UNITED STATES v. NEWMAN (2024)

ORDER ON MOTION TO APPROVE SALE OF 13 ANNIES WAY

Concluding that a purchase price of $815,000 represents fair market value, the court rejects the owner-defendant's just compensation argument and approves the sale agreement submitted by the government, authorizing the court-appointed receiver to sell the owner-defendant's real property for the enforcement of federal tax liens.

I. PROCEDURAL BACKGROUND

On November 28, 2022, the United States of America (Government) filed a civil action pursuant to 26 U.S.C. § 7401, et seq., against Robert K. Newman and several other Defendants,¹ seeking to recover Mr. Newman's unpaid federal taxes and enforce federal tax liens against Mr. Newman's real property, including the real property at 13 Annies Way, Kennebunk, Maine (13 Annies Way). Compl. (ECF No. 1). On May 25, 2023, Defendant Kennebunk Savings Bank filed a crossclaim against Mr. Newman, seeking to foreclose on the first of its two mortgages secured by an interest in 13 Annies Way. Def./Cross-Claim Pl. Kennebunk Savings Bank's Cross-Claim for Foreclosure and Sale Against Def./Cross-Claim Def. Robert K. Newman (ECF No. 41).

On August 29, 2023, the Government filed a motion for partial summary judgment, requesting the entry of summary judgment that 1) Mr. Newman is liable for self-reported income tax liabilities in the amount of $325,132.52 for tax years 2011 to 2017 and 2020, 2) there are valid and subsisting tax liens for Mr. Newman's self-reported income tax liabilities attached to 13 Annies Way, and 3) the Government is entitled to enforce those liens through a sale of the property. Pl. United States of America's Mot. for Partial Summ. J. on Self-Reported Income Taxes at 1-2 (ECF No. 67). On November 9, 2023, the Court granted in part and dismissed in part the Government's motion, fixing the amount of Mr. Newman's self-reported income tax liabilities at $255,319.79 but granting the motion in all other respects. Order on Pl. United States of America's Mot. for Partial Summ. J. on Self-Reported Income Taxes (ECF No. 98).

On November 20, 2023, the Government filed a motion for reconsideration, averring that the lower liability amount fixed by the Court was the product of an error in the Government's statement of material facts. Pl. United States of America's Mot. to Reconsider Ruling on Partial Summ. J. and Amend J. to Include Post-Return Statutory Penalties and Interest (ECF No. 103). On December 28, 2023, the Court granted the Government's motion for reconsideration and amended the amount of Mr. Newman's self-reported income tax liabilities to be $325,132.52. Order on Mot. for Recons. (ECF No. 110).

On August 1, 2023, the Government filed a motion seeking the appointment of a prejudgment receiver to sell 13 Annies Way, representing that a prompt sale of the property was necessary because federal tax liens attached to the property were “losing value due to accumulating mortgage interest, property tax liabilities, and general neglect.” Pl. United States of America's Mot. for Appointment of Pre-Judgment Receiver to Sell Property (ECF No. 52). On October 23, 2023, the Court granted the Government's motion, appointing as receiver Christina Stone, Senior Vice President and Broker at Legacy Properties Sotheby's International Realty. Order on Mot. for Appointment of Prejudgment Receiver to Sell Property at 19 (ECF No. 95). The Court's October 23, 2023 order allowed Ms. Stone to enter into a sale agreement for 13 Annies Way, but provided all Defendants, including Mr. Newman, the opportunity to object to any sale agreement and conditioned the final sale of the property on approval by the Court.² Id. at 24.

On December 19, 2023, Mr. Newman filed an objection to Ms. Stone's pricing of 13 Annies Way, arguing that the initial listing price recommended by Ms. Stone was too low. Resp. and Disagreement with Receiver Pricing of 13 Annie's Way, Kennebunk, Maine (ECF No. 107). On January 9, 2024, the Government informed the Court that the parties had agreed to initially list 13 Annies Way for $1,150,000 and decrease the listing price by $100,000 at set intervals if no offers at or above the current listing price were received. Pl. United States’ Resp. and Notice of Agreement as to Def. Robert K. Newman's Mot. for Review of Listing Price by the Court (ECF No. 107) (ECF No. 111). On January 10, 2024, the Court approved the pricing scheme set forth by the Government. Order (ECF No. 112).

On May 30, 2024, the Government filed a motion seeking the Court's approval of a sale agreement for 13 Annies Way for a purchase price of $815,000. Pl. United States’ Mot. to Approve Sale of 13 Annies Way and Post-Closing Deposit of Net Proceeds in the Ct. Registry (ECF No. 122) (Gov't's Mot.). On June 20, 2024, Mr. Newman objected to the sale agreement. Def. Robert K. Newman's Resp. and Rejection of Mot. to Approve Sale of 13 Annies Way and Post-Closing Deposit of Net Proceeds in the Ct. Registry (ECF No. 125) (Def.’s Opp'n). On June 27, 2024, the Government replied to Mr. Newman's objection. Pl. United States’ Reply in Supp. of Mot. to Approve Sale of 13 Annies Way (ECF No. 126) (Gov't's Reply). No other Defendant objected to the sale agreement.³

II. FACTUAL BACKGROUND 4

After her appointment as receiver, Ms. Stone showed 13 Annies Way to one prospective buyer and previewed the property for two other realtors before officially placing the property on the market on February 12, 2024. Gov't's Mot., Attach. 2, Decl. of Christina Stone, Court-Appointed Receiver ¶¶ 5-6 (Stone Decl.). Before listing the property, Ms. Stone hired professional contractors to conduct mold tests, which revealed high levels of mold. Id. ¶ 17. Based on the levels of mold in the house, the contractors recommended that 13 Annies Way remain unoccupied until professional mold remediation takes place. Gov't's Mot., Attach. 4, Mold Report.

Pursuant to the parties’ agreement, which the Court approved, the initial listing price for 13 Annies Way was $1,150,000. Stone Decl. ¶ 6. The listing price was subsequently reduced three times. On March 11, 2024, the listing price was reduced to $1,050,000. Id. ¶ 8. On April 4, 2024, the listing price was reduced to $950,000. Id. ¶ 10. Finally, on April 26, 2024, the listing price was reduced to $850,000. Id. ¶ 12.

Ms. Stone showed 13 Annies Way to prospective buyers until the sale agreement became effective on May 24, 2024. Id. ¶ 14. In total, the house was on the market for over 100 days. Id. During this time, Ms. Stone received inquiries from over 30 prospective buyers and showed the property to more than 15 buyers. Id. While the house was listed for $1,150,000, Ms. Stone showed the property five times and answered four inquiries that did not result in showings. Id. ¶ 7. After the listing price was reduced to $1,050,000, Ms. Stone showed the property three times and answered five inquiries that did not result in showings. Id. ¶ 9. When 13 Annies Way was listed for $950,000, Ms. Stone showed the property three times and answered five inquiries that did not result in showings. Id. ¶ 11. Finally, after the final price drop to $850,000, Ms. Stone showed the property seven times and answered at least five inquiries that did not result in showings. Id. ¶ 13.

In total, there were three written offers to purchase 13 Annies Way.⁵ Id. ¶ 15. The offer that was ultimately selected by Ms. Stone and the Government was for a purchase price of $815,000 with contingencies for inspection and financing. Id. Ms. Stone and the Government also considered an offer to purchase the home for $750,000 without contingencies, but ultimately chose to accept the higher offer. Id. The third written offer was for a significantly lower price, and Ms. Stone did not seriously consider it. Id.

According to Ms. Stone, most prospective buyers who saw 13 Annies Way commented on the house's poor condition and stated it required too much rehabilitation work. Id. ¶ 17. The prospective buyers agreed that significant rehabilitation and reconstruction was required to make the property livable. Id. Ms. Stone disclosed the results of the mold testing to prospective buyers. Id.

After weighing the written offers based on purchase price, financing, and contingencies, the Government and Ms. Stone selected the offer for $815,000 because it reflected the highest purchase price. Id. ¶¶ 18-19. In Ms. Stone's view, the sale agreement submitted for approval by the Government represents the highest and best offer that is likely to be received in present market conditions. Id. ¶ 20.

III. THE PARTIES’ POSITIONS

A. The Government's Motion to Approve Sale

In its motion, the Government asks the Court to “approve the Purchase and Sale Agreement” for 13 Annies Way and “authorize deposit into the Court registry of the sale proceeds remaining after distributions made at closing.” Gov't's Mot. at 1-2. The Government also requests that “the Court approve the sale promptly” because the buyer can withdraw from the sale agreement “if the sale is not approved by July 10.” Id. at 2.

In its memorandum of law, the Government submits that the sale agreement currently before the Court “represents the highest and best price available under current market conditions, especially considering the disrepair and mold that has severely impacted the value of the property.” Id., Attach. 1., Mem. of Law in Supp. of Pl. United States’ Mot. to Approve Sale of 13 Annies Way and Post-Closing Deposit of Net Proceeds in the Ct. Registry at 1-2 (Gov't's Mem. of Law). After reviewing the procedural and factual history of the case, the Government reiterates that “[g]iven the long period of listing, the active marketing by the Receiver, and the consistent feedback from buyers, it would appear that the offer that has been selected at $815,000 represents a fair market price, and the highest and best available in the market.” Id. at 2-4.

Anticipating Mr. Newman's just compensation argument, the Government avers that “[a]ny such arguments are meritless in light of the robust sale process described above and the high offer that was selected.” Id. at 4 n.1. The Government submits that the just compensation “required by the Takings Clause is normally measured by fair market value,” and the sale agreement contemplates a purchase price that represents fair market value. Id. Further, the Government asserts that the amount of money it expects to receive from the sale “is enough of an interest to justify this receivership sale under Internal Revenue Code § 7403, which provides for the possibility of a sale ‘in all cases where a claim or interest of the United States [in the property] is established.’ ” Id. (alteration in original) (emphasis omitted) (quoting 26 U.S.C. § 7403(c)). Finally, the Government reviews how proceeds from the sale of 13 Annies Way should be distributed. Id. at 4-5.

B. Robert Newman's Objection

In response, Mr. Newman urges the Court to “reject the Purchase and Sale Agreement” and “not authorize deposit into Court registry of sale proceeds remaining after distributions made at closing.” Def.’s Opp'n at 1. According to Mr. Newman, the “proposed sale will cover just 10-15 percent of the debt,” leaving him “with 85-90 percent of the debt and no home.” Id. at 2. Mr. Newman therefore asks the Court to either put 13 Annies Way back on the market or allow him “to pay the United States Treasury the sum it would receive from the proposed sale” and retake possession of the property. Id.

In Mr. Newman's view, the Court should reject the sale because “the Receiver has not garnered the highest value of this property.” Id. Mr. Newman avers that the Internal Revenue Service (IRS) initially expected to recover far more from the sale of 13 Annies Way, and he points out that an IRS appraiser initially estimated the value of 13 Annies Way to range from $1,000,000 to $1,250,000. Id. at 3. After reviewing price estimates from Zillow and similar websites, as well as recent home sales in the area, Mr. Newman argues that “structural integrity is not a factor in value” and 13 Annies Way “could have been sold at a much higher rate based on the property and location, even with the intent to demolish.” Id. at 3-4.

Mr. Newman then takes issue with Ms. Stone's conduct, criticizing her for placing 13 Annies Way “on the market in the month of February, in the dead of winter in a resort/vacation town” and suggesting she “should have put the property on the market beginning in May or June,” which would have yielded a “better reception at a better price with the same timing outcome.” Id. at 4-5. Mr. Newman accuses Ms. Stone of running a “disorganized process” because the initial listing for the property erroneously overstated its square footage. Id. at 5. In addition, Mr. Newman expresses skepticism about the results of the mold test. Id.

Turning to the terms of the sale agreement, Mr. Newman claims, without citing evidence or authority, that IRS “procedures would have rejected” a forced sale for the amount of money the Government expects to recover here. Id. at 6. Mr. Newman further maintains that had the IRS and Department of Justice “accurately investigated,” “both would have concluded that this action should not have been taken.” Id.

Ultimately, Mr. Newman argues that the “amount of money the house will sell for is not Just Compensation.” Id. at 8. Had Ms. Stone “correctly marketed the property,” Mr. Newman continues, “the property would have had interest in the $1.5 million to $1.7 million zone.” Id. In Mr. Newman's view, the fair market value for 13 Annies Way is $1,100,000 at a minimum. Id. Because the sale agreement is for a purchase price of $815,000, Mr. Newman asserts that he will not receive just compensation if the sale is allowed to proceed. Id. at 9.

C. The Government's Reply

The Government begins its reply by suggesting that Mr. Newman “presents no evidence to cast doubt that $815,000 is a fair market price, revealed after multiple months of public listing and after over 15 prospective buyers viewed the property.” Gov't's Reply at 2. The Government reiterates its view that just compensation under the Takings Clause “is measured by fair market value.” Id. According to the Government, the case relied upon by Mr. Newman does not “disturb the principles that fair market value is the basis for ‘just compensation’ and that a lien-enforcement sale can proceed even if the secured debt is not fully satisfied.” Id.

Turning to Mr. Newman's evidence, the Government avers that “Mr. Newman has never obtained his own third-party appraisal or assessment” and “did not get a second opinion when there was a hearing in which the property value was in dispute.” Id. at 3. The Government further submits that Mr. Newman's reliance on the IRS appraiser's estimated value is misplaced because the estimate “is not a substitute for fair market value in the light of the Receiver's active marketing to the public.” Id. Instead, the Government argues that the purchase price of $815,000, reflected in the sale agreement, represents fair market value because it is “the highest amount that any actual buyer coming out of this process is willing to pay.” Id. at 4.

In conclusion, the Government warns that “[f]urther delay will only further reduce the United States’ recovery, as Mr. Newman's unpaid mortgages and property taxes continue to increase.” Id. at 5. Submitting that “Mr. Newman cites no authority and establishes no basis for halting the lien-enforcement sale already ordered by the Court,” the Government “respectfully requests the Court approve the sale promptly.” Id. at 5-6.

IV. DISCUSSION

Mr. Newman contends that the purchase price of $815,000 contemplated by the sale agreement does not constitute just compensation in violation of the Takings Clause of the Fifth Amendment to the United States Constitution.⁶ Def.’s Opp'n at 8-9. Assuming the Takings Clause is applicable here, which the Government has not challenged, Mr. Newman's argument is unavailing because the circumstances indicate that a purchase price of $815,000 constitutes fair market value.

The United States Supreme Court “has repeatedly held that just compensation normally is to be measured by ‘the market value of the property at the time of the taking contemporaneously paid in money.’ ” United States v. 50 Acres of Land, 469 U.S. 24, 29, 105 S.Ct. 451, 83 L.Ed.2d 376 (1984) (quoting Olson v. United States, 292 U.S. 246, 255, 54 S.Ct. 704, 78 L.Ed. 1236 (1934)); see also In re Fin. Oversight & Mgmt. Bd., 41 F.4th 29, 41 n.4 (1st Cir. 2022) (“As the Supreme Court has explained, ‘just compensation’ is ‘the full monetary equivalent of the property taken’; that is, ‘[t]he owner is to be put in the same position monetarily as he would have occupied if his property had not been taken’ ”) (alteration in original) (quoting Almota Farmers Elevator & Warehouse Co. v. United States, 409 U.S. 470, 473-74, 93 S.Ct. 791, 35 L.Ed.2d 1 (1973)).

In this case, the Court can ascertain fair market value by examining the behavior of prospective buyers during the time 13 Annies Way was on the market. Ms. Stone actively listed 13 Annies Way for over three months. Stone Decl. ¶ 14. During this time, she received inquiries from over thirty prospective buyers, and showed the property to over fifteen prospective buyers. Id. Despite this interest, Ms. Stone received only three written offers, and the offer that was ultimately selected represented the highest purchase price by $65,000, a considerable margin. Id. ¶ 15. That $815,000 was the highest offer after an extended period on the market strongly suggests that it constitutes fair market value.

This conclusion is reinforced by how buyers reacted to seeing the property. Ms. Stone reports that most prospective buyers who viewed the property commented that the house was in poor condition, and they universally agreed that significant repairs were necessary for the house to be livable. Id. ¶ 17. These impressions are consistent with the mold tests conducted after Ms. Stone was appointed as receiver, which revealed levels of mold so high that remediation was recommended prior to reoccupation of the home. Id.; Mold Report at 4.

Based on the condition of the house and the initial lack of offers despite consumer interest, the Court concludes that the initial listing prices for 13 Annies Way were higher than the market was willing to pay. It was only when the price was reduced that prospective buyers started making serious offers, demonstrating that a lower price point represented fair market value. Once the price of 13 Annies Way approached fair market value, the Government and Ms. Stone accepted the highest offer received. Under these circumstances, the Court determines that a purchase price of $815,000 constitutes fair market value.

Mr. Newman resists this conclusion by criticizing Ms. Stone's marketing of 13 Annies Way and pointing to other estimates of the property's value. Def.’s Opp'n at 4-5. However, Mr. Newman's arguments do not outweigh the activity of the market. This is not a case where the Court needs to rely on estimates to determine fair market value because the purchase price was actually determined by the market. Though the estimates cited by Mr. Newman are higher than $815,000, the market did not agree with these estimates, and it is the market's perspective that determines just compensation.

The evidence offered by the Government establishes that a purchase price of $815,000 constitutes fair market value for 13 Annies Way. Therefore, even accepting Mr. Newman's argument on its own terms, the Court rejects Mr. Newman's contention that approval of the sale agreement will not yield just compensation.⁷

V. CONCLUSION

The Court GRANTS Plaintiff United States’ Motion to Approve Sale of 13 Annies Way and Post-Closing Deposit of Net Proceeds in the Court Registry (ECF No. 122). In accordance with this decision, the Court takes the following actions:

1. The Court ORDERS that the sale of 13 Annies Way by the Receiver under the terms of the Sale and Purchase Agreement is hereby AUTHORIZED and APPROVED.

2. The Court further ORDERS that the Receiver is authorized and directed to sell 13 Annies Way under the approved Sale and Purchase Agreement.

3. The Court further ORDERS that, with respect to the sale of 13 Annies Way, a portion of the proceeds of sale shall be credited or disbursed at closing to pay:

a. Any real property taxes due and owing or accrued on the property at the time of closing that have priority over the federal tax liens under 26 U.S.C. § 6323(b)(6);

b. Any hold for estimated unpaid water and sewer charges;

c. The pro rata portion of any gas, water and sewer, and/or electric service charges accrued and/or due as of the date of closing;

d. The settlement or closing charges, including the fees charged by the title company or attorney to conduct the closing, if any, to be paid by the Seller;

e. The Receiver's compensation of 6% of the sale price ($48,900 to be shared with the buyer's real estate agent), along with reimbursable expenses approved by the United States in the amount of $2,233.69 and any other approved expenses incurred before closing; and

f. If agreed upon by the United States, an amount to pay off the senior mortgages of Kennebunk Savings Bank.

4. The Court further ORDERS that the remaining net sale proceeds, after disbursements in accordance with the preceding paragraph, shall be held in escrow by the closing agent pending an order authorizing deposit of the remaining net sale proceeds into the Court registry, and the United States shall promptly after closing, in accordance with Local Rule 67, prepare and submit a proposed order specifying the amount to be deposited by the Clerk in an interest-bearing account.

5. The Court further ORDERS that if the receivership sale of 13 Annies Way does not obtain an authorized exemption from Maine real estate withholding under 36 M.R.S. § 5250-A, or there is a dispute among the parties to the transaction or case concerning whether the sale is exempt, then any amount that might be required to be withheld shall be deposited with other net sale proceeds in the Court registry as provided above, and the United States shall file an appropriate motion to bring any dispute before this Court for resolution.

6. The Court further ORDERS that the sale of 13 Annies Way shall be free and clear of all existing rights, titles, claims, liens, and interests (including without limitation the right of redemption) of the Receiver and the parties to this case, including the United States, Robert K. Newman, Kennebunk Savings Bank, The Woods Association, Inc., Superior Plus Energy Services d/b/a Downeast Energy, Casco Bay Electric, LLC, Maine Revenue Services, the Maine Department of Labor Bureau of Unemployment Compensation, and the Tax Collector of Kennebunk, Maine.

7. The Court further ORDERS that the use of a Receiver's Deed for the sale of 13 Annies Way that is substantially in the form of the one attached to this Order is approved, and the York County Register of Deeds shall permit the recording of the deed in the county land records after it is executed provided it receives the normal recording fee. The deed shall convey all of the rights, titles, claims, and interests that Robert K. Newman has in the subject property to the buyer.

8. The Court further ORDERS that at the Buyer's election this order may also be recorded with the Receiver's Deed.

9. The Court further ORDERS that, upon being informed that the closing has occurred, the Clerk shall unseal Plaintiff United States’ Response and Notice of Agreement as to Defendant Robert K. Newman's Motion for Review of Listing Price by the Court (ECF No. 111), Sealed Order (ECF No. 113), and Plaintiff United States’ Motion to Seal Response and Listing-Price Agreement Filed at Docket #111 (ECF No. 114).

SO ORDERED.

FOOTNOTES

1.   The other Defendants in this action are Kennebunk Savings Bank, the Woods Association, Inc., Superior Plus Energy Services Inc. d/b/a Downeast Energy, Casco Bay Electric, LLC, Maine Revenue Services, the Maine Department of Labor, and the Tax Collector of Kennebunk, Maine. Compl. (ECF No. 1).

2.   Specifically, the October 23, 2023 order provides:The Receiver shall negotiate a sale of the property, and in doing so may make a counteroffer subject to approval by the United States, and may agree to a purchase price and enter into a purchase agreement subject to approval by the United States and subject thereafter to approval by the Court. When the Receiver obtains a purchase agreement for the property that the United States has approved, the United States shall file a motion with the Court for approval of the sale on the terms of the agreement. The defendants shall have the right to file an objection to the motion.

3.   The Government represents that it sought the positions of the other non-defaulted parties prior to filing its motion for approval of sale. Pl.’s Mot. at 2. According to the Government, the Woods Association, Inc., and the Town of Kennebunk concur in the Government's motion, while Kennebunk Savings Bank, Maine Revenue Services, the Maine Department of Labor, and Casco Bay Electric have not taken a position. Id. The Government further represents that “the Maine parties agree that Maine real estate withholding amounts may be placed in the Court's registry if unresolved or disputed.” Id. All parties from which the Government sought a position are represented by counsel. The remaining defendant, Superior Plus Energy Services Inc. d/b/a Downeast Energy, failed to file a timely answer and was defaulted on February 27, 2023. See Order Granting Mot. for Entry of Default (ECF No. 26).

5.   In addition to these written offers, Ms. Stone received a small number of verbal offers for a purchase price of $600,000 or less. Stone Decl. ¶ 16.

6.   The Takings Clause states, “nor shall private property be taken for public use, without just compensation.” U.S. Const. amend. V.

7.   Regarding Mr. Newman's claims that the Court should reject the sale because it will yield a small amount for the Government in comparison with Mr. Newman's overall tax debt, the Court has already explained to Mr. Newman that the Court “may decree a sale of” any real property to which a federal tax lien has attached “in all cases where a claim or interest of the United States therein is established.” 26 U.S.C. § 7403(c); Order on Pl. United States of America's Mot. for Partial Summ. J. on Self-Reported Income Taxes at 27 n.7. As the Court wrote, although the statute is phrased in permissive terms, the Court does not have the discretion to halt a sale “simply to protect the interest of the delinquent taxpayer.” United States v. Rodgers, 461 U.S. 677, 709, 103 S.Ct. 2132, 76 L.Ed.2d 236 (1983). Mr. Newman has not provided a legal basis for halting the sale based on the amount the Government will recover.

JOHN A. WOODCOCK, JR., UNITED STATES DISTRICT JUDGE