Opinion
A-23-CV-1097-RP
07-09-2024
PRESTIGE DEFAULT SERVICES, LLC, IN ITS CAPACITY AS SUBSTITUTE TRUSTEE FOR U.S. BANK TRUST NATIONAL ASSOCIATION AS TRUSTEE OF CABANA SERIES III TRUST, Interpleader-Plaintiff, v. GEORGE KENNETH IVORY A/K/A KENNETH IVORY; OFFICE OF THE ATTORNEY GENERAL OF TEXAS; DEPARTMENT OF TREASURY INTERNAL REVENUE SERVICE; EDWARD BUTLER & ROBIN BUTLER, SOLELY IN THEIR CAPACITY AS COMANAGING CONSERVATORS OF K.S. IVORY A MINOR, Defendants/Claimants-in-Interpleader.
HONORABLE ROBERT PITMAN, UNITED STATES DISTRICT JUDGE:
REPORT AND RECOMMENDATION OF THE UNITED STATES MAGISTRATE JUDGE
MARK LANE, UNITED STATES MAGISTRATE JUDGE
Before the court are United States of America's Motion for Summary Judgment Determining Lien Priority in the Excess Proceeds from the Sale of Defendant Kenneth Ivory's Homestead (Dkt. #13) and all related briefing. After reviewing the pleadings, the relevant case law, and determining a hearing is unnecessary, the undersigned submits the following Report and Recommendation to the District Court.
The motion for summary judgment was referred by United States District Judge Robert Pitman to the undersigned for a Report and Recommendation as to the merits pursuant to 28 U.S.C. § 636(b), Rule 72 of the Federal Rules of Civil Procedure, and Rule 1(d) of Appendix C of the Local Rules of the United States District Court for the Western District of Texas. See Text Order dated April 1, 2024.
I. Background
In 2021, Defendant George Kenneth Ivory's (“Ivory”) real property was foreclosed upon. The foreclosure sale resulted in excess proceeds of $243,624.38. In 2013, Edward and Robin Butler filed an Abstract of Judgment of $16,696.69 against Ivory's property for past child and medical support of K.S., a minor. In 2017, the IRS filed federal tax liens against Ivory's property totaling $767,364.82. In 2018, the Office of the Attorney General of Texas (“OAG”) filed a child support lien against Ivory's property for his then-current child support arrearage of $87,809.20. In December 2022, Prestige Default Services, LLC (“Prestige”) filed this interpleader action in state court to resolve the claims to excess sale proceeds. Prestige also seeks its attorneys' fees and costs of $7,438.35 for filing the interpleader complaint.
The IRS has moved for summary judgment that its liens have priority. Prestige argues that it is still entitled to its attorneys' fees and costs. The OAG, whose claim encompasses the Butlers' claim, asserts there is at least a fact issue as to lien priority. The OAG disputes the real property was Ivory's homestead and argues its lien is superior to the IRS's lien. The court will first address Prestige's response and then address the OAG's arguments.
II. Summary Judgment Standard
Summary judgment is appropriate under Rule 56 of the Federal Rules of Civil Procedure only “if the movant shows there is no genuine dispute as to any material fact and that the movant is entitled to judgment as a matter of law.” FED. R. CIV. P. 56(a). A dispute is genuine only if the evidence is such that a reasonable jury could return a verdict for the nonmoving party. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 254 (1986).
The party moving for summary judgment bears the initial burden of “informing the district court of the basis for its motion, and identifying those portions of [the record] which it believes demonstrates the absence of a genuine issue of material fact.” Celotex Corp. v. Catrett, 477 U.S. 317, 323 (1986). The burden then shifts to the nonmoving party to establish the existence of a genuine issue for trial. Matsushita Elec. Indus. Co., Ltd. v. Zenith Radio Corp., 475 U.S. 574, 585-87 (1986); Wise v. E.I. Dupont de Nemours & Co., 58 F.3d 193, 195 (5th Cir. 1995). The parties may satisfy their respective burdens by tendering depositions, affidavits, and other competent evidence. Estate of Smith v. United States, 391 F.3d 621, 625 (5th Cir. 2004).
The court will view the summary judgment evidence in the light most favorable to the non-movant. Griffin v. United Parcel Serv., Inc., 661 F.3d 216, 221 (5th Cir. 2011). The nonmovant must respond to the motion by setting forth particular facts indicating that there is a genuine issue for trial. Miss. River Basin Alliance v. Westphal, 230 F.3d 170, 174 (5th Cir. 2000). “After the non-movant has been given the opportunity to raise a genuine factual issue, if no reasonable juror could find for the non-movant, summary judgment will be granted.” Id.
III. Analysis
A. Priority as to Prestige
Prestige seeks to recover $7,438.35 for attorneys' fees and costs related to filing the interpleader complaint. First, Prestige argues that one of the cases the IRS relied on for its priority claim is unpublished. Next, Prestige asserts that Texas and Business Commerce Code § 22.006 allows the trustee or substitute trustee to recover reasonable actual costs attorneys' fees.
A federal tax lien securing Ivory's 2007 - 2015 tax liabilities was filed with the Travis County Clerk on October 30, 2017; and a federal tax lien securing Ivory's 2016 tax liability was filed on December 19, 2017. MSJ Exhs. 14, 15; see 26 U.S.C. § 6323 (a),(f) (perfecting a federal tax lien). Prestige's interest in the excess proceeds arose after the IRS's liens were perfected. Accordingly, the IRS's lien has priority over Prestige's interest in the excess sale proceeds. See Spinks v. Jones, 499 F.2d 339, 340 (5th Cir. 1974) (“The stakeholder of an interpleaded fund is not entitled to attorney's fees to the extent that they are payable out of a part of the fund impressed with a federal tax lien.”).
Nor does Texas and Business Commerce Code § 22.006 upset this priority order. State law does not trump federal law establishing the priority of federal liens. See United States v. Rodgers, 461 U.S. 677, 683 (1983) (“[A]lthough the definition of underlying property interests is left to state law, the consequences that attach to those interests is a matter left to federal law.”).
Accordingly, the IRS's lien has priority over Prestige's interest in the excess sale proceeds.
B. Priority as to OAG
The IRS argues its liens take priority because the OAG's liens cannot attach to a homestead and, even if the real property was not Ivory's homestead, the IRS's liens were perfected first. The OAG argues the IRS lacks evidence that the real property was Ivory's homestead and its liens date back to 2013 when the Butlers recorded their Abstract of Judgment.
Unlike the IRS's lien, neither the OAG's lien nor the Butlers' Abstract of Judgment could attach to the property at issue so long as it was Ivory's homestead. Compare TEX. PROP. CODE § 41.001(c) (“The homestead claimant's proceeds of a sale of a homestead are not subject to seizure for a creditor's claim for six months after the date of sale.”) and TEX. FAM. CODE § 157.317(b) (“A lien attaches to all non-homestead real property of the obligor but does not attach to a homestead exempt under the Texas Constitution or the Property Code.”), with 6 U.S.C. § 6323 (a),(f) (perfecting a federal tax lien). Thus, if the real property was Ivory's homestead, the IRS's lien takes priority.
The IRS claims the property was Ivory's homestead based on his 2007 deed of trust that required him to occupy and use the property as his principal residence for at least one year. MSJ Ex. 2, p.5, ¶ 6. The IRS also relies on Ivory's 2020 bankruptcy petition that listed the property as his home address. See In re Ivory, Case No. 20-10329-TMD (Bankr. W.D. Texas), Dkt. 3 at 2 ¶ 5. On that form, Ivory stated, “I have lived here (Travis County) for over 12 years.” Id. at ¶ 6. The IRS argues “[o]nce it is established that the property is a homestead, there is a presumption that the homestead status continues unless terminated,” Matter of Rubarts, 896 F.2d 107, 110 (5th Cir. 1990), and “the burden of showing abandonment of a homestead rests on the party attacking the claim, In re Reagor, 294 F. 875, 877 (5th Cir. 1923).
The OAG asserts that Ivory never filed for the property to have a homestead exemption. However, “[n]o specific writing is needed to claim a homestead. By the mere act of using and enjoying a property as a home, a person qualifies for the protections mandated by the Texas Constitution.” Dodd v. Harper, 670 S.W.2d 646, 649 (Tex. App.-Houston [1st Dist.] 1983). Moreover, “[t]o assert that this protection of the Texas Constitution could be voided by a mere failure to designate the property as a homestead for tax purposes would be to render the constitutional homestead protection meaningless.” Id.
The OAG also argues Ivory never sought to remove the OAG lien based on the property's status as a homestead. But the evidence also establishes that Ivory did not pay child support, federal taxes, and apparently his mortgage; thus it is unclear why Ivory's failures to seek homestead protections would carry any weight. Again, no formal act is required for entitlement to homestead protections-“the mere act of using and enjoying a property as a home, a person qualifies for the protections mandated by the Texas Constitution.” Dodd, 670 S.W.2d at 649.
The OAG argues that, viewing the evidence in its favor, there is at least a fact issue as to whether the property remained Ivory's homestead between 2008-2020. The OAG contends the IRS has not met its burden to prove Ivory's continuous homestead at the property. However, the OAG has not come forward with any evidence of its own. It has not brought forth car registration documents, driver's license documents, or even declarations from the Butlers as to where they believed Ivory to live during the relevant time. While this is a close call, the only evidence before the court is that Ivory did live in home from 2007 on and in 2020 again affirmed the property as his residence. The OAG presents no evidence, only speculation, that he may have established a homestead somewhere else for at least six months during that period. This is not enough.
Finally, the OAG argues that under Texas Family Code Section 157.317(f), a state court should determine whether the property was Ivory's homestead. But that section states, “A lien attaches to all non-homestead real property of the obligor but does not attach to a homestead exempt under the Texas Constitution or the Property Code.” This is not such a situation.
However, the IRS also argues that even if the property was not Ivory's homestead, its liens still take priority. “Federal tax liens do not automatically have priority over all other liens. Absent provision to the contrary, priority for purposes of federal law is governed by the common-law principle that ‘the first in time is the first in right.'” U.S. By & Through I.R.S. v. McDermott, 507 U.S. 447, 449 (1993). A competing state lien is deemed to be in existence for “first in time” purposes only when it has been “perfected” in the sense that “the identity of the lienor, the property subject to the lien, and the amount of the lien are established.” Id.; Rice Inv. Co. v. United States, 625 F.2d 565, 568 (5th Cir. 1980). “Further, the determination of whether ‘a lien has acquired sufficient substance and has become so perfected as to defeat a later-arising or later-filed federal tax lien' is a matter of federal law.'” Rice Inv. Co., 625 F.2d at 568.
The OAG argues that when the Butlers filed their application for services with the OAG's Child Support Division, the OAG took assignment from that point forward of the Butlers' rights over Ivory's assets. The OAG argues that its 2018 lien therefore relates back to the 2013 Abstract of Judgment filed by the Butlers. For support, the OAG relies on Texas Family Code § 157.318, which states:
A lien is effective until all current support and child support arrearages, including interest, any costs and reasonable attorney's fees, and any Title IV-D service fees authorized under Section 231.103 for which the obligor is responsible, have been paid or the lien is otherwise released as provided by this subchapter. The lien secures payment of all child support arrearages owed by the obligor under the underlying child support order, including arrearages that accrue after the lien notice was filed or delivered as provided by Section 157.314.TEX. FAM. CODE § 157.318(a)-(b) (emphasis added).
But the OAG makes no argument that the amount of its lien was sufficiently established by the Butlers' Abstract of Judgment to be “perfected” under federal law such that The OAG's lien can take priority over the IRS's liens. See McDermott, 507 U.S. at 449 (requiring the amount of the lien to be established to perfected). Moreover, when the Supreme Court considered whether a federal tax lien was prior in right to an attachment lien where the federal tax lien was recorded after the date of the attachment lien but before the date the attaching creditor obtained judgment, the Court held the federal tax lien took priority. United States v. Sec. Tr. & Sav. Bank of San Diego, 340 U.S. 47, 50 (1950) (“Nor can the doctrine of relation back-which by process of judicial reasoning merges the attachment lien in the judgment and relates the judgment lien back to the date of attachment-operate to destroy the realities of the situation.”). Accordingly, the court rejects the OAG's attempt to relate its liens back to date the Butlers' Abstract of Judgement was recorded.
The Butlers' Abstract of Judgment was filed in 2013. However, at the time, the property at issue was Ivory's homestead. Thus, no lien could attach until six months after the property's sale. The IRS's liens were filed in 2017, and Texas's homestead laws do prevent their immediate attachment. The OAG's lien was filed in 2018, while the property was Ivory's homestead. Accordingly, the IRS's liens are entitled to priority.
IV. Recommendations
The court RECOMMENDS that the District Judge GRANT United States of America's Motion for Summary Judgment Determining Lien Priority in the Excess Proceeds from the Sale of Defendant Kenneth Ivory's Homestead (Dkt. #13).
V. Objections
The parties may file objections to this Report and Recommendation. A party filing objections must specifically identify those findings or recommendations to which objections are being made. The District Court need not consider frivolous, conclusive, or general objections. See Battles v. United States Parole Comm'n, 834 F.2d 419, 421 (5th Cir. 1987).
A party's failure to file written objections to the proposed findings and recommendations contained in this Report within fourteen (14) days after the party is served with a copy of the Report shall bar that party from de novo review by the District Court of the proposed findings and recommendations in the Report and, except upon grounds of plain error, shall bar the party from appellate review of unobjected-to proposed factual findings and legal conclusions accepted by the District Court. See 28 U.S.C. § 636(b)(1)(C); Thomas v. Arn, 474 U.S. 140, 150-53 (1985); Douglass v. United Sers. Auto. Ass'n, 79 F.3d 1415 (5th Cir. 1996)(en banc).