SMS ASSOCIATES v. Clay

Citations: 868 F. Supp. 337; 1994 U.S. Dist. LEXIS 17185; 1994 WL 675138Docket: Civ. A. 92-2845

Court: District Court, District of Columbia; November 23, 1994; Federal District Court

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Ozzie Clay entered a contract to sell property located at 2805 Chesterfield Place, N.W., Washington, D.C., to SMS Associates. After Clay failed to convey the property, SMS filed suit on September 1, 1983, seeking specific performance. On July 22, 1985, the Superior Court granted specific performance, ordering Clay to convey title to the property. An order signed on June 29, 1992, further divested Clay of all legal and equitable title, vesting it in SMS. This order acknowledged SMS's acceptance of title subject to outstanding liens, allowing for subsequent litigation to quiet title.

In the current case, SMS has filed a motion for summary judgment, asserting that equitable title passed to them upon contract execution and that any liens incurred by Clay after that date do not attach to the property under District of Columbia law. The only recorded liens at the contract's execution were two deeds of trust from Clay, which SMS has purchased. Other liens recorded after the contract include those from the District of Columbia, the United States, and several judgment creditors.

On March 18, 1994, Judge Lamberth ordered all interested parties to appear regarding the property by a specified deadline, warning that failure to do so would result in processing the case as a default. This notice was to be published for six consecutive weeks following the order.

The doctrine of equitable conversion posits that equity treats as completed actions that should be completed, specifically the transfer of property title to the buyer and payment to the seller. The District of Columbia recognizes this doctrine, as established in Liberty National Bank of Washington v. Smoot, which asserts that a sales contract for land results in its conversion to personalty. This doctrine allows parties to a real estate contract to be deemed equitable owners of the property and purchase money even prior to seeking specific performance in court. Three prerequisites for equitable conversion must be satisfied: the contract must be valid, enforceable, and affect real estate. In this case, all prerequisites are met, countering the defendant's claim that the plaintiff only acquired title upon the court's order for specific performance. The court rejects the notion that an executed deed is necessary for equitable conversion, emphasizing that such a requirement undermines the doctrine's purpose. Furthermore, the defendant's attempts to convey the property to a trust and execute a deed of trust post-contract and post-specific performance order are ineffective, as he could only convey the interest he had after these events. Additionally, the contract stipulates that the property must be conveyed free of liens and encumbrances.

Defendant Clay's actions to encumber the property post-contract execution and specific performance order breach contract terms. Clay asserts he informed plaintiff, through partner Mr. Sacks, about two promissory notes, one secured by the property, before the contract's execution. He provided a signed affidavit to this effect. The deed of trust was not executed until 1987, after the contract was signed. Clay argues this note encumbered the property as the plaintiff knew of it, thus not qualifying as a bona fide purchaser. Conversely, the plaintiff denies prior knowledge of the notes. During a November 7, 1994, status hearing, the Court indicated it might grant summary judgment for the plaintiff against all defendants except Clay Properties, pending a credibility determination on whether Mr. Sacks knew of the notes. The Court also noted that, even if Clay's allegations were true, the promissory notes were ineffective against the property due to non-recordation until 1987. Citing District of Columbia law (D.C.Code 45-801), the Court referenced a precedent that a deed is ineffective against bona fide purchasers unless recorded. A bona fide purchaser is defined as one who acquires property for value without knowledge of outstanding claims. The Court emphasized that a proper title search protects against unrecorded interests, barring actual or inquiry notice. Plaintiff contends that a deed of trust is only effective post-execution, delivery, and recordation, but fails to substantiate this claim.

Interests in real property can be legally transferred without recording the conveyancing document, unless a third party acquires an interest without notice of the unrecorded instrument. The burden of proving that a purchaser had notice of a prior unrecorded interest lies with the claimant of that interest. In this case, the court determined that the claimant failed to demonstrate that Mr. Sacks had actual notice of two promissory notes. Judge Kramer found Mr. Clay's testimony regarding his knowledge of the prospective purchaser lacked credibility due to inconsistencies and lack of supporting evidence. Notably, Mr. Clay, an experienced businessman, delayed recording the deed of trust until November 1987, raising doubts about his claims. 

The doctrine of equitable conversion is relevant in assessing the rights of judgment creditors during the period between a contract's signing and the deed's delivery. Creditors may claim an interest in a debtor's real estate interests, depending on statutory provisions concerning creditor execution and judgment liens. Generally, while the seller may only hold bare legal title, their equitable right to a lien on the property serves as a property interest subject to judgment liens, which are valued based on the seller's owed amount under the contract, rather than the property's overall value. In this instance, the IRS's tax liens constitute a judgment lien that attaches to the funds owed to Mr. Clay from the property purchase.

26 U.S.C. § 6321 establishes that if a person liable for tax fails to pay after demand, the owed amount becomes a lien in favor of the United States on all of that person's property. In United States v. National Bank of Commerce, the Supreme Court ruled that state law determines the nature of the taxpayer's legal interest in property. In this case, because the District of Columbia follows the equitable conversion doctrine, the defendant is entitled to payment for property sold to the plaintiff. As of May 18, 1983, the defendant's interest in the property constitutes a right to receive outstanding sums due under the sale contract, resulting in tax liens attaching to this right.

Regarding attorneys' fees, under Rule 56(g) of the Federal Rules of Civil Procedure, the Court awards reasonable fees to the plaintiff, limited to those incurred for the November 7, 1994 hearing. The rule allows for such an award if affidavits are shown to be filed in bad faith or solely for delay. The Court found that the defendant, Mr. Clay, engaged in dilatory tactics over the protracted ten-year litigation, frustrating both the Court and the Superior Court. The Court concluded that the defendant submitted affidavits in bad faith and made false representations under oath. Consequently, the plaintiff is entitled to reasonable costs and attorneys' fees, subject to the Court's review of the submissions.

The Court's conclusions include that equitable title to the property transferred to the plaintiff around May 17, 1983; a lis pendens was established on September 1, 1983, providing notice of the plaintiff's claim; and that tax and judgment liens filed against the defendant after this date are ineffective against the plaintiff’s interest in the property.

District of Columbia tax liens filed against Ozzie Clay and related entities after September 1, 1983, do not attach to the property and violate a written release between the plaintiff and the District of Columbia. The conveyance of the property via a Deed of Gift on April 1, 1987, to trustees for the "Eric O. Clay Irrevocable Trust" is deemed null and void because the plaintiff held equitable title at that time, and the trustees were not bona fide purchasers without notice, as shown by the unopposed Motion for Summary Judgment. Defendant Clay was divested of title following a court order on July 1, 1992. Defendants Leonard Clay (trustee), Chester and Joan McKenzie, William Mockabee (trustee), Dismer Auxier Company, and others claiming an interest in the property failed to appear after being served. Consequently, title to the property at 2805 Chesterfield Place, N.W., is quieted in favor of SMS Associates, a D.C. limited partnership, against all claims and liens from the aforementioned defendants. These defendants are permanently enjoined from asserting any rights to the property. Plaintiff's attorneys are ordered to submit an affidavit detailing incurred expenses.

A title search is insufficient to fully protect a purchaser from claims against the property. According to statute 45-801, a deed takes effect upon delivery to the designated individual, but for creditors and subsequent bona fide purchasers without notice, it only takes effect upon recording. This contradicts Mr. Clay's assertion of having given actual notice to the plaintiff before signing the contract. Once a lien is identified, the purchaser must direct contract payments to the judgment creditor instead of the vendor. Judgment creditors of Clay, including Chester V. McKenzie and Dismer Auxier Company, can only claim amounts due under the sale contract between Clay and the plaintiff. The United States, as a defendant, is not seeking relief but acknowledges that the plaintiff holds priority over tax liens and does not oppose the plaintiff's motion for summary judgment. The District of Columbia had previously agreed to release lien rights against Clay for a payment but subsequently recorded additional liens without addressing them in this case. Judge Kessler indicated potential sanctions against Mr. Clay for his conduct in her order divesting him of all legal and equitable title.