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MIKULEC v. UNITED STATES

March 5, 1982

Charlotte MIKULEC, Plaintiff,
v.
UNITED STATES of America, Defendant



The opinion of the court was delivered by: ELFVIN

MEMORANDUM and ORDER

This is an action to quiet title to a piece of real property or, alternatively, for an order compelling defendant to pay plaintiff $ 121,008.44 as the value of property taken by defendant, plus interest thereon. Jurisdiction lies under 28 U.S.C. § 2410. Plaintiff has moved and defendant has cross-moved for summary judgment.

 The property at issue had originally been owned by plaintiff and members of her family in varying percentages. In 1976 Jarl Extrusions, Inc. ("Jarl") recovered two judgments-the first against plaintiff and her son, Conrad Mikulec, for $ 3,161.50 *fn1" and the second against Conrad and Power-Pak Products ("Power-Pak") for $ 121,008.44. These judgments were given in 1978 for execution to the Erie County Sheriff, who seized the interests of plaintiff and her son in the property and noticed the property for sale. Defendant was notified of the impending sale because it held outstanding tax liens against the son's property.

 Jarl assigned its interests in the son's property to plaintiff August 21, 1978, reserving its interest and rights in the judgment taken against Power-Pak. At the public auction of the property, plaintiff bought it in for $ 50. Title was transferred to her by a Sheriff's deed in October 1978.

 Defendant exercised its right to redeem the property pursuant to section 7425(d)(1) of the Internal Revenue Code and tendered $ 50.89 to plaintiff, representing the plaintiff's purchase price plus 6% interest as required by statute.

 The facts of this case appear to be settled to the satisfaction of the parties. It remains only to determine whether the amount tendered by defendant was the proper amount due plaintiff upon exercise of defendant's right of redemption.

 When the United States exercises its right to redeem real property in order to satisfy tax liens "the amount to be paid * * * shall be the sum of-

 "(1) the actual amount paid by the purchaser at such sale (to which 26 U.S.C. § 7425(b) applies) (which, in the case of a purchaser who is the holder of the lien being foreclosed, shall include the amount of the obligation secured by such lien to the extent satisfied by reason of such sale)." 28 U.S.C. § 2410(d). (Emphasis added.) (Other amounts comprising such amount to be paid include interest and maintenance expenses necessarily incurred, but only the quoted portion is presently at issue in this case.)

 Plaintiff argues that she is entitled to $ 121,008.44 as the holder of the judgment lien against her son's property assigned to her by Jarl. She alleges that her purchase of the property for $ 50 satisfied completely by operation of law the judgment balance and that defendant must pay her the amount thereof in order to redeem the property. Defendant contends that the proper redemption price is the amount actually paid by plaintiff for the property plus interest and any maintenance fees. Both are incorrect.

 The Treasury Regulations implementing 28 U.S.C. § 2410(d) treat more fully the question of the extent to which a lien is "satisfied" where the purchaser is the holder of the lien being foreclosed. For our purposes the relevant part reads:

 
"Where, after the sale, the holder of the lien being foreclosed has the right to the unpaid balance of the amount due him, the amount legally satisfied by reason of the sale does not include the amount of such lien to the extent a deficiency judgment may be obtained therefor." 26 C.F.R. § 301.7425-4(b)(2) (ii). *fn2"

 The availability of a deficiency judgment and the amount thereof are matters of state law. Thus, three hypotheticals regarding the redemption price, set out at 26 C.F.R. § 401.5-1(c)(2), reflect different outcomes depending upon the state law measure of the extent to which a lien obligation is legally satisfied as a result of a foreclosure sale. I recite here only Example (2i i ), which I deem applicable in the present case:

 
"Assume (that A, a delinquent taxpayer, owns Blackacre located in X State upon which B holds a mortgage. After the mortgage is properly recorded, a notice of tax lien is filed which is applicable to Blackacre. Subsequently, A defaults on the mortgage and B forecloses on the mortgage which has an outstanding obligation in the amount of $ 100,000. At the foreclosure sale, B bids $ 50,000 and obtains title to Blackacre as a result of the sale. At the time of the foreclosure sale, Blackacre has a fair market value of $ 75,000.) (U)nder the laws of X State, the fair market value of the property foreclosed is the amount of the obligation legally satisfied as a result of the foreclosure sale, and in a case in which the amount of the obligation exceeds the amount of the fair market value of the property, the mortgagee has the right to a judgment for the deficiency computed as the difference between the obligation and the fair market value of the property. In such a case the district director must * * * pay $ 75,000 in order to redeem Blackacre, whether or not B seeks a judgment for the deficiency."

 It appears that under the law of New York a purchaser at a sheriff's sale who is the holder of the judgment lien being executed is entitled to a deficiency judgment only to the extent that the fair market value of the property executed upon at the time of the sale is exceeded by the obligation of the judgment. Consequently the Treasury Regulations cited above dictate that, in order to redeem the ...


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