Source: http://kirschenbaumesq.com/article/us-v-baran-996-f2d-25-72-aftr2d-93-5400-2nd-cirny-jun-14-1993-no-1228-92-6279
Timestamp: 2019-04-19 22:25:36+00:00

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Hartford Accident & Indemnity Co., Defendants.
through doctrine of equitable subrogation.
extrinsic evidence and properly resolved matter without trial.
relative to remainder interest. 26 U.S.C.A. § 7403.
lien. 26 U.S.C.A. § 6323(i)(2).
Kirschenbaum, on the brief), for defendants-appellants.
Gabriel W. Gorenstein, Asst. U.S. Atty., New York City (Roger S. Hayes, U.S.
Atty. and Ping C. Moy, Asst. U.S. Atty., on the brief), for plaintiff- appellee.
Before: NEWMAN and MAHONEY, Circuit Judges, and EGINTON, [FN*] District Judge.
District of Connecticut, sitting by designation.
further consideration of equitable subrogation.
Chase Manhattan mortgage was senior to the federal tax lien.
FN1. The first name is spelled "Marie" in some of the papers.
favor of the Government in the amount of $259,601.84.
in a deed. No additional instrument is required. See, e.g., Winick v.
236 (1983); United States v. Kocher, 468 F.2d 503, 506-07 (2d Cir.1972), cert.
the entire property through use of "a standard statutory or commercial table."
764 F.2d 1126, 1130-31 (5th Cir.1985).
not be prejudiced by remaining junior to the Government.
758, 229 N.E.2d 435, 439 (1967). See, e.g., The Thrift v. Michaelis, 259 N.Y.
A.D. 1042, 145 N.Y.S.2d 335 (2d Dep't 1955); Union Savings Bank of Patchogue v.
Association v. Skow, 25 A.D.2d 880, 881, 270 N.Y.S.2d 234, 236 (2d Dep't 1966).
F.2d 909, 914-15 (2d Cir.1960).
the lender to offer an excuse for his failure to discover the intervening lien.
of retaining a first mortgage on the property.
 A more subtle question is the effect of equitable subrogation in this case.
remaining $25,000 after the Government.
Miller v. Federal Land Bank of Spokane, 587 F.2d 415, 420 (9th Cir.1978), cert.
denied, 441 U.S. 962, 99 S.Ct. 2407, 60 L.Ed.2d 1067 (1979); Malinoski v.
prejudice the senior creditor. See Walther v. Bank of New York, 772 F.Supp.
to satisfy the subrogated Chase Manhattan lien from the remainder interest.
mortgage and hypothetical interest payments on prior mortgage).
UNITED STATES of America, Plaintiff-Appellee,v.Zenowia BARAN, Ostap Baran, and Self Reliant (NY) Federal Credit Union,Defendants-Appellants,Joseph F. Farano, Maria Farano, Joseph M. Farano, Phyllis Marie Farano, andHartford Accident & Indemnity Co., Defendants.
Argued April 26, 1993.Decided June 14, 1993.
United States sought to foreclose federal tax lien on life estate in property which had been sold to purchasers unaware of tax lien. The United States District Court for the Southern District of New York, Miriam Goldman Cedarbaum, J., foreclosed lien, and owners and their mortgagee appealed. The Court of Appeals, Jon O. Newman, Circuit Judge, held that remand was required to determine whether tax lien should be subordinated to junior lien of mortgagee through doctrine of equitable subrogation.
Under New York law, life estate may be created by reservation in deed; no additional instrument is required.
Phrase "life estate" has well-established meaning: it is estate in land giving life tenant full and exclusive possession of property for duration of tenant's life.
In construing unambiguous deed, district court properly declined to consider extrinsic evidence and properly resolved matter without trial.
It was within district court's discretion to accept government's method for determining value of life estate in real property subject to federal tax lien, even though appraiser stated that life estate was probably unmarketable, where property owners made no claim that standard Internal Revenue Service (IRS) table for valuing life estates erroneously overstated economic value of life estate relative to remainder interest. 26 U.S.C.A. § 7403.
Remand was required to determine whether federal tax lien should be subordinated to junior lien of mortgagee through doctrine of equitable subrogation, even though district court held that mortgagee was not entitled to be subrogated to senior mortgage, where record was unclear as to whether court recognized that it had discretion, under New York law, to subrogate mortgagee to discharged senior lien. 26 U.S.C.A. § 6323(i)(2).
Under New York law, mortgagee is subrogated to senior lien, where funds of mortgagee are used to satisfy lien of existing, known incumbrance and, unbeknown to mortgagee, another lien on property exists which is senior to mortgage but junior to lien satisfied with mortgage funds, regardless of whether mortgagee has excuse for failure to discover intervening lien; purpose of subrogation is to prevent intervening lienor from converting mistake of mortgagee into magical gift for himself.
Court could infer that mortgagee discharged senior lien on property under agreement with mortgagor, as required, under New York law, for mortgagee to be equitably subrogated to senior lien as against undiscovered intervening lien, where mortgagee made payment to discharge earlier mortgage as part of closing at which mortgagee supplied financing with intent of retaining first mortgage on property.
Assuming doctrine of equitable subrogation applied, under New York law, mortgagee's lien would be senior to federal tax lien on life interest, even though, as a result, mortgage would be secured to greater extent than funds actually paid to discharge senior mortgage; since tax lien was not on entire property, but only on life estate, it could be satisfied out of proceeds of sale only to extent of value of life estate, while, in contrast, senior mortgage was in entire property. *26 Burton Aronson, Garden City, NY (Samuel Kirschenbaum, Kirschenbaum & Kirschenbaum, on the brief), for defendants-appellants.
Gabriel W. Gorenstein, Asst. U.S. Atty., New York City (Roger S. Hayes, U.S. Atty. and Ping C. Moy, Asst. U.S. Atty., on the brief), for plaintiff- appellee.
FN* The Honorable Warren W. Eginton of the United States District Court for the District of Connecticut, sitting by designation.
In 1980, Maria Farano, [FN1] the owner of a house located at 52 Stoneleigh Road, Yonkers, New York (the "property"), deeded the property to her children, Joseph M. Farano and Phyllis Marie Farano (the "Farano children"), "subject to a life estate in the lives of" herself and her husband Joseph F. Farano (the "Farano parents"). In 1982, the IRS filed a federal tax lien against the Farano parents for an unpaid assessed balance of $82,221.86. Pursuant to 26 U.S.C. § 6321 (1988), the tax lien attached to all property owned by the Farano parents, and has continued to accrue interest. There appears to be agreement that Maria Farano's deed was ineffective to create a life estate for her husband. The tax lien therefore applied, at most, to Maria's life estate. In 1986, the Farano children and the Farano parents together conveyed the property to Zenowia and Ostap Baran for $440,000. The purchase was financed by Self Reliant. Apparently unaware of the federal tax lien, Self Reliant, in addition to loaning the Barans money to pay the Faranos, provided a check at the closing for $68,293.90 to discharge a prior mortgage held by Chase Manhattan Bank. The Chase Manhattan mortgage was senior to the federal tax lien.
 1. Creation of a life estate. The Barans and Self Reliant make several related arguments concerning the 1980 deed that conveyed the property to the Farano children "subject to" a life estate in favor of Maria Farano. They contend that a deed cannot create a life estate, that the life estate did not include the entire premises, that the life estate terminated upon an attempt to attach Maria Farano's assets, and that summary judgment was inappropriate because the deed was ambiguous. None of these arguments is convincing. New York authorities recognize that a life estate can be created *28 by reservation in a deed. No additional instrument is required. See, e.g., Winick v. Winick, 26 A.D.2d 663, 272 N.Y.S.2d 869 (2d Dep't 1966), app. denied, 19 N.Y.2d 581, 279 N.Y.S.2d 1026, 226 N.E.2d 707 (1967). The phrase "life estate" has a well-established meaning. It is an estate in land giving the life tenant full and exclusive possession of the property for the duration of the life tenant's life. See In re Hinman's Will, 22 Misc.2d 655, 657, 200 N.Y.S.2d 170, 172 (Surr.Ct.1960). Because there was no ambiguity in the deed, the District Court properly declined to consider extrinsic evidence, see Uihlein v. Matthews, 172 N.Y. 154, 158-60, 64 N.E. 792, 794 (1902), and properly resolved the matter without a trial, see Hurd v. Lis, 92 A.D.2d 653, 654, 460 N.Y.S.2d 173, 174 (3d Dep't 1983).
The District Court acted within its discretion in accepting the Government's valuation method. 26 U.S.C. § 7403 (1988) allows the Government to seek the sale of the whole property in order to maximize the value of its interest. See United States v. Rodgers, 461 U.S. 677, 691, 103 S.Ct. 2132, 2142, 76 L.Ed.2d 236 (1983); United States v. Kocher, 468 F.2d 503, 506-07 (2d Cir.1972), cert. denied, 411 U.S. 931, 93 S.Ct. 1897, 36 L.Ed.2d 390 (1973). Often, as in this case, "interests in property, when sold separately, may be worth ... significantly less than the sum of their parts." Rodgers, 461 U.S. at 694, 103 S.Ct. at 2143. Apparently wishing to retain ownership of the property in the Barans, the defendants requested an opportunity to satisfy the Government's claim prior to a sale of the property. The District Court was free to grant that request while still valuing the life estate as a percentage of the value of the entire property through use of "a standard statutory or commercial table." See id. at 698-99, 103 S.Ct. at 2145. Defendants make no claim that the standard IRS table for valuing life estates erroneously overstates the economic value of a life estate relative to the remainder interest. See Harris v. United States, 764 F.2d 1126, 1130-31 (5th Cir.1985).
 Under 26 U.S.C. § 6323(i)(2) (1988), we look to state law to determine whether equitable subrogation is available. New York courts have routinely applied subrogation "where the funds of a mortgagee are used to satisfy the lien of an existing, known incumbrance when, unbeknown to the mortgagee, another lien on the property exists which is senior to his but junior to the one satisfied with his funds." King v. Pelkofski, 20 N.Y.2d 326, 333-34, 282 N.Y.S.2d 753, 758, 229 N.E.2d 435, 439 (1967). See, e.g., The Thrift v. Michaelis, 259 N.Y. 302, 181 N.E. 580 (1932); Whitestone Savings & Loan Association v. Moring, 286 A.D. 1042, 145 N.Y.S.2d 335 (2d Dep't 1955); Union Savings Bank of Patchogue v. Dudine, 40 Misc.2d 155, 242 N.Y.S.2d 692 (Sup.Ct.1963). *29 The purpose of subrogation is to prevent a junior lienor from converting the mistake of the lender "into a magical gift for himself." Long Island City Savings & Loan Association v. Skow, 25 A.D.2d 880, 881, 270 N.Y.S.2d 234, 236 (2d Dep't 1966). In effect, subrogation erases the lender's mistake in failing to discover intervening liens, and grants him the benefit of having obtained an assignment of the senior lien that he caused to be discharged. See Pipola v. Chicco, 274 F.2d 909, 914-15 (2d Cir.1960).
 A more subtle question is the effect of equitable subrogation in this case. The Government appears to suggest that subrogation is inappropriate because it cannot increase the extent to which Self Reliant's interest is secured. The Government's theory is that because the discharged Chase Manhattan mortgage (worth approximately $68,000) was for less than the difference between the value of the entire property (approximately $353,000) and the value of the life interest subject to the tax lien (approximately $260,000), it makes no difference whether Self Reliant has priority to the extent of the Chase Manhattan mortgage. In other words, the Government contends, Self Reliant would be secured to the extent of $93,000 ($353,000- $260,000) regardless of whether it took that amount from the proceeds of a sale after satisfaction of the tax lien or whether it took $68,000 ahead of the Government and took the remaining $25,000 after the Government.
FN2. The Government contends that under the doctrine of marshaling of assets, Self Reliant should be required to satisfy its lien solely from the remainder interest. Marshaling of assets cannot be required, however, when it will prejudice the senior creditor. See Walther v. Bank of New York, 772 F.Supp. 754, 767 (S.D.N.Y.1991). Self Reliant would be prejudiced if it were required to satisfy the subrogated Chase Manhattan lien from the remainder interest.
Although the decision to apply equitable subrogation is committed to the discretion of the trial court, the record is unclear as to whether the District Court recognized that it had discretion under New York law to subrogate Self Reliant to the discharged Chase Manhattan lien. Accordingly, we will vacate the judgment and remand the matter to the District Court for further consideration of the equities, as well as for any adjustments in the relative interests of the parties required by the payment or non-payment of interest on the portion of the Self Reliant mortgage corresponding to the prior Chase Manhattan mortgage. See Pipola v. Chicco, 274 F.2d at 915 (mortgagee and mortgagor entitled to priority over tax lien to extent of *30 discharged prior mortgage and hypothetical interest payments on prior mortgage).

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