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First Sentinel Bank v. United States

United States District Court, W.D. Virginia, Abingdon Division

January 25, 2019


          Mark L. Esposito and M. Shaun Lundy, PennStuart, Bristol, Tennessee, for Plaintiff;

          Catriona M. Coppler and Ryan O. McMonagle, Trial Attorneys, Tax Division, U.S. Department of Justice, Washington, D.C., for United States.


          James P. Jones United States District Judge

         In this civil case, the plaintiff bank seeks a determination that its mortgage lien survived a nonjudicial foreclosure sale of the subject real property and that tax liens against the property remain inferior to the bank's lien. The United States contends that the bank's lien merged with its title when it purchased the property at the foreclosure sale, and therefore the bank's lien was extinguished and the tax liens have been elevated in priority. Both parties have moved for summary judgment. For the reasons that follow, I will grant in part the bank's Motion for Summary Judgment and deny the United States' Motion for Summary Judgment.


         The following undisputed facts are taken from the summary judgment record.

         Edson L. Knapp and Renda K. Knapp owned real property in Richlands, Virginia (the “Property”). The Knapps executed a credit line deed of trust (the “Deed of Trust”) on September 26, 2007, for the benefit of First Sentinel Bank (“First Sentinel”), which granted First Sentinel a first lien security on the Property. The initial principal amount of the Deed of Trust was $180, 000. In 2010, after First Sentinel recorded the Deed of Trust, the Internal Revenue Service (“IRS”) filed federal tax liens against the Property. The tax liens total $305, 439.78 and represent unpaid federal income taxes from 2008 and 2009.

         On June 11, 2013, Frederick W. Harman was appointed Substitute Trustee under the Deed of Trust. As of June 13, 2013, the fair market value of the Property was $110, 000. On June 28, 2013, Harman conducted a nonjudicial foreclosure sale of the Property, which was purchased by First Sentinel for $130, 000. The Knapps owed $156, 549.64 in principal to First Sentinel, in addition to real estate taxes, interest, and late charges.

         Internal Revenue Code § 7425(b) provides that property subject to a tax lien remains subject to the lien following a nonjudicial foreclosure sale unless the IRS is given at least 30 days notice of the foreclosure sale. Trustee Harman gave the IRS only 16 days notice of the sale of the Property and sent the notice to the wrong IRS office.

         Following the foreclosure sale, Trustee Harman added a notation to the promissory note secured by the deed of trust stating, “The unpaid balance is credited with $126, 178.13, as a result of the foreclosure sale on June 28, 2013.” ECF No. 33-1.[1] There is no evidence that First Sentinel agreed to or acknowledged this notation. First Sentinel had been aware of the IRS liens but believed they were discharged at the time of the foreclosure sale. Following the foreclosure sale, First Sentinel did not release the Deed of Trust. It did not learn that the IRS liens had not been discharged until after it entered into a contract to sell the Property in December 2015. As a result of the IRS liens, the contract to sell the Property was terminated.

         In January 2015, First Sentinel agreed to accept from the Knapps a reduced sum of $35, 000, without any additional interest, to be paid over 28 months. The Knapps actually paid $14, 918.75, which reduced the base lien amount to $144, 717.12. From October 2013 through September 2016, First Sentinel leased the Property to residential tenants at a rate of $800 per month. Beginning in June 2017, First Sentinel entered into a month-to-month lease of the Property at a rate of $500 per month.

         First Sentinel's Complaint contains two counts. Count I seeks a declaration by the court that its lien on the Property survived the foreclosure sale and has priority over the IRS liens. In Count II, First Sentinel seeks a declaration that the IRS liens cannot be enforced unless any future sale of the Property permits payment in full of the outstanding debt to First Sentinel.[2]


         The parties' cross motions for summary judgment have been fully briefed and orally argued and are ripe for decision. Summary judgment is appropriate when “the movant shows that there is no genuine dispute as to any material fact and the movant is entitled to judgment as a matter of law.” Fed.R.Civ.P. 56(a). Summary judgment is not a “disfavored procedural shortcut, ” but an important mechanism for ...

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