Unpublished Disposition, 907 F.2d 155 (9th Cir. 1990)

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U.S. Court of Appeals for the Ninth Circuit - 907 F.2d 155 (9th Cir. 1990)

UNITED STATES of America, Plaintiff-Appellant,v.Edward G. WEBB and Marilyn K. Webb, Defendants-Appellees.

No. 89-55299.

United States Court of Appeals, Ninth Circuit.

Argued and Submitted May 11, 1990.Decided July 11, 1990.

Before HUG and TROTT, Circuit Judges, and EDWARD C. REED,*  Jr., District Judge.



The United States appeals the district court's judgment discharging the Webbs' 1980 tax debt because the IRS subordinated its tax lien on property once owned by the Webbs without notifying them. The district court's judgment is reversed and the case remanded with directions to enter the judgment sought by the IRS.


This court reviews the exercise of a district court's equitable powers under the "abuse of discretion" standard. See Lemon v. Kurtzman, 411 U.S. 192, 200 (1973). Whether the doctrine of estoppel applies is a question of law which this court reviews de novo. Mukherjee v. INS, 793 F.2d 1006, 1009 (9th Cir. 1986). We review the district court's application of the doctrine for abuse of discretion. Eilrich v. Remas, 839 F.2d 630, 632 (9th Cir.) cert. denied, 109 S. Ct. 60 (1988).


* The first issue this court must decide is which standard of review should be applied to this matter. The Government argues that the district court applied the doctrine of equitable estoppel and therefore this court may review de novo the district court's decision to determine whether that doctrine applies. The Webbs contend the district court was exercising its equitable powers, and therefore this court must review the decision under the abuse of discretion standard.

Based upon the language of the district court's judgment, it is clear that the district court did not engage in any type of estoppel analysis. The district court noted that there is no statutory basis for requiring the IRS to notify the tax debtors that it was subordinating its lien, but fashioned "in the interest of equity" an equitable duty. The sole reasoning given for creating this duty was the court's view of the burden this would place upon the IRS. The court stated, "In the absence of any binding requirement requiring notice and in the interest of equity, the smaller burden of notifying the taxpayer of negotiations to subordinate is greatly outweighed by the possibility of actual prejudice resulting from the lack of notice." We are convinced the district court intended to exercise equitable powers to reach this result, and we therefore review the district court's judgment for an abuse of discretion.


The Webbs cite Swann v. Board of Education, 402 U.S. 1, 15 (1971), for the proposition that " [o]nce a right and violation have been shown, the scope of a District Court's equitable powers to remedy past wrongs is broad, for breadth and flexibility are inherent in equitable remedies." While this statement is undoubtedly true, it presumes a legal wrong. This is not consistent with the facts or the law governing the instant case. The IRS had no legal duty to inform the Webbs of the subordination. Thus, the court did not use its equitable powers to fashion a remedy, but to fashion a duty. This was an abuse of the district court's discretion. We hold that the IRS did not have a duty, legal or equitable, to inform the Webbs of the subordination.

Since the IRS had no legal duty to inform the Webbs of the intended subordination, the IRS did not breach any legal duty owed to the Webbs. The partnership of Chula & May was the legal owner of the property in which the IRS held an interest--the tax lien. The IRS was not aware of the agreement between Chula & May and the Webbs, and had no reason to believe that the Webbs retained any interest in the property. The IRS, when requested to subordinate its tax lien to facilitate acquisition of new financing, had the authority to subordinate the lien, and did so believing that its actions were in the best interests of all involved.

From the record, it appears that Chula & May did not honor the contract with the Webbs and apply the funds received from refinancing the debt toward the tax lien. The Webbs did apparently suffer an injury because of this breach of contract. In this proceeding, however, the Webbs received a default judgment against Chula & May. While this judgment may prove to be worthless, it is the Webbs' only remedy, for it was Chula & May's breach of contract which caused the injury, not any conduct of the IRS; and our holding does no more than require the Webbs to be responsible for a legitimate tax debt, due and owing.


The IRS acted within the law in granting the subordination, and had no legal duty to notify the Webbs. The district court's judgment is reversed and this matter remanded to the district court to enter the judgment sought by the IRS.



The Honorable Edward C. Reed, Jr., Chief Judge, United States District Court, District of Nevada, sitting by designation


This disposition is not appropriate for publication and may not be cited to or by the courts of this circuit except as provided by 9th Cir. Rule 36-3