Federal Criminal Law Opinions

EQUITY INVESTMENT PARTNERS, LP, Plaintiff-Counter-Defendant-Appellant, v. KARIN LENZ, Defendant-Cross-Defendant-Appellee, UNITED STATES OF AMERICA, Internal Revenue Service, Defendant-Cross-Claimant-Counter-Claimant-Appellee. 11th Circuit. Case No. 09-11887. January 29, 2010. Appeal from the U.S. District Court for the Southern District of Florida (No. 08-60630 CV-CMA).

(Before WILSON and COX, Circuit Judges, and RESTANI,* Judge.)

(COX, Circuit Judge.) Equity Investment Partners, LP (“Equity”) claims to hold a security interest in certain real property owned by Karin Lenz (“Karin”). The Internal Revenue Service (“IRS”) placed a lien on the real property due to Karin’s and her husband’s unpaid tax liabilities. Equity filed an action against Karin and the United States seeking to foreclose its mortgage and to establish the priority of its security interest over the federal tax lien. The IRS counterclaimed to establish the priority of its tax lien. The district court granted the IRS summary judgment establishing that the tax lien was a superior interest. The court held that Equity did not qualify as a “holder of a security interest” under I.R.C. § 6323. Equity appeals. We vacate and remand for further proceedings.

I. BACKGROUND
Equity is an investment partnership; its majority owners, Stacie Daley (“Daley”) and Corbett Lenz (“Corbett”) are the children of Karin and her husband Randolph Lenz (“Randolph”). Randolph and Karin suffered financial difficulties as a result of various proceedings brought against them by the Federal Deposit Insurance Corporation (“FDIC”). To assist with personal expenses and costs related to the FDIC proceedings, Daley and Corbett loaned their parents over $3 million. The funds were loaned through Equity and several other entities these children owned and controlled. Most of the loaned monies were transferred to Randolph’s personal bank account, but they were used for the joint expenses of Randolph and Karin. Some of the loaned monies were transferred directly to a law firm to cover the costs of legal representation in the FDIC proceedings. In addition to the loans, Costa Corporation, another entity owned and controlled by these children, transferred over $8 million to the FDIC as part of a settlement of all claims against Randolph, Karin, Corbett, Daley, and other entities.

Karin held title to certain real property located in Florida. After Daley and Corbett began loaning their parents money through Equity and other entities, Equity entered into a mortgage and security agreement with Karin. The agreement granted Equity a security interest in the real property in exchange for a loan of $1 million. Equity and Karin signed a promissory note, referenced by the mortgage, establishing the terms of the loan. On October 21, 2004, the mortgage was recorded in public records. Equity did not make a contemporaneous payment of $1 million to Karin at the time the mortgage and promissory note were executed. Daley and Corbett assert that the purpose of the mortgage was to secure repayment of the monies they had advanced to their parents as of the time of the mortgage transaction. Approximately ten months later, after the amounts loaned to Karin and Randolph increased to over $3 million and after the FDIC settlement payment, Equity and Karin entered into a mortgage modification agreement. The agreement increased the loan amount secured by the mortgage by an additional $2 million. The promissory note was amended to include the amount of the additional loans and set forth repayment terms. On August 12, 2005, this mortgage modification was recorded in public records. Once again, Equity did not contemporaneously pay Karin the $2 million specified in the agreement.

Daley asserts that it was agreed and understood that when the various family members entered into the settlement agreement with the FDIC, the real property would be used to secure repayment of funds advanced to Randolph and Karin. (R.46 Ex. 13 at 3 ¶ 22.) And, she asserts it was agreed that the mortgage would be issued in Equity’s name “as the overall entity entitled to recover repayment of the loans on behalf of the various entities owned and controlled by [Daley] and [Corbett].” (Id. at ¶ 23.) Karin testified in a deposition that she does not recall why she signed the mortgage, but in the same deposition she also testified that the purpose of the mortgage modification was “[p]robably so I can pay my children back.” (R.43 Ex. 11 at 20.) Karin failed to make any payments on the mortgage debt and was in default within a few months after the mortgage modification agreement was executed. According to Daley, Equity did not immediately foreclose its mortgage because it wanted to afford Karin the opportunity to sell the real property and realize its full value.

The IRS made assessments against Randolph and Karin for unpaid income taxes. It prepared a Notice of Federal Tax Lien on all property and rights to property belonging to Randolph and Karin. The IRS filed the notice in public records on August 16, 2005, after the mortgage and mortgage modification agreements between Equity and Karin had been filed.

II. PROCEDURAL HISTORY
Equity filed suit in the United States District Court for the Southern District of Florida against Karin and the United States seeking to foreclose its mortgage and establish the priority of its security interest over the tax lien. Karin did not respond to Equity’s Complaint, and the Clerk entered her default. See Fed. R. Civ. P. 55(a). The IRS answered the Complaint, filed a counterclaim against Equity to establish the priority of its tax lien over Equity’s security interest, and filed a crossclaim against Karin seeking to foreclose its tax lien. Equity moved for summary judgment, and the IRS moved for partial summary judgment; both motions sought to establish the priority of their respective interests in the real property. Equity asserted that because the mortgage and mortgage modification were filed before the notice of the tax lien was filed, Equity’s security interest takes priority pursuant to I.R.C. § 6323(a). The IRS countered that Equity’s mortgage and mortgage modification could not take priority because they did not create a security interest under I.R.C. § 6323. And, even if these mortgages did create a security interest, the IRS argued, the transfer of an interest to Equity was fraudulent and was therefore unenforceable against the tax lien.

The district court concluded that because Equity did not “produce objective evidence that ‘money or money’s worth’ was exchanged for an interest in the Property, the Mortgage Modification does not qualify as a security interest under Section 6323(a), and the IRS tax lien takes priority.” (R.67 at 13.) The court also concluded that whether the conveyance was fraudulent is a disputed question of fact which could not be resolved on summary judgment.1 (Id. at 14.) Because it held Equity did not have a security interest under section 6323, it granted the IRS partial summary judgment and denied Equity’s motion for summary judgment. (Id. at 15).

Equity filed a motion to reconsider based on newly discovered evidence in the form of a loan and security agreement purporting to show that money or money’s worth was exchanged for its interest in the real property. The court declined to consider the evidence and denied Equity’s motion because the agreement was in Equity’s possession during the discovery period, and Equity did not exercise reasonable diligence to discover and produce the evidence. (R.80 at 7.) The court also explained that, even if it were to consider the evidence, the newly discovered agreement would fail to demonstrate that Equity held a security interest under section 6323(a). (Id. at 8.)

After it was granted partial summary judgment, the IRS moved to amend its counterclaim and crossclaim by adding Merrill Lynch Credit Corporation as a defendant because it also has an interest in the real property and was therefore an indispensable party to the case. The court denied the IRS’s motion, and the parties stipulated to the dismissal without prejudice of the IRS’s counterclaim and crossclaim. The court dismissed these claims without prejudice and entered a final judgment in the case.2 Equity appeals the grant of partial summary judgment to the IRS, the denial of its motion for summary judgment, and the denial of its motion to reconsider.

III. ISSUES ON APPEAL AND

CONTENTIONS OF THE PARTIES
The main issue on appeal is whether there exists a disputed issue of material fact that precludes summary judgment establishing the priority of interests in the real property owned by Karin. Equity contends that evidence shows the mortgage and mortgage modification agreements created a security interest in the real property. And, because the agreements were recorded in public records prior to the recording of the tax lien, Equity argues it is entitled to summary judgment establishing the priority of its security interest. The IRS counters that the tax lien is a superior interest because the mortgage and mortgage modification agreements are not security interests. It argues that evidence shows Equity did not part with “money or money’s worth” as required for the formation of a security interest under I.R.C. § 6323. Therefore, the IRS argues, summary judgment establishing the priority of the tax lien was appropriate.

Equity also argues that the court abused its discretion in denying its motion for reconsideration. To prevent manifest injustice, Equity contends the court should have reconsidered its judgment in light of a newly discovered loan and security agreement purporting to show that it parted with “money or money’s worth” in exchange for the mortgage and mortgage modification agreement. The IRS counters that the court properly declined to consider the newly discovered document because it was in Equity’s possession throughout the discovery period, and Equity failed to exercise due diligence to produce it.

IV. STANDARD OF REVIEW
We consider de novo a grant or denial of summary judgment. See Baker v. Birmingham Bd. of Educ., 531 F.3d 1336, 1337 (11th Cir. 2008).

We review the denial of a motion for reconsideration for abuse of discretion. Corwin v. Walt Disney Co., 475 F.3d 1239, 1254 (11th Cir. 2007).

V. DISCUSSION
If a person accrues a federal tax liability, a lien is created by operation of law “in favor of the United States upon all property and rights to property, whether real or personal, belonging to such person.” I.R.C. § 6321. That lien arises at the time the assessment is made and continues until the tax liability is satisfied or becomes unenforceable by reason of lapse of time. Id. § 6322. A lien is not valid, however, “against any purchaser, holder of a security interest, mechanic’s lienor, or judgment lien creditor” until notice has been filed. Id. § 6323(a). This means that “any ‘security interest’ which arises prior to the proper filing of a federal tax lien takes priority over the tax lien.” Litton Indus. Automation Sys., Inc. v. Nationwide Power Corp., 106 F.3d 366, 368 (11th Cir. 1997) (citation omitted). In the case of real property, notice of the tax lien must be filed “in one office within the State . . . as designated by the laws of such State, in which the property subject to the lien is situated . . . .” I.R.C. § 6323(f)(1)(A)(i).

Equity claims it holds a security interest in the real property that is superior to the tax lien. It is undisputed that the mortgage and mortgage modification were properly recorded prior to the filing of the notice of tax lien. So, if the mortgage and mortgage modification satisfy the requirements of I.R.C. § 6323 to create a security interest, that interest has priority over the tax lien.

The Internal Revenue Code defines a security interest as “any interest in property acquired by contract for the purpose of securing payment or performance of an obligation or indemnifying against loss or liability.” I.R.C. § 6323(h)(1). To be protected under section 6323(a), a holder of a security interest must show (1) the security interest was acquired by contract to secure payment or performance of an obligation or indemnify against loss; (2) the property to which the security interest was to attach existed at the time of filing of the tax lien; (3) at the time the tax lien was filed, the security interest was protected under state law against a judgment lien arising out of an unsecured obligation; and (4) the holder of the security interest parted with “money or money’s worth.” In re Haas, 31 F.3d 1081, 1085 (11th Cir. 1994) (citing I.R.C. § 6323(h)(1)). The parties agree that the first three requirements are met. The disputed issue is whether Equity parted with “money or money’s worth.”

At the time the mortgage and mortgage modification were executed, Karin did not receive contemporaneous payments in the amounts noted in the agreements. Equity claims that the notes and mortgages were issued to secure the debts owed by Karin and Randolph to Equity and other entities. It argues that it parted with “money or money’s worth” as defined by the Internal Revenue Code and Treasury Regulations because the mortgages were given to secure antecedent debts.

The IRS counters with two arguments. First, it contends that in order to prove it parted with “money or money’s worth,” Equity must present evidence that at the time monies were advanced to Karin and Randolph, the parties agreed that, at some future date, they would execute an agreement to secure the loans. It claims Equity has not presented such evidence. Second, it contends Equity has not presented sufficient evidence to show that at the time the mortgages were executed, the parties intended for the mortgages to secure the antecedent debts. According to the IRS, the only evidence Equity offers to show the purpose of the mortgages is “self-serving” statements that are unsupported and insufficient to satisfy Equity’s burden of proof.

The district court observed that Equity did not produce any“objective evidence demonstrating that either the Mortgage or the Mortgage Modification was intended to satisfy [the] antecedent debts.” (R.67 at 10) (emphasis added). It explained that neither the mortgage documents nor the promissory notes refer to the loans Daley and Corbett advanced to their parents through Equity and other entities, and it noted there was no other documentation to support Equity’s contention that the mortgage and mortgage modification were issued to secure repayment of the loans. The court acknowledged that Daley and Randolph asserted in affidavits and depositions that the family members agreed that the purpose of the mortgage and mortgage modification was to repay the loans. (Id. at 5.) Nevertheless, it reasoned Equity “failed to produce anything more than circumstantial evidence” that the agreements were intended to secure the antecedent debts. (Id. at 11.) Because “Equity failed to explicitly outline this consideration in [the mortgage documents], and [it failed] to produce any other objective evidence demonstrating the parties’ agreement,” (id. at 12) (emphasis added), the court concluded Equity did not present sufficient evidence to show that it had parted with “money or money’s worth.” Therefore, the court held, Equity did not hold a security interest as defined by I.R.C. § 6323(h)(1), and the IRS was entitled to partial summary judgment establishing the priority of the tax lien.

Treasury regulations define “money or money’s worth” as including money, a security, tangible or intangible property, services, and other consideration reducible to a money value. 26 C.F.R. § 301.6323(h)-1(a)(3). It also includes “any consideration which otherwise would constitute money or money’s worth . . . which was parted with before the security interest would otherwise exist if, under local law, past consideration is sufficient to support an agreement giving rise to a security interest.” Id. Under Florida law, the local law in this case, past consideration is sufficient to support the creation of a security interest. Fla. Stat. § 673.3031(1)(c) (providing that an instrument is issued for value if “issued or transferred as payment of, or as security for, an antecedent claim against any person, whether or not the claim is due”); see also Lea v. Suhl, 417 So. 2d 1179, 1181 (Fla. App. 1982) (issuance of a note in payment of an antecedent obligation rendered additional consideration unnecessary).

Federal law determines the priority of competing liens asserted against a taxpayer’s property. Aquilino v. United States, 363 U.S. 509, 513-14, 80 S. Ct. 1277, 1280 (1960). And, for Equity’s interest in the property to have priority, Equity must show it is the holder of a security interest as defined by the Internal Revenue Code and Treasury Regulations. But, because the Regulations direct us to apply state law to determine whether past consideration may satisfy the “money or money’s worth” requirement, Florida law controls this issue. Past consideration may support the creation of a security interest under Florida law. So, Equity may prove it parted with money or money’s worth by showing that at the time the mortgage and mortgage modification were executed, both Karin and Equity agreed that the purpose of the agreements was to secure repayment of the loans.3

The IRS seems to contend that Equity must present evidence of “contemporaneous consideration” — that is, at the time the loans were originally given, the parties agreed that Equity would receive a security interest at some future date. (Appellee’s Br. at 28.) We disagree. Equity need not show that the parties contemplated future execution of a security agreement at the time the loans were issued. Rather, to show past consideration, Equity must present evidence that the security agreement was executed for the purpose of repaying the loans. The IRS cites no authority holding or suggesting that Florida law demands contemporaneous consideration, and we are aware of none. Indeed, comments to the Florida statute defining consideration suggest otherwise. These comments imply that a note or security interest given to satisfy an antecedent debt is supported by consideration even if, at the time the debt arose, the parties did not contemplate future issuance of a note or security agreement. Fla. Stat. § 673.3031 cmt. 1 (providing as an example of past consideration, “X owes Y $1,000. The debt is not represented by a note. Later X issues a note to Y for the debt.”).

Summary judgment is appropriately granted where there is no genuine issue of material fact, and the moving party is entitled to judgment as a matter of law. Fed. R. Civ. P. 56(c)(2). It should be granted “against a party who fails to make a showing sufficient to establish the existence of an element essential to that party’s case, and on which that party will bear the burden of proof at trial.” Celotex Corp. v. Catrett, 477 U.S. 317, 322, 106 S. Ct. 2548, 2552 (1986). Here, both the IRS and Equity moved for summary judgment, but a disputed issue of a material fact precludes its grant to either party.

At dispute is whether the mortgage and mortgage modification were executed to secure repayment of the debts owed to Equity by Randolph and Karin. Randolph stated in an affidavit that “[i]t was understood and agreed at the time the loans were made that my wife would agree to place a Mortgage on the Property to provide security for the loans that were being made.” (R.46 Ex. 14 at 3 ¶ 17.) Karin testified in her deposition that she did not remember why she signed the mortgage, but she also testified that she signed the mortgage modification “[p]robably so I can pay my children back.” (R.43 Ex. 11 at 20.) Daley stated in an affidavit that at the time of the FDIC settlement, “it was agreed and understood that the Property would be utilized to secure repayment of the funds being advanced on behalf of [Randolph] and [Karin].” (R.46 Ex. 13 at 3 ¶ 22.) Her affidavit also claims the parties executed a participation agreement “giving [Equity] the right to collect the loan proceeds and to obtain the mortgages for the loans made by our various entities.” (Id. at ¶ 24.)

These statements could suffice to establish the purpose of the mortgage and mortgage modification. While the statements may be “self-serving” and may not be “objective evidence,” they are evidence nonetheless. If believed, they would support a finding that the mortgages were given to satisfy the antecedent debts. This finding would lead the court to hold that the mortgages were supported by past consideration and that Equity parted with “money or money’s worth.” The truth of these statements, however, is disputed. At trial, Equity will have the burden of proof on this element of its claim.

Without determining the credibility of these statements, there remains a genuine issue of material fact that precludes summary judgment for either party — whether the mortgage and mortgage modification were executed to secure repayment of the loans. And, it is not appropriate to assess credibility on summary judgment. See, e.g., United States v. Four Parcels of Real Property in Greene and Tuscaloosa Counties in State of Ala., 941 F.2d 1428, 1437 (11th Cir. 1991) (en banc).

Having concluded the court erred in granting the IRS summary judgment establishing the priority of the tax lien, we need not consider whether the court abused its discretion in denying Equity’s motion to reconsider. We reverse the grant of partial summary judgment in favor of the IRS, affirm the denial of Equity’s motion for summary judgment, and remand for further proceedings not inconsistent with this opinion.

REVERSED IN PART; AFFIRMED IN PART; AND REMANDED.

__________________

*Honorable Jane A. Restani, Chief Judge, United States Court of International Trade, sitting by designation.

1The district court’s conclusion that a genuine issue of material fact precludes resolving on summary judgment whether the conveyance was fraudulent is not challenged on this appeal.

2Under the Ryan rule, we generally hold that voluntary dismissals granted without prejudice and without further condition are not final, appealable judgments. See Ryan v. Occidental Petroleum Corp., 577 F.2d 298, 303 (5th Cir. 1978); See also Bonner v. City of Prichard, 661 F.2d 1206, 1209 (11th Cir. 1981) (en banc) (adopting as precedent decisions of the Former Fifth Circuit handed down prior to the close of business on September 30, 1981). The purpose of this rule is to prevent a party from voluntarily dismissing its remaining claims without prejudice after a non-final adverse district court order has been entered in order to manufacture a final judgment. Schoenfeld v. Babbitt, 168 F.3d 1257, 1266 (11th Cir. 1999). We decline to apply the Ryan rule in this case because the dismissal without prejudice was not an improper attempt by Equity or the IRS to manufacture a final judgment to pursue an immediate appeal; rather, it was prompted by the district court’s refusal to permit the IRS to join an indispensable party. Accordingly, we have jurisdiction to consider this appeal.

3Even if evidence shows that Randolph was the sole party responsible for the antecedent debts because many of the loans were made directly to him, the notes and mortgages would still be supported by valid consideration under Florida law if Karin agreed that the purpose of the mortgage and mortgage modification were to secure Randolph’s antecedent debts. See Fla. Stat. § 673.3031 cmt. 4 (noting subsection (1)(c) “is intended to apply to an instrument given in payment of or as security for the debt of a third person . . . .”).

* * *

AQUA LOG, INC., a Georgia corporation, Plaintiff-Appellee, v. STATE OF GEORGIA, Claimant-Appellant. 11th Circuit. Case No. 08-16225. AQUA LOG, INC., Plaintiff-Appellee, v. STATE OF GEORGIA, Interested Party-Appellant. Case No. 08-16274. January 28, 2010. Appeals from the U.S. District Court for the Southern District of Georgia (Nos. 07-00036-CV02, 07-00208 CV-1).

(Before BLACK, WILSON and COX, Circuit Judges.)

(BLACK, Circuit Judge.) This appeal arises from two in rem admiralty actions filed by Appellee Aqua Log, Inc. (Aqua Log) seeking to salvage logs lying at the bottom of Georgia’s rivers. Appellant the State of Georgia intervened as an interested party and alerted the courts to its claim to ownership of the logs. In each case, Georgia filed a motion to dismiss, arguing the court lacked subject matter jurisdiction because the Eleventh Amendment prohibited a federal court from adjudicating its interest in the logs. The district courts denied Georgia’s motions to dismiss, holding Georgia could not claim Eleventh Amendment immunity because it lacked actual possession of the res. We affirm the district courts’ orders.

I. BACKGROUND
During the nineteenth and early twentieth centuries, commercially harvested logs were commonly rafted down Georgia’s rivers and streams to coastal markets. A small percentage of such logs sank while in transit and remain submerged in Georgia’s waterways. These logs, referred to as deadhead logs, were cut from old growth forests and thus have certain valuable characteristics not found in modern timber.

In 1985, Georgia passed a statutory scheme governing the use and ownership of submerged cultural resources. See O.C.G.A. § 12-3-80 to -83. Under these statutes, the state is given title to all submerged cultural resources and the Georgia Department of Natural Resources (DNR) is empowered to enact such rules and regulations as may be necessary to protect or recover such resources. O.C.G.A. §§ 12-3-80 to -81.

At the time Aqua Log filed its complaints, Georgia had a permit procedure in place exclusively applicable to the removal of deadhead logs. See O.C.G.A. § 12-3-82.1 (repealed January 1, 2008).1 This procedure required anyone who desired to recover deadhead logs to first submit an application to the DNR with a plan detailing the location, scope, and methods of the proposed recovery. O.C.G.A. § 12-3-82.1(c). The DNR was authorized to issue a permit only after considering the operation’s effect on factors such as water quality, wildlife habitat, the state’s commercial and recreational fisheries, endangered species, and land use. O.C.G.A. § 12-3-82.1(e)(1).2 The applicant was required to pay an annual fee of $10,000, post a bond of up to $50,000, and pay the DNR adequate consideration for any recovered logs. O.C.G.A. § 12-3-82.1(f)-(h). Anyone who removes a submerged cultural resource without a permit is guilty of a misdemeanor. O.C.G.A. § 12-3-83.

The Wildlife Resources Division of the DNR contracted with the United States Department of the Navy to use sonar to survey portions of the Altamaha River for the presence of deadhead logs. The survey was completed on September 20, 2000, and revealed a relatively low number of logs, many of which have likely changed position since the time of the survey due to normal river conditions.

Aqua Log filed two nearly identical complaints against certain specified in rem defendant logs lying on the bottom of the Altamaha and Flint Rivers in the Southern District and Middle District of Georgia. In each case Aqua Log requested the court to grant a salvage award for its recovery of the in rem defendants, or, if the owners of the logs could not be determined, title to the logs under the law of finds.

The only pertinent difference between the two cases was the manner in which the logs were seized. In the case in the Southern District, several state officers were present at the time of the seizure, which was conducted pursuant to an order from the magistrate judge granting the U.S. Marshals control of the premises.3 In the case before the Middle District, a representative log was seized pursuant to an order from the magistrate judge without the presence of state officers soon after the complaint was filed.

Georgia filed a statement in each case for the limited purpose of alerting the court to Georgia’s claim of ownership of the in rem defendants. The statements explicitly stated Georgia did not waive its sovereign immunity. Georgia also filed a motion to dismiss for lack of subject matter jurisdiction in each case, arguing the Eleventh Amendment barred the court from adjudicating its interest in the logs. Both district courts denied Georgia’s motions, finding the Eleventh Amendment did not defeat federal jurisdiction because the state lacked actual possession of the res at issue in each case. Georgia appeals these orders in a consolidated appeal.4

II. JURISDICTION
The judicial power of the federal courts extends “to all Cases of admiralty and maritime Jurisdiction.” U.S. Const. art. III, § 2, cl. 1. The jurisdiction of the federal courts is limited, however, by the Eleventh Amendment, which provides that “[t]he Judicial power of the United States shall not be construed to extend to any suit in law or equity, commenced or prosecuted against one of the United States by Citizens of another State, or by Citizens or Subjects of any Foreign State.” U.S. Const. amend. XI. While early cases cast doubt on whether the Eleventh Amendment is applicable in this context, the Supreme Court has more recently held in rem admiralty actions are “not wholly exempt” from the Amendment’s limitations on federal jurisdiction. See California v. Deep Sea Research, Inc., 523 U.S. 491, 502-03, 118 S. Ct. 1464, 1470-71 (1998).

“Although the Eleventh Amendment bars federal jurisdiction over general title disputes relating to state property interests, it does not” defeat federal jurisdiction over all in rem admiralty actions to which a state claims an interest. Id. at 506, 118 S. Ct. at 1472. As in all cases involving sovereign immunity, the state must not consent to the federal court’s jurisdiction or otherwise waive its immunity. Coll. Sav. Bank v. Fla. Prepaid Postsecondary Educ. Expense Bd., 527 U.S. 666, 675, 119 S. Ct. 2219, 2226 (1999). The state must also have “a colorable claim to possession” of the res. Fla. Dept. of State v. Treasure Salvors, Inc., 458 U.S. 670, 697, 102 S. Ct. 3304, 3321 (1982). Finally, the state must be in possession of the res. Deep Sea Research, 523 U.S. at 507-08, 118 S. Ct. at 1473.

Georgia has not waived its immunity and has asserted at least a colorable claim to ownership of the res. The sole issue raised on appeal is thus whether Georgia had possession of the logs lying at the bottom of the Altamaha and Flint Rivers.5

III. DISCUSSION
In Deep Sea Research, the Supreme Court reaffirmed the vitality of a series of cases dating back to the nineteenth century that hold a government can assert sovereign immunity in an in rem admiralty proceeding only when it is in possession of the res. Deep Sea Research, 523 U.S. at 506-07, 118 S. Ct. at 1472-73. Although these cases hold a state lacking possession cannot assert sovereign immunity, courts have yet to provide a comprehensive definition of the possession requirement. To determine if Georgia possessed the res in this case, we must therefore analyze each case and, where the law remains uncertain, look to how possession is defined in other areas of the law.

This Court’s analysis begins with The Davis, 77 U.S. 15 (1869), a Reconstruction era case decided under the analogous sovereign immunity of the United States.6 The Supreme Court has recently held that “[w]hile this Court’s decision in The Davis was issued over a century ago, its fundamental premise remains valid in in rem admiralty actions.” Deep Sea Research, 523 U.S. at 507, 118 S. Ct. at 1473.7 In The Davis, the United States shipped a cargo of cotton aboard a private vessel that, after meeting with disaster at sea, was transported to a place of safety by a group of salvors. 77 U.S. at 16. Upon the ship’s arrival at port, and before the cargo was delivered, the ship’s salvors filed an in rem action in state court requesting a lien against the vessel and its cargo for salvage services rendered in saving the property. The United States intervened, claiming immunity based on its ownership of the cargo. Id.

The Court in The Davis held an in rem action may be maintained against government property when the suit “does not require that the property shall be taken out of the possession of the United States.” Id. at 21. The Court continued:

But what shall constitute a possession which, in reference to this matter, protects the goods from the process of the court? The possession which would do this must be an actual possession, and not that mere constructive possession which is very often implied by reason of ownership under circumstances favorable to such implication. We are speaking now of a possession which can only be changed under process of the court by bringing the officer of the court into collision with the officer of the government, if the latter should choose to resist. The possession of the government can only exist through some of its officers, using that phrase in the sense of any person charged on behalf of the government with the control of the property, coupled with its actual possession.
Id. at 21. Applying this test, the Court ultimately found the government lacked possession because the vessel was a common carrier and the goods had not yet been delivered to an officer of the United States. Id. at 21-22.

The Supreme Court again interpreted the possession requirement in Compania Espanola de Navegacion Maritima, S.A. v. The Navemar, 303 U.S. 68, 58 S. Ct. 432 (1938). In The Navemar, a Spanish corporation brought an in rem admiralty suit against a Spanish steamship in federal court. The Spanish government claimed ownership of the vessel and challenged the court’s jurisdiction on the basis of sovereign immunity. Id. at 70-71, 58 S. Ct. at 433. The Court stated, to claim immunity, the Spanish government would need to demonstrate “actual possession by some act of physical dominion or control.” Id. at 75-76, 58 S. Ct. at 435. The Court ultimately held Spain’s claim of ownership, which arose from a decree of attachment rather than any physical presence, could not qualify as possession for purposes of immunity. Id.8

The Supreme Court’s most recent discussion of the possession requirement is found in California v. Deep Sea Research. The plaintiff in Deep Sea Research brought an in rem admiralty action against a shipwreck found in California’s waters. 523 U.S. at 495-96, 118 S. Ct. at 1467. California intervened and asserted sovereign immunity based on its claim to the vessel under state and federal statutes granting the state title to certain abandoned shipwrecks located on submerged state lands. Id. at 496, 118 S. Ct. at 1467. The state was not present during the plaintiff’s seizure of items from the shipwreck. At the time plaintiff filed its complaint, the state was not even aware of the shipwreck’s location. Transcript of Oral Argument at 27, Deep Sea Research, 523 U.S. 491, 119 S. Ct. 2219 (No. 96-1400), 1997 WL 751917. Relying on longstanding precedent in maritime cases, the Supreme Court held the state could not claim immunity because it lacked possession of the res. Id. at 507-08, 118 S. Ct. at 1473. Borrowing from The Davis, the Court stated, to claim immunity, a state must have “an actual possession, and not that mere constructive possession which is very often implied by reason of ownership under circumstances favorable to such implication.” Id. at 507, 118 S. Ct. at 1473 (quoting The Davis, 77 U.S. at 21).9

After reviewing this precedent, we conclude a state must exert some element of physical control over the res to satisfy the possession requirement. All three cases discussed above hold possession requires something more than mere ownership or legal control of the res. The Court in The Navemar stated the government needed to demonstrate “possession by some act of physical dominion or control.” 303 U.S. at 75, 58 S. Ct. at 435. In The Davis, the Court indicated physical possession is required by stating “possession of the government can only exist through some of its officers.” 77 U.S. at 21.

The Supreme Court has also indicated physical control over the res is necessary by defining the requisite possession as actual possession. See Deep Sea Research, 523 U.S. at 507, 118 S. Ct. at 1473; The Navemar, 303 U.S. at 75, 58 S. Ct. at 435; The Davis, 77 U.S. at 21.10 As Judge Wood explained in her well reasoned opinion in this case, “legal treatises from the same time period [as The Davis]clearly indicate that actual possession includes a purposeful and physical dimension. For example, in his 1888 treatise, ‘Possession in the Common Law,’ British law professor Frederick Pollock notes that, while ‘[a]ctual possession’ as opposed to ‘constructive possession’ is . . . an ambiguous term . . . [i]t is most commonly used to signify physical control, with or without possession in law.’ ” Aqua Log, Inc. v. Lost and Abandoned Pre-Cut Logs and Rafts of Logs, 584 F.Supp.2d 1367, 1380 (S.D. Ga. 2008) (quoting Frederick Pollock & Robert Samuel Wright, Possession in the Common Law 27 (Oxford Univ. Press 1888)).

Outside the context of in rem admiralty proceedings, cases contemporary to The Davis and The Navemar also hold actual possession requires some measure of physical control. The New York Court of Appeals, for example, held “[p]ossession means simply the owning or having a thing in one’s own power; it may be actual, or it may be constructive. Actual possession exists where the thing is in the immediate occupancy of the party; constructive is that which exists in contemplation of law, without actual personal occupation.” Brown v. Volkening, 64 N.Y. 76, 80 (1876); see also, Churchill v. Onderdonk, 59 N.Y. 134, 136 (1874) (“Actual possession . . . mean[s] a foothold on the land, an actual entry, a possession in fact, a standing upon it, an occupation of it, as a real demonstrative act done.”); Shannon v. Long, 60 So. 273, 276 (Ala. 1912) (“Actual possession, or possession in fact, exists when the thing is in the immediate occupancy of the party . . . .”) (quoting S. Railway Co. v. Hall, 41 So. 135, 136 (Ala. 1906)). Applying this definition of actual possession, the Vermont Supreme Court explained that “logs in a stream, or piled upon the banks of a stream for the purpose of being floated down the stream, . . . . [are] of such a cumbrous character and so situated, that they . . . [are] incapable of actual, personal possession. Constructive possession is all, or nearly all, that it is practicable for the owner to have of such property.” Kingsley v. White, 57 Vt. 565 (1885).

Modern cases likewise define actual possession as “physical possession” or “actual personal dominion.” See, e.g., United States v. Derose, 74 F.3d 1177, 1185 (11th Cir. 1996). In modern criminal law, “[c]onstructive possession . . . occurs when one has knowledge of the thing possessed ‘coupled with the ability to maintain control over it or reduce it to his physical possession, even though he does not have actual personal dominion.’ ” United States v. Wynn, 544 F.2d 786, 788 (5th Cir. 1977) (quoting Spataro v. State, 179 So.2d 873, 877 (Fla. App. 1965)). “Similarly, a court may find constructive possession by finding ownership, dominion, or control over the contraband itself or dominion or control over the premises or the vehicle in which the contraband was concealed.” Derose, 74 F.3d at 1185 (citing United States v. Martinez, 588 F.2d 495, 498 (5th Cir. 1979)).

Applying this definition, Georgia’s possession was, at most, mere constructive possession, which is insufficient to meet the possession requirement of the Supreme Court’s in rem admiralty jurisprudence. Georgia performed no act of physical control with respect to the res.11 At the time the res in each case was seized, state officers either were not present or were merely observers of a proceeding controlled by U.S. Marshals. Georgia claims possession by locating the logs using sonar, enacting a statutory scheme conferring ownership and control over the logs to the state, owning the land on which the logs are situated, and patrolling the rivers. None of these acts, however, is sufficient to establish actual possession.

Georgia’s ownership of the land on which the logs are located, and any possible possession of such land by patrolling the rivers, at most merely gives rise to constructive possession of the logs. Courts contemporary to The Davis and The Navemar have held a landowner, through his actual possession and control of her land, has only constructive possession of personal property found on her land. In Ferguson v. Ray, for example, the Oregon Supreme Court held a landowner had superior title to a lessee who found a large quantity of gold-bearing quartz on the leased property. 77 P. 600 (Or. 1904). The court explained “the legal possession [of the personal property] rests on a real de facto possession [of the land], constituted by the occupier’s general power and intent to exclude unauthorized interference.” Id. at 603. Moreover, in dicta, the Supreme Court of Connecticut stated in Mather v. Chapman that when personal property is washed on a privately owned shore, the “owner of the land . . . is deemed to be constructively the first occupant.” 40 Conn. 382 (1873) (emphasis added).

Georgia’s legal control of the res is also insufficient to create possession for purposes of Eleventh Amendment immunity. As discussed above, mere legal control, without any element of physical control, can create only constructive possession. Any alternative ruling would largely collapse the distinction between actual and constructive possession. The standard case of constructive possession is that which is “implied by reason of ownership.” The Davis, 77 U.S. at 21. The state regulations governing deadhead logs seem to control the logs in much the same way mere ownership grants an owner the right to control his property. In each case, the state and the owner have the right to use the property, can exclude others from enjoyment of the property, and can institute legal actions against those who do not respect their property rights. Just as California’s claim of title to the shipwreck in Deep Sea Research was found to be insufficient, Georgia’s legal control of the res through its statutory scheme cannot create actual possession.

We therefore hold Georgia cannot assert Eleventh Amendment immunity and must submit to the district courts’ jurisdiction. This Court does not address which party should ultimately prevail on the merits. We express no opinion as to whether Aqua Log may claim the logs under admiralty law.

III. CONCLUSION
For the reasons stated above, we hold Georgia cannot assert Eleventh Amendment immunity because it lacks possession of the res in each case. We therefore affirm the district courts’ orders denying Georgia’s motions to dismiss for lack of subject matter jurisdiction.

AFFIRMED.

__________________

1After the expiration of section 12-3-82.1 on January 1, 2008, permits for the removal of deadhead logs are governed by section 12-3-82, which establishes procedures for obtaining a permit for the exploration, survey, or recovery of any submerged cultural resource.

2The DNR appointed a task force in 1998 to review the possible consequences of removing deadhead logs from Georgia’s waterways. The task force concluded removing submerged timber could have an effect on game fish, mussels, endangered species, water quality, and stream morphology. The task force also noted the removal of deadhead logs could interfere with recreational boating.

3Prior to the seizure, Georgia had notified Aqua Log of its ownership of the logs and the need to obtain a permit before undertaking any actions with respect to the in rem defendants.

4While the orders appealed are interlocutory orders, they are appealable under the collateral order doctrine because they address Eleventh Amendment immunity. Puerto Rico Aqueduct and Sewer Auth. v. Metcalf & Eddy, Inc., 506 U.S. 139, 147, 113 S. Ct. 684, 689 (1993).

5The Southern District found Georgia had raised a colorable claim to ownership of the logs and had not waived its immunity. Aqua Log did not cross appeal and has not otherwise contested the district court’s conclusions. The Middle District found it unnecessary to reach these issues after finding Georgia lacked possession of the res.

6Although earlier cases indicated a government in possession of the res was entitled to immunity from an in rem admiralty action, see The Schooner Exchange v. McFaddon, 11 U.S. 116 (1812) (holding France was entitled to immunity regarding an in rem action against a French ship of war in the possession of French officers), The Davis appears to be the first Supreme Court case holding a government could not claim immunity because of a lack of possession.

7In Deep Sea Research, the Supreme Court also explained that “[i]n considering whether the Eleventh Amendment applies where the State asserts a claim in admiralty to a res not in its possession, this Court’s decisions in cases involving the sovereign immunity of the Federal Government in in rem admiralty actions provide guidance, for this Court has recognized a correlation between sovereign immunity principles applicable to States and the Federal Government.” 523 U.S. at 506-07, 118 S. Ct. at 1472-73 (citing Tindal v. Wesley, 167 U.S. 204, 213, 17 S. Ct. 770, 773-74 (1897); Treasure Salvors, 458 U.S. at 710, 102 S. Ct. at 3327).

8The Supreme Court applied the possession requirement soon after deciding The Navemar in a case with very similar facts. See Republic of Mexico v. Hoffman, 324 U.S. 30, 65 S. Ct. 530 (1945). Federal district and circuit courts have likewise held a foreign government cannot claim sovereign immunity with respect to a vessel not in its possession. See United States v. Jardine, 81 F.2d 745 (5th Cir. 1935); The Carlo Poma, 259 F. 369 (2d Cir. 1919) (rev’d on other grounds 255 U.S. 219, 41 S. Ct. 309); The Attualita, 238 F. 909 (4th Cir. 1916); The Johnson Lighterage Co. No. 24, 231 F. 365 (D.N.J. 1916); Long v. The Tampico, 16 F. 491 (S.D.N.Y. 1883).

9The Sixth Circuit has applied Deep Sea Research in two cases involving similar in rem actions for abandoned shipwrecks. See Fairport Int’l Exploration, Inc. v. The Shipwrecked Vessel, 177 F.3d 491, 497-98 (6th Cir. 1999); Great Lakes Exploration Group, LLC v. Unidentified Wreck and (For Salvage-Right Purposes), Abandoned Sailing Vessel, 552 F.3d 682, 689 (6th Cir. 2008). In each case, the Sixth Circuit held the state could not claim immunity because it did not have actual possession of the shipwreck.

10Circuit courts have also stated the government must demonstrate actual possession. See Bouchard Transp. Co. v. Updegraff, 147 F.3d 1344, 1349 (11th Cir. 1998); Fairport Int’l Exploration, Inc. v. The Shipwrecked Vessel, 177 F.3d 491, 498 n.3 (6th Cir. 1999).

11We need not decide whether physical markings of ownership, such as nets, buoys, or signs, would have been sufficient to create actual possession because Georgia does not claim to have created any such physical indicia of ownership.

* * *