United States District Court, D. Arizona
Eric L. Gilbert, et al., Plaintiffs,
v.
United States of America, et al., Defendants.
ORDER
Honorable John J. Tuchi United States District Judge
At
issue is the Motion to Dismiss and/or, Alternatively, Motion
for Summary Judgment (Doc. 27, MTD) and Separate Statement of
Facts (Doc. 28, DSOF) filed by Defendant Philip K. Leopard,
as Trustee of Namaca Management, Ltd. Plaintiffs Eric L. and
Audra Gilbert filed a Response (Doc. 39, Resp. to MTD) with a
Separate Statement of Facts (Doc. 40, PSOF), and Leopard
filed a Reply (Doc. 48, Reply to MTD). Leopard also filed a
Reply Statement of Facts (Doc. 49), but because this filing
is prohibited by Local Rule 56.1(b), the Court will strike it
from the docket.
Also at
issue is Leopard's Motion for Leave to File First Amended
Verified Answer and Counterclaim (Doc. 57, MTA), to which
Plaintiffs filed a Response (Doc. 60, Resp. to MTA), and
Leopard filed a Reply (Doc. 61, Reply to MTA).
Defendant
the United States did not file briefs in response to
Leopard's Motions. The Court resolves these Motions
without oral argument. See LRCiv 7.2(f).
I.
BACKGROUND
In the
First Amended Complaint (FAC)-the operative
pleading-Plaintiffs allege the following. (Doc. 18, FAC.) On
July 2, 2014, Plaintiffs entered into a Contract for Deed
(“Contract”) with Namaca Management, Ltd., a
foreign “Unincorporated Business Trust
Organization.”[1] (FAC Ex. A, Contract.) Defendant Leopard
is Namaca's Trustee. The Contract provides the terms for
a sale by Namaca (Seller) to Plaintiffs (Buyer) of a
residential property (“Property”) in Peoria,
Arizona, for $1.2 million, with a $60, 000 down payment
payable upon execution of the Contract. The Contract
provides, “The Seller guarantees the Property is not
currently encumbered and further agrees to take no action
causing the Property to become encumbered so long as this
Contract is in effect.” (Contract at 1.) It also
states:
Seller affirms they have not allowed any interests (legal
rights) to be created who [sic] affect the ownership or use
of this property. No. other persons have legal rights in this
property, except the rights of utility companies to use this
property along the road or for the purpose of serving this
property. There are no pending lawsuits or judgments against
Seller or other legal obligations, which may be enforced
against the Property.
(Contract at 2.)
On July
3, 2014-the day after the parties entered into the
Contract-First American Title Agency issued a Condition of
Title report that reflected the existence of a tax lien on
the Property in favor of the United States, recorded on March
5, 2014, in the amount of $416, 372.05. In response, Leopard
represented to Plaintiffs that the tax lien was an invalid
lien.
On July
19, 2014, Plaintiffs and Namaca entered into an Amendment to
Contract for Deed (“Amendment”). (FAC Ex. B,
Amendment.) Among other things, it provided:
Title search has discovered an invalid lien and other issues
with title to the Property. These title issues shall be
resolved prior to or at the time of final conveyance of the
Property deed to Purchaser. See Attachment B “ALTA
Commitment (6-17-06)-N”, and Seller is taking immediate
and appropriate steps to have the title issues resolved as
quickly as possible.[2]
Plaintiffs
signed the Amendment, and, although a signature is present as
Authorized Signatory on behalf of Namaca, it is unclear whose
signature it is.[3]
The
Contract provided that Plaintiffs pay $4, 750 per month for
the first 24 months and make an additional lump sum payment
of $90, 000 by March 1, 2015, which Plaintiffs did. Under the
Contract, after 24 months, the monthly payments are to be
calculated by way of an attached Adjustable Rate Rider, and
the final balloon payment on the Property is due on August 1,
2019.
On
November 4, 2015, the United States recorded a second tax
lien on the property, in the amount of $283, 007.48. In
response, Plaintiffs allege that Leopard represented
“on several occasions” that the tax liens would
be removed from the Property. (FAC ¶ 23.)
On
August 31, 2017, Plaintiffs notified Leopard's attorney
that, because Namaca is a foreign trust, the Foreign
Investment in Real Property Tax Act (FIRPTA) requires them to
withhold a portion of the purchase price due. Furthermore,
Plaintiffs contended that the rules governing Fixed or
Determinable Annual or Periodic (FDAP) income of nonresident
aliens or foreign partnerships require them to withhold a
portion of their interest payments. Accordingly, Plaintiffs
requested Namaca's Taxpayer Identification Number.
On
September 6, 2017, Leopard responded by sending extensive
documentation, and it did not include an Internal Revenue
Service (I.R.S.) Form W-8-a foreign entity's claim that
it is exempt from certain tax withholdings-but did include
materials purporting to be withholding and reporting
certificates apparently downloaded from a “Sovereignty
Education and Defense Ministry” (SEDM) website. These
materials represented that Leopard and Namaca are
“non-resident non-persons” exempt from U.S. tax
withholding.
On
September 22, 2017, Plaintiffs' counsel responded that
the I.R.S. has discredited Leopard's representations and
that Plaintiffs must withhold all additional sums payable
under the Contract until their FDAP withholding obligations
have been satisfied. On September 29, 2017, Leopard responded
by sending a 174-page publication that attempts to refute the
I.R.S.'s publication titled “The Truth About
Frivolous Tax Arguments.” Leopard stated that the
Property is not a “U.S. real property interest”
subject to statutory withholding and that Plaintiffs'
compliance with I.R.S. withholding requirements would be a
breach of the Contract. Leopard repeated his position in
letters dated October 4 and 6, 2017, that Plaintiffs'
failure to make full payments to Namaca under the Contract is
a breach.
On
October 13, 2017, Plaintiffs filed this action against
Leopard, as Trustee for Namaca, and against the United
States. (Doc. 1.) On December 7, 2017, Leopard recorded a
Notice of Election to Forfeit (DSOF Ex. B, Notice) in
Arizona, which purports to forfeit Plaintiffs' interests
under the Contract if they fail to pay the balance due on the
Contract-over $1 million-by December 27, 2017. Then, on
December 28, 2017, Leopard recorded an Affidavit of
Completion of Forfeiture (DSOF Ex. D, Affidavit) in Arizona,
purporting to forfeit Plaintiffs' interests under the
Contract for failure to pay monies due.
In the
FAC, Plaintiffs raise five claims against Defendants: (1)
quiet title, against both Defendants; (2) interpleader,
against both Defendants; (3) breach of contract and specific
performance, against Namaca; (4) declaratory judgment,
against Namaca; and (5) wrongful recording under A.R.S.
§ 33-420, against Namaca. Two theories underlie
Plaintiffs' claims. First, Plaintiffs contend the
Contract allows them to make a payment in full for the
Property at any time, and they are prepared to do so now, but
Namaca is not able to convey the Property to them with clear
title as it is obligated to do under the Contract. Second,
Plaintiffs are caught between the United ...