Gilbert v. United States

          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 ...