Trying To Undo A Settlement: Bad Liens Don’t Make Bad Settlement Payments

Road & Highway Builders, LLC v. United States , 702 F.3d 1365 (Fed. Cir. 2012) -

A secured junior lender who purchased property at a senior lender's foreclosure sale paid $100,000 to the Internal Revenue Service to induce it to release a right of redemption in connection with its tax liens on the property. After a bankruptcy court held that the junior lender had priority over the IRS but would not address the settlement payment, the junior lender sued the IRS in the U.S. Court of Federal Claims. It sought return of its $100,000 settlement payment, arguing that the settlement was void for lack of consideration.

The debtor, originally named Crystal Cascades, LLC, changed its name to Crystal Cascades Civil, LLC in May 2001 after it acquired a taxpayer identification number from the IRS. July 2004 a bank made loans to Crystal Cascades secured by deeds of trust on its property. August 2004 and January 2005 the IRS filed notices of tax liens using the correct taxpayer identification number, but using the outdated name of "Crystal Cascades, LLC." February 2005 deeds of trust were recorded against the property to secure loans made to Crystal Cascades by the junior lender, Road and Highway Builders, LLC (RHB). After the bank initiated foreclosure proceedings in June 2005, Crystal Cascades filed a chapter 11 bankruptcy. RHB filed an adversary proceeding in the bankruptcy against the IRS to establish that its liens had priority over the IRS tax liens. Contemporaneously RHB purchased the property at the bank's foreclosure sale for $1.4 million. Shortly after the foreclosure sale, RHB and the IRS negotiated a settlement in which RHB paid $100,000 for a release of the IRS right of redemption.

More than a year later, the bankruptcy court found that the IRS notices did not provide constructive notice since they contained an incorrect name. Thus, RHB's liens had priority. The bankruptcy court awarded surplus foreclosure sale proceeds to RHB, but declined to address the $100,000 settlement payment.

A year or so later RHB sued the IRS in the Court of Federal Claims. It sought recovery of its $100,000 payment, asserting that the settlement agreement was void for lack of consideration based on an argument that the right of redemption was illusory because it was later held to be invalid. After losing in the Court of Federal Claims, RHB appealed to the Federal Circuit Court.

Finding that the case turned on whether the IRS acted in bad faith, the Circuit Court...