Source: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-caed-2_01-cv-02301/USCOURTS-caed-2_01-cv-02301-4/pdf.json

Nature of Suit Code: 870
Nature of Suit: Tax Suits
Cause of Action: 26:7403 Suit to Enforce Federal Tax Lien

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IN THE UNITED STATES DISTRICT COURT

FOR THE EASTERN DISTRICT OF CALIFORNIA

UNITED STATES OF AMERICA,

Plaintiff,

v.

J. LEONARD PADILLA, et al.,

Defendants. 

CIV-S-01-2301 DFL GGH

MEMORANDUM OF OPINION

AND ORDER

The United States seeks to enforce a settlement agreement

and to foreclose on property encumbered by federal tax liens. 

The court DENIES the motion to enforce the settlement agreement

and orders foreclosure of the property in accordance with the

conditions set forth below. 

I.

The government filed this suit on December 17, 2001. It

seeks to foreclose on 59.5 acres of real property in Natomas

(“Natomas property”) owned by J. Leonard Padilla (“Padilla”) and

Julie Padilla (“Julie”). Julie Padilla and Leonard Padilla each

have a one-half interest in the Natomas property. On March 4,

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2005, the U.S. secured a money judgment against Leonard Padilla

for unpaid taxes in the amount of $2,158,760.41 plus interest and

penalties since February 24, 2004. See United States v. Padilla,

CIV-S-01-2300 DFL GGH, slip op. at 2, 5-6 (E.D. Cal. Mar. 4,

2005). 

In June 2005, the government and Julie Padilla entered into

a settlement agreement. Julie agreed to pay the U.S. $2,350,000

in exchange for the U.S. discharging its liens against the

Natomas property and dismissing this case. (Mot. at 5.) In

addition, the U.S. agreed to reduce Leonard Padilla’s debt by

$2,000,000 and to reduce Rose Moreno-Padilla’s debt by $350,000. 

(Id.) However, Julie did not pay the $2,350,000 due under this

agreement. (Ham Decl. ¶ 13.) 

II.

A. Ordering Foreclosure

The government seeks a foreclosure order under Internal

Revenue Code § 7403. (Mot. at 10 n.4). Section 7403 permits the

government to file a civil action to recover taxes due from the

sale of any property in which the taxpayer has an interest. The

section permits foreclosure and sale of an entire property even

when the taxpayer shares his ownership interest in the property

with a third-party. United States v. Rodgers, 461 U.S. 677, 693-

94, 103 S.Ct. 2132 (1983). 

Courts weigh the following factors when deciding whether to

order foreclosure on real property in which third-parties have a

legal interest: (1) economic prejudice to the government; (2) the

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 At oral argument Julie explained to the court that she is 1

negotiating with various potential buyers and that she is seeking

some kind of joint venture relationship that would pay her a lump

sum upon sale and also permit her to share in future development

income. 

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third-party’s legal expectations that the property would be

protected from forced sale; (3) dislocation costs and potential

undercompensation of the third-party; and (4) the comparative

property interests of the delinquent taxpayer and the thirdparty. Id. Courts should balance these factors with a view

towards the government’s “paramount interest” in “prompt and

certain collection of delinquent taxes.” Id. at 710-11. 

Julie argues that the Rodgers factors cited above weigh

against ordering foreclosure in this case because she would be

undercompensated by a forced sale. (Opp’n at 5.) However, this 1

contention misunderstands the Court’s use of the term

“undercompensated.” The Court does not use the term to suggest

that a third-party should be afforded the opportunity to select

when and under what conditions the property should be sold. 

Instead, the Court is referring to the proper allocation of the

proceeds of sale when the third-party possesses a non-ownership

interest in the property such as a life estate or a state law

homestead exemption. Rodgers, 461 U.S. at 698-99, 704-05. In

those situations, the third-party may be entitled to a percentage

of the proceeds in excess of her ownership interest in the

foreclosed property. Id. at 698-99. There is nothing in Rodgers

to support Julie’s contention that a court should delay

foreclosure because a properly held judicial sale will not fetch

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the highest possible selling price for the property. Therefore,

the court finds that foreclosure of the Natomas property is

appropriate.

However, as discussed at oral argument, the court is

persuaded that all of the parties will be better off if the

property is sold through a market transaction rather than a

foreclosure sale. The government does not oppose this concept. 

Consequently, the government shall prepare a foreclosure order

that provides for the appointment of a trustee who will be

afforded a reasonable period of time within which to sell the

property. 

B. Settlement Agreement

The government has failed to assert a basis for federal

subject matter jurisdiction over the breach of contract claim. 

There are also numerous factual issues that would require an

evidentiary hearing. As a result, the motion is DENIED without

prejudice to its renewal in the event that the government seeks

to go forward on this theory. 

III.

As discussed above, the court DENIES without prejudice the

motion to enforce the settlement agreement and instructs the

government to prepare a foreclosure order that provides for the

appointment of a trustee who will be afforded a reasonable period

of time to sell the property. To the extent possible, the

government should seek to obtain the defendants’ approval of the

proposed order. The defendants may file objections to the

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proposed order within 7 calendar days of its submission to the

court. 

IT IS SO ORDERED.

Dated: April 11, 2006

 

/s/ David F. Levi 

DAVID F. LEVI

United States District Judge 

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