Wadsworth et al v. Talmage et al

Motion to Dismiss for Failure to State a Claim , Motion to Dismiss for Lack of Jurisdiction . Oral Argument requested.

D. Or.January 6, 2017

US Mot. to Dismiss Case No. 3:16-cv-2082-SI 1 CAROLINE D. CIRAOLO Principal Deputy Assistant Attorney General LINDSAY L. CLAYTON JENNIFER Y. GOLDEN 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) 202-307-0054 (f) Lindsay.L.Clayton@usdoj.gov Jennifer.Y.Golden@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 Request for Oral Argument The United States of America, by and through its undersigned counsel, moves to dismiss the Complaint (Dkt. # 1) filed by John Wadsworth, as trustee for the RBT Victim Recovery Trust Case 3:16-cv-02082-SI Document 19 Filed 01/06/17 Page 1 of 21 US Mot. to Dismiss Case No. 3:16-cv-2082-SI 2 (the “VRT”) as to the United States1 under Fed. R. Civ. P. 12(b)(1) for lack of standing and under Fed. R. Civ. P. 12(b)(6) for failure to state a claim on which relief may be granted. In support of this response, the United States pleads as follows: TABLE OF CONTENTS TABLE OF CONTENTS ................................................................................................................ 2 BACKGROUND ............................................................................................................................ 2 ARGUMENT .................................................................................................................................. 4 1. The VRT has not established standing to sue the United States. ......................................... 5 2. Ronald Talmage had “property or rights to property” to which the United States’ lien attached. ...................................................................................................................................... 7 3. The VRT, meanwhile, cannot establish an actionable “property interest” in the River Cliff Property. .................................................................................................................................... 11 A. No express or constructive trust exists; therefore, the VRT cannot yet have any “property right.” .................................................................................................................... 11 B. The VRT beneficiaries do not hold “title” to the River Cliff Property, nor can they equitably trace their funds to it. ............................................................................................ 13 4. The VRT’s claims are inchoate and therefore inferior to the perfected federal tax liens. . 18 CONCLUSION ............................................................................................................................. 20 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 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 civil cover sheet hinges jurisdiction on its ability to sue the United States under 26 U.S.C. § 2410. [Dkt. # 1-1]. The civil cover sheet also inaccurately lists the county of residence of Ronald and Annette Talmage as Multnomah County, Oregon. Id. John Wadsworth is well aware that the Talmages do not reside in Oregon, as he is currently trying to evict 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 complaint for lack of jurisdiction. Case 3:16-cv-02082-SI Document 19 Filed 01/06/17 Page 2 of 21 US Mot. to Dismiss Case No. 3:16-cv-2082-SI 3 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 through the newly organized VRT. 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), two dual US-Japanese citizens, and an unknown number of Japanese citizens. [Dkt. # 1] at ¶ 1. At some point in time,2 Ronald Talmage embezzled millions of dollars from the VRT beneficiaries. Id. at ¶ 3. He made fraudulent representations concerning his investment background “[b]eginning prior to 2002 and continuing through 2016.” Id. at ¶ 15. Talmage also made false representations about what he would do with money obtained from the VRT beneficiaries. Id. at ¶¶ 16-18. Talmage’s representations collectively induced the VRT beneficiaries to provide him with “over $50,000,000” of their money. Id. at ¶¶ 19-20. 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 ¶¶21-22. Instead of investing the money, Talmage used money from the VRT beneficiaries for his own purposes, including to “acquire 2 The complaint is frequently unclear about what occurred when, arguably failing the pleading standards set forth in Fed. R. Civ. P. 8(a) and 9(b). Case 3:16-cv-02082-SI Document 19 Filed 01/06/17 Page 3 of 21 US Mot. to Dismiss Case No. 3:16-cv-2082-SI 4 and improve” the River Cliff Property. Id. at ¶¶ 3, 10. To accomplish this, Talmage “funneled” the money through various entities. Id. at ¶ 13. Talmage purchased the River Cliff Property with his then-wife Kumiko for $903,000 in November of 1997. Id. at ¶ 24. One of the entities through which he funneled VRT beneficiary money paid off a promissory note on the River Cliff Property. Id. Over the following years, Talmage entertained guests at the River Cliff Property, made significant improvements to it (including “a new home, stables, a Japanese teahouse, and a tennis court”), and transferred title to another entity that he controlled. Id. at ¶¶ 25-28. In the meantime, 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 ¶ 29. The following “facts,” which are really legal conclusions couched as fact, need not be accepted as true: Talmage “never had valid title” to the River Cliff Property; the River Cliff Property is “beneficially owned by” the VRT; there is a “constructive trust” on the River Cliff Property in favor of the VRT beneficiaries; and the federal tax liens “could not attach to the River Cliff Property” or are otherwise a cloud on the VRT beneficiaries’ title to the River Cliff Property. Id. at ¶¶ 10, 33, 37. ARGUMENT The complaint should be dismissed because it fails the threshold test of establishing that the VRT has standing to sue the United States on the claims it alleges. Maya v. Centex Corp., 658 F.3d 1060, 1067 (9th Cir. 2011) (explaining that Article III of the Constitution requires those seeking to invoke the jurisdiction of the federal courts to first establish standing). If the VRT lacks standing, there is no subject matter jurisdiction. Id. Therefore, dismissal is appropriate under Fed. R. Civ. P. 12(b)(1). The complaint should also 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 Case 3:16-cv-02082-SI Document 19 Filed 01/06/17 Page 4 of 21 US Mot. to Dismiss Case No. 3:16-cv-2082-SI 5 motion to dismiss, a complaint must “contain sufficient factual matter to state a facially plausible claim to relief.” Id. Here, there is no cognizable legal theory that would allow the VRT to prevail on its claims, even assuming the alleged material facts are true. Therefore, the complaint fails to set forth a plausible claim to relief. First, the VRT misconstrues 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. Second, the complaint distorts the law concerning equitable remedies, which cannot provide the VRT with the relief it seeks. Third and finally, even if it had managed to set forth an adequate equitable claim, the VRT cannot possess a competing “property” interest in the River Cliff Property until or unless it prevails on that claim against Ronald Talmage. Such a claim would not be choate under federal law until the Court enters judgment in its favor. 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. As a result, the United States’ federal tax liens are necessarily prior in time and superior in right to the VRT’s constructive trust claim. Each of these issues is discussed in turn, below. 1. The VRT has not established standing to sue the United States. Standing is a prerequisite for subject matter jurisdiction. Maya, 658 F.3d at 1067. In order to establish standing to sue, a plaintiff must show that “(1) it has suffered an ‘injury in fact’ that is (a) concrete and particularized and (b) actual or imminent, not conjectural or hypothetical; (2) the injury is fairly traceable to the challenged action of the defendant; and (3) it is likely, as opposed to merely speculative, that the injury will be redressed by a favorable decision.” Id. The VRT has failed to meet this standard as to the United States because it has failed to sufficiently connect itself or its beneficiaries to the purchase of the River Cliff Property in 1997 or establish that any of its purported beneficiaries have properly vested the VRT with the authority to bring this lawsuit. Case 3:16-cv-02082-SI Document 19 Filed 01/06/17 Page 5 of 21 US Mot. to Dismiss Case No. 3:16-cv-2082-SI 6 First, it isn’t clear from the complaint that any of the beneficiaries of the VRT actually claim they gave Talmage funds prior to his purchasing the River Cliff Property. If none did, then the VRT’s claims are futile, because its beneficiaries cannot actually “trace” their funds to the purchase of the River Cliff Property (this concept is discussed in greater detail below). Simply put, the complaint, as drafted, establishes only a hypothetical injury and a speculative possibility of recovery for the VRT. Second, though not entirely clear from the complaint, the VRT appears to be a “litigation trust,” which is a concept originating in bankruptcy law. 11 U.S.C. § 1123(b)(3)(B); Paige Holden Montgomery and Casey A. Burton, An Introduction to Litigation Trusts, ABA Litigation Section, 14 Comm. & Bus. Lit. 2 (May 30, 2013), available at http://mcaf.ee/yd3vei. Here, there is no bankruptcy involving Ronald Talmage. Accordingly, no bankruptcy court has requested or otherwise authorized the VRT to pursue a claim against the United States. Nor does the complaint establish that the VRT is properly vested with the authority to litigate the claims it seeks to bring. This alone deprives the VRT of standing to sue. See, e.g., Rahl v. Bande, 328 B.R. 387, 400 (S.D.N.Y. 2005) (finding that litigation trust lacked standing to bring claims not specifically transferred to it in litigation trust agreement.). A cynic might say that the creation of the VRT is no more than an attempt to circumvent class action rules and/or the inability to otherwise proceed anonymously, which was extensively briefed by the United States in connection with the motion to intervene in its foreclosure action. See, [Dkt. # 25] in United States v. Rivercliff Farm, Inc., Case No. 3:16-cv-1248-SI (D. Or. Aug. 11, 2016). Such a litigation strategy should not be countenanced; the United States should not be expected to answer a complaint when it cannot even tell who is suing it. The VRT’s failure to establish standing is grounds for the Court to dismiss its complaint for lack of subject matter jurisdiction under Fed. R. Civ. P. 12(b)(1). Case 3:16-cv-02082-SI Document 19 Filed 01/06/17 Page 6 of 21 US Mot. to Dismiss Case No. 3:16-cv-2082-SI 7 2. Ronald Talmage had “property or rights to property” to which the United States’ lien attached. 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 “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. 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 the imposition of a constructive trust, 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 Case 3:16-cv-02082-SI Document 19 Filed 01/06/17 Page 7 of 21 US Mot. to Dismiss Case No. 3:16-cv-2082-SI 8 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 complaint invokes only legal conclusions the VRT claims state law could draw from a constructive trust remedy 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 complaint fails to allege facts sufficient to establish that Talmage lacked “property or rights to property” in the River Cliff Property. Accordingly, the VRT cannot divest the River Cliff Property of the federal tax liens on the claims set forth in the complaint, even assuming all of the facts set forth are true. Though not cited in the complaint, in a separate filing the VRT beneficiaries 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)3; 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).4 The Court should discount those decisions for several reasons. 3 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). 4 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 19 Filed 01/06/17 Page 8 of 21 US Mot. to Dismiss Case No. 3:16-cv-2082-SI 9 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 Mortgagee Services, LLC v. Barker, 282 Fed.Appx. 572, 574 (9th Cir. 2008)5 (finding that constructive trust under state 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 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. 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 19 Filed 01/06/17 Page 9 of 21 US Mot. to Dismiss Case No. 3:16-cv-2082-SI 10 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 (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. Case 3:16-cv-02082-SI Document 19 Filed 01/06/17 Page 10 of 21 US Mot. to Dismiss Case No. 3:16-cv-2082-SI 11 3. The VRT, meanwhile, cannot establish an actionable “property interest” in the River Cliff Property. The complaint must fail for another reason. In order to bring a suit under 28 U.S.C. § 2410, the VRT must have an actionable property interest of its own in the River Cliff Property. E.g., E.J. Friedman Co., Inc. v. United States, 6 F.3d 1355, 1357-1358 (9th Cir. 1993); Shaw v. United States, 331 F.2d 493, 497 (9th Cir. 1964) (finding that wife could not sue the United States under 28 U.S.C. § 2410 to quiet title to property in which she held a homestead interest because state homestead laws “do not create a present property interest, but merely confer privileges and exemptions”); United States v. Woolley, 2003 WL 21790346, *1 (D. Neb. 2003) (collecting cases). Based on the facts alleged in the complaint, at most, the VRT has an inchoate state law claim against Talmage that may eventually lead to a property interest in the River Cliff Property. This is not the same as possessing a current property interest that can support a quiet title suit. Specifically, the complaint seeks to quiet title to the River Cliff Property on the theory that the VRT beneficiaries are its “beneficial owners.” In support, the complaint advances several equitable theories. All are flawed, as discussed below. A. No express or constructive trust exists; therefore, the VRT cannot yet have any “property right.” First, the complaint argues that it has a property interest by virtue of either an “express trust” or a “constructive trust under state law.” See, [Dkt. # 1] at 9-10. On the facts presented, neither of these theories establishes that the VRT has a property interest sufficient to support an action under 28 U.S.C. § 2410. To the contrary, 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 the VRT beneficiaries, nor is there any written instrument conveying an interest in the River Cliff Property to them. Therefore, the VRT does not yet have an actionable property interest as required to support a quiet title action against the United States. E.g., E.J. Friedman, 6 F.3d at 1357-1358. The theories set forth in the complaint cannot overcome this Case 3:16-cv-02082-SI Document 19 Filed 01/06/17 Page 11 of 21 US Mot. to Dismiss Case No. 3:16-cv-2082-SI 12 conclusion. First, the facts in the complaint cannot support any allegation that the River Cliff Property was held in an express trust. Second, the imposition of a constructive trust is an equitable remedy that cannot create a property right until it is judicially imposed. Each of these issues will be addressed in turn. Express Trust. Under Oregon law, an express trust with respect to real property can “come into existence only by writings subscribed by the party creating the trust, or his lawful agent, and executed with such formality as may be required by the law.” Shipe v. Hillman, 292 P.2d 123, 125 (Or. 1955) (citing Or. Rev. Stat. § 93.020); see also Hope Presbyterian Church of Rogue River v. Presbyterian Church (U.S.A.), 291 P.3d 711, 725-726 (Or. 2012) (acknowledging that express trust on real property falls within statute of frauds under Oregon law); Berean Fundamental Church Council, Inc. v. Braun, 576 P.2d 361, 364 (Or. 1978); but see, Robert v. Carton, 2008 WL 5155649, *4 (D. Or. Dec. 8, 2008) (suggesting, without citing any Oregon case, that intent to create an express trust does not necessarily have to be in writing). The complaint does not allege that the VRT beneficiaries intended that Talmage purchase the River Cliff Property with their funds, to hold in trust for them. In fact, it alleges the opposite - that Talmage did not have their permission to use his funds as he pleased. Nor does the complaint allege that the VRT beneficiaries and Talmage memorialized any agreement concerning the River Cliff Property in writing. Thus, the complaint must fail on any “express trust” claim.6 Constructive Trust. Nor can the VRT rely on Oregon law concerning the equitable remedy of “constructive trust” to establish that it has a 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 6 Even if such a claim were cognizable here, any express trust claim would likely be barred by the statute of limitations. Or. Rev. Stat. § 12.274 (providing that no action may be brought against the trustee of an express trust “more than 10 years from the date of the act or omission complained of, or two years from the termination of any fiduciary account established under the trust, whichever date is later.”). Case 3:16-cv-02082-SI Document 19 Filed 01/06/17 Page 12 of 21 US Mot. to Dismiss Case No. 3:16-cv-2082-SI 13 at 56-57. The VRT cites no judgment imposing a constructive trust, and appears to admit that it has none by virtue of the fact that the very same complaint seeks precisely that relief against Talmage under theories of fraud, breach of fiduciary duty, conversion, money had and received, and unjust enrichment. [Dkt. # 1]. This very case is presumably the cause of action that could give rise to a constructive trust, if the VRT prevails. But it has not prevailed yet, and therefore only has a speculative claim to the River Cliff Property. This is not sufficient to qualify as a “property interest” that could support a lawsuit under 28 U.S.C. § 2410 against the United States. Indeed, if the Court were to conclude that such a speculative claim is sufficient, then any of Talmage’s general creditors could presumably sue the United States under 28 U.S.C. § 2410 on the theory that they might be able to collect against the River Cliff Property if they eventually obtain a judgment awarding them an interest in that property. This is not enough. B. The VRT beneficiaries do not hold “title” to the River Cliff Property, nor can they equitably trace their funds to it. Though the complaint is not entirely clear on this front, it appears that the VRT also claims to have “title” to the River Cliff Property based at least in part on the faulty premise that Oregon has adopted a blanket rule that “[a] thief or embezzler cannot obtain good title” to property purchased with stolen or embezzled funds. [Dkt. # 1] at 10. The VRT cites no law in support of this claim, perhaps because Oregon law does not support this sweeping proposition. Here, the VRT alleges that Talmage stole money from its beneficiaries. But Talmage no longer has their money. According to the complaint, he used at least some of it for his own purposes, including to purchase and improve the River Cliff Property. The VRT then erroneously concludes that this means Talmage never acquired good title to the River Cliff Property, and that they therefore hold title to the property. [Dkt. # 1] at ¶ 33 (“Because Talmage never had title to the funds he embezzled, Talmage also never had valid title to the River Cliff property.”); ¶ 38 (the federal tax liens are a “cloud on the [VRT] beneficiaries’ title to the property”). This logic leaps too far, and confuses title to the stolen money with title to the River Cliff Property. Case 3:16-cv-02082-SI Document 19 Filed 01/06/17 Page 13 of 21 US Mot. to Dismiss Case No. 3:16-cv-2082-SI 14 While it is true that the right to trace the title to funds is generally quite expansive, the complaint cannot support it here. First, the facts alleged are insufficient. 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)). The complaint here is missing a critical factual allegation that is necessary to support the VRT beneficiaries’ tracing allegations (which, standing alone, offer no more than the type of formulaic recitations that Iqbal and Twombly disregard). Specifically, nowhere in the complaint does the VRT allege that any of its beneficiaries provided funds to Talmage prior to Talmage’s purchase of the River Cliff Property in November of 1997. Nor does the complaint ever specifically allege that the River Cliff Property was purchased with funds belonging to the specific investors who are the VRT’s beneficiaries. This may be intentional. In separate filings before this court, what appears to be the same group of investors alleged that they provided funds to Ronald Talmage “beginning in 2002.” [Dkt. # 43] at 2, [Dkt. # 44] at ¶¶ 3-4, 9 in United States v. RiverCliff Farm, Inc., Case No. 3:16-cv-1248-SI (D. Or. Sept. 30. 2016). If this is the case, then the River Cliff Property could not have been purchased with “their” money, and none can “trace” his funds to the property. As stated above, this not only undermines the VRT’s tracing allegations, but also calls its standing into question. Even if the VRT were to attempt to cure this factual deficiency, it would fail on the law. On the facts alleged, the VRT beneficiaries are not entitled to any kind of “tracing” remedy in the first place. This is so because, where funds are commingled - such as in a Ponzi scheme - the law does not allow equitable tracing. 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 Case 3:16-cv-02082-SI Document 19 Filed 01/06/17 Page 14 of 21 US Mot. to Dismiss Case No. 3:16-cv-2082-SI 15 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.”). Though creative, the VRT’s tracing claim is simply not supported by the law, and they can obtain no relief on it. 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 (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. Assuming for the moment that the Talmages used only funds stolen from the VRT’s beneficiaries for this purchase,7 the 7 As already stated, if none of the beneficiaries of the VRT actually gave Talmage funds prior to his purchasing the River Cliff Property, then their claims are futile. Case 3:16-cv-02082-SI Document 19 Filed 01/06/17 Page 15 of 21 US Mot. to Dismiss Case No. 3:16-cv-2082-SI 16 VRT has two potential courses it could pursue under Oregon law. First, it 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 available to the VRT would be to acknowledge that the seller took their 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 the VRT’s tracing rights. The VRT could then argue that it is entitled to impose a constructive trust on 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 complaint inappropriately conflates stolen cash with un-stolen real estate. In so doing, the complaint appears to 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 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 dictate that it was transferred to the VRT’s beneficiaries. 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 Case 3:16-cv-02082-SI Document 19 Filed 01/06/17 Page 16 of 21 US Mot. to Dismiss Case No. 3:16-cv-2082-SI 17 United States has been unable to locate (and the complaint fails to cite) any Oregon law that would support “vesting” title of the River Cliff Property directly in the VRT’s beneficiaries from the very beginning, without any court imposing an equitable remedy and requiring an actual transfer of title to them. The appropriate remedy here, if the VRT can prove its claims, is imposition of a constructive trust, not a ruling that “title” somehow leapt over Ronald Talmage and was secretly held by the VRT beneficiaries all this time. Finally, it is worth noting that, even if Oregon law supported the rule suggested by the VRT, title could not be vested only in the VRT beneficiaries. 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, taking the VRT’s theory to its logical end, the most they could hope to prove is that title to the River Cliff Property belongs to some combination of the United States and the VRT beneficiaries, not to the beneficiaries by themselves. 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 these types of cases. In the absence of clear authority, the Court should not accept the VRT’s invitation down this treacherous path. Finally, though the complaint mentions 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 “property interest” in the River Cliff Property. Case 3:16-cv-02082-SI Document 19 Filed 01/06/17 Page 17 of 21 US Mot. to Dismiss Case No. 3:16-cv-2082-SI 18 4. The VRT’s claims are inchoate and therefore inferior to the perfected federal tax liens. Even assuming the facts in the complaint could support a claim under 28 U.S.C. § 2410, the complaint must fail for another reason: the VRT’s potential interest is necessarily inferior to the federal tax liens. Therefore, the VRT can obtain no relief on its claims, even if it could proceed. 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)). An interest 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 complaint that would allow the Court to conclude that the VRT’s claim to the River Cliff Property is superior to the claim of the United States. This is so because, even today, there remains 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 needs 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). The VRT’s claim that it is entitled to a “constructive trust” remedy makes no difference: until a court awards the VRT a constructive trust in the River Cliff Property, it holds nothing more than an inchoate claim. 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.”). Case 3:16-cv-02082-SI Document 19 Filed 01/06/17 Page 18 of 21 US Mot. to Dismiss Case No. 3:16-cv-2082-SI 19 This analysis is fatal to the VRT’s attempts to assert a quiet title claim against the United States. There is no question that the United States already has perfected federal tax liens against the River Cliff Property. [Dkt. # 1] at ¶ 29 (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, the VRT’s claim is inchoate. Therefore, even if a constructive trust 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.”). This result is also required by 26 U.S.C. § 6323(b), 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. Assuming all facts in the complaint to be true, the VRT simply cannot obtain “quiet title” to the River Cliff Property vis-à-vis the United States. Its claim must be dismissed. // Case 3:16-cv-02082-SI Document 19 Filed 01/06/17 Page 19 of 21 US Mot. to Dismiss Case No. 3:16-cv-2082-SI 20 CONCLUSION WHEREFORE, for the reasons set forth above, the United States respectfully requests that the Court dismiss the complaint for failure to state a claim for relief. Date: January 6, 2017 Respectfully submitted, CAROLINE D. CIRAOLO Principal Deputy Assistant Attorney General /s/ Lindsay L. Clayton LINDSAY L. CLAYTON JENNIFER Y. GOLDEN 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) 202-307-0054 (f) Lindsay.L.Clayton@usdoj.gov Jennifer.Y.Golden@usdoj.gov Of Counsel: BILLY J. WILLIAMS United States Attorney Case 3:16-cv-02082-SI Document 19 Filed 01/06/17 Page 20 of 21 US Mot. to Dismiss Case No. 3:16-cv-2082-SI 21 CERTIFICATE OF SERVICE I hereby certify that on this 6th day of January, 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, WILLIAMS, KASTNER & GIBBS PLLC 1001 SW Fifth Avenue, 16th Floor Portland, OR 97204-1116 (503) 228-7967 tped@williamskastner.com Attorney 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 19 Filed 01/06/17 Page 21 of 21