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United States v. Cox

United States District Court, E.D. North Carolina, Southern Division

September 7, 2017




         This cause comes before the Court on plaintiffs motion for judgment on the pleadings and defendants' motion to dismiss for lack of subject matter jurisdiction. Fed.R.Civ.P. 12(b)(1) and (c). The appropriate responses and replies have been filed and a hearing on the motions was held before the undersigned on August 11, 2017, at Raleigh, North Carolina. For the reasons that follow, the motion to dismiss is allowed in part and the motion for judgment on the pleadings is allowed in part.


         On September 3, 2015, plaintiff, the government, initiated this action on behalf of its agency the Internal Revenue Service seeking a judgment of foreclosure in its favor directing the judicial sale of real property located in Brunswick, Bladen, Robeson, Scotland, and Davidson Counties, North Carolina; in Horry and Marlboro Counties, South Carolina; and in Jefferson County, Alabama by the United States Marshal. The government alleges that defendants Wallace and Lisa Cox, who are married and reside in Robeson County, North Carolina, are justly and truly indebted to the government as a result of promissory notes executed by them in accordance with a settlement agreement entered into in a civil forfeiture action, United States v. Cox Personal and Real Property, No. 7:07-CV-128-F (E.D.N.C), which was approved by the Court on December 23, 2010. The settlement agreement as approved provided that Wallace and Lisa Cox (the Coxes) agreed to pay the government $3, 066, 837.25 on the terms outlined in the settlement agreement, with the final payment being due December 23, 2013, and the Coxes executing promissory notes and securing the same by deeds of trust on thirty-five tracts of real property. The government alleges that, as contemplated by the settlement agreement, six tracts of property - three in Jefferson County, Alabama, two in Robeson County, North Carolina, and one in Bladen County, North Carolina - have been sold by the Coxes and released from the deeds of trust. On February 16, 2014, after having failed to pay the total amount owed to the government by the date the last payment was due, the Coxes executed another promissory note and deed of trust providing additional security to the government. The government alleges that there remains $3, 198, 987.12 due and owing to the government in principal and accrued interest through August 20, 2015. The government seeks to foreclose on the subject property and requests that it be paid the amount of its claim out of the proceeds of the sale, after payment of costs associated with the sale.

         The Coxes, after being served with the complaint, filed answers and counterclaims against the government for violation of their constitutional rights, specifically for violation of the Double Jeopardy Clause of the Fifth Amendment and the Excessive Fines Clause of the Eighth Amendment. The Coxes contend that their attorney who represented them in the settlement of the in rem forfeiture action led them to believe that the settlement agreement would resolve all outstanding issues with the government, criminal and civil. After the execution of the settlement agreement, however, which was signed by counsel for the Coxes and not the Coxes themselves, the government initiated criminal proceedings against them. The Coxes both pleaded guilty and Wallace Cox was sentenced to thirty-three months' imprisonment and a $50, 000 fine and Lisa Cox was sentenced to three years of probation and a $50, 000 fine. United States v. Cox, 7:11-CR-9-F (E.D.N.C).


         I. Motion to dismiss.

         As it concerns the Court's subject matter jurisdiction, the Court considers first the Coxes' motion to dismiss. Federal Rule of Civil Procedure 12(b)(1) authorizes dismissal of a claim for lack of subject matter jurisdiction. When subject matter jurisdiction is challenged, the plaintiff has the burden of proving jurisdiction to survive the motion. Evans v. B.F. Perkins Co., 166 F.3d 642, 647-50 (4th Cir. 1999). "In determining whether jurisdiction exists, the district court is to regard the pleadings' allegations as mere evidence on the issue, and may consider evidence outside the pleadings without converting the proceeding to one for summary judgment." Richmond, Fredericksburg & Potomac R.R. Co. v. United States, 945 F.2d 765, 768 (4th Cir. 1991).

         The Coxes first move to dismiss the complaint for judicial foreclosure of property located outside of North Carolina. They further argue that the government failed to make the appropriate trustees party plaintiffs, which is required by statute. N.C. Gen. Stat. § 45-45.3. The Court considers each argument in turn.

         Although the "debt" in this case arose from the settlement of the Coxes' claims to property in the prior civil forfeiture action, the following discussion is instructive:

When a debtor defaults on a secured debt, the creditor generally has two remedies. He may bring an action at law to recover on the promissory note or other written evidence of the debt, or he may bring an equitable action to foreclose on the property securing the debt. Although law and equity have merged, and although many jurisdictions permit a creditor to pursue these two remedies simultaneously, there remain important distinctions between the two remedies. An action on the promissory note is in personam; the creditor seeks to recover money from the debtor. As discussed above, such an action is one "for money damages ... founded upon [a] contract." By contrast, an action to foreclose on the property securing the debt is in rem; the creditor's remedy is limited to the property. As one commentator has said, "A foreclosure suit has been said to be merely a proceeding for the legal determination of the existence of the mortgage lien, the ascertainment of its extent, and the subjection to a sale of the estate pledged for its satisfaction." Thus, in a foreclosure action, the creditor does not seek to recover money directly from the debtor; rather, he seeks only to satisfy the debt through seizure and sale of the property. The creditor's right to seek satisfaction of the debt from the property is independent of his right to seek satisfaction from the debtor.

United States v. Alvarado, 5 F.3d 1425, 1428-29 (11th Cir. 1993) (internal citations omitted); see also Phillips v. Charles Schreiner Bank, 894 F.2d 127, 132 (5th Cir. 1990). Here, the government seeks both a money judgment against the Coxes personally and authorization of a judicial foreclosure proceeding on the property subject to valid promissory notes and deeds of trusts. While 28 U.S.C. § 2002, which provides the procedure to be followed in a federal judicial foreclosure sale, specifically contemplates that property subject to foreclosure may be situated in more than one county, state, district, or circuit, this Court is without the authority in an in rem proceeding to directly affect title to property outside of its jurisdiction. Indeed, in a case cited by the government, the Supreme Court has held that

a court of equity, acting upon the person of the defendant, may decree a conveyance of land situated in another jurisdiction, and even in a foreign country, and enforce the execution of the decree by process against the defendant; but, it was said: 'Neither its decree nor any conveyance under it, except by the party to whom the title is vested, is of any efficacy beyond the jurisdiction of the court.'

Fall v. Eastin, 215 U.S. 1, 9 (1909) (citation omitted); see also S. Floridabanc, S.A. v. Feldman,703 F.Supp. 627, 628 (E.D. Mich. 1989) ("Generally, a judgment in one state cannot operate so as to affect title to land in another state.").[1] Accordingly, the Court finds that while it may enter judgment against the Coxes personally, it cannot order the judicial foreclosure sale of property located outside the state of North Carolina, and more specifically the Eastern District of North Carolina.[2] To the extent this is ...

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