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United States v. Cardaci

United States Court of Appeals, Third Circuit

May 8, 2017

UNITED STATES OF AMERICA, Appellant in 14-4237, 15-1247 & 15-3433

          Argued November 3, 2016

         On Appeal from the United States District Court for the District of New Jersey (D.C. Civil Action No. 1-12-cv-05402) District Judge: Hon. Jerome B. Simandle

          Julie C. Avetta [ARGUED] Michael J. Haungs Curtis C. Pett United States Department of Justice Tax Division Counsel for Appellant

          Anthony P. Monzo [ARGUED] Monzo Catanese Hillegass Counsel for Appellees

          Before: JORDAN, GREENAWAY, JR., and RENDELL, Circuit Judges.


          JORDAN, Circuit Judge.

         The government has been trying to collect unpaid taxes assessed against Gary S. Cardaci, and, to that end, it sought the judicial sale of the home he owns in New Jersey with his wife, Beverly. The United States District Court for the District of New Jersey concluded that a forced sale would be inequitable and instead ordered that Mr. Cardaci make monthly rent payments to the government. Unhappy with that outcome, the government has appealed. The Cardacis, who should have been delighted with the decision, have filed a cross appeal to challenge both the requirement to pay rent and the monthly rental amount. Even though no sale was ordered, the Cardacis also question the authority of the District Court to order a sale. We confirm the District Court's authority to consider whether the Cardacis' property should be subject to a forced sale but will vacate and remand for recalculation of Mr. and Mrs. Cardacis' respective interests in the property and reconsideration of the equitable factors weighing for and against a sale.[1]

         I. Background

         A. Factual Background

         Mr. Cardaci was the owner of Holly Beach Construction Company ("Holly Beach" or "the Company"). In 2000 and 2001, the business began to fail, and, in an effort to shore it up, Mr. Cardaci used approximately $49, 600 in taxes withheld from the wages of his employees to pay suppliers and wages rather than payroll taxes. During that two-year period, Mr. Cardaci took approximately $20, 000 in salary from Holly Beach. He used that income to support his family, including making mortgage payments and paying private school tuition for one of his sons.

         The Company eventually folded and Mr. Cardaci tried unsuccessfully to start other businesses. He has not had a regular income since 2009. On top of those financial frustrations, he also has medical problems that limit his employment options. Since 2005, Beverly Cardaci has been the primary wage earner in the family. She earns about $62, 000 a year as a public school teacher.

         The Cardacis own property in Cape May County, New Jersey, that they purchased in 1978 as their home. They claim no dependents now, but two of their adult children live in the house with them at least part of each year. Their son Garrett lives there full time with his wife and three children. Garrett earns approximately $37, 600 a year. He emerged from bankruptcy a year and a half before the bench trial in this case. He and his wife do not pay rent. Another son, Robert, lives in the house during the summer while he does seasonal work. He earns just under $4, 000 a year.

         The Cardacis' house has been their marital domicile continuously since they bought it, and the only mortgage on the property was paid in full in 2009. Mr. Cardaci made the majority of the monthly mortgage payments from 1978 through 2005, but, after that, Mrs. Cardaci was the sole payor. The District Court determined that the house has a fair market value of $150, 500. If the house were put to a forced sale, the government would set the minimum bid at 60 percent of the assessed value, which is $90, 300.

         At the time of the District Court's order, Mr. Cardaci was fifty-eight and Mrs. Cardaci was sixty-two. Neither party submitted evidence of the Cardacis' life expectancies, so the District Court, using the Social Security Administration's Actuarial Life Table, calculated the expectancies on the assumption that they were the same.

         B. Procedural Background

         In August 2012, the government brought this action to reduce to judgment federal tax assessments against Mr. Cardaci and to force the sale of the Cardaci home.[2] It sought to collect half of the proceeds to pay for Mr. Cardaci's tax liability and to distribute the remainder to Mrs. Cardaci. Upon the government's motion for summary judgment, the District Court, recognizing that Mr. Cardaci owed $80, 083.87 plus interest and that the government had a valid lien on the Cardaci property, granted partial summary judgment to that effect. The Court also held that the suit was timely because an assessment was first made in 2002, and the suit was brought within 10 years of that assessment. The Court did not, however, grant summary judgment with regard to the request to foreclose on the property.

         Instead, the District Court determined that it had "limited discretion" to order an alternative remedy instead of a foreclosure sale. United States v. Cardaci, No. CIV. 12-5402 (JBS), 2014 WL 7524981, at *6 (D.N.J. Aug. 21, 2014). It noted that federal law does authorize such a sale and that New Jersey state law treats marital property as at least occasionally subject to partition, so the Court recognized that it could order a sale of the property, despite Mrs. Cardaci's interest in the property and her objection to foreclosure. But it decided that additional factual development at a trial would be needed before it could properly weigh the equities and determine whether foreclosure was proper.

         After a two-day bench trial, the Court issued a judgment based on its consideration of the equitable factors set out in the Supreme Court's decision in United States v. Rodgers, 461 U.S. 677, 710-11 (1983). The District Court examined: (1) "the extent to which the [g]overnment's financial interests would be prejudiced if it were relegated to a forced sale of the partial interest actually liable for the delinquent taxes;" (2) whether Mrs. Cardaci had "a legally recognized expectation that [the] separate property would not be subject to forced sale by the delinquent taxpayer or his or her creditors;" (3) the likely prejudice to Mrs. Cardaci "in personal dislocation costs and … practical undercompensation;" and (4) "the relative character and value of the non-liable and liable interests held in the property[.]" Rodgers, 461 U.S. at 710-11. It also considered additional equitable factors such as the impact a forced sale would have on other non-liable parties. Ultimately, the Court concluded that it would be inequitable to force the sale of the property.

         That conclusion was based in some measure on the Court's method of valuing Mr. and Mrs. Cardacis' respective interests in their home. In calculating those interests, the Court refused to find them equal. It determined that Mrs. Cardaci's interest in the property, in the event of a forced sale, would be eighty-six percent, because she "owns an undivided one-half interest in the whole of the property, plus a right of survivorship." Cardaci, 2014 WL 7524981, at *9. Using life estate interest tables published by the Health Care Financing Administration in the New Jersey Medicaid Manual, the Court decided that Mrs. Cardaci's life estate interest was worth approximately seventy-two percent of the value of her interest in the property. The Court then added that life estate value (seventy-two percent times the fifty percent value of her interest, to equal thirty-six percent of the value of the property) to her one-half survivorship interest and concluded that she had an eighty-six percent interest in the value of the property, leaving the government to recover only fourteen percent of the proceeds from a forced sale.[3]Based on that calculation and consideration of the equitable factors from Rodgers, the Court found that "[t]he equities of this case warrant the exercise of the Court's 'very limited discretion not to order a sale.'" Id. at *17 (citation omitted). It therefore fixed an imputed monthly rental value of $1, 500 for the property and ordered Mr. Cardaci to pay half of that value to the IRS each month.[4]

         Shortly after the final judgment was entered, the Cardacis filed a motion for reconsideration under Fed.R.Civ.P. 59(e). They argued that the imputed rental value was inaccurate and, in support, submitted declarations from two different realtors. Concluding that such evidence should have been ...

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