Opinion ID: 490620
Heading Depth: 2
Heading Rank: 3

Heading: Priority of the Federal Lien

Text: 21 The district court ordered that the Polk property be sold and the proceeds applied to the costs of the sale, the outstanding first mortgage, the federal tax lien (up to one-half of the remaining proceeds), and Anderson, in that order. Anderson contends that, even if the federal lien survived the foreclosure judgment, it should be subordinated to his interests for two reasons: first, because Anderson once held two mortgages, both senior to the tax lien; second, because Anderson has expended substantial sums to maintain and improve the Polk property since he bought it. 22 Whether or not Anderson retains any legal interest in the Polk property corresponding to the two former mortgages is a matter of Arizona law. See Magneson v. C.I.R., 753 F.2d 1490, 1495 (9th Cir.1985), citing Aquilino v. United States, 363 U.S. 509, 512-13, 80 S.Ct. 1277, 1279-80, 4 L.Ed.2d 1365 (1960). According to Arizona law, a mortgagee's interest does not survive the discharge or satisfaction of the underlying debt, regardless of the mortgagee's intent. Best Fertilizers of Arizona, Inc. v. Burns, 116 Ariz. 492, 493, 570 P.2d 179, 180 (1977) (en banc). It follows that Anderson, now that his mortgage has been discharged, has no mortgagee's interest entitled to priority over the federal lien in a judicial sale. 23 Anderson argues that principles of equity entitle him to priority over the tax lien. Specifically, he wishes to be subrogated to the rights of the (former) mortgagees (one of which was himself) as against the government. Whether or not Anderson is entitled to subrogation is a matter of Arizona law. See Simon v. United States, 756 F.2d 696, 698 (9th Cir.1985), citing 26 U.S.C. Sec. 6323(i)(2). In Arizona, 24 Subrogation is the substitution of another person in the place of a creditor, so that the person in whose favor it is exercised succeeds to the rights of the creditor in relation to the debt. 25    26    27 So when one, being himself a creditor, pays another creditor, whose claim is preferable to his, it is held that the person so paying is subrogated to the rights of the other creditor. 28 Mosher v. Conway, 45 Ariz. 463, 469, 46 P.2d 110, 112 (1935). 29 The doctrine of subrogation does not apply to Anderson's purchase of the property in satisfaction of his own third mortgage. [T]here can be no right of subrogation when one pays a debt which he is obligated to pay. Del E. Webb Hotel Co. v. Bentley, 8 Ariz.App. 408, 412, 446 P.2d 687, 691 (1968). Nor should the doctrine be applied to preserve the priority of the second mortgage. The purpose of the doctrine is manifestly to protect a creditor's rights against the property when the creditor is forced to pay off competing creditors. The doctrine operates in relation to the debt which he pays off. In this case, Anderson no longer has a creditor's interest to protect; he now owns the fee interest. By the same token, he needs no subrogation to give him leverage against the debtor; the debtor (Polk) is out of the picture. Moreover, subrogation can only be granted when an equitable result will be reached. Mosher, 45 Ariz. at 468, 46 P.2d at 112. But in this case the equities do not decisively favor Anderson, who failed to notify the United States of his foreclosure. 30 Anderson relies on Pipola v. Chicco, 274 F.2d 909 (2d Cir.1960). In Pipola, a senior mortgage (A) on real property was paid off by the purchaser with borrowed funds secured by a new mortgage (B). In the meantime, a tax lien had been filed on the property, junior to A but senior to B. When the government sued to enforce the tax lien, the parties agreed that the new mortgagee should be paid ahead of the government. 31 It is unlikely that a similar result would be reached today without agreement of the parties. In 1966, Congress added section 7425 to the tax code, describing in narrow terms the circumstances in which a federal tax lien can be extinguished without the government's consent. The effect of this provision was considered in Southern Bank v. IRS, 770 F.2d 1001 (11th Cir.1985), cert. denied sub nom. Mid-State Homes, Inc. v. United States, --- U.S. ----, 106 S.Ct. 2890, 90 L.Ed.2d 977 (1986), a case factually similar to this one. The court concluded that: 32 the failure of the mortgagees to comply with the notice provisions of 26 U.S.C. Sec. 7425 before they conducted the foreclosure sales and purchased the property, caused their mortgage liens to be extinguished and the federal liens to be elevated from their junior status. 33 Id. at 1009. The court added, Equitable principles do not persuade us to reach a contrary conclusion for the harsh results now imposed could have easily been avoided by [the foreclosing mortgagees]. Id. We agree with the reasoning of the Eleventh Circuit. 34 Finally, Anderson claims reimbursement for his maintenance and improvement expenses before the government takes anything. The IRS disputes whether all of the claimed expenses were really for maintenance. This court has indicated that maintenance expenses incurred by a senior lienholder can be given priority over a tax lien. See Little v. United States, 704 F.2d 1100, 1108 (9th Cir.1983) (Little I ); cf. Little v. United States, 794 F.2d 484 (9th Cir.1986) (Little II ). Both Little I and Little II involved a government redemption of property after a non-judicial foreclosure sale. Accordingly, 26 U.S.C. Sec. 7425(d) applied to that case, while it does not apply to the present case. Section 7425(d) incorporates by reference 28 U.S.C. Sec. 2410(d), which provides explicitly for payment by the government (as redemptioner) for maintenance and improvements. Again, that statute is not applicable in the present case, nor has Anderson suggested another basis for his claims to compensation, other than general principles of equity. We reject this claim. 35 AFFIRMED.