Opinion
Civil Action No. 2:18-1686-BHH
2020-03-26
GUARDIAN TAX SC, LLC, Plaintiff, v. Ralph DAY a/k/a Ralph M. Day, Sr.; Virginia Day a/k/a Virginia D. Day; the Bank of New York, as Trustee for CWHEQ Revolving Home Equity Loan Trust, Series 2007-A; United States of America, by and through its agency, the Internal Revenue Service ; Charleston County, South Carolina; and Daniel M. Gregory, in his official capacity as the Charleston County Delinquent Tax Collector, Defendants.
Matthew Adams Abee, Nelson Mullins Riley and Scarborough LLP, Columbia, SC, for Plaintiff. Sean Matthew Foerster, Rogers Townsend and Thomas PC, Columbia, SC, for Defendant Bank of New York Mellon. George John Conits, US Attorneys Office, Greenville, SC, for Defendant United States of America. Bernard Eugene Ferrara, Jr., Edward L. Knisley, Jr., Joseph Dawson, III, Johanna Serrano Gardner, Charleston County Attorney's Office, North Charleston, SC, Kevin Michael DeAntonio, Senn Legal, Charleston, SC, for Defendant Charleston County South Carolina. Bernard Eugene Ferrara, Jr., Joseph Dawson, III, Johanna Serrano Gardner, Charleston County Attorney's Office, North Charleston, SC, Kevin Michael DeAntonio, Senn Legal, Charleston, SC, for Defendant Daniel M. Gregory.
Matthew Adams Abee, Nelson Mullins Riley and Scarborough LLP, Columbia, SC, for Plaintiff.
Sean Matthew Foerster, Rogers Townsend and Thomas PC, Columbia, SC, for Defendant Bank of New York Mellon.
George John Conits, US Attorneys Office, Greenville, SC, for Defendant United States of America.
Bernard Eugene Ferrara, Jr., Edward L. Knisley, Jr., Joseph Dawson, III, Johanna Serrano Gardner, Charleston County Attorney's Office, North Charleston, SC, Kevin Michael DeAntonio, Senn Legal, Charleston, SC, for Defendant Charleston County South Carolina.
Bernard Eugene Ferrara, Jr., Joseph Dawson, III, Johanna Serrano Gardner, Charleston County Attorney's Office, North Charleston, SC, Kevin Michael DeAntonio, Senn Legal, Charleston, SC, for Defendant Daniel M. Gregory.
ORDER
Bruce Howe Hendricks, United States District Judge
In this action, Plaintiff Guardian Tax, LLC ("Plaintiff" or "Guardian") seeks to quiet title in its name to real property located at 714 Ocean Boulevard, Isle of Palms, South Carolina (Parcel No. 568-11-00-222) ("the Property"), which Plaintiff purchased on October 31, 2016, at a non-judicial tax sale ("the Tax Sale") held by Charleston County, South Carolina ("Charleston County") and Daniel M. Gregory, in his official capacity as the Charleston County Delinquent Tax Collector ("Tax Collector") (collectively, "the County"). Specifically, Plaintiff seeks a declaration that it is seized in fee simple good and marketable title to the Property, "free of any liens or other interests extinguished by the Tax Sale, including interests of all parties who may have had an interest in the Property at the time of the sale but who failed to redeem the Property after proper notice." (ECF No. 28 at 2.) On August 28, 2019, Defendant United States of America ("United States"), by and through its agency, the Internal Revenue Service ("IRS"), filed a motion for summary judgment (ECF No. 70 ), seeking a declaratory judgment that Plaintiff purchased the Property subject to and without disturbing the federal tax liens against the Property.
The same day, Defendant The Bank of New York, as Trustee for CWHEQ Revolving Home Equity Loan Trust, Series 2007-A ("Trustee"), also filed a motion for summary judgment (ECF No. 71 ) on its crossclaims against the United States (by and through the IRS) and Defendants Ralph Day a/k/a Ralph M. Day, Sr. ("Ralph Day"), Virginia Day a/k/a Virginia D. Day ("Virginia Day") (collectively "the Days" ). In its motion, the Trustee seeks sole right to and possession of any and all surplus funds ("overage") remaining from the Tax Sale.
The Days are the previous owners of the Property. In 2006, Ralph Day executed a home equity credit line agreement and disclosure statement ("HELOC") to Countrywide Home Loans, Inc., evidencing a loan made to him with a credit limit of $1,850,000.00. To secure repayment of the loan, the Days executed and delivered to Mortgage Electronic Registration Systems, Inc., a mortgage covering the Property. The mortgage was recorded on September 20, 2006, in the Office of the Register of Deeds for Charleston County, and the Trustee is the current owner and holder of the HELOC and assignee of the mortgage. (ECF No. 28 at 4-5 ; ECF No. 71-1 at 2.) The Days failed to pay ad valorem real property taxes for tax years 2010 through 2015, ultimately resulting in the sale of the Property to Plaintiff at the Tax Sale in 2016. The Days have not answered or otherwise appeared in this action and entries of default were entered by the Clerk on September 17, 2018, and February 12, 2019. (ECF Nos. 26 and 55.)
Plaintiff filed a motion for summary judgment (ECF No. 72 ) on August 30, 2019, seeking an order declaring it to have fee simple title to the Property, clear of Defendants’ interests because the 2016 Charleston County Tax Sale was conducted according to state law. In the alternative, Plaintiff asserts that if the Court finds that IRS had valid liens and that notice by the County to the IRS was insufficient, then the remedy is to give the IRS 120 days to redeem the Property.
In addition, the National Tax Lien Association ("NTLA") filed a motion for leave to participate as amicus curiae (ECF No. 76 ) on August 30, 2019, and submitted a proposed amicus brief in support of Plaintiff's motion for summary judgment. The Court granted NTLA's motion in a text order filed March 5, 2020.
Also on August 30, 2019, the County filed a motion to dismiss for failure to state a claim, or in the alternative, for summary judgment (ECF No. 74 ). In its motion, the County asserts that Plaintiff's first alternative cause of action against it fails to state a claim, or in the alternative, that if it does state a claim, then the County is immune from liability under the South Carolina Tort Claims Act ("SCTCA"), S.C. Code Ann. § 15-78-60 (11) (2005).
STIPULATED FACTS
On April 25, 2019, the parties filed a stipulation agreeing to certain facts. (ECF No. 61.) In pertinent part, the parties agree that Guardian is the current owner of the Property and that the United States reserves the right to assert that Guardian owns the Property subject to the federal tax liens described in the stipulation. (Id. at 1.) The parties agree that the United States, by and through the IRS, recorded Notices of Federal Tax Lien in the public records of Charleston County as follows: on March 30, 2015, against Ralph Day (with an outstanding balance of $1,013,879.47 as of March 18, 2019); on March 30, 2015, against Ralph Day (with an outstanding balance of $876,643.64 as of March 18, 2019); and on April 6, 2015, against Virginia Day (with an outstanding balance of $1,013,879.47 as of March 18, 2019). (Id. at 2-5.) The parties agree that the ten-year limitations periods on collection of the assessments against Virginia Day have expired, and the United States does not seek to collect the balance owed on the tax assessments from Virginia Day. (Id. at 5.) The parties further agree that interest will continue to accrue on the assessments as provided by sections 6621 and 6622 of the Internal Revenue Code. (Id. ) The parties do not dispute the validity of the assessments, but Plaintiff reserves the right to dispute whether the assessments are a lien against the Property as a matter of law. (Id. )
In addition, the parties agree that Ralph and Virginia Day failed to pay ad valorem real property taxes on the Property for the tax years 2010-2015, and as a result, the County conducted a Tax Sale on October 31, 2016, to collect the balance owed. (Id. at 6.) The parties agree that the County did not give written notice of the Tax Sale to the IRS prior to the tax sale by registered, certified, or personal mail service. The County posted the Official Notice of Levy for sale in name of "Day Ralph and Virginia" in the Post and Courier once a week for three consecutive weeks prior to the Tax Sale. (Id. ) Plaintiff successfully bid $1,860,000.00 at the Tax Sale, and the Tax Sale generated approximately $1,200,000.00 in excess proceeds, which is personal property. The United States has not submitted an application to the County requesting the excess proceeds, nor has it filed a cross-claim in this lawsuit seeking the excess proceeds. (Id. )
The parties agree to the following with respect to bankruptcy actions filed by Ralph Day. First, Ralph Day filed a Chapter 11 bankruptcy petition in the District of New Jersey on May 6, 2008, and the case was converted to a Chapter 7 case on February 9, 2010, with Ralph Day receiving a discharge pursuant to 11 U.S.C. § 727 on December 4, 2013. Second, Ralph Day filed a Chapter 13 bankruptcy petition in the District of New Jersey on December 14, 2017, and the case was converted to a Chapter 11 case on February 12, 2018, and remained open as of the date of the parties’ stipulation. (Id. at 6-7.) Guardian filed a stay relief motion seeking the bankruptcy court's approval to (1) have titled to the Property transferred to Guardian through issuance of the tax deed and execution of all other associated and necessary instruments, and (2) file an in rem action under S.C. Code Ann. § 12-61-101 to obtain a declaration that it is seized in fee simple good and marketable title to the Property, free of any liens or other interests extinguished by the Tax Sale. Ralph Day never filed an objection to the stay relief motion, and on April 5, 2018, the bankruptcy court entered its final order granting the stay relief motion. (Id. at 7.)
The parties agree that Ralph Day filed an adversary proceeding against the County seeking to set aside the conveyance of the Property as fraudulent and/or voidable, and that Guardian moved to intervene in the adversary proceeding and to dismiss. The bankruptcy court granted both motions and dismissed the adversary proceeding on June 1, 2018. (Id. )
The parties stipulate that the County issued a tax deed for the Property to Guardian on April 24, 2018, and it was recorded on April 24, 2018, in the public records of Charleston County. The County thereafter issued a corrective tax deed, which was recorded on June 25, 2018. (Id. )
STANDARDS OF REVIEW
A motion to dismiss pursuant to Federal Rule of Civil Procedure 12(b)(6) examines the legal sufficiency of the facts alleged on the face of a plaintiff's complaint. Edwards v. City of Goldsboro , 178 F.3d 231, 243 (4th Cir. 1999). To survive a Rule 12(b)(6) motion, "[f]actual allegations must be enough to raise a right to relief above the speculative level." Bell Atlantic Corp. v. Twombly , 550 U.S. 544, 555, 127 S.Ct. 1955, 167 L.Ed.2d 929 (2007). The "complaint must contain sufficient factual matter, accepted as true, to ‘state a claim to relief that is plausible on its face.’ " Ashcroft v. Iqbal , 556 U.S. 662, 678, 129 S.Ct. 1937, 173 L.Ed.2d 868 (2009) (quoting Twombly , 550 U.S. at 570, 127 S.Ct. 1955 ). A claim is facially plausible when the factual content allows the court to reasonably infer that the defendant is liable for the misconduct alleged. Id. When considering a motion to dismiss, the court must accept as true all of the factual allegations contained in the complaint. Erickson v. Pardus , 551 U.S. 89, 94, 127 S.Ct. 2197, 167 L.Ed.2d 1081 (2007).
Pursuant to Rule 56 of the Federal Rules of Civil Procedure, a court shall grant summary judgment if a party shows that there is no genuine dispute as to any material fact and the party is entitled to judgment as a matter of law. Fed. R. Civ. P. 56(a). The judge is not to weigh the evidence, but rather to determine if there is a genuine issue of fact. Anderson v. Liberty Lobby, Inc. , 477 U.S. 242, 249, 106 S.Ct. 2505, 91 L.Ed.2d 202 (1986). If no material factual disputes remain, then summary judgment should be granted against a party who fails to make a showing sufficient to establish the existence of an element essential to that party's case, and on which the party bears the burden of proof. Celotex Corp. v. Catrett , 477 U.S. 317, 323, 106 S.Ct. 2548, 91 L.Ed.2d 265 (1986). All evidence should be viewed in the light most favorable to the non-moving party. See Perini Corp. v. Perini Constr., Inc. , 915 F.2d 121, 123-24 (4th Cir. 1990).
DISCUSSION
The parties do not dispute the material facts in this case, and they assert there is no need for a trial. As previously set forth, the United States filed a motion for summary judgment seeking a declaration that Plaintiff purchased the Property subject to and without disturbing the federal tax liens against the Property. In contrast, Plaintiff filed a motion for summary judgment asserting that the United States has no valid tax liens, or in the alternative, that if the United States does have valid tax liens, then the proper remedy is to give the IRS 120 days to redeem the Property. In addition, the Trustee filed a motion for summary judgment seeking a declaration that it has sole right to the overage from the Tax Sale. And the County filed a motion for summary judgment asserting that Plaintiff has failed to state a claim against it, or in the alternative, that it is immune from liability pursuant to the SCTCA.
I. The United States’ Tax Liens
In its motion for summary judgment, the United States seeks a declaratory judgment that the Property was conveyed to Guardian subject to and without disturbing the United States’ filed Notices of Federal Tax Lien. More specifically, the United States asserts that the statutory liens against Ralph and Virginia Day attached to the Property; that the United States perfected those liens and made them enforceable as to other judgment creditors more than 30 days prior to the tax sale; and that the perfected liens were not discharged by the Tax Sale because the County did not provide the United States with written notice of the sale as required by federal law. (ECF No. 70 at 12.)
In support of its motion, the United States relies on 26 U.S.C. § 7425 (titled "Discharge of Liens"), which provides in pertinent part:
(b) Other sales.--Notwithstanding subsection (a) a sale of property on which the United States has or claims a lien, or a title derived from enforcement of a lien, under the provisions of this title, made pursuant to an instrument creating a lien on such property, pursuant to a confession of judgment on the obligation secured by such an instrument, or pursuant to a nonjudicial sale under a statutory lien on such property–
(1) shall, except as otherwise provided, be made subject to and without disturbing such lien or title, if notice of such lien was filed or such title recorded in the place provided by law for such filing or recording more than 30 days before such sale and the United States is not given notice of such sale in the manner prescribed in subsection (c)(1); or
...
(c) Special rules.--
(1) Notice of sale.--Notice of a sale to which subsection (b) applies shall be given (in accordance with regulations prescribed by the Secretary) in writing, by registered or certified mail or by personal service, not less than 25 days prior to such sale, to the Secretary.
26 U.S.C. § 7425(b) and (c) (emphasis added).
Plaintiff opposes the United States’ motion and asserts both in its opposition to the United States’ motion and in its own motion for summary judgment that § 7425(b) must be read in conjunction with the plain language of § 6323(b)(6), which provides in pertinent part:
(b) Protection for certain interests even though notice filed. –Even though notice of a lien imposed by section 6321 has been filed, such lien shall not be valid–
...
(6) Real property tax and special assessment liens.–With respect to real property, as against a holder of a lien upon such property, if such lien is entitled under local law to priority over security interests in such property which are prior in time, and such lien secures payment of–
(A) a tax of general application levied by any taxing authority based upon the value of such property;
....
26 U.S.C. § 6323(b)(6)(A) (emphasis added).
According to Plaintiff, § 6323(b)(6)(A) provides that the United States’ federal tax liens "shall not be valid" as to an ad valorem tax lien. Id. Thus, Plaintiff argues that "[t]he plain meaning of the words "such lien shall not be valid’ " is clear, and Plaintiff claims that these words mean that a federal tax lien "has no legal force or effect where a state ad valorem tax lien is attached to the real property and is unsatisfied." (ECF No. 72-14 at 12.) Importantly, however, Plaintiff's argument wholly overlooks the words "as against a holder of a lien upon such property " in § 6323(b)(6) (emphasis added). The Court finds that these words limit the phrase "shall not be valid" and that these words must be given meaning. Therefore, the Court flatly disagrees with Plaintiff's argument that § 6323(b)(6)(A) means that the IRS held no valid liens on the Property. Rather, in giving meaning to the phrase "as against the holder of a lien upon such property," the Court finds that § 6323(b)(6)(A) merely gives priority to Charleston County's ad valorem tax lien without discharging the United States’ valid tax liens. See also Fox v. Moultrie, 379 S.C. 609, 666 S.E.2d 915 (S.C. 2008) (finding that a federal tax lien was subordinated to Charleston County's lien pursuant to § 6323(b)(6)(A) and rejecting the argument that the federal tax lien was invalidated by § 6323(b)(6)(A) ).
Likewise, the Court is not convinced by the arguments set forth in NTLA's amicus brief.
The Court recognizes that Fox is not binding precedent; nevertheless, the Court is persuaded by the Supreme Court of South Carolina's reasoning. See 379 S.C. at 618, 666 S.E.2d at 920 ("Interpreting all of the sections together, section 6323(b)(6)(A) provides that the federal lien is subordinated to the County's lien; it does not render the federal lien invalid as to the property itself or any other party."). Moreover, the Court is not convinced by Plaintiff's specific-over-general argument because, although Plaintiff is correct as to the general canon of statutory interpretation that the specific governs the general, Plaintiff's argument is based on a flawed reading of § 6323(b)(6) that ignores the words "as against a holder of a lien upon such property," as explained above.
The evidence of record, including the parties’ stipulated facts, indicates that (1) statutory liens arose against Ralph and Virginia Day; (2) these federal tax liens attached to the Property; and (3) the notices of the federal tax liens were filed more than 30 days prior to the Tax Sale. (ECF No. 61-1.) Having rejected Plaintiff's argument that § 6323(b)(6) invalidated the federal tax liens, the Court agrees with the United States that it was entitled to notice of the Tax Sale pursuant to § 7425. Specifically, § 7425(c)(1) requires such notice to be given "in writing, by registered or certified mail or by personal service, not less than 25 days prior to such sale, to the Secretary." 26 U.S.C. § 7425(c)(1). Importantly, the parties agree that "[t]he County did not give written notice of the Tax Sale to the IRS prior to the Tax Sale by registered or certified mail, or by personal service." (ECF No. 61 at 6.) Thus, the Court agrees with the United States that, pursuant to § 7425(b)(1), the Tax Sale of the Property to Guardian was made "subject to and without disturbing" the federal tax liens at issue.
In its motion for summary judgment, Plaintiff argues that if the IRS was entitled to notice of the Tax Sale, then it received sufficient notice because the County posted notice of the Tax Sale on the front door of the Property and the County published notice that the Property would be sold at the Tax Sale three separate times. (ECF No. 72-14 at 15-16.) Plaintiff also asserts that the County sent notice of the Tax Sale to Ralph Day's bankruptcy trustee, "putting the bankruptcy estate–and by extension, its creditors–on notice of the Tax Sale." (Id. ) None of these efforts on the part of the County satisfy the plain requirements of § 7425, and the Court finds no merit to Plaintiff's argument.
Section 7425(b)(1) provides:
... a sale of property on which the United States has or claims a lien, ..., under the provisions of this title, made pursuant to ... a nonjudicial sale under a statutory lien on such property–
(1) shall, except as otherwise provided, be made subject to and without disturbing such lien or title, if notice of such lien was filed or such title recorded in the place provided by law for such filing or recording more than 30 days before such sale and the United States is not given notice of such sale in the manner prescribed in subsection (c)(1);
26 U.S.C. § 7425(b)(1) (emphasis added).
In its motion for summary judgment, Plaintiff next argues that the proper remedy is to give the IRS 120 days to redeem the Property rather than permitting the federal liens to remain on the Property. Plaintiff alleges:
If the IRS held a lien on the Property such that it was entitled to notice of the Tax Sale under § 7425(b), and if the IRS's knowledge of the Tax Sale through the bankruptcy litigation was not sufficient notice under federal law, then the proper remedy is to put the IRS in the same position it would have
held had the County properly mailed notice to the IRS. That is, the Court should give the IRS the right to redeem the Property, not declare Guardian's interest to remain subject to the IRS's lien.
(ECF No. 72-14 at 17.) Plaintiff argues that this remedy is consistent with South Carolina law and that giving the IRS the right to redeem to protect its interest would avoid an inequitable result.
In response, the United States asserts that neither federal law, nor state law, nor equity support Plaintiff's position. After review, the Court agrees with the United States. First, the Court has determined that Plaintiff took the Property subject to and without disturbing the federal tax liens pursuant to § 7425(b)(1). The federal regulations explaining the United States’ right to redemption under § 7425(d), explain that, "[i]n the event a sale does not ultimately discharge the property from the tax lien (whether by reason of local law or the provisions of section 7425(b) ), the provisions of this section do not apply because the tax lien will continue to attach to the property after the sale." 26 C.F.R. § 301.7425-4(a)(3). Thus, the Court agrees with the United States that § 7425(d) does not apply.
Moreover, the Court agrees with the United States that Plaintiff's attempt to extinguish the federal tax liens by relying on South Carolina law fails because § 7425 provides a specific and comprehensive scheme for the enforcement of federal tax liens, and thus, it naturally preempts any state law purporting to discharge a federal tax lien without notice.
Finally, the Court finds nothing inequitable about the outcome required by § 7425 because Plaintiff easily could have avoided it by engaging in due diligence prior to the Tax Sale. As the United States points out in its memorandum in opposition to Plaintiff's motion for summary judgment:
Guardian had constructive notice of the federal tax liens prior to the Tax Sale, as well as the duty to inform itself of all the facts and legal requirements surrounding the Property and the Tax Sale before bidding. Guardian's bid at the Tax Sale was the largest Guardian had ever made in South Carolina, yet Guardian did not engage in any greater due diligence than was its norm. A routine title search would have cost Guarding $200 to $300, an incidental expense compared to the more than $2 million Guardian claims to have invested in the Property to date.
(ECF No. 83 at 16.) See also Fox , 379 S.C. at 619-20, 666 S.E.2d at 920-21 (noting that "potential buyers must research tax sale property purchases" and that "anyone researching the property would be aware it was subject to a federal tax lien"); (Cf. ECF No. 72-14 at 5 ("Although Guardian did not receive a title report for the Property before the Tax Sale, it did review information regarding the Property to determine whether to purchase it.").).
Based on the foregoing, the Court finds that the United States is entitled to a declaratory judgment that the sale of the Property to Guardian was made subject to and without disturbing the United States’ tax liens. In addition, the Court finds no support for Plaintiff's argument that the proper remedy in this case is to give the IRS 120 days to redeem the Property. Accordingly, the Court grants the United States’ motion for summary judgment and denies Plaintiff's motion for summary judgment.
II. The Overage from the Tax Sale The Trustee seeks summary judgment on its crossclaims against the Days and the United States, requesting an order "granting it sole right to the entire amount of tax sale overage held by the Tax Collector and ordering that the Tax Collector disburse the overage to the Trustee." (ECF No. 71-1 at 10.) Specifically, the Trustee asserts: (1) that it has a contractual right to the overage pursuant to the terms of the mortgage; (2) that it has a statutory right to the overage pursuant to Chapter 9 of the South Carolina Commercial Code; and (3) that it has an enforceable equitable lien on the overage.
The Trustee is the current owner and holder of the HELOC and the debt secured thereunder and is the assignee of the mortgage. According to the Trustee, "[a]s of August 22, 2019, there was due to the Trustee under the HELOC the amount of $3,541,794.23, plus continuing interest and advances thereafter." (ECF No. 71-1 at 3.)
The Days are currently in default, and the United States filed an Answer to the Trustee's crossclaims admitting that "Trustee's lien priority with respect to any proceeds of the subject property, including the tax sale overage, is superior to that of the United States of America" and that "Trustee is entitled to a judgment declaring as much." (ECF No. 21 ¶¶ 52-53.) In addition, the United States filed a response to the Trustee's motion indicating that it does not oppose the motion other than to assert that the Trustee is entitled to a judgment declaring the priority of the Trustee's interest in the overage and not a judgment that the Trustee holds the "sole interest" in the overage. (ECF No. 77 at 2-3.)
Plaintiff filed a response in opposition to the Trustee's motion indicating that it opposes the motion (if the Court accepts the United States’ argument that the Property was conveyed subject to and without disturbing the federal tax liens) because (1) the overage is the personal property of the Days to which the Trustee has no contractual right; (2) the Trustee has no equitable lien; and (3) the IRS is the proper claimant of the overage.
As an initial matter, the Court agrees with the Trustee that Plaintiff lacks standing to challenge the Trustee's claim for overage because Plaintiff has no right to assert a priority claim to overage on behalf of the IRS, and because Plaintiff has no right to dispute whether the Days intended to pledge their interests in the overage as security under the mortgage or whether an equitable lien encumbers the Days’ interest in the overage. Nevertheless, the Court finds no merit to Plaintiff's arguments.
South Carolina law provides the appropriate procedure for a claimant seeking tax sale overage. Specifically, S.C. Code Ann. § 12-51-130 provides in pertinent part:
If the tax sale of an item produced more cash than the full amount due in taxes, assessments, penalties, and costs, the overage must be applied to any outstanding municipal tax liens on the property. Any remaining overage belongs to the owner of record immediately before the end of the redemption period to be claimed or assigned according to law. These sums are payable ninety days after execution of the deed unless a judicial action is instituted during that time by another claimant.
S.C. Code Ann. § 12-51-130 (emphasis added). The Trustee is the only claimant who has satisfied this section's judicial action requirement. And here, despite Plaintiff's arguments to the contrary, the Court agrees with the Trustee that the terms of the mortgage effectively assigned the Days’ right to any tax sale overage to the Trustee. Specifically, the mortgage provides that the Days, in consideration of the loan, "grant and convey to MERS [ ] and to the successors and assigns of MERS, the premises," to include "all rights and interests which derive from [the Days’] ownership, use or possession of the Premises." (ECF No. 71-2 at 17.) The terms of the mortgage also provide that the Days would pay all real estate taxes owed and would "assign to you the proceeds of any award or claim for damages, direct or consequential, in connection with any condemnation or other taking of the Premises, ...." (Id. at 18 (emphasis added).) The Court finds these terms sufficient to assign the Days’ right to any overage to the Trustee.
The Court notes as a practical matter that it is not convinced by Plaintiff's argument that rents and profits resemble surplus proceeds from a tax sale. As the Trustee explains in its reply, "Tax sale overage ... is the result of a transmutation of the mortgaged real estate into cash proceeds through a government seizure and sale of that real estate. It is the same collateral that was in existence at the time of the mortgage origination and that was deemed necessary at the time of origination to fully secure the lender up to the debt amount, just converted into a different form." (ECF No. 88 at 8.)
In addition to the foregoing, the Court agrees with the Trustee that an equitable lien to the overage arose by virtue of the Days’ failure to perform its obligations and protect the Property from being taken for the nonpayment of real estate taxes. Furthermore, as the Court explained with respect to the United States’ interests in this case, the Court finds nothing inequitable about the result here. Accordingly, the Court grants the Trustee's motion for summary judgment and declares that the Trustee's interest in the overage takes priority over the United States’ interest, and the Court orders the Tax Collector to disburse the overage to the Trustee.
As the Trustee explains in its reply brief:
Plaintiff could have avoided its potential losses through the exercise of due diligence before bidding at the tax sale. Since 2003, Plaintiff has known of the IRS noticing requirement under 26 U.S.C. § 7425(b)(1). Yet Plaintiff failed to search title on the subject property for federal tax liens before bidding because it's not part of "[Plaintiff's] process to pull title on every property, on any property in South Carolina just simply from the excessive costs incurred." Although Plaintiff had never bid in excess of $1 million on any property at a South Carolina tax sale before this one, and its $1.86 million bid on the subject property was a "break from tradition[,]" Plaintiff still refused to pay the $200 or $300 required for a title search before bidding on the subject property.
Plaintiff further failed to review the Tax Collector's file for any notices to the IRS before bidding at the tax sale because it believed that "one, the time and cost to do so would outweigh the benefit, and, two, the only party that's going to show that they've been noticed is the owner." Despite this mistaken belief, had Plaintiff conducted a basic title search of the subject property and reviewed the Tax Collector's file for this property, it would have revealed that the IRS had tax liens on the subject property and that the Tax Collector's file contained no notice of the tax sale to the IRS. Therefore, Plaintiff's own lack of due diligence and thriftiness caused its potential losses in this matter.
Plaintiff could have also avoided its potential losses by not opposing the Tax Collector's earlier attempt to void the tax sale and by not opposing Ralph Day's adversary proceeding to void the tax sale–the same relief it has now requested in the alternative from the Court.
(ECF No. 88 at 14 (internal citations omitted).)
The Court notes that the overage does not satisfy in full the Trustee's interest.
III. The Plaintiff's First Alternative Cause of Action
In its complaint, Plaintiff seeks as a first alternative cause of action to recover all amounts due pursuant to S.C. Code Ann. § 12-51-100. (ECF No. 28 at 9-10.) Specifically, Plaintiff requests, as an alternative to a declaration of quiet title, "a refund of the Tax Sale bid, all property taxes paid by Plaintiff, all costs justly chargeable against the Property, and legal interest on the Tax Sale bid at the rate of 12% from the date of the Tax Sale until paid, as provided in S.C. Code Ann. §§ 12-51-90 and -100, together with pre-judgment interest." (Id. at 9.)
In its motion to dismiss, the County asserts that Plaintiff's complaint fails to state a plausible alternative claim because Plaintiff does not allege any defect in the Tax Sale. In the alternative, the County asserts that if Plaintiff has pleaded facts sufficient to state a cause of action against the County, then the County is nevertheless entitled to summary judgment because the SCTCA provides the County with immunity from liability for losses allegedly resulting from actions taken in the assessment or collection of taxes.
Plaintiff asserts in response to the County's motion that the Federal Rules of Civil Procedure permit it to assert alternative claims. Plaintiff states that it is not trying to recover on inconsistent remedies; rather, "it is asking the Court to quiet title as its main relief," and in the alternative, it is seeking "to recover on its reimbursement claim only if it is unsuccessful on its first claim." (ECF No. 86 at 3.)
Here, although Plaintiff is correct that it may plead alternative claims for relief, this does not excuse the fact that there has been no redemption of the Property. Thus, Plaintiff's reliance on S.C. Code Ann. § 12-51-100 misplaced. Moreover, although Plaintiff's complaint pleads alternative claims for relief, this also does not excuse the fact that Plaintiff's complaint fails to allege any facts to show that the Tax Sale should be set aside or otherwise declared void. In other words, nowhere in Plaintiff's complaint does it allege a defect in the Tax Sale; to the extent Plaintiff means to argue that the Tax Sale is void due to the County's failure to send notice to the IRS, the Supreme Court of South Carolina determined in Fox that "[n]othing in the state statutes required the County to notify the IRS of the tax sales." 379 S.C. at 614-15, 666 S.E.2d at 918.
In addition, the Court notes merely as a practical matter that Plaintiff actually opposed an earlier attempt by the Tax Collector to void the sale (ECF No. 74-14 ); and Plaintiff admits it moved for relief from the stay in Ralph Day's bankruptcy action "so that the tax deed could be issued" (ECF No. 72-14 at 7 ) and it moved to intervene and dismiss Ralph Day's separate adversary action against the County, which challenged the validity of the Tax Sale. (ECF No. 72-14 at 7-8.)
In all, therefore, the Court agrees with the County that Plaintiff's complaint fails to state a plausible claim to recover amounts due pursuant to S.C. Code Ann. § 12-51-100. Accordingly, the Court grants the County's motion to dismiss.
CONCLUSION
Based on the foregoing, the Court: (1) grants the United States’ motion for summary judgment (ECF No. 70 ) and declares that the sale of the Property to Guardian was made subject to and without disturbing the United States’ tax liens; (2) the Court grants the Trustee's motion for summary judgment (ECF No. 71 ) and declares that the Trustee's interest in the overage from the Tax Sale takes priority over the United States’ interest, and the Court orders the Tax Collector to disburse the overage to the Trustee; (3) the Court denies Plaintiff's motion for summary judgment (ECF No. 72 ); and (4) the Court grants the County's motion to dismiss (ECF No. 74 ).