Daily Development for April 27, 2000

By: Patrick A. Randolph, Jr.
Professor of Law
UMKC School of Law
Of Counsel: Blackwell Sanders Peper Martin
Kansas City, Missouri
randolphp@umkc.edu

TITLE; TAX DEEDS; IRS FORECLOSURE: Notwithstanding that taxpayer had actual notice of sale, IRS failure to provide notice as required by statute of presale seizure of property rendered title void, and equitable claims such as laches are of no help to party purchasing such void title in that party's action to quiet title.

Village of Dimondale v. Grable, LC No. 97001253 (Mich App. 4/21/2000) http://www.michbar.org/opinions/home.html?/opinions/appeals/2000/0 42100/6815.html

One judge in an earlier opinion characterized the taxpayer in this case as a "tax protester," but later changed the term to "tax evader." The IRS claim for taxes against the individual and his corporation exceeded $2,000,000, and the government came after the property.

At stake in this action is the requirement of notice of seizure of a taxpayer's property, which occurs after assessment and prior to sale. The statute provides for direct notice in writing, either by delivery or service of process, and as this court interpreted the statute, does not contemplate that such notice be mailed if the IRS knows the taxpayer's whereabouts:

"As soon as practicable after seizure of property, notice in writing shall be given by the Secretary [of the Treasury] to the owner of the property (or, in the case of personal property, the possessor thereof) or shall be left at his usual place of abode or business if he has such within the internal revenue district where the seizure is made. If the owner cannot be readily located, or has no dwelling or place of business within such district, the notice may be mailed to his last known address. Such notice shall specify the sum demanded and shall contain, in the case of personal property, an amount of the property seized and, in the case of real property, a description with reasonable certainty of the property seized. [Id. (emphasis supplied).]"

Here, apparently, the IRS did mail notice of seizure, but it was undisputed that it knew where the taxpayer was.

The statute requires that following seizure, the IRS must serve the taxpayer with separate notice of sale if it intends to sell the property. This notice also must be by personal service or delivery, and it is apparently undisputed that such notice was provided and in fact that the taxpayer had actual notice of the sale. A federal court also determined that proper notice had been provided to the taxpayer's wholly owned corporation, which owned a number of properties. Indeed, the federal court sanctioned the taxpayer for frivolous actions in contesting the notice it adjudicated.

The property at issue in this case, however, apparently was owned by the taxpayer in his individual capacity and was not specifically at issue in the federal litigation. Following the federal litigation, the taxpayer filed a notice with the county recorder notifying all parties that he was contesting any title transferred by the IRS due to the notice failure involving him, personally.

At about that time, the IRS in fact sold the property to Holberg, who later sold to Albert. Albert filed a quiet title action, to which the taxpayer answered, contending that the tax deed was void. During the pendency of this quiet title action, Albert sold his interest to the City of Dimsdale.

The trial court granted summary judgment against the taxpayer, concluding that the taxpayer had abundant actual notice of the sale and had done nothing to contest its validity during an extended redemption period or thereafter, for a period of over two years. Although the court acknowledged that both Holberg and Albert had notice of the taxpayer's position, the trial court was of the view that actual notice cured any technical failure to serve process on the taxpayer, and that in any event the taxpayer was barred by laches.

On appeal: held: Reversed.

The court cited to other Michigan cases that had held that an inadequate notice of sale renders the title thus sold void, even where a taxpayer has actual notice. Here, of course, there was a valid notice of the sale, but an inadequate notice of the seizure. On the equitable issue, the court concluded that equities cannot be raised to support a deed made void because of statutory notice violation in a tax sale procedure:

"The Village of Dimondale and Albert's argument that Grable's inequitable delay in acting on his rights bars his claim to the property is similarly without merit. It is not at all clear in Michigan that the general rule that a party aggrieved by a defective tax sale must act promptly and equitably to avoid the sale applies when there was defective notice of a tax assessment, seizure, or sale. See Howard, supra at 508, quoting Detroit Trust Co v Lieberwitz, 275 Mich 429, 436; 266 NW 406 (1936). In both Howard and Ruff, the taxpayers were plaintiffs who attempted to quiet title, and in doing so opened the door to the respective defendants' claims that they acted inequitably. In this case, Grable, the defendant, did not institute the equitable action to quiet title. Therefore, we see no reason to bar him from asserting an otherwise valid defense to the claim against his property. See generally Stabile v General Enterprises, 70 Mich App 711, 718; 246 NW2d 375 (1976) (equity is a shield, not a sword)."

Comment 1: Doesn't it make a difference that the defect is in a pre sale procedure? Where there is adequate notice and opportunity to contest the sale itself, and no defect in the sale notice, is it appropriate to find the sale void, especially years later? The issue is not statutory. The court does not say that the statute voids the sale. The issue apparently is one of common law.

Comment 2: The notion that the doctrine of laches is a "shield, but not a sword," is an intriguing one in this context. Is the court saying nothing the parties can later use laches to defend if Grable attempts to interfere with their use and enjoyment of the property, but cannot get clear title until that time, thus rendering their interest in the property valueless until then? This appears to be an odd result.

It should be noted that the instant plaintiffs in the quiet title had knowledge of the claimed invalidity of their title at the time that they bought. This may render their laches claim somewhat weak. But what if a third party purchaser bought who had neither actual nor constructive knowledge of Grable's claim (let's assume that the self serving notice filed with the recorder does not have constructive notice authority). Shouldn't such a person be permitted to use laches to clear title?

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