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Ramsay v. Sanibel & Lancaster Insurance, LLC

United States District Court, E.D. Virginia, Norfolk Division

June 13, 2016

CHRISTOPHER RAMSAY, Plaintiff,
v.
SANIBEL & LANCASTER INSURANCE, LLC, ROBERTA L. GARCIA-GUAJARDO, STEVEN GUAJARDO, and GARY J. HUNTER, Defendants.

          MEMORANDUM ORDER

          Mark S. Davis United States District Judge

         This matter is before the Court on the United States Magistrate Judge's Report and Recommendation, ECF No. 80, and the parties' objections to such Report and Recommendation, regarding certain issues related to the sale of "4301 Newport Ave., a/k/a 600 Maryland Ave., Norfolk, Virginia" ("the property"). As discussed below, following a de novo review of the Report and Recommendation, and the objections filed thereto, the Court will ADOPT the findings and recommendations set forth in the Report and Recommendation of the United States Magistrate Judge filed on October 27, 2015, AS AMENDED by this Memorandum Order.

         I. FACTUAL AND PROCEDURAL

         HISTORY On June 30, 2015, the Court granted Plaintiffs Motion for Execution Sale, ECF No. 37, and determined that it would order the sale of the property. ECF No. 65. On August 4, 2015, pursuant to 28 U.S.C. § 636(b) (3) and Local Rule 72, the Court referred this matter to the co-assigned United States Magistrate Judge to resolve certain issues related to the sale of the property. ECF No. 69. The Report and Recommendation of the Magistrate Judge was filed on October 27, 2015, ECF No. 80, proposing findings and recommendations regarding (1) the persons who possess an interest in the property and the extent of their respective interests; (2) the liens on the property; (3) the order of priority of the liens on the property; and (4) whether all interested parties are currently before the Court. Id. at 1.

         By copy of the Report and Recommendation, each party was advised of the right to file written objections to the findings and recommendations made by the Magistrate Judge. On October 30, 2015, Plaintiff filed his objections to the Report and Recommendation. ECF No. 81. On November 12, 2015, Judgment Debtor and Defendant, Roberta Garcia-Guajardo ("Garcia-Guajardo"), filed objections to the Report and Recommendation. ECF No. 86. Plaintiff responded to Garcia-Guajardo's objections on November 24, 2015, ECF No. 87, and Garcia-Guajardo filed a "Response to Plaintiff[*s] Objections" on December 4, 2015, ECF No. 88. On January 25, 2016, based on such objections, the Court directed the parties to submit supplemental information regarding the entity that holds the mortgage lien on the property. ECF No. 89. On February 8, 2016, both parties responded to the Court's Order. ECF Nos. 91, 92. About that same time, Judgment Debtor and Defendant Steven Guajardo ("Guajardo") filed three separate Voluntary Petitions for Chapter 13 Bankruptcy in the United States Bankruptcy Court for the Eastern District of Virginia. See Case No. 2:15-bk-74306, Bankr. E.D. Va., ECF No. 1; Case No. 2:16-bk-70222/ Bankr. E.D. Va., ECF No. 1; Case No. 2:16-bk-70685, Bankr. E.D Va., ECF No. 1. As discussed in the Court's Order, dated May 19, 2016, Guajardo's bankruptcy petitions have been dismissed and this matter is no longer subject to a stay related to Guajardo's petitions for Chapter 13 bankruptcy. ECF No. 95. However, as the Court stated in its May 19, 2016 Order, issues remained regarding the identity of the entity that holds the mortgage on the property and the Court ordered Plaintiff to submit additional information regarding the entity that currently holds the mortgage on the property. Id. at 4. On May 26, 2016, Plaintiff filed his response to the Court's May 19, 2016 Order. ECF No. 96. The Court now has sufficient information to review the Report and Recommendation and will address the parties' objections to such Report and Recommendation in turn.

         II. PLAINTIFF'S OBJECTIONS

         Plaintiff makes two objections to the Report and Recommendation. First, while Plaintiff does not object to the order of priority recommended by the Magistrate Judge, Plaintiff does object to the amount of the property sale proceeds to which the United States Department of the Treasury, Internal Revenue Service ("IRS") has a claim. Pl's Objs. to R. & R. at 1-2. Plaintiff asserts that, although the IRS has proper and valid liens on the property owned by Guajardo and Garcia-Guajardo as tenants by the entirety, the IRS is entitled to only one-half of the proceeds from sale of the property, after payment of costs and the superior mortgage lien, because the IRS's liens are against Guajardo only. Id. at 2. Second, and relatedly, Plaintiff argues that, after payment of costs, the mortgage lien, and one-half of the remaining proceeds to the IRS, Garcia-Guajardo should be allowed to apply all remaining sale proceeds to Plaintiff s individual or joint and several debts against her in the order that she chooses. Although Garcia-Guajardo filed objections and a "Response to Plaintiff[']s Objections, " she does not address either of Plaintiff's objections. As discussed below, the Court SUSTAINS Plaintiff s objection regarding the amount of sale proceeds to which the IRS has a claim, and OVERRULES Plaintiffs objection regarding Garcia-Guajardo's ability to discretionarily pay her debts with the property sale proceeds remaining after payment of the costs, the mortgage lien, and the IRS tax liens.

         A. IRS Interest in Sale Proceeds

         In this matter, Guajardo and Garcia-Guajardo own the property as tenants by the entirety. Pl's Resp., Ex. 1, Deed of Bargain and Sale, ECF No. 78-1. The IRS tax liens are against Guajardo only. Pl's Resp. on Execution Sale, 3. ECF No. 73; Id. Exs. 5, 6, 7, Notice of Federal Tax Lien, ECF Nos. 73-5, 73-6, 73-7. As the Magistrate Judge noted, " [g]enerally, creditors of only one tenant cannot attach a lien to property held jointly as tenants by the entirety." R. & R. at 5-6 (listing cases in support). However, the United States Supreme Court has recognized an exception to this general rule with respect to federal tax liens. In United States v. Craft, 535 U.S. 274 (2002), the Supreme Court held that property owned as a tenancy by the entirety may be subject to attachment of federal tax liens, even though the tax liens are against one tenant only. Id. at 283-84. In Craft, interpreting 26 U.S.C. § 6321 which allows a federal tax lien to be attached "upon all property and rights to property, whether real or personal, belonging to [a federal tax debtor], " the Supreme Court determined that a federal tax lien may attach to a debtor-tenant's interest in property held as a tenancy by the entirety when that interest "constitute[s] 'property' or 'rights to property'" under the applicable state law. Id. at 283. Relying on the ruling in Craft, and determining that the IRS "has a valid federal tax lien attached to the property" under Virginia law, the Magistrate Judge found that the IRS has a valid claim to proceeds of the sale of the property, after payment of the costs of sale and the superior mortgage lien. R. & R. at 6-7 (citing Craft, 535 U.S. at 283-88). The Magistrate Judge, however, did not determine the extent of Guajardo's interest in the tenancy by the entirety property, the proceeds of which may be applied to the IRS liens. The Court, therefore, AMENDS the Report and Recommendation to note that, because Guajardo's rights to the property are equal to a one-half interest in the property, the IRS's claim on the proceeds of the property sale is limited to one-half of the sale proceeds, after payment of the costs of sale and the superior mortgage lien.

         While the Supreme Court has held that a valid IRS lien may attach to a debtor-tenant's interest in property held as a tenancy by the entirety, it did not address the extent of such interest or the value of such interest for purposes of paying an IRS lien. See Craft, 535 U.S. at 289 ("We express no view as to the proper valuation of respondent's husband's interest in the entireties property . . . ."}. However, several courts have found that, when a federal tax lien against an individual is attached to property held as a tenancy by the entirety, the debtor-tenant's "property or right to property" is equal to a one-half interest in, or fifty percent of, the tenancy by the entirety property. Thus, such courts have found that the IRS's lien attaches only to the debtor-tenant's one-half interest in the property, and the IRS's lien is paid out of the sale proceeds of that one-half interest. For example, in Popky v. United States, 419 F.3d 242 (3d Cir. 2005), the Court of Appeals for the Third Circuit found that, under Pennsylvania law, the IRS debtor had an interest in property held as a tenancy by the entirety and an IRS tax lien was properly attached to the debtor-tenant's interest. Id. at 244. However, the debtor-tenant's interest was equal to one-half of the property, in accordance "with the longstanding Pennsylvania definition of tenancies by the entireties" and Pennsylvania's practice of equal division of assets between spouses "when an entireties estate is severed because of a sale with consent of both tenants, divorce or other reasons." Id. at 245 (internal citations omitted). Thus, "[w]hen a federal tax lien attaches to a property held in a tenancy by the entireties, it attaches to the delinquent taxpayer's one-half interest in the property." United States v. Tyler, 528 F.App'x 193, 198 (3d Cir. 2013) (unpublished) (citing Popky, 419 F.3d at 244-45); see United States v. Hoyt, 524 F.Supp.2d 638, 642 (D. Md. 2007) (citing Popky, 419 F.3d at 244-45, for the proposition that the government was entitled to fifty percent of the proceeds from sale of Maryland property, held as a tenancy by the entirety, to satisfy tenant-taxpayer's debt for unpaid tax assessments) . Thus, the Third Circuit held that, because the debtor-tenant's "property or rights to property" is equal to a one-half interest in the tenancy by the entirety property, the IRS's federal tax lien attaches to the debtor-tenant's one-half interest in such property, and the IRS's tax lien is paid out of the sale proceeds of that one-half interest.

         Similarly, in the unpublished case of United States v. Barczyk, 434 F.App'x 488 (6th Cir. 2011), the Sixth Circuit held that, under Michigan law, the debtor-tenant had an interest in property held as a tenancy by the entirety and the IRS tax lien was properly attached to the debtor-tenant's interest in such property. Id. at 493. However, the Sixth Circuit determined, "because tenants by the entirety[, under Michigan law, ] 'have equal interests in their home, division according to their interests results in an equal distribution of the proceeds of the sale of the home'" between the innocent and debtor tenant. Id. at 4 94 {citing United States v. Barr, 617 F.3d 370, 373 {6th Cir. 2010)) . Thus, in Barczyk, the Sixth Circuit held that the "non-defaulting spouse 'is entitled to fifty percent of the proceeds of the foreclosure sale of the home, ' with the other fifty percent going to the Government to satisfy the defaulting spouse's tax debt." Id. (quoting Barr, 617 F.3dat 373); see also United States v. Winsper, 680 F.3d 482, 492 (6th Cir. 2012) (determining that, under Kentucky law, an innocent tenant and debtor tenant have interests in tenancy by the entirety property "of equal character and value" and, if the property is to be sold to satisfy the debtor tenant's IRS lien, the innocent tenant has a 50% interest in tenancy by the entirety property).

         Virginia law, similar to Pennsylvania and Michigan law discussed above, instructs that spouses, who own property as a tenancy by the entirety, equally share in such estate "a present right to the use and possession of, and income from the entire property, and an expectancy of survivorship to the interest of the other spouse." In re Philips, 14 B.R. 781 (Bankr. W.D. Va. 1981) (internal citations omitted). Thus, if a tenancy by entirety is sold or divided, and such division is not otherwise addressed by law, a Virginia tenant's "right[] to property, " held as a tenancy by the entirety, is equal to a one-half interest in such property.[1] See Sundin v. Klein, 221 Va. 232, 241 (1980) (determining that a wife had an "undivided one-half interest" in property held as a tenancy by the entirety with her husband and imposing a constructive trust upon such interest after husband killed the wife (citing Norris v. Barbour, 188 Va. 723, 743-44 (1949); Jenkins v. Jenkins, 211 Va. 797, 799-800 (1971))); Liqhtburn v. Lightburn, 22 Va. Ct. App. 612, 616 (1996) (explaining that, prior to enactment of Va. Code § 20-107.3, which requires equitable distribution of marital assets in divorce proceeding, a tenant was entitled to "an undivided one-half interest" in property held as a tenancy by the entirety (citing Sundin, 221 Va. at 241)); Pratt v. Pratt, No. 2394-10-4, 2012 WL 3573972, at *2 (Va. Ct. App. Aug. 21, 2012) (unpublished) (explaining that "[d]uring their marriage, husband and Agatha held the house as tenants by the entirety, each owning an undivided one-half interest in the whole" (citing Lightburn, 22 Va. Ct. App. at 615)). Further, courts that have addressed enforcement of a federal tax lien against a tenant of Virginia property, held as a tenancy by the entirety, have found that a tenant of such property is entitled to a one-half interest in such property. Gregory v. U.S. Pep't of Treasury, No. l:12-CV-00042, 2012 WL 5426533, at *1 n.2 (W.D. Va. Nov. 7, 2012) (unpublished) ("[A] federal tax lien can apply to an individual spouse's one-half interest in property held as tenants by the entirety, so long as the law of the state in which the property is located would treat the individual spouse's interest as a property interest. It is undisputed that Virginia, the state in which the property is located, so treats a spouse's ownership as a tenant by the entirety." (internal citations omitted)); cf. United States v. Parr, No. 3:10-CV-00061, 2011 WL 4737066, at *5 (W.D. Va. Oct. 6, 2011) (unpublished) (finding that the sale proceeds of property held as a tenancy by the entirety, after payment of a priority mortgage lien, should be divided between the debtor tenant to satisfy his federal tax delinquency and the non-liable tenant "to compensate her for her non-liable possessory interest in the property"). Additionally, in addressing the Supreme Court's decision in Craft, the IRS has determined that "[a]s a general rule, the value of the taxpayer's interest in entireties property will be deemed to be one-half." Collection Issues Related to Entireties Prop., 2003-2 C.B. 643, 2003-39 I.R.B. 643 (2003). Thus, in Virginia, a debtor-tenant who owns property held as a tenancy by the entirety possesses a one-half interest in such property and a federal tax lien may attach to that debtor-tenant's one-half interest.

         Thus, as the property is located in Virginia, and Virginia recognizes that tenants have a one-half interest in property held as a tenancy by the entirety, the Court finds that Guajardo has a one-half interest in the property. As such, the IRS's liens attach to Guajardo's one-half interest and shall be paid out of the sale proceeds of that one-half interest, after payment of costs and the superior mortgage lien. Therefore, the Court SUSTAINS Plaintiff's objection regarding the amount of sale proceeds to which the IRS has a claim, and AMENDS the Report and Recommendation to note that: (1) Guajardo has a one-half interest in the property, (2) the IRS's liens attach to Guajardo's one-half interest in the property, and (3) the IRS's liens shall be paid out of the sale proceeds of that one-half interest, after payment of the costs of sale and the superior mortgage lien.

         B. ...


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