Entra Default Solutions, LLC v. United States

Background

The case concerns competing claims to surplus proceeds from a trustee’s sale of property located at 161 Smith Road in Alamo, California. Anthony P. Thekkek and Prema P. Thekkek owned the property. The Internal Revenue Service (IRS) and others recorded liens against it, including an IRS lien of more than $17,000,000.

PSG & Associates Management, Inc. and Perla S. Guitierrez had previously sued the Thekkeks in California state court. The parties settled that lawsuit, and the state court approved the settlement while retaining jurisdiction to enforce it. The settlement required the Thekkeks to transfer the property and other properties to PSG by grant deed.

Entra Default Solutions, LLC later began judicial foreclosure proceedings for the property. After the foreclosure sale, Entra notified entities with recorded interests about the surplus proceeds. The IRS, the California Franchise Tax Board (FTB), and Golden State Palms, Inc. filed claims to the funds. PSG did not file a claim but filed an objection. Entra then filed a petition in Contra Costa County Superior Court asking the court to resolve the unresolved claims and determine how to distribute the deposited surplus funds.

The IRS removed the petition to federal court. PSG moved to remand, meaning it asked the federal court to return the case to state court. Entra took no position on the motion. The FTB withdrew its claim and disclaimed any interest in the funds.

Arguments on Remand

PSG argued that the petition was based primarily on California law governing surplus proceeds and did not present a substantial federal question. PSG also argued that the state court that approved its settlement was the appropriate court to address questions about the settlement and entitlement to the funds. PSG contended that the Thekkeks had failed to disclose the liens and that the settlement’s warranties supported PSG’s claim to the surplus proceeds.

The IRS argued that removal was proper under 28 U.S.C. §§ 1444 and 2410. Section 1444 allows the United States to remove to federal court an action brought under section 2410 against the United States in state court. Section 2410 applies when the United States has or claims a mortgage or other lien on property involved in the action.

Court’s Analysis

Judge Orrick relied on the Ninth Circuit’s decision in Quality Loan Serv. Corp. v. 24702 Pallas Way, Mission Viejo, CA 92691. In that case, a state-court petition concerning unresolved claims to surplus foreclosure proceeds was removed by the United States based on an IRS tax lien. The Ninth Circuit held that the procedure was functionally equivalent to an interpleader action—an action used to resolve competing claims to the same funds or property—and was removable under section 1444 even if California law used a different label.

The court found that the petition here was materially identical in its facts and procedural posture to the petition in Quality Loan. Entra had disclaimed no interest in the funds in the quoted discussion, deposited the surplus proceeds, and asked the court to resolve competing claims. The court therefore concluded that the IRS was entitled to remove the action. It also cited other authority recognizing federal-question jurisdiction over actions concerning the priority of IRS tax liens.

The court emphasized that the motion to remand addressed only whether the case belonged in federal court. It did not decide PSG’s claims concerning the surplus funds, the settlement, or any alleged breach by the Thekkeks. Those claims and defenses could be raised and adjudicated in federal court as appropriate.

Disposition

The court denied PSG’s motion to remand. The opinion did not determine which claimant is entitled to the surplus proceeds.