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Wadsworth v. Talmage

United States District Court, D. Oregon

August 1, 2017

JOHN WADSWORTH, individually and as trustee for the RBT VICTIM RECOVERY TRUST, Plaintiff,
v.
RONALD B. TALMAGE, an individual, ANNETTE C. TALMAGE, an individual, RIVERCLIFF FARM, INC., an Oregon corporation, NEW CENTURY PROPERTIES LTD., a foreign corporation, UNITED STATES OF AMERICA, and MULTNOMAH COUNTY, a political subdivision, Defendants.

          Thomas A. Ped, WILLIAMS, KASTNER GREENE & MARKLEY, William B. Ingram and Alan R. Houston, STRONG & HANNI, PC, Of Attorneys for Plaintiff John Wadsworth, individually and as trustee for the RBT Victim Recovery Trust.

          David A. Hubbert, Acting Assistant Attorney General; Lindsay L. Clayton, Jennifer Y. Golden, and Alex Halverson, Trial Attorneys, UNITED STATES DEPARTMENT OF JUSTICE, TAX DIVISION, Ben Franklin Station, Billy J. Williams, United States Attorney, UNITED STATES ATTORNEY'S OFFICE, DISTRICT OF OREGON Of Attorneys for Defendant United States of America.

          OPINION AND ORDER

          Michael H. Simon United States District Judge.

         Plaintiff John Wadsworth (“Wadsworth”), individually and as trustee for the RBT Victim Recovery Trust (collectively, the “Trust”), has sued Ronald B. Talmage (“Talmage”), Annette C. Talmage, RiverCliff Farm, Inc. (“RFI”), New Century Properties Ltd. (“NCPL”), the United States of America (the “United States”), and Multnomah County (collectively, “Defendants”), seeking to quiet title in real property located at 35701 NE Chamberlain Road in Corbett, Oregon (the “RiverCliff Property”). The only claim that the Trust asserts against the United States is to quiet title. The United States moves to dismiss that claim pursuant to Federal Rules of Civil Procedure 12(b)(1) and 12(b)(6).[1] For the reasons that follow, the motion is granted.

         STANDARDS

         A. Motion to Dismiss for Lack of Subject Matter Jurisdiction

         Federal courts are courts of limited jurisdiction. Gunn v. Minton, ___ U.S. ___, 133 S.Ct. 1059, 1064 (2013) (citation omitted). As such, a court is to presume “that a cause lies outside this limited jurisdiction, and the burden of establishing the contrary rests upon the party asserting jurisdiction.” Kokkonen v. Guardian Life Ins. Co. of Am., 511 U.S. 375, 377 (1994) (citations omitted); see also Robinson v. United States, 586 F.3d 683, 685 (9th Cir. 2009); Safe Air for Everyone v. Meyer, 373 F.3d 1035, 1039 (9th Cir. 2004). A motion to dismiss under Federal Rule of Civil Procedure 12(b)(1) for lack of “subject-matter jurisdiction, because it involves a court's power to hear a case, can never be forfeited or waived.” United States v. Cotton, 535 U.S. 625, 630 (2002). An objection that a particular court lacks subject matter jurisdiction may be raised by any party, or by the court on its own initiative, at any time. Arbaugh v. Y&H Corp., 546 U.S. 500, 506 (2006); Fed.R.Civ.P. 12(b)(1). The Court must dismiss any case over which it lacks subject matter jurisdiction. Fed.R.Civ.P. 12(h)(3).

         B. Motion to Dismiss for Failure to State a Claim

         A motion to dismiss for failure to state a claim may be granted only when there is no cognizable legal theory to support the claim or when the complaint lacks sufficient factual allegations to state a facially plausible claim for relief. Shroyer v. New Cingular Wireless Servs., Inc., 622 F.3d 1035, 1041 (9th Cir. 2010). In evaluating the sufficiency of a complaint's factual allegations, the court must accept as true all well-pleaded material facts alleged in the complaint and construe them in the light most favorable to the non-moving party. Wilson v. Hewlett-Packard Co., 668 F.3d 1136, 1140 (9th Cir. 2012); Daniels-Hall v. Nat'l Educ. Ass'n, 629 F.3d 992, 998 (9th Cir. 2010). To be entitled to a presumption of truth, allegations in a complaint “may not simply recite the elements of a cause of action, but must contain sufficient allegations of underlying facts to give fair notice and to enable the opposing party to defend itself effectively.” Starr v. Baca, 652 F.3d 1202, 1216 (9th Cir. 2011). All reasonable inferences from the factual allegations must be drawn in favor of the plaintiff. Newcal Indus. v. Ikon Office Solution, 513 F.3d 1038, 1043 n.2 (9th Cir. 2008). The court need not, however, credit the plaintiff's legal conclusions that are couched as factual allegations. Ashcroft v. Iqbal, 556 U.S. 662, 678-79 (2009).

         A complaint must contain sufficient factual allegations to “plausibly suggest an entitlement to relief, such that it is not unfair to require the opposing party to be subjected to the expense of discovery and continued litigation.” Starr, 652 F.3d at 1216. “A claim has facial plausibility when the plaintiff pleads factual content that allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged.” Iqbal, 556 U.S. at 678 (citing Bell Atl. Corp. v. Twombly, 550 U.S. 544, 556 (2007)).

         BACKGROUND

         At its core, this is a lawsuit to quiet title to real property. Both the Trust and the United States assert rights against the RiverCliff Property. The Trust is composed of victims of an alleged Ponzi scheme conducted by Talmage.

         As alleged in the Second Amended Complaint (“SAC”) (ECF 39), in November 1997, Talmage and his then-spouse, Kumiko Talmage, purchased the RiverCliff Property. SAC ¶ 16. The down payment for the Property was made with funds stolen from Talmage's then-investor clients. Id. The balance of the purchase price was paid in full in February 1998. Id. None of these earlier investor clients include any of the beneficiaries of the Trust. SAC ¶¶ 16-18. In 2001, Talmage divorced Kumiko and agreed to pay $1.4 million for her half-interest in the RiverCliff Property, but he did not pay her or receive her interest in the Property at that time. SAC ¶ 18.

         Beginning in 2002, Talmage began receiving funds from the beneficiaries of the Trust, allegedly through false pretenses and embezzlement. SAC ¶ 17. These funds were used to make improvements on the RiverCliff Property and to pay pre-2002 investor clients whose funds were used to acquire the property in 1997 and to improve it thereafter. SAC ¶¶ 17, 26. On January 21, 2005, Talmage, acting through NCPL, paid $1.5 million to Kumiko Talmage, and she conveyed to Talmage her half-interest in the RiverCliff Property. SAC ¶ 18. Talmage used money fraudulently received from the Trust's beneficiaries to pay Kumiko. Id. By February 2005, Talmage claimed sole ownership over the RiverCliff Property. Id. On June 30, 2005, Talmage conveyed title to the RiverCliff Property to RFI, a subsidiary of NCPL. SAC ¶ 19. Talmage controlled both RFI and NCPL. SAC ¶¶ 12, 19. After the conveynance, Talmage continued to reside in and use the RiverCliff Property as his own. SAC ¶ 19.

         The United States claims that Talmage and his current spouse, Annette Talmage (collectively, the “Talmages”) failed to pay federal income taxes for the 1998-2005 and 2007 tax years. SAC ¶ 33. The United States filed notices of federal tax liens on September 17, 2008; November 28, 2008; May 20, 2013; and January 31, 2014. Id. In related litigation, the United States seeks to foreclose its tax liens on the RiverCliff Property under the theory that Talmage's transfer of the RiverCliff Property to RFI was fraudulent or done for the purpose of avoiding his tax liabilities. SAC ¶ 36. The Trust does not dispute the amount of the Talmages' tax liabilities. SAC ¶ 35. The Trust also does not dispute that RFI “is not a bona fide purchaser and can have no better title to the [RiverCliff] [P]roperty than Talmage.” SAC ¶ 37. The Trust asserts, however, that “[b]ecause Talmage never had title to the funds he embezzled, Talmage also never had valid title to the RiverCliff Property, which was acquired and improved with the proceeds of the embezzled funds.” SAC ¶ 37. Thus, argues the Trust, the federal tax liens “never attached to the RiverCliff Property.” SAC ¶ 38.

         The Trust commenced this lawsuit on October 28, 2016. ECF 1. In the first motion to dismiss filed by the United States, the Government argued that, among other things, the Trust has not established standing to sue the United States. ECF 19. The Court granted the Government's motion to dismiss and gave the Trust leave to replead. ECF 36. On March 13, 2017, the Trust obtained a $90 million judgment (after trebling) against Talmage in Utah state court and later registered that judgment in Oregon state court. SAC ¶¶ 30-32.

         DISCUSSION

         The Government moves to dismiss the Trust's quiet title claim against the United States on two alternative grounds. First, the United States argues that the Court continues to lack subject matter jurisdiction because the Trust did not have Article III standing at the commencement of this action. Second, the Government argues that the Trust cannot quiet title to the RiverCliff Property as a matter of law based on the allegations contained in the Second Amended Complaint.

         A. Standing

         The Court dismissed the original Complaint because it contained no allegation that the Trust's beneficiaries had assigned their claims to Wadsworth or the Trust. ECF 36. Thus, the Trust did not properly allege Article III standing. Although the Second Amended Complaint alleges that “[e]ach beneficiary, including Mr. Wadsworth, has assigned his, her or its right, title and interest in the claims herein to Mr. Wadsworth as trustee of the Victim Trust, ” SAC ¶ 1, the United States argues that this allegation continues to be insufficient because it does not allege when the assignment occurred. If the assignment occurred after the Trust filed the original Complaint, the United States argues, the Trust did not have Article III standing at the time the Trust filed the original Complaint. Skaff v. Meridien N. Am. Beverly Hills, LLC, 506 F.3d 832, 838 (9th Cir. 2007) (“The existence of standing turns on the facts as they existed at the time the plaintiff filed the complaint.”).

         The Court concludes, however, that the Second Amended Complaint adequately alleges standing. In its Order dismissing the original Complaint, the Court allowed the Trust to file an amended complaint to allege when the Trust's beneficiaries assigned their claims to Wadsworth or the Trust. ECF 36. The Court construes its Order as also granting the Trust leave to file a supplemental pleading under Rule 15(d) of the Federal Rules of Civil Procedure. Because the Trust alleges that the assignment occurred before it filed the Second Amended Complaint, the Trust now adequately alleges standing. See Northstar Fin. Advisors Inc. v. Schwab Invs., 779 F.3d 1036, 1044 (9th Cir. 2015) (noting that “Rule 15(d) permits a supplemental pleading to correct a defective complaint and circumvents ‘the needless formality and expense of instituting a new action when events occurring after the original filing indicated a right to relief'” (quoting 6A Charles Alan Wright, Arthur R. Miller, & Mary Kay Kane, Federal Practice and Procedure § 1505 (3d ed. 2015)).

         B. Quiet Title

         To determine whether the Trust has stated a valid claim to quiet title to the RiverCliff Property, the Court begins by analyzing the present ownership of the RiverCliff Property within the meaning the words “property” and “rights to property” contained in the tax lien statute, 26 U.S.C. § 6321 (“§ 6321”). The Trust argues that it adequately alleges that its beneficiaries presently own the RiverCliff Property. The United States responds that Talmage, as the owner of the RiverCliff Property, conveyed title to RFI, as his nominee[2] or alter ego. If the Trust is correct, then the Trust states a valid claim to quiet title. If, however, the United States is correct and RFI holds legal title to the RiverCliff Property as Talmage's nominee or alter ego, then the Court must determine whether the existing federal tax liens have priority over any interest asserted by the Trust's beneficiaries.

         1. Ownership of the RiverCliff Property

         The Trust does not allege that its beneficiaries hold legal title to the RiverCliff Property-or have ever held legal title to the RiverCliff Property, lived in that property, or used that property on a regular basis. Rather, the Trust argues that it has sufficiently alleged that its beneficiaries currently own the Property under either the equitable theory of resulting trust[3] or the equitable theory of constructive trust.[4] SAC ΒΆΒΆ 40, 43. These are legal conclusions couched as factual allegations. ...


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