US v Schwartz, a recent case out of a federal district court in South Carolina, highlights the question of whether parallel proceedings in state probate court should lead the district court to decline to exercise its jurisdiction under the Declaratory Judgment Act to resolve lien attachment and priority issues. It is an issue I had not considered before, and the opinion raises some questions which I am not sure how to answer. I will briefly summarize the facts and the reasons for the court’s decision to let a county probate court decide whether the US interests have priority over other creditors.
A quick summary of the facts will tee up the issue. The decedent Margaret Knapp died in 2008. At the time of her death Knapp owned two interests in South Carolina real properties, one of which as the linked obituary indicates she had moved into shortly before her death. Probate proceedings in Charleston County South Carolina commenced after she passed away.
The opinion describes multiple proceedings in probate court:
a petition in the Charleston County Probate Court to invalidate a 2008 will executed by the decedent, reinstitute a 2006 will because of undue influence, and remove co-defendant Marc Knapp as personal representative of the estate; (2) an action in the South Carolina Court of Common Pleas for Charleston County to set aside a deed to unrelated property previously owned by the decedent; (3) a second action in the South Carolina Court of Common Pleas seeking partition of the unrelated property; and (4) the appointment of Schwartz [the defendant in the federal case] as special representative of the estate.
While the estate’s personal representative filed a Form 706, the estate tax due of over $400,000 was unpaid. IRS assessed the estate tax and made demand for payment. The decedent’s estate also filed 2007 and 2008 income tax returns on behalf of Knapp, also without payment of over $150,000 in tax. IRS also assessed and made demand for payment of the income tax. The estate and income taxes remained unpaid; to ensure priority of its interest the government filed notices of federal tax lien (NFTL) in the public records of Charleston County for both the income and estate taxes.
On the same day in 2016 that the US filed its NFTL, the estate’s personal representative Schwartz filed a Petition to Sell Real Estate and for Approval of Priority of Application of Proceeds in the Probate Court seeking an order allowing him to sell the South Carolina real properties free and clear of the United States’ tax liens.
About six weeks after Schwartz filed his petition in probate court, United States filed the action in district court, “seeking a declaratory judgment that: (1) its tax liens attach to two real properties located in Charleston County; and (2) those liens have priority over the other parties named in this action.”
The suit in federal court did not seek enforcement; rather it relates to priority and “contends that its estate tax liens have priority over claims by the special administrator Schwartz and co-defendant Marc Knapp. The United States further contends that its income tax liens for 2007 have priority over any other party’s interest in the Properties.” In the complaint the US asks the federal court to “declare that the proceeds of any sale of the subject properties be paid first to the United States to be applied in satisfaction of the Estate of Margaret Lee Knapp’s unpaid federal estate and income tax liabilities.”
About a month after filing the federal action, the US also filed a motion for injunctive relief, asking the court “to issue an injunction prohibiting Schwartz from selling the Properties unless he deposits all sale proceeds into the Court’s registry pending a final determination of the relative priorities of the parties’ interests.”
Schwartz objected claiming that the district court did not have subject matter jurisdiction and also arguing that the state court should have jurisdiction under Colorado River Water Conservation District v US. Colorado River is a 1970’s Supreme Court case which provides the basis for one of the many federal abstention doctrines that govern when a federal court should decline to proceed even if it did have subject matter jurisdiction when there is a related state court proceeding. (As an aside, for those who share an interest in mundane civil procedure doctrines as well as tax procedure, a Shriver Center on Poverty Law manual has a nice description of the various federal abstention doctrines, including the Colorado River doctrine).
The federal district court opinion decides in favor of Schwartz and his efforts to remove the case from federal court, but not on subject matter jurisdiction grounds or on the specific application of the Colorado River abstention doctrine. Instead, the district court judge discusses its power to issue declaratory judgments and also for its general discretion to not that exercise judicial power, and then applies both to the messy facts in the case at hand:
The Court has “great latitude in determining whether to assert jurisdiction over declaratory judgment actions.”. The Declaratory Judgment Act provides in pertinent part that “[i]n a case of actual controversy within its jurisdiction,… [the Court] … may declare the rights and other legal relations of any interested party seeking such declaration, whether or not further relief is or could be sought.” 28 U.S.C. § 220l(a) (emphasis added). “This power has consistently been considered discretionary.” Centennial Life Ins. Co. v. Poston , 88 F.3d 255, 256 (4th Cir. 1996) [liberal citation omissions here and throughout]
A declaratory judgment action “is appropriate ‘when the judgment will serve a useful purpose in clarifying and settling the legal relations in issue, and … when it will terminate and afford relief from the uncertainty, insecurity, and controversy giving rise to the proceeding.’” Poston , 88 F.3d at 256 (quoting Quarles, 92 F.2d at 325).
After providing the context for its power to act, the opinion also notes that sometimes exercising discretion not to act when there is a related state proceeding is appropriate:
At the same time, whenever a parallel proceeding is pending in state court, district courts must also take into accounts ‘considerations of federalism, efficiency, and comity.’”
The opinion notes that the Fourth Circuit has provided four factors for the Court to consider in balancing the state and federal interests:
- whether the state has a strong interest in having the issues decided in its courts;
- whether the state courts could resolve the issues more efficiently than the federal courts;
- whether the presence of overlapping issues of fact or law might create unnecessary entanglement between the state and federal courts; and
- whether the federal action is mere procedural fencing, in the sense that the action is merely the product of forum-shopping.
While noting that the record did not suggest that the US was forum shopping it felt that the other three factors “weigh heavily” in favor of dismissal:
The decedent’s estate has already been opened in the Charleston County Probate Court, and several issues related to the decedent’s estate have been and continue to be addressed in the South Carolina state court system. Resolving conflicting claims to a decedent’s estate is one of the primary functions of a probate court, and this Court has no doubt that the Charleston County Probate Court is the more suitable forum to handle the United States’ claim.
The opinion (and this post) barely scratch the surface when considering some of the knotty jurisdictional issues when there are state court proceedings that relate to in some ways federal tax assessments. I note that the factors discussed in Schwartz vary somewhat from the Colorado River doctrine, and while no expert in that area it seems they provide for more flexibility for federal courts to punt in deciding these priority issues while there is a related state court proceeding. This seems like a case more appropriate for federal court to decide, and one certainly that the government would want to make sure generally is resolved.
Keith was puzzled by this case, wondering why Justice did not simply remove the lien priority case to district court instead of bringing a declaratory judgment and injunction case, though he was unsure if there was something unique about probate cases but that generally the US has a right to remove cases to federal courts when it is a defendant. As Keith notes, this decision seems to leave to the state court the ability to make a determination regarding the priority of two federal tax liens. That is unusual and something the government never wants.