constructive trust or an equitable lien on the property acquired from the bona fide purchaser. Mattson, 723 P.2d at 1001; Lane County Escrow, 560 P.2d at 615; Unterkircher v. Unterkircher, 195 P.2d 178, 182 (Or. 1948). There is no presumption that the thief does not obtain “good title” to the property purchased, nor is there a presumption that title to the new property is somehow vested in the victim absent imposition of one of these equitable remedies. See, Id. Applying these principles to this case, the critical transaction is Ronald and Kumiko Talmage’s purchase of the River Cliff Property in November 1997. Even assuming Plaintiffs’ stolen funds were used for this purchase, Plaintiffs would only have two potential courses to pursue under Oregon law. First, they could “trace” title to the stolen funds to the seller, and sue him for recovery of those funds. Since there appears to be no question that the seller provided “consideration” in the form of the River Cliff Property, this course would rest on the presumption that the seller did not take the stolen funds in good faith and therefore could not obtain good title to the funds. The second course of action would be to acknowledge that the seller took the stolen money in good faith. Under this second course, the only conclusion is that the seller obtained good title to the “stolen” funds, cutting off Plaintiffs’ tracing rights. Plaintiffs could then argue (as they have) that they are entitled to an equitable remedy allowing them to collect against the River Cliff Property. Neither course of action involves a presumption that title to the River Cliff Property was transferred to anyone other than Ronald Talmage. Essentially, the second amended complaint continues to inappropriately conflate stolen cash with un-stolen real estate. [Dkt. # 39] at ¶ 37 (alleging that Talmage “never had valid title” to the River Cliff Property). In so doing, Plaintiffs inappropriately confuse the concepts of void and voidable title. See, e.g., S.E.C. v. Madison Real Estate Group, LLC, 647 F.Supp.2d 1271, 1278-1279 (D. Utah 2009) (explaining that defendant, who was engaged in a Ponzi scheme, nonetheless obtained valid title to real property obtained Case 3:16-cv-02082-SI Document 44 Filed 05/09/17 Page 20 of 26 US Mot. to Dismiss 2d Amended Complaint Case No. 3:16-cv-2082-SI 21 through the use of illegally procured loans; while the loan transactions were voidable, this did not make title void.); Akins v. Vermast, 945 P.2d 640, 643 fn7 (Or. Ct. App. 1997) (distinguishing between void title, requiring fraud in factum - i.e., through a forged deed - and voidable title, which results from fraud in the inducement.). Here, title is at most voidable (not void), because there is no allegation that Talmage procured the deed to the River Cliff Property through overt fraud in the acquisition of the property itself, such as a forged deed. Furthermore, even if title were held to be void, Oregon law would return title to the seller, not accomplish Plaintiffs’ goals of achieving superprioity over the United States. This makes sense from a policy perspective. If an undetermined, unrecorded constructive trust claim could prevent title from passing indefinitely, it would seriously hamper real estate transactions (and keep title insurers awake at night). This is why the bona fide purchaser rule and the remedy of constructive trust exist - to compensate victims without undermining an orderly system of commerce. The United States has been unable to locate (and the second complaint fails to cite) any Oregon law that would vest title of the River Cliff Property directly in Plaintiffs without any court imposing an equitable remedy and requiring an actual transfer of title to them. The appropriate remedy here, if Plaintiffs can prove their claims, is imposition of a constructive trust, not a ruling that title secretly leapt over Talmage to Plaintiffs. Finally, it is worth noting that, even if Oregon law supported the rule suggested by Plaintiffs, title could not be vested only in them. Talmage defrauded the United States, too. Talmage v. Commissioner, 95 T.C.M. (CCH) 1122 (2008). At least some of the funds he used to purchase and improve the River Cliff Property came at the expense of United States taxpayers. Therefore, the most Plaintiffs could hope to prove is that title to the River Cliff Property belongs to some combination of the United States and Plaintiffs, not to them alone. Taking such an approach would leave the Court in a hopeless morass. Does the United States own title to the River Cliff Property as a tenant in common with each of the VRT beneficiaries? Are we joint tenants? What are our obligations to each other? Must we pay utilities and property taxes? Who must do what? Who is entitled to what? This is precisely why equitable tracing is not allowed in Case 3:16-cv-02082-SI Document 44 Filed 05/09/17 Page 21 of 26 US Mot. to Dismiss 2d Amended Complaint Case No. 3:16-cv-2082-SI 22 these types of cases. In the absence of clear authority, the Court should not accept Plaintiffs’ invitation down the choose-your-own-equitable-remedy path. Finally, though the second amended complaint continues to pursue it, this Court has already decided that Department of Justice, Tax Division, Directive 137 does not provide litigants with any substantive rights. [Dkt. # 50] at 4 in United States v. Rivercliff Farm, Inc., Case No. 3:16-cv-1248-SI. Accordingly, the directive cannot provide any basis for the VRT to claim a superior interest in the River Cliff Property. E. The United States’ supposed “knowledge” of the Ponzi scheme is irrelevant. Plaintiffs raise the new allegation that, in 2008, the United States government somehow had notice of a Ponzi scheme, perpetrated in Japan, which they - the putative victims and mostly Japanese citizens - did not discover until nearly a decade later in 2016. Setting aside the extremely dubious nature of the allegation in the first instance, it is irrelevant whether or not the United States was aware of the existence of a Ponzi scheme when it filed notice of its federal tax liens. First, knowledge of a Ponzi scheme is not the same thing as knowledge of a competing claim to the River Cliff Property. Thus, even in a standard UCC-type priority contest, it isn’t clear that knowledge that Talmage was engaged in other fraudulent dealings would have any bearing on the validity of the government’s lien. Second, even assuming knowledge of the Ponzi scheme equated to notice of Plaintiffs’ claims to the River Cliff Property, neither the “first-in-time” choateness rule nor 26 U.S.C. § 6323 would invalidate the perfection (and resulting priority) of the federal tax liens based on this knowledge. See, e.g., In re Haas, 31 F.3d 1081, 1087-1088 (11th Cir. 1994) (rejecting application of a notice rule to the IRS); Dragstem v. Obermeyer, 549 F.2d 20, 26 (7th Cir. 1977). Indeed, the decision in Loanstar, which arguably controls this entire case, accepted that the United States had knowledge of the competing claim through a notice of lis pendens filed prior to the perfection of the federal tax lien. 282 Fed.Appx. at 573. Nonetheless, the United States had a superior interest, because its liens were perfected before the competing claimant’s lien became Case 3:16-cv-02082-SI Document 44 Filed 05/09/17 Page 22 of 26 US Mot. to Dismiss 2d Amended Complaint Case No. 3:16-cv-2082-SI 23 choate or any equitable remedy was imposed. Id. at 573-574. Thus, even assuming this questionable allegation concerning the government’s knowledge to be true, it is irrelevant. F. Subrogation to an inchoate interest of prior investors does not entitle Plaintiffs to priority over the United States. Having now admitted that their money did not actually fund the purchase price of the River Cliff Property, Plaintiffs seek to bootstrap themselves onto the “prior investors” whose funds allegedly were used for the purchase. This claim cannot elevate Plaintiffs ahead of the United States. It is true that subrogation may be allowed under 26 USC 6323(i)(2), which provides “[w]here, under local law, one person is subrogated to the rights of another with respect to a lien or interest, such person shall be subrogated to such rights for purposes of any” federal tax lien. Assuming Plaintiffs could establish that Oregon law would subrogate them to the rights of the prior investors, all this would give Plaintiffs is the same rights held by those investors. But the prior investors have the same problem as Plaintiffs: they have no interest in the River Cliff Property that was choate when the United States perfected its federal tax liens. (Indeed, they do not appear to have any choate interest even today, nor are they actively pursuing one). Nor do the prior investors have any argument to superpriority under 26 U.S.C. § 6323. Thus, even if Plaintiffs could show they were entitled to subrogation, it would not grant Plaintiffs an interest in the River Cliff Property superior to that of the United States. 4. Plaintiffs are not entitled to costs and fees under 28 U.S.C. § 2412. The final salvo of the second amended complaint is the new claim that Plaintiffs should be entitled to recover litigation costs, including attorney’s fees, under 28 U.S.C. § 2412. [Dkt. # 39] at ¶¶ 41, 44. Plaintiffs ignore the plain language of that statute, which indicates that it does not apply to “any costs, fees, and other expenses in connection with any proceeding to which section 7430 of the Internal Revenue Code of 1986 applies.” 28 U.S.C. § 2412(e). That statute, in turn, governs in “any administrative or court proceeding which is brought by or against the United States in connection with the determination, collection, or refund of any tax, interest, or penalty” under the internal revenue laws. 26 U.S.C. § 7430. This case is brought against the Case 3:16-cv-02082-SI Document 44 Filed 05/09/17 Page 23 of 26 US Mot. to Dismiss 2d Amended Complaint Case No. 3:16-cv-2082-SI 24 United States due to its federal tax liens against the River Cliff Property. Therefore, this is a court proceeding brought in connection with the collection of taxes. The statute cited by Plaintiffs does not apply. Had Plaintiffs pleaded the correct statute - 26 U.S.C. § 7430 - their claim would still fail because they have failed to plead that they exhausted administrative remedies or that the United States’ position in this litigation is not substantially justified. See, 26 U.S.C. § 7430(b)(1), (c)(4)(B). Plaintiffs also cannot show that they are entitled to fees due to the plain fact that, as set forth above, they have failed to even state a claim against the United States. Accordingly, Plaintiffs cannot be the “prevailing party” as required under either statute, and their claim that they are entitled to an award of fees should also be dismissed. // Case 3:16-cv-02082-SI Document 44 Filed 05/09/17 Page 24 of 26 US Mot. to Dismiss 2d Amended Complaint Case No. 3:16-cv-2082-SI 25 CONCLUSION Assuming all facts in the second amended complaint to be true, Plaintiffs cannot obtain “quiet title” to the River Cliff Property vis-à-vis the United States because the United States has a superior interest in the property as a matter of law. WHEREFORE, for the reasons set forth above, the United States respectfully requests that the Court dismiss the complaint with prejudice for failure to state a claim for relief. Date: May 9, 2017 Respectfully submitted, DAVID A. HUBBERT Acting Assistant Attorney General /s/ Lindsay L. Clayton LINDSAY L. CLAYTON JENNIFER Y. GOLDEN ALEX HALVERSON Trial Attorneys, Tax Division U.S. Department of Justice P.O. Box 683 Washington, D.C. 20044 202-307-2956 (v - Clayton) 202-307-6547 (v - Golden) 202-305-7539 v - Halverson) 202-307-0054 (f) Lindsay.L.Clayton@usdoj.gov Jennifer.Y.Golden@usdoj.gov Alex.Halverson@usdoj.gov Of Counsel: BILLY J. WILLIAMS United States Attorney Case 3:16-cv-02082-SI Document 44 Filed 05/09/17 Page 25 of 26 US Mot. to Dismiss 2d Amended Complaint Case No. 3:16-cv-2082-SI 26 CERTIFICATE OF SERVICE I hereby certify that on this 9th day of May, 2017, I electronically filed the foregoing document with the Clerk of Court using the CM/ECF system, which will send notice of this filing to the following: Thomas A. Ped Charles Markley WILLIAMS, KASTNER & GIBBS PLLC 1001 SW Fifth Avenue, 16th Floor Portland, OR 97204-1116 (503) 228-7967 tped@williamskastner.com William B. Ingram STRONG & HANNI PC wingram@strongandhanni.com Attorneys for Plaintiff /s/ Lindsay L. Clayton LINDSAY L. CLAYTON Trial Attorney, Tax Division United States Department of Justice Case 3:16-cv-02082-SI Document 44 Filed 05/09/17 Page 26 of 26