Whelco Industrial, Ltd. v. United States

ORDER

This is a quiet title action in which the plaintiff, Whelco Industrial, Inc. [Whelco] seeks to remove or invalidate several federal tax liens filed by the Internal Revenue Service. Whelco contends that the government’s liens did not, have not, and cannot attach to its assets, and that it otherwise cannot be held accountable for the Whitney Electric Corporation’s [Whitney] tax obligations. In making this argument Whelco has relied on Ohio law relating to successor corporations.

In response, the government principally claims that federal common law, not state law, controls the determination of whether Whelco is a successor to Whitney. As such, Whelco is responsible for Whitney’s tax liabilities. The government also asserts that its notice of liens against Whitney could not be undone by a state court receivership because it was not a party to that proceeding.

I tried the case without a jury. Following submission of post-trial briefs, I found for the government [Doc. 39]. I based my decision, in which I accepted the government’s assertion that federal common law rather that Ohio law controlled, in considerable part on my understanding of the importance of a uniformly operating system of federal tax collection.

Whelco has filed a motion to alter or amend the judgment and stay this court’s execution of the judgment [Docs. 41, 42]. In its motion to alter or amend, Whelco focuses primarily on precedents in which courts: 1) held that state law controlled issues related to quiet title actions, and 2) rejected uniformity as a significant policy interest warranting creation of federal common law.

For the reasons that follow, I grant plaintiffs motion to alter or amend. Nonetheless, reaching an issue that I did not have to reach in my earlier decision, I decide that issue in favor of the government and thus confirm entry of judgment in its favor.

*821 Background

For several years Whitney repaired “electric motors, gear boxes, pumps, things that are used in heavy industry to create motion” in the Toledo, Ohio, and Fort Wayne, Indiana, areas. (Tr. at 113:2-4.) During the period pertinent to this suit, attorney Richard Farrar [Richard] was Whitney’s sole owner and President.

National City Bank [National City] filed a financing statement perfecting its interest in Whitney’s collateral on November 13, 2001. National City’s lien extended to Whitney’s accounts receivable, inventory, machinery, and equipment. Greenfield Commercial Credit, LLC [Greenfield], a factoring company, also filed a financing statement on March 13, 2002, thereby also perfecting its interest in Whitney’s accounts and inventory.

On July 31, 2002, the IRS filed a notice of federal tax lien against Whitney for unpaid employment taxes for the fourth quarter of 2001 and first quarter of 2002; the first quarter of 2002 obligation remains unpaid. Additional notices followed on December 18, 2002, February 18, 2003, and January 20, 2004. When the IRS filed its liens, Whitney owed National City, a first lien holder, upwards of $550,000. Greenfield concurrently had a lien on all of Whitney’s accounts receivable.

In August, 2002, an attorney from National City spoke with Michael Farrar [Michael], Richard’s son, who was active in Whitney’s management, about whether Michael would be interested in purchasing Whitney’s assets. Michael expressed interest in such a purpose and in growing the business.

On September 30, 2002, Whitney ceased operations. Wheleo, which Richard had incorporated shortly before that date, began operations on October 1, 2002. Michael was the President and owner of Wheleo.

Also on October 1, 2002, Wheleo entered into a lease with Whitney, whereby Wheleo could use Whitney’s machines, equipment, and other personal property. The lease imposed no obligation on Wheleo to assume Whitney’s debts or claim the proceeds of any of Whitney’s uncollected accounts receivable. Wheleo continued in essentially the same business as Whitney, and operated that business from the same premises and with the same employees. Though Michael opened a new bank account and instituted other changes, the business, in terms of where it was done, what was done, how it was done, why it was done, and who was doing it, remained substantially unaltered.

On October 11, 2002, National City filed a cognovit complaint in the Lucas County, Ohio, Court of Common Pleas against Whitney; the complaint asked the court to appoint a receiver for both Whitney and the 3607 Company, a real estate holding company (owned by Richard) which owned the building in which Wheleo (and previously, Whitney) had its operations.

The Common Pleas Court entered cog-novit judgment that day. It concurrently appointed attorney Ralph DeNune as receiver.

During the course of the receivership, DeNune had conversations with Gregory Yurich, an IRS representative. They discussed the possible sale of Whitney’s assets and National City’s hen priority. Though the IRS was not made and did not become a party to subsequent proceedings in the receivership action, it was aware of a potential sale of Whitney’s assets.

On November 20, 2003, Michael entered into an agreement with DeNune to purchase Whitney’s assets for $555,228.85. The price was set by National City. As a result of this transaction, National City’s lien was discharged. In addition, Green *822 field received $325,565.48 from Whitney’s accounts receivable. 1

To finance the purchase, Michael received a $150,000 loan from George Bal-ias. 2 He also obtained financing from Crestmark Bank, for which he provided his personal guarantee and mortgaged the family residence. In the Asset Purchase Agreement, Michael specifically declined to assume any of Whitney’s obligations or liabilities.

The Court of Common Pleas approved the sale in January, 2004. The Motion Confirming Sale provides that the “assets were sold free and clear of all liens and encumbrances.”

On April 14, 2004, the IRS filed two notices of federal tax liens against Whelco as the alter ego/fraudulent transferee/nominee of Whitney. The IRS filed additional nominee liens against Whelco on April 27, 2004 and August 5, 2004. These led to the Service’s collection of upwards of $105,000 of Whelco’s receivables.

In response to these actions, Whelco brought a quiet title action, which the government removed from the Lucas County Court of Common Pleas to this court. Whelco sought a declaration that the tax liens against Whitney could not attach to the assets Whelco purchased at the receivership sale, while the government aimed to show that Whelco was Whitney’s successor/alter ego and as such was responsible for its unpaid taxes.

Following a nonjury trial and post-trial briefing, I entered judgment in favor of the United States. Because inconsistent state laws could lead to different collection outcomes in different states, I held that the federal “continuity of operations” test — rather than Ohio’s “continuity of ownership” test — controlled. As a result, I .held that the defendant’s knowledge of the government’s potential claim, coupled with the substantial continuity of the business’s operations before and after the sale, made Whelco a successor to Whitney for the purposes of Whitney’s tax liability. Whelco Indus., Ltd. v. U.S., 503 F.Supp.2d 906 (N.D.Ohio 2007).

On September 13, 2007, plaintiff filed its pending motion to alter or amend judgment and stay execution of the judgment. Although I conclude that plaintiff is correct that state law, not federal law, controls, I also conclude that the government correctly argues that its notice of liens against Whitney could not be undone by the state court receivership. Not having had to address that issue in my first opinion, I again find for the government and hold that the liens on assets formerly owned by Whitney remain in effect.

Discussion

Three situations justify altering or amending a judgment under Rule 59(e): “(1) a clear error of law; (2) newly discovered evidence; (3) an intervening change in controlling law; or (4) a need to prevent manifest injustice.” Intern Corp. v. Henderson, 428 F.3d 605, 620 (6th Cir.2005). A party must file a 59(e) motion within ten days of the court issuing its judgment. Id. at 611; Fed. R. Civ. Pro. 59(e).

*823 Nine days after I issued my order denying Whelco’s motion to quiet title, Whelco submitted the instant motion arguing that a clear error of law or a manifest injustice would result if I enforced the aforementioned order. Employing a slight change in tactics, Whelco now argues that, because state law often controls actions to quiet title pursuant to 28 U.S.C. § 2410, state law should wholly control this case and that uniformity cannot justify the application of federal common law.

1. Application of State Law or Federal Common Law

A. Lien Cases

Part of Whelco’s new arguments focuses on lien cases. The plaintiff now points to numerous situations in which state law decides whether the court should quiet title under 28 U.S.C. § 2410. First and foremost, plaintiff relies on the Supreme Court’s decision in U.S. v. Brosnan, 363 U.S. 237, 80 S.Ct. 1108, 4 L.Ed.2d 1192 (1960). In that case, the Court held that state law governed the divestiture of federal tax liens, explaining that “the need for uniformity in this instance is outweighed by the severe dislocation to local property relationships which would result from our disregarding state procedures.” Id. at 242, 80 S.Ct. 1108.

This holding, however, does not control the current case because the state law in question here does not directly define property rights. Rather, the conflicting laws in this case deal with Whelco’s status as a successor corporation. Whelco does not point to a state procedure that extinguished the liens that the government imposed on its property, and the corporation’s status as a successor to Whitney does not implicate “an area of complex property relationships long since settled and regulated by state law.” 3 Id. at 242, 80 S.Ct. 1108.

The plaintiff also points to the Sixth Circuit’s holding in Spotts v. United States, 429 F.3d 248 (6th Cir.2005). In Spotts, the appellate court looked to state property law to decide whether a delinquent taxpayer had a property interest in the home owned by his wife. Id. at 251. Only if the husband had an interest under state law could the United States rightfully maintain its lien on the property. Whelco argues that because state law determines whether a party is a nominee for the purposes of property ownership, state law should also determine whether a party is a successor for the purposes of tax liability. 4

In contrast to Spotts, however, the IRS targets Whelco as a successor to Whitney — not as a constructive trustee for property actually owned by Whitney. If state law defines a party’s role as a nominee it arguably should also define the party’s role as a successor. See Whelco Indus., Ltd. v. U.S., 503 F.Supp.2d 906, 911 (N.D.Ohio 2007). However, the motivation for the holding in Spotts — and the other cases Whelco cites — is a concern for.the *824 primacy of state law’s role in deciding property questions. 5 See Brosnan, supra; 363 U.S. at 241-42, 80 S.Ct. 1108 (property relationships “long since settled and regulated by state law”); Aquilino, supra, 363 U.S. at 512-13, 80 S.Ct. 1277 (“state law controls in determining the nature of the legal interest which the taxpayer had in the property”); Spotts, supra, 429 F.3d at 251 (citing Drye v. U.S., 528 U.S. 49, 58, 120 S.Ct. 474, 145 L.Ed.2d 466 (1999); U.S. v. Nat’l Bank of Commerce, 472 U.S. 713, 722, 105 S.Ct. 2919, 86 L.Ed.2d 565 (1985)). This issue is not a concern in the case at bar; no one questions Whelco’s ownership of the property subject to the liens. As a result, Spotts ’ reliance on Kentucky’s constructive trust law and Brosnan’s concerns for “local property relationships” should not control this court. Spotts, supra, 429 F.3d at 251-53; Brosnan, supra, 363 U.S. at 242, 80 S.Ct. 1108. 6

Thus, I am not persuaded by Whelco’s arguments that the aforementioned precedents control and that any alternative outcome would be a “clear error” or “manifest injustice.” Intera Corp., supra, 428 F.3d at 620.

B. Uniformity

There is no disagreement that the application of federal common law requires a “a significant conflict between some federal policy or interest and the use of state law.” Mickowski v. Visi-Trak Worldwide, LLC, 415 F.3d 501, 511 (6th Cir.2005) (citing Atherton v. FDIC, 519 U.S. 213, 218, 117 S.Ct. 666, 136 L.Ed.2d 656 (1997)). The plaintiff, however, now claims that uniformity of federal tax law does not constitute a “federal policy or interest” that justifies the application of a federal common law. The plaintiffs arguments persuade me that federal common law should not apply in this case and that the court should apply Ohio’s “continuity of ownership” test when assessing successor liability for the purposes of federal tax obligations.

In my previous decision, I held that the federal government’s interest in tax collection unimpaired by inconsistent state doctrines met the Sixth Circuits Mickow-ski requirement. In reaction, Whelco now cites to several opinions holding that an interest in uniformity does not justify the *825 application of federal common law. 7 See, e.g., U.S. v. Kimbell Foods, Inc., 440 U.S. 715, 728, 99 S.Ct. 1448, 59 L.Ed.2d 711 (1979) (uniformity does not justify federal rules of lien priority with regard to certain lending programs); O’Melveny & Myers v. FDIC, 512 U.S. 79, 87, 114 S.Ct. 2048, 129 L.Ed.2d 67 (1994) (uniformity does not justify federal common law regarding imputation of knowledge to the FDIC as receiver); Marsh v. Rosenbloom, 499 F.3d 165 (2d Cir.2007) (uniformity does no justify federal common law based on equitable trust fund doctrine); Faith Pescatore v. Pan Am. World Airways, Inc., 97 F.3d 1, 11 (2d Cir.1996) (uniformity does not justify a federal rule governing damages in cases arising under the Warsaw Convention).

Another factor that persuades me to alter my previous decision reflects an oversight by both litigants. In support of its arguments, the government cited several cases in which other federal courts have applied federal common law. While persuasive, many of these decisions were isolated to specific areas of law. For ex- *826 ample, in the context of a labor dispute, federal common law, not state law, dictates “[wjhether a company or individual is responsible for the financial obligations of another company or individual.” N.L.R.B. v. Fullerton Transfer & Storage Ltd., Inc., 910 F.2d 331, 335 (6th Cir.1990) (“Although state law cases may provide guidance in fashioning the content of federal law, they are not binding and thus do not control the outcome of this case.”); see also Textile Workers Union of Am. v. Lincoln Mills of Ala., 353 U.S. 448, 456, 77 S.Ct. 912, 1 L.Ed.2d 972 (1957) (holding that when Congress passed § 301(a) it “adopted a policy which placed sanctions behind agreements to arbitrate grievance disputes, by implication rejecting the common-law rule” and requiring courts to fashion federal law from national labor policy). In a case interpreting the Employee Retirement Income Security Act (ERISA), the Third Circuit similarly held that the statute “preempts any state law of veil piercing” therefore requiring the creation of federal common law. Thomas v. Peacock, 39 F.3d 493, 503 (4th Cir.1994), rev’d on other grounds, 516 U.S. 349, 353-54, 116 S.Ct. 862, 133 L.Ed.2d 817.

Sixth Circuit decisions interpreting the Comprehensive Environmental Response, Compensation, and Liability Act (CERC-LA), also persuade me that I may have been mistaken in holding that federal common law, rather than state law, should dictate successor liability. Other circuits, including the Third, Smith Land & Improvement Corp. v. Celotex Corp., 851 F.2d 86, 92 (3d Cir.1988), Fourth, U.S. v. Carolina Transformer Co., 978 F.2d 832, 838 (4th Cir.1992), Seventh, N. Shore Gas Co. v. Salomon, Inc., 152 F.3d 642, 654 (7th Cir.1998), and Eighth, U.S. v. Mex. Feed & Seed Co., 980 F.2d 478, 487 n. 9 (8th Cir.1992), have endorsed the application of federal common law to decide successor liability in CERLCA cases.

The Sixth Circuit, however, is not among those circuits. Instead, our Circuit has held that “the liability of a successor corporation for CERCLA obligations is determined by reference to state corporation law, rather than federal common law.” 8 City Mgmt. Corp. v. U.S. Chem. Co., Inc., 43 F.3d 244, 250 (6th Cir.1994); see also Anspec Co., Inc. v. Johnson Controls, Inc., 922 F.2d 1240, 1248-51 (6th Cir.1991). 9

*827 There are countervailing arguments that support applying federal common law. None of the cases applying state law relate to taxation, a government function on which all other federal functions rely. See, e.g., Grable & Sons Metal Prods., Inc. v. Darue Eng’g and Mfg., 545 U.S. 308, 315, 125 S.Ct. 2363, 162 L.Ed.2d 257 (2005); Bull v. U.S., 295 U.S. 247, 259, 55 S.Ct. 695, 79 L.Ed. 1421 (1935) (“But taxes are the lifeblood of government, and their prompt and certain availability an imperious need.”). Furthermore, in an effort to attain uniformity in particular circumstances, courts have applied federal common law. See supra, n. 7. In fact, the very case on which Whelco relies to argue that uniformity of the law can never constitute a conflicting federal policy or interest, also explains that “federal programs that ‘by their nature are and must be uniform in character throughout the Nation’” would undoubtedly “necessitate formulation of controlling federal rules.” U.S. v. Kimbell Foods, Inc., 440 U.S. 715, 728, 99 S.Ct. 1448, 59 L.Ed.2d 711 (1979). 10

Enforcement of the federal tax code is arguably such a program. However, recent decisions diminishing the relevance of uniformity, in combination with our Circuit’s decisions regarding successor liability in the CERCLA context, persuade me that this is not the case.

Therefore, I alter my preceding opinion and hold that Ohio’s “continuity of ownership” test should apply to decide whether Whelco is successor to Whitney for the purposes of federal tax obligations. For the reasons outlined in my previous opinion, I also find that under the “continuity of ownership” test Whelco is not a successor to Whitney and cannot be held liable for Whitney’s debts to the United States. 11

*828 2. Receivership Action

Alteration of my previous decision makes it necessary for me to adjudicate the other issues raised by this case: namely whether the tax hens the government placed on property owned by Whitney and purchased by Whelco at the receivership sale remain because the government was not joined as a party to the receivership action. I hold that the hens remain on the assets based on 26 U.S.C. § 7425(a).

Pursuant to 26 U.S.C. § 6321, “[i]f any person liable to pay any tax neglects or refuses to pay the same after demand,” the amount owed “shall be a hen in favor of the United States upon all property and rights to property” of such person. Meanwhile, 26 U.S.C. § 7425(a) provides in part:

If the United States is not joined as a party, a judgment in any civil action or suit described in subsection (a) of section 2410 of title 28 of the United States Code, or a judicial sale pursuant to such a judgment, with respect to property on which the United States has or claims a hen under the provisions of this title — (1) shall be made subject to and without disturbing the hen of the United States, if notice of such ben has been filed in the place provided by law for such filing at the time such action or suit is commenced. 12

An action to foreclose a mortgage or other hen on property is one of the actions identified by 28 U.S.C. § 2410. 28 U.S.C. § 2410(a)(2).

As previously noted, the IRS filed its first notice of federal tax hen with respect to the unpaid Whitney employment-tax liabilities on July 31, 2002, several months before Whitney shut its doors and the bank began receivership proceedings. The IRS filed additional notices of federal tax hens on December 18, 2002, February 18, 2003 and January 20, 2004. 13 The assets on which the government imposed the hens include equipment Whelco uses in its day-to-day operations and the rights to the trade name and customer lists that Whelco purchased.

Whelco points out that certain creditors — namely, National City and Greenfield — had hens superior to the IRS’s hens. While that may be so, the fact remains that the government’s junior hens remain undisturbed. See, e.g., U.S. v. Winterburn, 749 F.2d 1283, 1286 (9th Cir.1984) *829 (“If [the previous action was to quiet title] the tax liens were not extinguished by the state court’s judgment because the government was not named as a party to that action”); U.S. v. McNeil, 661 F.Supp. 28, 30 (E.D.Ky.1987) (holding that because the U.S. was not properly joined to the judicial proceeding, the government’s liens remained after the related sale); Myers v. U.S., 483 F.Supp. 1154, 1158 (W.D.La. 1980) (“If a foreclosing creditor does not comply with the statute either by failing to join the government as a party or by failing to give the requisite notice, as the case may require, inferior tax liens will not be discharged by the foreclosure sale, but will follow the property into the hands of a third party.”).

Whelco also suggests that the government’s knowledge of the receivership proceeding in some way substitutes for joining the United States as a party. But the government’s knowledge of the receivership cannot undermine 26 U.S.C. § 7425. Even if I deemed the sale of Whitney’s property a “non-judicial sale” — implicating a mere notification requirement under 26 U.S.C. § 7425(b) 14 — the government’s actual knowledge of the sale would not meet the notification standards of 26 U.S.C. § 7425(c). 15 See, e.g., Rimco Acquisition Co. v. Johnson, 68 F.Supp.2d 793, 796-97 (E.D.Mich.1999) (citing 26 U.S.C. § 7425’s notice requirements and noting that property transfers after the attachment of a lien do not affect the lien); Nat’l Cent. Bank v. U.S., 1977 WL 4333, at * 4 (M.D.Pa. June 8, 1977) (pointing out that joinder will discharge junior federal liens in the § 7425(a) context, while “a specific form of notice in prescribed detail” is required under § 7425(b)).

Therefore, the liens filed on July 31, 2002, December 18, 2002, and February 18, 2003, remain on the assets in Whelco’s possession and Whelco’s motion to quiet title fails with regard to those assets.

Conclusion

For the foregoing reasons, I conclude that Whelco has met the requirements to justify the alteration of my previous judgment but that the government’s liens still remain on Whitney’s assets that Whelco purchased at the receivership sale.

*830 It is, accordingly,

ORDERED THAT

1. Plaintiffs motion to alter or amend judgment be, and the same hereby is granted;

2. Judgment be, and the same hereby is entered in favor of plaintiff Whelco Industries, Ltd. with regard to liens imposed by the government against Whelco Industries, Ltd. as successor to Whitney Electric; and

3. Judgment be, and the same hereby is entered in favor of the defendant United States of America and against the plaintiff Whelco Industries, Ltd. for liens on Whitney property that Whelco subsequently purchased at the receivership sale.

So ordered.