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Mikulec v. United States

decided: April 5, 1983.

CHARLOTTE MIKULEC, PLAINTIFF-APPELLEE,
v.
UNITED STATES OF AMERICA, DEFENDANT-APPELLANT



A judgment creditor purchased her debtor's property at an execution sale held upon her lien. The United States, as tax lienor, attempted to redeem the purchased property from the judgment creditor-purchaser for the $50 she bid at the execution sale. The purchaser refused the offer of $50 and brought suit to quiet title or, in the alternative, for an order setting as the redemption price the amount of her outstanding judgment -- $121,008.44. The District Court for the Western District of New York, Elfvin, J., held that the United States, to redeem the property, had to pay the purchaser the lesser of the amount of her outstanding judgment and the property's fair market value. When the United States declined to make such payment, the District Court entered judgment quieting title in the purchaser. From that judgment the United States appeals.

Lumbard, Mansfield and Kearse, Circuit Judges.

Author: Lumbard

LUMBARD, Circuit Judge.

This appeal requires us to decide the extent to which, under New York law, a judgment creditor's judgment is satisfied if, at an execution sale held upon her lien, she purchases the judgment debtor's property herself. The question arises in connection with an attempt by the United States, as tax lienor, to redeem from a judgment creditor-purchaser a part interest in a factory in Buffalo, New York. In a decision filed on March 8, 1982, Judge Elfvin of the Western District of New York held that under New York law Charlotte Mikulec's purchase, as a judgment creditor, of property belonging to her debtor, her son (Conrad Mikulec), for less than value satisfied her judgment to the extent of the property's fair market value. 533 F. Supp. 1142 (W.D.N.Y. 1982). He therefore held that the United States, to redeem the interest in the factory, had to pay Charlotte the interest's fair market value or the amount of her outstanding judgment ($121,008.44), whichever was less. The United States declined to make such payment and on May 25, 1982 the district court entered judgment quieting title in Charlotte. The United States now appeals from that judgment, and contends that Judge Elfvin should have set as the redemption price the $50 Charlotte bid at the execution sale. The government argues that under New York law Charlotte's judgment was satisfied not to the extent of the purchased interest's value, but only by the $50 actually bid. We agree with the government's interpretation of New York law and accordingly, we reverse.

The facts are not disputed. On October 4, 1968 Charlotte Mikulec, her husband, Stanley, and their son, Conrad, acquired a factory in Buffalo, New York. Conrad took a 50 percent interest in the property, and Charlotte and Stanley each took a 25 percent interest. On November 8, 1972 the Mikulecs mortgaged the property to Manufacturers and Traders Trust Co. for $185,580.

On March 10, 1976 Jarl Extrusions, Inc. obtained a judgment in New York Supreme Court, Erie County, against Power-Pak Products, Inc. and Conrad in the amount of $144,933. On May 24, 1976 Jarl obtained a judgment in the same court against both Charlotte and Conrad in the amount of $3,161.*fn1 Executions with respect to both judgments were issued to the Erie County Sheriff and on June 2, 1978 he seized Charlotte's and Conrad's interests in the factory. The United States received notice of the pending sheriff's sale because it had filed tax liens against Conrad's interest.*fn2 On August 21, 1978 Jarl assigned its March 10, 1976 and May 24, 1976 judgments to Charlotte. That same day the sheriff's sale was held, and Charlotte purchased Conrad's interest for $50. A sheriff's deed transferred title to Charlotte in October, 1978. On or about December 19, 1978 the United States attempted to redeem the property under 26 U.S.C. § 7425(d)(1)(1976), by sending Charlotte's attorney a check for $50.98 (representing Charlotte's purchase price plus six percent interest). Charlotte rejected the government's check, and on December 4, 1980 brought suit to quiet title or, alternatively, for an order setting as the redemption price the amount outstanding on the March 10, 1976 judgment against Conrad -- $121,008.44.

Section 7425(d)(1) of the Internal Revenue Code, 26 U.S.C. § 7425(d)(1)(1976), authorizes the United States to redeem from the purchaser at an execution sale real property subject to federal tax liens. Section 2410(d) of 28 U.S.C. states that the redemption price shall be:

(1) the actual amount paid by the purchaser at such sale (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).

(emphasis supplied). Where, as here, the lien holder purchases the liened property, "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)(1982). The extent to which a deficiency judgment may be obtained is solely a matter of state law. See the examples in 26 C.F.R. § 301.7425-4(b)(5); Equity Mortgage Corp. v. Loftus, 504 F.2d 1071, 1075-76 (4th Cir. 1974). Thus the only issue presented by this case is the extent to which Charlotte's purchase of her debtor's property at an execution sale satisfied her judgment under New York law.

In ruling that Charlotte's purchase of Conrad's property satisfied her judgment by the lesser of the property's value and the amount of the judgment, the district court relied upon the decision of the New York Supreme Court, Westchester County, in Wandschneider v. Bekeny, 75 Misc. 2d 32, 346 N.Y.S.2d 925 (1973). In Wandschneider, judgment creditors purchased their judgment debtor's house, in which the debtor had equity of at least $27,000, at a sheriff's sale for $500. On the day following the sale the judgment debtor commenced a special proceeding in Supreme Court to set the sale aside. Finding that it would be unconscionable to permit the judgment creditors to acquire equity of $27,000 in exchange for a $500 reduction in their outstanding judgment, Justice Gagliardi held that CPLR § 5240, together with his general equity powers, authorized him to adjust the parties' rights. Section 5240 provides:

The court may at any time, on its own initiative or the motion of any interested person, and upon such notice as it may require, make an order denying, limiting, conditioning, regulating, extending or modifying the use of any enforcement procedure. Section 3104 is applicable to procedures under this article.

To prevent the judgment creditors from reaping a windfall, Justice Gagliardi offset against the creditors' outstanding judgment the amount of equity they acquired through the purchase. The Justice supported his ruling by drawing an analogy to Real Property Actions and Proceedings Law § 1371(2), which limits a foreclosing mortgagee's right to a deficiency judgment to the difference between the debt and the greater of the property's fair market value and the bid price.

If Wandschneider established the rule of New York law applicable to this case, we would agree with the district court's ruling. We conclude, however, that for two reasons the district court's reliance upon Wandschneider was misplaced. First, the New York Court of Appeals has held that § 5240 may not be used to adjust parties' rights after a sale has been validly completed and title transferred. Guardian Loan Co. v. Early, 47 N.Y.2d 515, 419 N.Y.S.2d 56, 392 N.E.2d 1240 (1979). Second, we do not think that New York law entitles a judgment debtor to a setoff even though the debtor himself never requests relief.

In Guardian Loan, after the defendants failed to pay a judgment for $1,268, their residence was sold at a sheriff's sale to a stranger to the underlying judgment for $3,020. Two days after the sale the sheriff delivered a deed to the purchaser. The defendants thereafter commenced a special proceeding to set aside the sale. They contended that they had equity in their residence of at least $39,000. The Suffolk County Supreme Court, relying upon § 5240, set the sale aside, and a divided Appellate Division affirmed. The Court of Appeals reversed, holding that although § 5240 grants courts broad discretionary powers to alter the use of enforcement procedures, "it has no application after a Sheriff's sale has been carried out and the deed delivered to the purchaser, at which time the use of the enforcement procedure will have been completed." 47 N.Y.2d at 520, 419 N.Y.S.2d at 59 (citations omitted). The Court of Appeals ...


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