Opinion ID: 507186
Heading Depth: 3
Heading Rank: 3

Heading: Availability of equitable relief under California law

Text: 22 As we understand California law, equitable relief is available to Provident and First American if three conditions are met: (1) Provident's best interests would be best served by preventing a merger of the lien and the fee; (2) the purposes of justice would be served; and (3) the government cannot prove by a preponderance of the evidence that Provident actually intended to merge the lien into the fee. Ito v. Schiller, 213 Cal. 632, 3 P.2d 1, 2 (1931) (quoting Jameson v. Hayward, 106 Cal. 682, 39 P. 1078 (1895)); see also Strike v. Trans-West Discount Corp., 92 Cal.App.3d 735, 155 Cal.Rptr. 132, 137-38 (1979). We need not discuss the first condition, because there is no dispute that Provident's best interests would be served by preventing a merger. 23
24 To determine whether justice would be served by allowing Provident's lien to survive the sale, we consider how our resolution of the issue would affect the parties. We presume that Provident did not act in bad faith when it failed to discover the government's liens. If we do not grant equitable relief, Provident would lose $159,444 (the amount Provident paid for the property) because the property would be subject to tax liens totalling $534,000. The government, on the other hand, would realize $159,444 which it otherwise would not have received had Provident notified it of the sale. We recognize that any money received by the government would go towards satisfaction of legitimate tax liens. If Provident had notified the government, however, the government's junior liens would have been extinguished, see 26 U.S.C. Sec. 7425(b)(2) and Sohn v. California Pacific Title Ins. Co., 124 Cal.App.2d 757, 269 P.2d 223, 230 (1954), and the government would not have received any proceeds from the sale because the sale yielded only enough money to satisfy a portion of Provident's senior lien, see Caito v. United Calif. Bank, 20 Cal.3d 694, 144 Cal.Rptr. 751, 754, 576 P.2d 466 (1978) (junior lienor draws from proceeds only after foreclosing senior lienor paid off). Under these circumstances, the equities favor Provident, particularly since 26 U.S.C. Sec. 7425(b)(1) eliminates virtually any harm the government suffered when it did not receive notice of the sale. 25 Because Provident failed to notify the government, section 7425(b)(1) provides that the sale was made subject to and without disturbing the government's liens. Even if Provident's senior lien survives the sale, the government is virtually in the same position it was in before the sale. If Provident sells the land, or if the government forecloses on it, the proceeds from the sale first go towards satisfaction of Provident's lien and any remaining proceeds go towards satisfaction of the government's liens. 26 We therefore conclude that Provident and First American could prove a set of facts which would show that the purposes of justice would be served if equitable relief were granted. 27
28 The final condition for receiving equitable relief involves the question of Provident's intention on the issue of merger. Because Provident did not express any intention on the merger issue, equity will presume that Provident did not intend to merge its lien with its fee interest if two conditions are met: (1) Provident's best interests would be served by preventing the merger, and (2) the purposes of justice would be served. Ito v. Schiller, 213 Cal. 632, 3 P.2d 1, 2 (1931); Strike v. Trans-West Discount Corp., 92 Cal.App.3d 735, 155 Cal.Rptr. 132, 137-38 (1979). We have concluded that Provident and First American could prove a set of facts to fulfill these conditions. We have also presumed that Provident intended to prevent a merger of its interests. On remand, the presumption is rebuttable if the government can prove by a preponderance of the evidence that Provident actually intended to merge its interests. See Sheldon v. La Brea Materials, 216 Cal. 686, 15 P.2d 1098, 1101 (1932) (merger rule not applied when no direct or circumstantial evidence of an express intention to merge); see also Strike, 92 Cal.App.3d 735, 155 Cal.Rptr. 132, 137 (placing burden of proof on person arguing that merger occurred).