United States v. Harry S. Stonehill Robert P. Brooks

Citations: 83 F.3d 1156; 96 Daily Journal DAR 5765; 96 Cal. Daily Op. Serv. 3523; 77 A.F.T.R.2d (RIA) 2212; 1996 U.S. App. LEXIS 11463; 1996 WL 263393Docket: 95-17019

Court: Court of Appeals for the Ninth Circuit; May 20, 1996; Federal Appellate Court

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Appellants Harry S. Stonehill and Robert P. Brooks are contesting a federal tax lien that allows the United States to sell their interest in a 101-acre residential property in Tiburon, California, held in tax receivership. The property, managed by a tax receiver, is under contract for sale to the Town of Tiburon for $6.8 million, contingent upon dismissing two state lawsuits alleging that Tiburon illegally down-zoned the property to lower its value. While the receiver agreed to dismiss the lawsuits, the appellants refused to withdraw their personal claims, leading the district court to order their dismissal, which the appellants subsequently appealed.

This legal matter originated from a tax dispute with the United States in 1965, culminating in a final judgment against the appellants in 1980, followed by federal liens on their property. In 1984, a tax receiver was appointed at the appellants' request to oversee the property’s foreclosure. The property, owned by Pine Street Corporation, was subject to various zoning changes by Tiburon, which ultimately allowed for only 19 home sites instead of the previously expected one home per acre.

The appellants assert that Tiburon's actions constituted illegal down-zoning aimed at facilitating the town's acquisition of the property for open space. As the town negotiated the purchase, the district court authorized the receiver to finalize the sale, despite the appellants’ objections. The court subsequently denied their motion for reconsideration.

The United States filed a motion to expand a receivership to include the appellants' personal claims against the Town, arguing these claims were affected by federal tax liens. The district court granted this motion on April 6, 1995. Subsequently, the appellants sought a stay from the Marin County Superior Court to prevent any action on their state lawsuits until the federal proceedings were resolved. Before the Superior Court could rule, the district court confirmed the sale of the property and ordered the appellants to dismiss their personal claims. The final order confirming the sale was issued on October 10, 1995, and the appellants appealed on October 17, 1995. An emergency stay was granted on November 7, 1995.

The appellate review of the district court's decision regarding the receivership is conducted for abuse of discretion. The primary issue on appeal is whether the government can attach and foreclose the appellants' personal lawsuits under a federal tax lien. The ruling states that such lawsuits, classified as choses in action, are personal property that can be subject to attachment and foreclosure. According to the Internal Revenue Code, if a person fails to pay taxes, the amount owed becomes a lien on all their property and rights, both real and personal. The Supreme Court has interpreted this broadly to encompass all taxpayer interests in property.

To determine if property is subject to a federal tax lien, a two-part analysis is applied: first, state law defines the nature of the taxpayer's legal interest in the property, and then federal law addresses the tax implications. California recognizes that a chose in action, whether arising from contract or tort, constitutes personal property. Multiple California court rulings affirm that causes of action for damages are deemed personal property, thereby making them subject to federal tax liens.

The interest in question pertains to whether it qualifies as property or rights to property under 26 U.S.C. 6321. Previous rulings indicate that a state law interest must be an economic asset with pecuniary worth and transferable to fall under federal tax lien jurisdiction. In California, choses in action, such as lawsuits, meet these criteria since a right to collect damages, even if speculative, holds economic value and can be transferred as specified in the California Civil Code. Consequently, the appellants' causes of action against Tiburon are considered property subject to federal tax liens, supporting similar findings in other cases.

Once a federal lien attaches, the government can foreclose on the property, including the taxpayers' causes of action, treating them as assets. The government may pursue the lawsuit to judgment, and it retains the ability to settle or dismiss the case, effectively stepping into the taxpayer's position. This ensures that the receivership can achieve favorable outcomes.

The process of foreclosure for taxpayers' property is governed by 28 U.S.C. 2001, which requires court-appointed appraisals before private sales and sets a minimum sale price of two-thirds of the appraised value. While this section specifically addresses real property, 28 U.S.C. 2004 extends these requirements to personal property unless otherwise ordered by the court, allowing discretion regarding appraisals for items like the appellants' causes of action.

The district court found appellants' claims against Tiburon to be meritless and lacking intrinsic value, clarifying that they do not own the property in question but are shareholders in Pine Street Corporation, which does. The appellants concede that the claim for damages related to property value decline belongs solely to the corporation and is managed by the receiver. They assert entitlement only to consequential damages linked to increased tax liabilities due to interest penalties from delays in selling the property, which they attribute to the alleged improper zoning.

Well-established corporate law principles prohibit shareholders from pursuing individual direct actions for injuries inflicted on the corporation by third parties. As a result, any claims against Tiburon are exclusively the Pine Street Corporation's, with the appellants' injuries being incidental. Previous cases illustrate that losses must be direct and not speculative to be recoverable, reinforcing that the appellants lack valid personal claims against Tiburon. Consequently, the district court acted within its discretion by requiring the appellants to release and dismiss any claims they may have against Tiburon.

The appellants argue that the district court erred in confirming a property sale, citing three reasons: failure to meet statutory appraisal requirements, the unfairness of the purchase price due to depressed property value, and exclusion of value for the dismissal of their personal lawsuits. The third argument has been dismissed as meritless. Regarding the statutory requirement under 28 U.S.C. 2001(b) for three disinterested appraisers, the appellants claim bias in the recommended appraisers. However, their allegations lack substantive evidence. For example, although one appraiser, Semple, had prior dealings with Tiburon, his appraisal was the highest, undermining claims of bias. Similarly, previous appraisals by Carneghi do not conclusively indicate a conflict of interest. The appellants' arguments against Mills are the weakest, lacking credible evidence of bias. The district court found the appellants' claims of bias unpersuasive, affirming that while the appraisers must be disinterested, they do not need to be unfamiliar with the property. Thus, the court's acceptance of the appraisals stands without clear error.

Appellants argue that the $6.8 million purchase price for the property is inadequate due to Tiburon's illegal down-zoning, claiming they should be compensated based on the property's value without the down-zoning. The court must not approve a sale for less than two-thirds of the fair market value, and the district court found the purchase price exceeded this threshold after reviewing three appraisals. The purchase agreement requires the receiver to dismiss valid causes of action against Tiburon, despite appellants’ claims being deemed meritless. An experienced attorney advised that the probability of recovering damages through litigation is low, and rejecting the current offer could lead to a lesser sale price if a private buyer is found. The district court concluded that the proposed sale offers the highest return on the property and saw no abuse of discretion in approving it. Additionally, the court affirmed that the appellants' personal lawsuits are subject to a federal tax lien, allowing the receivership to encompass them. The district court's order confirming the sale was upheld, with directions for appellants to dismiss their claims against Tiburon and for the emergency stay to be lifted to facilitate the sale. The decision is affirmed and remanded.