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Stop in the Name of Love and other Legal Arguments Regarding Unpaid Taxes

Posted on Dec. 7, 2020

When one of the top songwriters of the Motown era, Edward J. Holland, Jr., has tax problems that generate a case involving lien priorities the temptation to write a post highlighting some of those song titles becomes too great for a mere mortal blogger to resist. I realize that most readers will not appreciate the greatness of a song writer whose peak years of productivity were 1963-1967, but I Can’t Help Myself from highlighting some of these great songs. For those few readers old enough to have grown up with the amazing Motown songs of the 1960s, the case provides a trip through memory lane. In United States v. Holland, No. 2:13-cv-10082 (E.D. Mich. 2020) the court decides that the federal tax lien has priority of the claim by attorneys for their fees from certain funds interpleaded from the sale of royalties on the songs written by Mr. Holland. Guest blogger Matthew Hutchens  wrote about an earlier phase of this case which has been You Keep Me Hangin On for quite some time. At this point the attorneys have Nowhere to Run except maybe back to the 6th Circuit.

About five years ago I wrote another blog post featuring the songs of a singer/songwriter, James Taylor, when someone with the same name had tax penalty issues. I cannot say that my prior post was a huge hit, perhaps because my musical taste runs a little to the geriatric side, but undeterred, I launch into post with musical Reflections.

When we last wrote about Mr. Holland, he had run up a small tab to the U.S. Treasury of about $19 million. A liability of this size will cause even a wounded IRS to Run, Run, Run to try to collect that money. Fortunately for the IRS the royalties for Mr. Holland’s songs were sold for $21 million and placed into the court’s registry as interpleaded funds. With a fund of that size, the IRS was not the only party thinking How Sweet It Is. This case involves the effort by attorneys who performed work for Mr. Holland to recover fees from the interpleaded funds. For reasons discussed below, the IRS argued that the attorneys could only seek their fees from Mr. Holland personally and not from these interpleaded funds.

The issue turns on whose funds were interpled. The IRS argues that the funds came from an entity while the attorneys argue it really came from Holland himself. The attorneys argue that Holland defrauded them. They argue:

that Holland fraudulently disguised the settlement proceeds as a “surreptitious loan” in order to avoid paying his attorneys. PY Resp. at 5-6, 14. Without further elaboration or citation to legal authority, Patmon and Young conclude that Holland’s alleged scheme to evade his creditors somehow entitles them to a constructive trust and attorney liens that would attach to the interpleaded funds — which are EHLP’s assets. Id. These theories lack merit.

Essentially, the attorneys argue that EHLP is the alter ego, nominee or fraudulent transferee of Holland hoping to obtain a Band of Gold. Those theories were at the center of the previous case on which we posted. In order to succeed the attorneys need to show that they have a lien for their fees that attaches to the funds. The court describes the types of attorney’s liens available in Michigan:

Michigan law recognizes two types of attorney liens: “(1) a general, retaining, or possessory lien, or (2) a special, particular, or charging lien.” A retaining lien is an attorney’s “right to retain possession of all documents, money, or other property of the client until the fee for services is paid,” and depends upon the attorney’s actual possession of such property. Patmon and Young are plainly not entitled to a retaining lien, as they cannot claim possession of the interpleaded funds held in the Court’s registry.

A charging lien, by contrast, is “a lien placed on a client’s judgment by an attorney who worked on the matter resulting in the judgment.” A charging lien attaches only to the judgment or recovery proceeds from the particular suit on which the attorney worked. The Court previously held that the interpleaded funds would not be subject to any charging liens Patmon and Young may obtain, as those funds “cannot reasonably be considered a ‘judgment or recovery’” stemming from Patmon’s and Young’s representation of Holland in the 1988 or 1992 litigation. (citations omitted)

Based on the absence of a valid attorney’s lien, the attorneys here cannot take from the interpled funds and must look only to Holland himself in order to obtain a recovery.

Next, the court looks at the source of the interpled funds in order to determine if Holland has an interest in those funds that would allow the attorneys to pursue a claim. It determines that EHLP, the partnership that placed the funds with the court, is a separate legal entity and that placing the funds with the court did not convert the funds from partnership assets to an individual asset of Holland. Following on that determination it concludes that creditors of the partnership have first right to the funds. This gives the attorneys almost Nowhere to Run.

After the partnership debts stands the IRS with its lien. The attorneys try to argue that the IRS lien had lapsed, but the court finds the IRS properly refiled its liens which causes the attorneys Nothing but Heartaches. Their liens were inchoate because the lawsuit they started in 2004 was still pending without final resolution:

Patmon’s and Young’s interests in Holland’s assets, by contrast, are not choate. Any judgment for damages, constructive trust, or other remedy obtained in connection with the state-court action would not become choate until that judgment is entered and would not relate back to the time the action was filed to take priority over the federal tax liens….

The attorneys asked for Just One Last Look seeking to get the court to consider the super-priority allowed to attorney’s liens over the federal tax lien pursuant to IRC 6323(b)(8). The problem with this argument is that they lack a retaining or charging lien upon which to establish the super-priority. In other words, It’s the Same Old Song about their failed liens on the property.

Having lost on the substantive arguments, the attorneys requested a stay of the proceedings in federal court, hoping that their longstanding state court action would come to a conclusion and provide them with a better basis for relief and an escape from legal Quicksand.  In this regard they made three arguments for a stay in which they ask the court to Give Me Just a Little More Time.  First, they argued that granting summary judgment to the IRS at this point would be inconsistent with prior orders of the court.  Like a Nightmare the court finds that none of its prior orders prevent it from determining the merits of their claims now.  Second, they argue the court should abstain, essentially arguing Baby Don’t Do It.  The court finds that no exceptional circumstances warrant abstaining from the decision.  Third, they argue that this decision violates the Rooker-Feldman doctrine preventing federal courts from exercising jurisdiction in a manner that voids final state court judgments.  The court finds that its decision does not contradict any state court judgement, preventing the doctrine from applying and leaving the attorneys Standing in the Shadows of Love.

It is not clear from the opinion just how much of the interpleaded fund the IRS will recover and whether it will satisfy the large outstanding tax debt owed by Mr. Holland. It is clear that Baby Love, Jimmy Mack and a whole host of greatest hits continue to have vitality as a basis for satisfying old debts. These songs of love and loss continue to hold the interest of Motown fans and tax collectors.

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