Progressive Consumers Federal Credit Union v. United States

UNITED STATES COURT OF APPEALS
UNITED STATES COURT OF APPEALS
FOR THE FIRST CIRCUIT
FOR THE FIRST CIRCUIT

No. 95-1712

PROGRESSIVE CONSUMERS FEDERAL CREDIT UNION,

Plaintiff, Appellant,

v.

UNITED STATES OF AMERICA,

Defendant, Appellee.

APPEAL FROM THE UNITED STATES DISTRICT COURT

FOR THE DISTRICT OF MASSACHUSETTS

[Hon. Reginald C. Lindsay, U.S. District Judge]

Before

Boudin, Circuit Judge,

Bownes, Senior Circuit Judge,

and Stahl, Circuit Judge.

Stephen M. Sheehy, with whom Kaye, Fialkow, Richmond &

Rothstein were on brief for appellant.

Kevin M. Brown, Attorney, with whom Donald K. Stern, United

States Attorney, Loretta C. Argrett, Assistant Attorney General,

Gary R. Allen, and William S. Estabrook, Attorneys, Tax Division,

Department of Justice, were on brief for appellee.

March 19, 1996

BOWNES, Senior Circuit Judge. On October 8,
BOWNES, Senior Circuit Judge.

1993, Progressive Consumer Federal Credit Union

("Progressive"), plaintiff-appellant, filed a complaint

against the Internal Revenue Service ("the government"),

defendant-appellee, in the Land Court Department of the Trial

Court of Plymouth County, Commonwealth of Massachusetts.

Progressive sought a declaration that its mortgage had

priority over properly recorded federal tax liens. The

government filed a notice of removal pursuant to 28 U.S.C.

1444, removing the action to the United States District Court

for the District of Massachusetts. The district court

entered a memorandum and order granting the cross-motion of

the United States for summary judgment on May 26, 1995,

holding that Progressive's mortgage was not entitled to

priority over the federal tax liens under the Massachusetts

common law doctrines of equitable subrogation or unjust

enrichment.

The mortgage at issue is secured by real property

located in Marshfield, Massachusetts. In 1987, as owners of

the property, Jeremiah and Deborah Folkard ("the Folkards")

executed a $150,000.00 mortgage note which was properly

recorded in favor of the Miles Standish Federal Credit Union

("MSFCU"). Between 1988 and 1990, the government recorded

six notices of tax liens on the Folkards' property for unpaid

federal taxes. The total amount of the liens, exclusive of

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interest accrued since recording, was $94,560.93. In 1990,

the Folkards refinanced their mortgage debt, then

$130,905.55, with MSFCU, executing a new note and mortgage to

secure a debt of $142,000.00. At the time of this

transaction, MSFCU was presumably unaware of the existing tax

liens. The 1987 mortgage was discharged at the moment the

new mortgage was recorded on November 26, 1990. This

resulted in priority of the federal tax liens, because of

their recording dates, over the new mortgage. On October 19,

1992, MSFCU assigned its interest in the 1990 note and

mortgage to Progressive. The record does not reflect when

Progressive became aware of the record priority of the

federal tax liens over its mortgage.
I. JURISDICTION
I. JURISDICTION

The threshold issue to be decided in this case,

whether the district court properly exercised subject-matter

jurisdiction over Progressive's claim, was raised for the

first time on appeal. The government argues that the

district court lacked jurisdiction on two grounds: (1) the

government has not waived its sovereign immunity and

therefore cannot be sued; and (2) the Declaratory Judgment

Act, 28 U.S.C. 2201(a), specifically bars the relief

requested.1 Lack of subject-matter jurisdiction can be

1. The district court had prima facie jurisdiction to hear

Progressive's claim because it involves issues of federal tax
liens and taxation. See 28 U.S.C. 1331, 1340; see also

United States v. Brosnan, 363 U.S. 237, 240 (1960); United

States v. Coson, 286 F.2d 453, 455-56 (9th Cir. 1961).

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raised at any point during litigation. There can be no doubt

of our power and duty to decide the issue. See Bender v.

Williamsport Area School Dist., 475 U.S. 534, 541 (1986);

Wells Real Estate v. Greater Lowell Bd. of Realtors, 850 F.2d

803, 813 (1st Cir. 1988).

A. Waiver of Sovereign Immunity
A. Waiver of Sovereign Immunity

It has long been established that the United States

is not subject to suit without a waiver of sovereign

immunity, and that any such waiver is to be strictly

construed. Nickerson v. United States, 513 F.2d 31, 32-33

(1st Cir. 1975). The government correctly argues that

Progressive wrongly relies on the Declaratory Judgment Act

("the Act"), 28 U.S.C. 2201(a), to constitute a waiver of

sovereign immunity because the Act "neither provides nor

denies a jurisdictional basis for actions under federal law,

but merely defines the scope of available declaratory

relief." McCarthy v. Marshall, 723 F.2d 1034, 1037 (1st Cir.

1983). Title 28 U.S.C. 2410(a)(1) provides the only basis

for finding a waiver of sovereign immunity in this case.2

2. In relevant part, 28 U.S.C. 2410 provides:

2410. Actions affecting property on
which United States has lien

(a) Under the conditions prescribed in
this section and section 1444 of this
title for the protection of the United
States, the United States may be named a
party in any civil action or suit in any
district court, or in any State court

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Under section 2410, the government waives its

sovereign immunity in both quiet title and foreclosure

actions. See 28 U.S.C. 2410(a)(1), (2). A party

bringing a fore-closure under this section, however, must

seek a judicial sale of the underlying property. 28 U.S.C.

2410(c). We begin by discussing whether Progressive's claim

of priority constitutes a quiet title action within the

meaning of 28 U.S.C. 2410(a)(1).

The Scope of Quiet Title Actions Under
The Scope of Quiet Title Actions Under

28 U.S.C. 2410(a)(1)
28 U.S.C. 2410(a)(1)

The government contends that Progressive's claim

does not fall within the coverage of section 2410(a)(1)

because its claim of priority is not a quiet title action

within the meaning of the statute. It follows, argues the

government, that because no judicial sale has taken place,

there can be no waiver of sovereign immunity and hence

Progressive cannot maintain its cause of action. We disagree

for the reasons that follow.

having jurisdiction of the subject mat-
ter--
(1) to quiet title to,

. . .

real or personal property on which the
United States has or claims a mortgage or
other lien.

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Section 2410(a)(1) has never been read to

incorporate the formalistic distinctions state law pleading

rules. United States v. Coson, 286 F.2d 453, 457 (9th Cir.

1961). In Coson, the Ninth Circuit held that "[i]t is plain

that the words 'quiet title' . . . are not intended to refer

to a suit to quiet title in the limited sense in which that

term is sometimes used . . . but that as used in the section

here referred to it comprehends a suit to remove a cloud upon

the title of a plaintiff." Id. Both the text and the

history of section 2410 support this view. The quiet title

provision was inserted by amendment to the predecessor

statute, following a recommendation by the Attorney General

of the United States (future Justice Jackson). The heart of

the recommendation stated:

[U]nder existing law there is no
provision whereby the owner of real
estate may clear his title to such real
estate of the cloud of a Government
mortgage or lien . . . . In many
instances persons acting in good faith
have purchased real estate without
knowledge of the Government lien or in
the belief that the lien had been
extinguished . . . . It appears that
justice and fair dealing would require
that a method be provided to clear real
estate titles of questionable or
valueless Government liens.

H.R. Rep. No. 1191, 77th Cong., 1st Sess. 2 (1941); S. Rep.

No. 1646, 77th Cong., 2d Sess. 2 (1942).

The government points out that, under Massachusetts

law, a plaintiff must have both actual possession and legal

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title to maintain a quiet title action, see MacNeil Bros. Co.

v. Realty Co. of Boston, Inc., 131 N.E.2d 178 (Mass. 1956

(citing cases)), and suggests that the contours of the state

law cause of action should guide our interpretation of

section 2410(a)(1), particularly where the state law is

consistent with federal common law (as the government argues

it is here). That is, the government argues that Congress

intended to waive sovereign immunity only in those cases that

would traditionally have been termed "quiet title" actions;

because Progressive did not bring and could not have brought

such an action,3 we should deem this case to be outside the

scope of section 2410(a)(1).

If, in substance, the relief the plaintiff sought

here--a declaration of the priority of Progressive's mortgage

over the government's tax lien--is congruent with the relief

available in a quiet title suit, it would frustrate

congressional intent to block plaintiff's access to relief.

Congress, after all, was concerned not with the niceties of

common law pleading, but with practical problems facing

owners whose property was encumbered by government liens.

What label the state has attached to the cause of action is a

helpful but not determinative guide to the proper

3. As mortgagee, Progressive holds legal title to the
property, see J&W Wall Sys., Inc. v. Shawmut First Bank &

Trust Co., 594 N.E.2d 859, 860 (Mass. 1992), but it is not in

possession.

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interpretation of the federal statute. See Harrell v. United

States, 13 F.3d 232, 235 (7th Cir. 1993).

The government, however, contends that the relief

that Progressive seeks would not have been available in a

quiet title action. Progressive does not seek to remove the

government's lien as invalid, but rather to establish the

priority of its own mortgage over the concededly valid

federal tax lien. Such relief would not have been available

in a traditional quiet title action, only in a foreclosure

action, where valid but junior liens are extinguished in

favor of a senior lien. It follows, argues the government,

that because no judicial sale has taken place, see 2410(c),

there can be no waiver of sovereign immunity.

A careful reading of the authorities, however, does

not support the government's narrow portrayal of the relief

available to quiet title plaintiffs. The government

principally relies on Kadson v. G.W. Zierden Landscaping,

Inc., 541 F. Supp. 991 (D. Md. 1982), aff'd sub nom. Kadson

v. United States, 707 F.2d 820 (4th Cir. 1983). In Kadson,

suits were brought by tax sale purchasers to foreclose all

equities of redemption in properties on which the United

States held tax liens. The district court held that the

suits were more properly characterized as foreclosure actions

than quiet title actions and that judicial sale was required

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in order for sovereign immunity to be waived. Id. at 995-

96.

Unlike the plaintiffs in Kadson, Progressive seeks

only a determination of priority between competing liens; it

never initiated a foreclosure action and did not seek to

extinguish the federal lien. The Kadson court cited United

States v. Morrison, 247 F.2d 285, 289 (5th Cir. 1957), for

the proposition that "priorities among valid interests are

the subject of foreclosure suits," whereas "the alleged

invalidity of adverse interests are the subjects of quiet

title actions." Kadson, 541 F. Supp. at 995. This, however,

does not tell the whole story of the Morrison opinion, in

which the Fifth Circuit explained that the "relief sought [in

section 2410(a)(1) claims], as traditional to equity as the

woolsack, is the judicial determination of the validity and

rank of the competing liens." Id. (emphasis added). The

court pointed out that it was an "unsound premise" to hold

that a quiet title action "is one to extinguish the lien of

the United States, rather than what it really is -- a

determination that a tax lien does not exist, has been

extinguished, or is inferior in rank." Id. (emphasis added).

Similarly, in Estate of Johnson, 836 F.2d 940 (5th Cir.

1988), the court rejected the government's contention that

foreclosure is the only relief available where lien

priorities are in dispute. It explained:

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[W]e think that section 2410, an integral
part of the Judicial Code rather than an
administrative mechanism of the tax
structure, establishes a specific
jurisdiction for these suits as bills to
quiet title or for foreclosure of the
private lien. The jurisdiction does not
depend on the specific relief sought,
[e.g.] foreclosure. Rather it rests on
the existence of the traditional
controversy in which a private party
asserts an ownership [interest] which is
superior to the claimed lien of the
United States government. (Quoting United

States

v. Morrison, 247 F.2d 285 (5th Cir.

1957).
836 F.2d at 945.

Other courts have adopted this logic. In

Brightwell v. United States, 805 F. Supp. 1464 (S.D. Ind.

1992), the court reasoned:

[While] [t]raditionally, actions to quiet
title have sought determinations of who
owns particular property, . . . [u]nder
federal law, the definition is somewhat
broader; a party may maintain a quiet
title action against the United States
when the government asserts that a
federal tax lien exists against the
property, 28 U.S.C. 2410(a), and thus
lien priority disputes have been
considered "quiet title" actions [for the
purposes of section 2410].

805 F. Supp. at 1469 (citing McEndree v. Wilson, 774 F. Supp.

1292, 1295-96 (D. Colo. 1991)). Moreover, while a priority

claim of the sort raised by Progressive has not yet been

decided by this Circuit, we have held and reaffirm today that

section 2410(a)(1) controversies encompass disputes

concerning both the "validity and priority of liens," as

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10

distinguished from actions seeking "their extinguishment in a

manner not permitted by the statutes." Remis v. United

States, 273 F.2d 293, 294 (1st Cir. 1960).

These cases undercut the government's contention

that a quiet title action is appropriate under section

2410(a)(1) only where the plaintiff seeks a decree that the

government's lien is defective or invalid and seeks to have

the cloud removed from his title. In support of its

position, the government primarily relies on Raulerson v.

United States, 786 F.2d 1090 (11th Cir. 1986), where the

court held that "section 2410 waives sovereign immunity only

in actual quiet title actions, not suits analogous to quiet

title actions." 786 F.2d at 1091. The court concluded that

plaintiff Raulerson's complaint was not an action to quiet

title because he had already forfeited title to his property

and had waived his property interest by the terms of a plea

agreement. Id. The instant case is not like Raulerson

because Progressive has title to the Folkards' property and

has not waived its ownership interest. Furthermore,

Progressive merely seeks a determination regarding the

priority of its ownership interest. The Raulerson plaintiff,

in contrast, sought a declaration that the IRS's claim had

priority over the valid claims of other branches of

government to ensure that the IRS's jeopardy assessment would

not be satisfied from his other assets. Id. at 1091-92.

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Consistent with the broad construction accorded section

2410's quiet title provision by a number of other

jurisdictions, we hold that Progressive's claim falls within

the meaning and scope of the statute.

The Declaratory Judgment Act and Section 2410
The Declaratory Judgment Act and Section 2410

In the alternative, the government argues that even

if we were to hold that the district court has jurisdiction

to hear Progressive's claim, the Declaratory Judgment Act

("the Act"), 28 U.S.C. 2201(a), nonetheless bars the court

from granting the relief requested. The Act provides, inter

alia, that a federal district court has the authority to

grant declaratory relief "[i]n a case of actual controversy

within its jurisdiction, except with respect to Federal taxes

. . . ." 28 U.S.C. 2201(a). A claim challenging the power

of the IRS to assess and collect taxes is barred by the Act.

McCarthy v. Marshall, 723 F.2d 1034, 1037 (1st Cir. 1983).

Similarly, "[w]hen a federal tax lien is

involved,

. . . an action pursuant to section 2410(a) will not lie if

its sole purpose is to challenge the validity of the

underlying assessment." Johnson v. United States, 990 F.2d

41, 42 (2d Cir. 1993). This is because the purpose of

section 2410 is "to waive the government's immunity from suit

so as to permit a court of proper jurisdiction to determine

the relative position of government liens on property as

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against other lienors -- not to permit a collateral attack on

the tax assessment." Broadwell v. United States, 234 F.

Supp. 17, 18 (E.D.N.C. 1964), aff'd 343 F.2d 470 (4th Cir.),

cert. denied, 382 U.S. 825 (1965); accord, McMillen v. United

States Dep't of Treasury, 960 F.2d 187, 189 (1st Cir. 1991);

Falik v. United States, 343 F.2d. 38, 41 (2d Cir. 1965);

Remis v. United States, 172 F. Supp. 732, 733 (D. Mass.

1959), aff'd, 273 F.2d 293 (1st Cir. 1960). Congress thus

did not intend section 2410(a)(1) to extend a new remedy by

which a plaintiff, whether taxpayer or third party, could

contest the government's assessment of taxes.4 Where a

plaintiff does not challenge the underlying tax assessment,

however, section 2410(a) has been recognized as a vehicle for

determining lien priority. See Estate of Johnson, 836 F.2d

4. Congress did intend section 2410(a)(1) to be a basis for
taxpayer challenges to the procedural validity of tax liens.
See Robinson v. United States, 920 F.2d 1157, 1161 (3d Cir.

1990)(where IRS failed to send notice of deficiency to
taxpayer when lien filed); Rodriguez v. United States, 629 F.

Supp. 333, 336 (N.D. Ill. 1986) (where IRS failed to send
notice of deficiency when levied on property); Ringer v.

Basile, 645 F. Supp. 1517, 1525-26 (D. Colo. 1986)(where IRS

violated own procedures when seized property). Likewise,
with regard to third party nontaxpayer plaintiffs, courts
have adopted the view that "[t]he validity of a lien,
depending upon compliance or noncompliance with statutory
requirements, or the priority of a lien validly filed is
quite a far cry from permitting a third party to attack the
tax assessment upon which a properly filed lien is based."
Pipola v. Chicco, 169 F. Supp 229, 232 (S.D.N.Y. 1959),

modified, 274 F.2d 909 (2d Cir. 1960). Progressive does not

challenge the procedural validity of the tax liens. It is a
matter of record that the liens were properly filed with the
Plymouth County (Massachusetts) Registry of Deeds.

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at 945 (executor's claim of priority of estate interest in

estate over federal tax lien constitutes quiet title action

where it does not contest merits of assessment); Morrison,

247 F.2d at 290-91 (property seller's claim of priority of

vendor's lien over federal lien constitutes quiet title

action where no hazard posed to revenues); First of America

Bank - West Michigan v. United States, 848 F. Supp. 1343,

1349 (W.D. Mich. 1993) (nontaxpayer third party has standing

under section 2410 to "merely . . . assert the priority of

its lien over the federal tax lien"); McEndree, 774 F. Supp.

at 1296 (vendor of property eligible to maintain quiet title

action alleging priority of equitable mortgage over federal

tax liens where no challenge to tax assessment itself).

Progressive's claim in no way contests the

legitimacy of the government's tax assessment or the

taxpayers' liability. It follows that "[s]ince the quiet

title action specifically mandated by section 2410 is in

substance a suit for a declaratory judgment," the Declaratory

Judgment Act will not operate as a wrench to deprive the

district court of its jurisdiction in this case. Aqua Bar &

Lounge Inc., 539 F.2d at 940; see also McEndree, 774 F. Supp.

at 1297 (Section 2410(a) provides an exception to the

Declaratory Judgment Act, as plaintiff's remedies are limited

to declaratory relief).

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In summary, because we conclude that the government

waives its sovereign immunity under 28 U.S.C. 2410(a)(1),

and that the Declaratory Judgment Act poses no bar to the

relief sought, we accordingly hold that the district court

properly exercised subject-matter jurisdiction over

Progressive's claim.

II. THE MERITS
II. THE MERITS

We now turn to the substantive issue on appeal:

whether Massachusetts law entitles Progressive's mortgage

priority over the federal tax liens.

Because the decision to grant summary judgment

calls a legal standard into play we review the district

court's order granting summary judgment for the United States

de novo. In re Varrasso, 37 F.3d 760, 763 (1st Cir. 1994);

Maldonado-Denis v. Castillo-Rodriguez, 23 F.3d 576, 581 (1st

Cir. 1994); Quaker State Oil Refining Corp. v. Garrity Oil

Co., 884 F.2d 1510, 1513 (1st Cir. 1989). Summary judgment

is appropriate only when "there is no genuine issue as to any

material fact and . . . the moving party is entitled to a

judgment as a matter of law." Fed. R. Civ. P. 56(c). The

district court held and we agree that because there are no

disputed material issues of fact summary judgment is

appropriate.

As our discussion of jurisdiction relates, it is

well-settled that federal law determines the priority of

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competing federal and state created liens. See United

States v. Rodgers, 461 U.S. 677, 683 (1983); Brosnan, 363

U.S. at 240-41. Section 6321 of the Internal Revenue Code

("the Code") authorizes the government to assert liens upon

"all property and rights to property" belonging to the

taxpayer for delinquent taxes. 26 U.S.C. 6321. Section

6322 of the Code further provides that "the lien imposed by

section 6321 shall arise at the time the assessment is made

and shall continue until the liability for the amount so

assessed . . . is satisfied or becomes unenforceable by

reason of lapse of time." 26 U.S.C. 6322.

These provisions do not, however, grant federal tax

liens automatic priority over all other liens. I.R.S. v.

McDermott, -- U.S. --, 113 S. Ct. 1526, 1528 (1993). The

determination of priority is governed by the rule of "first

in time, first in right." Id. at 1527. A federal lien which

attaches first is thus senior, so long as notice is properly

filed.5 In order for a state created lien to take priority

over a later assessed federal lien it must be "choate" or

"perfected" so that "the identity of the lienor, the property

subject to the lien, and the amount of the lien are

established" prior to the filing of the subsequent federal

5. The Code provides that "[t]he lien imposed by section
6321 shall not be valid as against any purchaser, holder of a
security interest, mechanic's lienor, or judgment lien
creditor until notice thereof . . .." 26 U.S.C. 6323(a).

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lien. United States v. New Britain, 347 U.S. 81, 84 (1954);

United States v. Pioneer Am. Ins. Co., 374 U.S. 84, 88

(1963); see also Baybank Middlesex v. Elec. Fabricators Inc.,

751 F. Supp. 304, 310 (D. Mass. 1990); United States v.

Rahar's Inn, Inc., 243 F. Supp. 459, 460 (D. Mass. 1965).

Choateness of a state created lien is a matter of federal law

and mirrors the standard applicable to liens asserted by the

government under sections 6321 and 6322 of the Code. United

States v. First Nat'l Bank and Trust Co., 386 F.2d 646, 647-

48 (8th Cir. 1967)(citing United States v. Vermont, 377 U.S.

351, 354 (1964)). State recording statutes are relevant

"only insofar as controlling federal authority dictates or

sound federal policy counsels" their application. United

States v. Lebanon Woolen Mills Corp., 241 F. Supp. 393, 398

(D.N.H. 1964). Section 6323(i)(2) of the Code authorizes

application of the common law doctrine of equitable

subrogation where provided by state law.6

Just as federal law governs the issue of priority,

it is equally well-settled that "in the application of a

federal revenue act, state law controls in determining the

nature of the legal interest . . . in the property . . . to

be reached by the statute." Aquilino v. United States, 363

6. "Where, under local law, one person is subrogated to the
rights of another with respect to a lien or interest, such
person shall be subrogated to such rights for purposes of any
lien imposed by section 6321 or 6324." 26 U.S.C. 6323
(i)(2).

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U.S. 509, 513 (1960)(quoting Morgan v. Commissioner, 309 U.S.

78, 82 (1940)); see also Maryland v. Louis, 451 U.S. 725, 746

(1981)(courts must proceed from "the basic assumption that

Congress did not intend to displace state law"). "The point

at which a state created security interest attaches is a

matter of state law." ICM Mortg. Corp. v. Herring, 758 F.

Supp. 1425, 1426 (D. Colo 1991)(citing Sec. Pac. Mortg. Corp.

v. Choate, 897 F.2d 1057, 1058-59 (10th Cir. 1990)). Federal

revenue statutes "creat[e] no property rights but merely

atta[ch] consequences, federally defined, to rights created

under state law." United States v. Bess, 357 U.S. 51, 55

(1958). For this reason, "it is critical to determine when

competing state created liens come into existence or become

valid." Matter of Fisher, 7 B.R. 490, 494 (W.D. Pa.

1980)(citing Pioneer Am. Ins. Co., 374 U.S. 84, 87 (1963));

see also; Aquilino, 363 U.S. at 514 (Reconciliation of state

law defining when a state created lien becomes effective and

federal law governing priority between competing liens

"strikes a proper balance between the legitimate and

traditional interest which the State has in creating and

defining the property interest of its citizens, and the

necessity for a uniform administration of the federal revenue

statutes").

The government argues that because section

6323(i)(2) explicitly authorizes the application of local

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laws of subrogation and is silent as to the application of

the doctrine of unjust enrichment, the district court was

correct in deeming the latter doctrine inapplicable to

Progressive's claim. We disagree. While the court was

correct in stating that Congress gave an "explicit directive

with respect to determining the priority of federal tax

liens," it was incorrect in holding that "there is no basis

upon which to presume the applicability of a common law

doctrine" not expressly provided for by the statute. To

essentially translate a directive for a federal scheme of

priority into a preemption of state law governing the nature

and extent of state created liens was unwarranted. To the

contrary, federal courts should presume applicability of

state common law doctrines in determining the status of state

created liens. Such determinations do not contravene federal

law simply because they ultimately bear on the federal issue

of who was first in time in determining priority.

Before addressing the status of Progressive's

current mortgage, we briefly review its history. In 1987,

MSFCU financed the Folkards' first mortgage in the amount of

$150,000.00. Between 1988 and 1990, the IRS filed six tax

liens on the property, totalling $94,560.93. In 1990, MSFCU

refinanced the Folkards' first mortgage debt, then

$130,905.55, by executing a new note to secure a debt of

$142,000.00. The recording of the 1990 mortgage discharged

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the 1987 mortgage, rendering the tax liens senior to MSFCU's

second mortgage on the record title to the property. In

1992, MSFCU assigned its mortgage to Progressive.

Progressive argues that under the doctrine of unjust

enrichment, MSFCU should be reinstated to its initial 1987

mortgage position and that Progressive is entitled to

effectively occupy MSFCU's reinstated position. We agree.

A. Massachusetts Common Law Doctrine
A. Massachusetts Common Law Doctrine

of Unjust Enrichment
of Unjust Enrichment

Under Massachusetts law, the doctrine of unjust

enrichment provides that "where a mortgage has been

discharged by mistake, equity will set the discharge aside

and reinstate the mortgage to the position which the parties

intended it to occupy, if the rights of the intervening

lienholders have not been affected." North Easton Co-op Bank

v. MacLean, 15 N.E.2d 241, 245 (Mass. 1938)(second mortgagee

not prejudiced by reinstatement of first mortgage where first

mortgage had been discharged by mistake upon first

mortgagee's acceptance of new note without knowledge of

intervening lien)(citations omitted); see also Provident Co-

Operative Bank v. Talcott, Inc., 260 N.E.2d 903, 909 (Mass.

1970)(assignee of first mortgagee declared holder of first

mortgage to prevent unjust enrichment of second mortgagee

where first mortgagee discharged mortgage through

inadvertence and second mortgagee's position not adversely

affected by acts of first mortgagee); Piea Realty v.

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Papuzynski, 172 N.E.2d 841, 846 (Mass. 1961)(exchange of new

mortgage notes for old ones did not constitute discharge of

old mortgage where parties had no intent to alter substance

or priority of old notes and mortgagor's grantees did not

show adverse change of position in reliance upon

transaction).

The government maintains that no "mistake" was made

because MSFCU intended to refinance the Folkards' first

mortgage, and so by law must have intended the consequences

of its actions -- i.e. the extinguishment of its original

security interests. Massachusetts law, however, clearly

contemplates situations where the intention to renew is not

tantamount to the intention to extinguish existing security

interests upon refinancing a mortgage. See North Easton Co-

op Bank, 15 N.E.2d at 245; Provident, 260 N.E.2d at 909; Piea

Realty, 172 N.E.2d. at 846; see also Financial Acceptance

Corp. v. Garvey, 380 N.E.2d 1332, 1335 (Mass. 1978)("Under

Massachusetts law the renewal of a note in a different form

does not operate to discharge a mortgage where the debt

itself has not been paid . . . . even where the new note

includes a new debt"); Worcester N. Sav. Inst. v. Farwell,

198 N.E. 897, 899 (Mass. 1935)(where bank, due to negligence

of its counsel, failed to discover later mortgage on property

and discharged first mortgage upon refinancing, first

priority restored to bank because bank did not intend for

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discharge of interest); compare ICM Mortg. Corp., 758 F.

Supp. at 1427 (where refinancing of deed of trust not

intended to extinguish security interest, second deed of

trust renewed prior obligation, resulting in priority of

state created lien over federal tax lien); see generally 33

A.L.R. 149 ("It is a general rule that the cancellation of a

mortgage on the record is not conclusive as to its discharge

. . . . [a]nd where the holder of a senior mortgage

discharges it of record, and contemporaneously therewith

takes a new mortgage, he will not, in the absence of

paramount equities, be held to have subordinated his security

to intervening lien unless the circumstances of the

transaction indicate this to have been his intention . . . .

"). We are thus convinced that an action based on the

failure to discover a properly recorded lien is precisely the

type of inadvertence the Massachusetts doctrine of unjust

enrichment aims to rectify. Furthermore, we are persuaded,

in accord with Progressive's view, that no reasonable lender

in MSFCU's position would have intended, upon refinancing, to

replace a first mortgage bearing the attachment of junior tax

liens with a second mortgage bearing the attachment of senior

tax liens, thereby relinquishing its senior interest on the

property.

The district court held that reliance on the

Massachusetts line of unjust enrichment cases was misplaced

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because such cases do not concern federal tax liens.

Although it is true that Massachusetts case law does not

address reinstatement of a state created lien to a position

of priority over a federal government lien, we are not

persuaded by the district court's reasoning. We think that

cases involving the reinstatement of mortgages which have

been inadvertently discharged to the advantage of unintended

and unexpected beneficiaries are sufficiently analogous to

Progressive's claim to warrant applicability. Whether or not

federal tax liens are involved in such cases, to us, seems

immaterial. This is mainly because the unjust enrichment

doctrine operates only to restore a state created lien to the

position it occupied prior to the inadvertent discharge.

Reestablishing the party's position, of itself, does not

disturb the status of competing liens -- whether those of a

private lienor or the federal government -- in terms of their

effective dates of attachment for the determination of

priority. It equitably determines the effective date of the

state created lien independent of other existing liens.

Federal law remains intact to determine both the choateness

of the state created lien and its order of priority in

relation to any competing federal liens.

Moreover, while Massachusetts courts have not had

occasion to apply the doctrine of unjust enrichment to the

federal government under this set of circumstances, federal

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courts have held that the doctrine is applicable where the

federal government is concerned; and in several instances,

have restored state created liens to their intended positions

without regard for the United States' potential loss of

priority under federal law. See United States v. McCombs, 30

F.3d 310, 333 (2d Cir. 1994)(holding that where government

ran afoul of notice requirements of federal statute governing

priority between federal tax liens and interests of

subsequent purchasers, to deny subsequent holder of security

interest priority over tax lien would allow government to

"leap frog" the interests vested in two prior mortgage liens

and would represent "a classic example of unjust

enrichment"); Dietrich Indus., Inc. v. United States, 988

F.2d 568, 573 (5th Cir. 1993)(holding that where purchaser

who paid vendor's senior mortgage debt as part of purchase

transaction with expectation that property was free of

additional encumbrances, to deny equitable subrogation remedy

"would give the government an unearned windfall in that it

would elevate the government's liens for no good reason");

Han v. United States, 944 F.2d 526, 530 n.3 (9th Cir.

1991)(holding that where purchasers of residential property

paid off and discharged priority position lender unaware that

additional federal tax lien attached to property, to require

the purchasers to pay a portion of the taxpayer's delinquent

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taxes would "unjustly enrich" and "produce a windfall" in

favor of the United States).

Finally, we note that no rights of the government

are impaired by MSFCU's mortgage reinstatement. The

government argues that the IRS is unlike a private creditor

in that it does not bargain for interest rates and thus can

never be unjustly enriched where valid liens have attached

for unpaid taxes. But Progressive does not argue, nor do we

suggest, that the government would be unjustly enriched by

the ultimate satisfaction of its legitimate tax liens. The

point is that the government could not have anticipated its

current priority status because from the outset its 1988-1990

liens were clearly junior to MSFCU's 1987 mortgage lien.

Absent the inadvertent discharge of MSFCU's mortgage in 1990,

the government would not have gained serendipitous priority

over MSFCU's second mortgage lien in 1990. This resulted in

the government's unjust enrichment at the expense of MSFCU in

1990, and ultimately of Progressive in 1992. We hold that

because MSFCU extinguished its initial 1987 mortgage interest

by mistake upon refinancing the Folkards' second mortgage in

1990, it should be equitably restored to its original 1987

lien position.

The government argues that the equities in favor of

MSFCU may not apply to Progressive because there is no

evidence that Progressive was unaware of the earlier

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government lien when it took the assignment of the mortgage

from MSFCU. But it is hornbook law that the assignee of a

mortgage succeeds to all of the assignor's rights power and

equities; and Massachusetts has applied this rule in a

situation very like this case. Provident Co-operative Bank,

260 N.E.2d at 908 ("By virtue of her purchase from Provident,

Mrs. Hutchinson succeeded to all of Provident's rights in

relation to the mortgage assigned, including the right to a

judicial determination whether it was a first mortgage or a

second mortgage."). Thus Progressive may assert any

equitable rights and defenses that MSFCU could have asserted

before it assigned the mortgage.

C. Conclusion
C. Conclusion

The parties do not dispute that MSFCU's mortgage

lien was choate as of its original recording in 1987. It

identified the lienor as MSFCU, described the Folkards'

property, and established the amount of the lien so that

nothing more needed to be done for the lien to be

"perfected." New Britain, 347 U.S. at 89. MSFCU was thus a

holder of a security interest in the Folkards' property that

attached before the filing of the federal tax liens

between 1988-1990. See 26 U.S.C. 6323(h)(1).

Because we hold that MSFCU should be restored to its

original mortgage lien position and that Progressive should

be subrogated to that same position, it follows that under

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the federal rule of priority, Progressive's mortgage is first

in time and hence first in right over the tax liens asserted

by the government.

We reverse the district court's decision and vacate
We reverse the district court's decision and vacate

its entry of summary judgment in favor of the United States.
its entry of summary judgment in favor of the United States.

Summary judgment shall be entered in favor of Progressive and
Summary judgment shall be entered in favor of Progressive and

an appropriate declaratory judgment order shall be entered.
an appropriate declaratory judgment order shall be entered.

Costs awarded to Progressive.
Costs awarded to Progressive.

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