Annotations- Attorney's Liability

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6332 Annotations: Attorney’s Liability- Levy

 

Penalty for Failure to Surrender Property: Attorney's Liability

 

[79-1 USTC ¶9305] United States of America v. Jerry Clayton Collier and Ronald L. Grimm

U. S. District Court, East. Dist. Tenn. No. Div., Civ. 3-79-2, 471 FSupp 1185, 3/20/79
[Code Sec. 6332]

Levy and distraint: Property held by another: Enforcement of levy: Penalty for failure to surrender property.--By failing to surrender funds held on behalf of his client, received pursuant to a settlement agreement, an attorney became personally liable for an amount equal to the value of the property levied upon. Since the attorney received the funds after being served with the notice of levy, property he held on behalf of his taxpayer-client was in the constructive possession of the United States . The amount of the taxpayer's property being held by the attorney was found to be the amount received in the settlement, less the attorney's fees and expenses in obtaining the settlement.

John H. Cary, Joe Vaulx Crockett, III, Department of Justice, Washington, D. C. 20530, for plaintiff. Dudley W. Taylor, Ambrose, Wilson & Grimm, Valley Fidelity Bank Bldg., Knoxville , Tenn. 37902 , for defendants.

Opinion as Rendered from the Bench

TAYLOR, District Judge:

The United States seeks to obtain a judgment against the defendant for failure to honor a levy served upon defendant to collect the unpaid taxes of his client, Mr. Jerry Collier. On February 8, 1979, the Court entered a default judgment against Collier for the sum of $83,562.46, plus interest and statutory additions provided by law.

Collier had contracted to perform certain construction work for the Bob Smith Construction Company and London Town Associates, Ltd. London Town was the project owner for whom Bob Smith Construction was performing work as a -- contractor. Collier performed and completed the work under a subcontract with Smith and filed a materialman's lien for the amount due him under the contract. London Town was not satisfied with Collier's performance and disputed the amount due.

Mr. Robert H. Leonard was the attorney for London Town . Mr. Leonard and Mr. Ronald L. Grimm, the defendant, negotiated a compromise settlement of $9,500.00. On October 3, 1974, Mr. Grimm contacted Mr. Leonard's office, notified him that $9,500.00 was acceptable and asked Mr. Leonard to go ahead and get the money within the next few days. Thereupon, Leonard contacted J. Kelly Sisk of London Town and requested a check for $9,500.00. On either the same or the following day, the check was mailed to Mr. Leonard payable jointly to Collier Masonry Company and Ronald L. Grimm, attorney.

On October 8, 1974, Revenue Officers E. B. Householder and Don Wilcox met with Mr. Grimm at his law office. Mr. Grimm informed the Revenue Officers that a settlement agreement had been reached and that his client, Mr. Collier, was to receive approximately $9,000.00 to $9,500.00, from which the law firm expected to receive one-third as attorney fees for obtaining the settlement. Mr. Grimm indicated at that time that the money would be forthcoming in a few days. At this meeting, Revenue Officer Householder served the notice of levy presently the subject of his litigation.

The next day Mr. Grimm met personally with Mr. Leonard and received the check for $9,500.00 in full settlement of the controversy with London Town . In exchange for this payment an affidavit was executed by Mr. Collier releasing the materialman's lien. The check was then deposited in the escrow account of Mr. Grimm's law firm. $3,198.25 was thereafter applied to the legal fees incurred by Mr. Grimm for services rendered in connection with this settlement.

Out of the remaining proceeds of this check, Mr. Grimm applied $4,747.66 to fees owed Mr. Grimm's firm by Mr. Collier in connection with other construction contracts; $750.00 to fees owed Mr. Grimm's firm for Mr. Collier's divorce; $480.00 and $257.02 to pay off two bad checks made out to other creditors by Mr. Collier; and the balance of $67.02 was applied to additional legal fees owed Mr. Grimm's firm by Mr. Collier.

The levy was served on Mr. Grimm on October 8, 1974. Service of a notice of levy creates a custodial relationship between the holder of the property belonging to the taxpayer and the United States . Upon service of the notice of levy, property and rights to property of the taxpayer held by Mr. Grimm were reduced to constructive possession of the United States . See Phelps v. United States [75-1 USTC ¶9467], 421 U. S. 330, at 334.

A person who fails to honor a levy becomes personally liable to the United States in an amount equal to the value of the property or rights to property levied on but not exceeding the amount of taxes due. 26 U. S. C. §6332(c)(1). Once notice of levy was served any property held by Mr. Grimm on behalf of Mr. Collier was held on behalf of the United States . By failing to surrender that property or the proceeds thereof to the Government, Mr. Grimm became personally liable for failing to honor the levy. Phelps v. United States, supra.

The evidence shows and the Court finds that Mr. Grimm possessed property belonging to the taxpayer. He possessed the right to receive property belonging to his client as the result of the settlement.

The Court finds from the evidence that Mr. Grimm is entitled to retain $3198.25 of the money received as his fee for representing Mr. Collier in the settlement with London Town . Mr. Grimm is also entitled, in the Court's opinion, to retain the $500.00 which he incurred as expenses in this settlement. The Court further finds that Mr. Grimm is not liable to the Government for the $257.02 and $480.00 paid to satisfy two bad checks of Collier.

It is accordingly ORDERED that judgment be, and the same hereby is, rendered against defendant Ronald L. Grimm, in favor of the United States , in the amount of $5,064.73.

Order Accordingly.

81-1 USTC ¶9282]United States of America , Plaintiff-Appellee Cross-Appellant v. Ronald L. Grimm, Defendant-Appellant Cross-Appellee

(CA-6), U. S. Court of Appeals, 6th Circuit, No. 79-1278/9, 1/6/81, Affirming in part and reversing in part an earlier DC opinion, 79-1 USTC ¶9305

[Code Sec. 6323]

Levy and distraint: Settlement award held by attorney: Unpaid taxes of client: Surrender of property.--An attorney who received a check in settlement of the taxpayer client's claim against a third party was required to turn over the check, less an amount for his fee and expenses, to the IRS. The attorney was in possession of intangible property that had been properly levied by the U. S. Amounts used by the attorney out of the taxpayer's portion of the settlement to satisfy two bad checks were not deductible from the amounts to be paid over pursuant to the levy because the U. S. had a superior claim over all the taxpayer's other creditors.

John H. Carey, United States Attorney, Knoxville, Tenn. 37902, M. Carr Ferguson, Assistant Attorney General, Joe Vaulx Crockett III, Gilbert E. Andrews, Carleton Powell, R. Bruce Johnson, Department of Justice, Washington, D. C. 20530, for plaintiff-appellee cross-appellant. Dudley L. Taylor, Ambrose, Wilson & Grimm, Knoxville , Tenn. 37902 , for defendant-appellant cross-appellee.

Before LIVELY and KEITH, Circuit Judges and CELEBREZZE, Senior Circuit Judge.

The United States filed an action against the Appellant Ronald L. Grimm for failure to honor a levy served upon the appellant to collect on the unpaid taxes of his client, Mr. Jerry Collier. Of the $9,500 that the appellant had for his client, the district court ruled that appellant was entitled to retain $3,198.25 of the money as his fee for representing the taxpayer and $500.00 for expenses. The court further found that the appellant did not have to return $257.02 and $480.00 used to satisfy two bad checks of Collier. Appellant was ordered to turn over the remaining $5,064.73. Appellant filed this appeal alleging that the district court's decision that he turn over the $5,064.73 was in error because he did not have in his possession any property rights or property belonging to Collier when the Notice of Levy was served. Appellee cross-appealed arguing that the monies the district court allowed appellant to deduct for bad checks should not have been allowed since the United States has a superior claim over all of taxpayer's creditors.

The appellant was in possession of money belonging to Collier because of the settlement of a claim between Collier and a third party. Collier contracted to perform certain construction work for the Bob Smith Construction Company (Smith) and London Town Associates, Ltd. ( London Town ). London Town was the project owner for whom Smith was performing work as a general contractor. Collier performed and completed the work under a subcontract with Smith and filed a materialmen's lien for the amount due him under the contract. London Town was not satisfied with Collier's performance and disputed the amount due.

Robert H. Leonard was the attorney for London Town . He and Grimm negotiated a compromise settlement of $9,500. On October 3, 1974, Grimm contacted Leonard's office, notified him that $9,500 was acceptable and asked Leonard to go ahead and get the money within the next few days. Leonard then contacted J. Kelly Sisk of London Town and requested a check for $9,500. On either the same or the following day, the check was mailed to Leonard payable jointly to Collier Masonry Company and Ronald L. Grimm, attorney.

On October 8, 1974, Revenue Officers E. B. Householder and Don Wilcox met with Grimm at his law office. Grimm informed the revenue officers that a settlement agreement had been reached and that Collier was to receive approximately $9,000 to $9,500, from which the law firm expected to receive one third as attorney fees for obtaining the settlement. Grimm indicated at that time that the money would be forthcoming in a few days. At this meeting, Householder served the Notice of Levy presently the subject of this litigation. The Notice of Levy informed Grimm that $82,578.09 was due and owing to the United States from Collier and that all property or rights to property belonging to Collier that were in Grimm's possession were thereby levied upon and seized for satisfaction of that debt.

The next day Grimm and Collier met with Leonard and received the check for $9,500 in full settlement of the controversy with London Town . In exchange for this payment, an affidavit was executed by Collier releasing the materialmen's lien. The check was then deposited in the escrow account of Grimm's law firm. Thereafter, the $3,198.25 was applied to the legal fees incurred by Grimm for services rendered in connection with this settlement.

Grimm possessed the right to receive property belonging to his client as the result of the settlement, and accordingly, Grimm was in possession of intangible property that was properly levied by the government under 26 U. S. C. §6331(a). See Phelps v. United States [75-2 USTC ¶9467], 421 U. S. 330 (1975); Sims v. United States [59-1 USTC ¶9338], 359 U. S. 108 (1959); United States v. Eiland [55-1 USTC ¶9487], 223 F. 2d 118 (4th Cir. 1955). The record is clear that the parties realized that Grimm as Collier's attorney, possessed the right to receive the proceeds of the settlement. The check was made out to both Collier and Grimm. The transmittal letter that Leonard had prepared to accompany the check was addressed to Grimm. Although Leonard does not remember whether the check was ultimately handed to Collier or Grimm, it is undisputed that the check was deposited in a trust account of Grimm's law firm. Thus the actions of the parties manifested their belief that Grimm had the right to collect the proceeds of the settlement for Collier.

We affirm the district court's holding that Grimm was liable to the government for the $5,064.73 paid over to Collier.

The government has cross-appealed arguing that the district court erred in not holding Grimm liable for $737.02 he paid to the two creditors of Collier. Both parties agree on appeal that if this court should find that appellant was in possession of property or rights to property belonging to Collier at the time the levy was activated, then the appellant is also liable for the $737.02 paid to creditors. We agree, and accordingly reverse the district court's holding that appellant was not liable for those funds.

[83-1 USTC ¶9372] United States of America , Plaintiff, Appellant v. F. Lee Bailey, et al., Defendants, Appellees

(CA-1), U. S. Court of Appeals, 1st Circuit, No. 82-1400, 707 F2d 19, 5/23/83, Affirming an unreported decision of the District Court

[Code Secs. 1001 and 6332]

IRS levies: Attorney's liability: Stock valuation.--The district court did not err when it determined that the value of 10,000 shares of stock that had been transferred in trust by the taxpayers to their attorneys to secure payment of their legal fees was $1, despite the fact that, on the date the IRS issued notices of levy on the stock, the closing price of the stock on the American Stock Exchange was $8 per share. The probative value of the stock exchange quotations was cast into serious doubt by the other evidence before the court and the government failed to meet its burden of establishing that the value of the stock was more than $1. Accordingly, the government was entitled to a recovery against the taxpayers' attorneys of $1, plus interest and costs.

William F. Weld, United States Attorney, Boston, Mass. 02109, Glen L. Archer, Jr., Assistant Attorney General, Michael L. Paup, Daniel F. Ross, Richard W. Perkins, Kenneth L. Greene, Department of Justice, Washington, D. C. 20530, for plaintiff, appellant, Kenneth J. Fishman, for defendants, appellees.

Before COFFIN and BOWNES, Circuit Judges, and TAURO, ^* District Judge.

COFFIN, Circuit Judge:

The United States government (government) appeals from a judgment by the district court holding defendants liable, under 26 U. S. C. §6332, for the value of certain stock certificates upon which the government imposed a tax levy and which defendants refused to release. The issue before us is whether the district court erred in determining that, despite the fact that on September 28, 1970, stock in Transogram Company, Inc. traded for $8 per share on the American Stock Exchange, the value of $10,000 shares of the stock on that date was only $1, because of circumstances set forth below. Since the court's finding was not clearly erroneous and since the court committed no error of law, we affirm.

Thomas and Evelyn Shaheen retained defendants F. Lee Bailey and Colin W. Gillis to represent them in certain civil and criminal proceedings arising out of the Shaheens' unpaid federal income tax liabilities for the 1966, 1967 and 1968 taxable years. To secure payment of their legal fees, the Shaheens created a trust for the benefit of the defendants and transferred certain items of real and personal property to the defendants as trustees. Included in the property transferred were 10,000 shares of Transogram stock. The certificates were in the name of Columbia Financial Corporation ( Columbia ) and on the certificates was the notation "SUBJECT TO INVESTMENT LETTER". Also transferred to defendants were documents executed by three directors of Columbia ratifying the transfer of the stock to the trust.

On September 14, 1970, the government made jeopardy assessments against the Shaheens for the taxable years 1966, 1967 and 1968. On September 28, 1970, the government issued Notices of Levy to defendants informing them that the assessments had been made and that they were immediately to surrender to the government all property in their possession belonging to the Shaheens. Defendants did not comply. On July 16, 1971, the government filed a complaint in the United States District Court for the District of Massachusetts alleging that, pursuant to Section 6332 of the Internal Revenue Act of 1954, 26 U. S. C. §6332, defendants were jointly and severally liable for a sum equal to the value as of the date of the levy of the assests of the Shaheens in their possession.

A trial was held on April 29, 1980. The court determined that the government had perfected its levy and that it was entitled to all the right title and interest of the Shaheens in the assets held by defendants as trustees. The court held, further, that in lieu of the property itself, which had become worthless since the date of the levy, the government was entitled to recover from defendants the value of that property as of September 28, 1970.

The only property concerning which the government introduced evidence of value was the Transogram stock, which, by the time of the trial, had become worthless. Based on the government's evidence that 900 shares of Transogram stock were traded on the American Stock Exchange on September 28, 1970, and that the closing price was $8 per share, the court concluded that the stock had some value. The court recognized, however, that several other factors bore on the value of the stock. First, the sale of 900 shares of the stock on September 28, 1970, brought about a price change of 3/8 of a point, thus suggesting that the market in Transogram shares was "thin" and would not absorb the 10,000 shares. Second, the certificates bore the legend "SUBJECT TO INVESTMENT LETTER", and it appeared that defendants lacked sufficient information regarding the restriction to enable them to transfer the shares freely on the open market. Finally, it was unclear whether the Shaheens were authorized to transfer the stock to defendants in the first place, given that the shares were in the name of Columbia and that there was no evidence that the directors who authorized the transfer constituted a majority of the board of directors. Noting those factors and the opinion testimony of defendant Gillis that the stock was worthless at the time of the levy, the court assigned the value of $1 for the 10,000 shares. From that determination, the government appeals.

The government admits that the fair market value of shares of stock is generally considered a question of fact that may not be disturbed unless it is clearly erroneous. See Arc Realty Co. v. Commissioner [61-2 USTC ¶9689], 295 F. 2d 98, 103 (8th Cir. 1961); United States v. United States Gypsum Co., 333 U. S. 364 (1948). It argues, however, that because the court placed on the government too heavy a burden of proof as to value, it did not require sufficient evidence of defendants that the stock was valueless.

In support of its argument that the district court should have placed a greater burden on defendants to rebut its evidence of value, the government points to several factors. First, it urges that section 6332 is a coercive statute that seeks to foster the swift tender of property upon which a levy has been made. See Flores v. United States [77-1 USTC ¶9380], 551 F. 2d 1169, 1174 (9th Cir. 1977); United States v. Montchanin Mills, Inc. [82-2 USTC ¶9624], 512 F. Supp. 1192, 1195 (D. Del. 1981). The purpose of the statute requires that the risk of loss due to property becoming worthless be on the defendants who refused to give up the property when the Notice of Levy was issued. That purpose would be undermined by a rule that places too heavy a burden of proof as to value on the government. Second, the government insists that evidence of the stock's actual value is more readily available to the holders of the stock than to the government. Thus, it is fair to place the burden on them to come forward with the evidence. Finally, the government points out that a number of courts have adopted a rule that absent evidence to the contrary, the value of stock is presumed to be equivalent to the value indicated by stock exchange quotations. See 10 J. Mertens, Law of Federal Income Taxation (Rev.), Sec. 59.14 and cases cited therein.

We acknowledge the reasonableness of a presumption that the value of stock is equal to the value indicated by the stock exchange quotations. Absent such a presumption, the government would rarely be able to establish the value of stock that a party wrongfully withheld from it. Even assuming that the government is entitled to such a presumption, however, we do not interpret the presumption as shifting to the defendants the burden of proving that the stock had no value. The presumption satisfies the government's initial burden of going forward with evidence of value. Absent rebuttal evidence, the government is entitled to prevail based on the value established by the stock exchange quotations. The burden imposed on the defendants by the presumption, however, is not to prove that the stock was valueless or that it had a particular value lower than that urged by the government, but only to come forward with enough evidence to support a finding that the stock exchange quotations are not a reliable indicator of the actual value of the stock on the day in question. As one court explained a similar presumption, in favor of the validity of the deficiency determinations of the Commissioner of Internal Revenue, the presumption is "a procedural device which requires the taxpayer to come forward with enough evidence to support a finding contrary to the Commission's determination." Rockwell v. Commissioner [75-1 USTC ¶9324], 512 F. 2d 882, 885 (9th Cir. 1975). The job of assessing the sufficiency of the evidence produced by defendants to rebut the presumption remains committed to the sound discretion of the trial court and the ultimate burden of persuasion on the issue of value remains on the government.

Admittedly, a different rule--one that would shift to defendants the burden of persuasion on the issue of value--would further enhance the coercive effect of the statute. Such a rule, however, might also result in injustice to defendants who do not, in fact, have any greater access to proof of the actual value of the property in question than does the government. ¹ In the absence of specific Congressional directive, we are reluctant to abandon the general rule that in tax, as in other litigation, plaintiffs have the burden of persuasion. See Rockwell v. Commissioner, supra, 512 F. 2d at 887. See also United States v. Massachusetts Mutual Life Ins. Co. [41-1 USTC ¶9425], 38 F. Supp. 333 (D. Mass. 1941), aff'd [42-1 USTC ¶9342], 127 F. 2d 880 (1st Cir. 1942) (under predecessor statute to section 6332, the government has the burden of proving the value of property it alleged was not surrendered). ²

Viewing the evidence in light of these principles, we cannot say that the court's determination was clearly erroneous. In addition to the stock certificates themselves, which raised questions about the stock's transferability, the district court had before it the testimony of defendant Gillis, a professor of law and an attorney admitted to practice in the Commonwealth of Massachusetts , and the deposition testimony of defendant Bailey. Both defendants testified that they had abandoned efforts to dispose of the stock because defendant Gillis had determined it to be worthless.

It would be helpful to know exactly what defendant Gillis testified led him to the conclusion that the stock was worthless. We are handicapped, however, by the fact that a significant portion of the transcription of defendant Gillis' testimony has been lost. Pursuant to Fed. R. App. P. 10(c), the government has filed and the district court has approved a supplemental statement of the evidence, briefly summarizing the lost testimony. The summary recites that "The substance of Mr. Gillis' testimony concerning the value of the Transogram shares was that he and Mr. Bailey (the other defendant) had believed the entire bundle of assets in the trust to be worthless, and that they had neither ascribed any particular value to the Transogram shares, nor made any effort to determine the value of those shares as of the date of the levies." In their brief, defendants' description of the testimony is that because the stock was subject to an investment letter, defendant Gillis believed that the stock could not be traded and had no market value.

Whatever the specifics of the testimony, the district court relied on it in support of its conclusion that the combined factors of evidence of a "thin" market in Transogram shares, an investment restriction on the certificates and the fact that the stock was in Columbia's name rendered the stock exchange quotations insufficient evidence of value to entitle the government to prevail. Particularly in light of the gaps in the evidence before us, we are unwilling to say that the court was not entitled to credit the testimony of defendant Gillis that in his opinion the stock was worthless on the date of the levy. We are also unwilling to say that the combined factors of the restrictions noted by the district court and the testimony of defendants was insufficient evidence for the court to conclude that the stock exchange quotations were not probative evidence of actual value of the stock on the date of the levy.

At the district court noted, the government offered no other evidence of value. Since the probative value of the stock exchange quotations was cast into serious doubt by the other evidence before the district court, the government failed to meet its burden of establishing that the value of the stock was more than $1. The judgment of the district court, granting the government recovery against the defendants of $1, plus interest from September 28, 1970 and costs, must be and is therefore

Affirmed.

^* Of the District of Massachusetts, sitting by designation.

¹ In this case, the court found that defendants did not have information available to them that would have permitted them to transfer the shares freely on the open market. The court thus apparently credited the testimony of defendants that they had been unable to obtain information that would enable them to dispose of the stock.

² The defense of no value is distinguishable from the defense that the defendant did not hold any property of the taxpayer at the time of the levy. The latter is one of two specifically recognized affirmative defenses to claim under section 6332. See United States v. Montchanin Mills, Inc., supra, 512 F. Supp. at 1194. Defendants can be presumed to have access to the necessary information to establish this defense and courts have imposed on defendants the burden of doing so. Id. at 1195.

[96-1 USTC ¶50,242] David J. Kurland, Esquire, Plaintiff v. The United States of America, a sovereign government, by and through its agency, The United States Department of Treasury, Internal Revenue Service, Priscilla Holtan, individually, Financial Services & Investment Corporation, a foreign corporation, Richard Holtan and Susan Gordon, as shareholders of Financial Services & Investment Corporation and Richard Holtan and Susan Gordon, individually, Defendants

U.S. District Court, Mid. Dist. Fla., Tampa Div., 95-515-CIV-T-17A, 3/6/96

[Code Sec. 6332 ]

Levy: Surrender of property: Attorney: Funds of client: Interpleaded funds.--An attorney who brought an interpleader action regarding money in his client trust accounts that belonged to a delinquent taxpayer was dismissed from the action. The attorney did not act improperly when he sought to interplead the funds instead of complying with a tax lien against the client's funds. The government did not allege facts to prove that the attorney engaged in improper conduct. The attorney did not release the funds after he was put on notice of the tax lien on the client's property. He provided an accounting of the origin, amount and disposition of the funds in the trust accounts. He also waived any right to attorneys' fees and stated that he did not hold any other funds for the taxpayer.

David J. Kurland, Law Office of David J. Kurland, 850 Clearwater-Largo Rd., S.W., Largo, Fla. 34640, pro se. Mary Apostolakos Harvey, Department of Justice, Washington, D.C. 20530, for U.S. Priscilla Holtan, 5420 Central Ave., St. Petersburg, Fla. 33707, pro se. Richard Holtan, Susan Gordon, 29 Washington Terrace, St. Louis, Mo. 63112, pro se.

ORDER ON PLAINTIFF'S MOTION TO DEPOSIT STAKE INTO COURT REGISTRY AND MOTION TO DISCHARGE STAKEHOLDER AND PERMIT REPRESENTATION

KOVACHEVICH, District Judge:

This cause is before the Court on Plaintiff David Kurland's Motion to Deposit Stake into the Court Registry, Motion to Discharge Stakeholder, and Motion to Permit Representation (Docket No. 19), and responses thereto, filed by the United States (Docket No. 20) and Financial Services & Investment Corporation (Docket No. 25). The present action for interpleader, which commenced in state court, was removed to this Court by the United States pursuant to 28 U.S.C. §1444 .

FACTS

On March 10, 1995, Plaintiff Kurland, a Florida attorney, instituted an interpleader action in the Circuit Court for the Sixth Judicial Circuit in and for Pinellas County , Florida . Plaintiff instituted the action pursuant to Florida Rule of Civil Procedure 1.240, in an attempt to avoid potential multiple liability arising from disbursement of funds held in his client trust accounts. The funds, $104,107.21 in total, were paid into Plaintiff's trust accounts as proceeds of a lawsuit brought by Plaintiff on behalf of his clients, Richard Holtan and Financial Services & Investment Corporation. Several claimants, the named Defendants in the present action, notified Plaintiff of their respective claims to the funds in his trust accounts, prompting Plaintiff to institute this interpleader action. On March 24, 1995, a Notice of Removal was filed by the United States of America pursuant to 28 U.S.C. §1444 . On April 11, 1995, the Order on Removal was granted. Since that time, the United States of America obtained a default judgment against Richard Holtan and Susan Gordon (Docket Nos. 17 & 18).

In the matter now before the Court, Plaintiff requests the Court to take the following action:

I. Accept payment of the disputed funds into the registry of the Court;

II. Dismiss Plaintiff from the action and permanently enjoin all Defendants from instituting, prosecuting or maintaining any action against Plaintiff in this matter;

III. Permit Plaintiff to continue its representation of Defendant Financial Services & Investment Corporation.

DISCUSSION

I. Acceptance of Funds into Registry of Court

Federal Rule of Civil Procedure 22, does not require the deposit of disputed funds into the registry of the Court. Murphy v. Travelers Ins. Co., 534 F.2d 1155, 1159 (5th Cir. 1976). However, the funds at issue here are in the possession of a Florida attorney and are subject to the Florida Bar's Interest on Trust Account (IOTA) Rules. Plaintiff argues that since the Florida Bar retains all the interest produced by IOTA accounts, the funds should be transferred to the Court registry where any interest earned would instead benefit the claimants. All the parties involved agree that their interests would be better served if the funds were taken out of the IOTA accounts and deposited into the Court registry. This Court has searched for and found no reason to deny Plaintiff's Motion to Transfer the funds to the Court registry.

II. Dismissal of Plaintiff

Plaintiff has also requested that the Court enter an order dismissing Plaintiff from this action and enjoining all Defendants from bringing or maintaining further action against Plaintiff in connection with this matter. The law normally regards the plaintiff in an interpleader action as having been discharged of full responsibility regarding the interpleaded funds when the funds have been paid into the registry of the court and the parties have had notice and opportunity to be heard. Central Bank of Tampa v. United States, 838 F. Supp. 564 (M.D. Fla. 1993) (citing Francis du Pont & Co. v. Sheen, 324 F.2d 3, 4 (3rd Cir. 1963)). Additionally, courts may enter an order relieving the interpleader plaintiff of further responsibility and enjoin the interpleaded defendants from bringing further action against that plaintiff with regard to the disputed funds. Id. (citing Holcomb v. Aetna Life Ins. Co., 228 F.2d 75 (10th Cir. 1955)).

Only two of the remaining Defendants in the present action have responded to Plaintiff's Motions. FS&IC states that it does not object to Plaintiff's motions. However, the United States, while agreeing that the funds should be placed in the Court's registry, objects to Plaintiff's discharge and further representation of FS&IC.

It is a generally accepted principle that a disinterested stakeholder filing an action in interpleader may be dismissed from the case, discharged from further liability, and, in the court's discretion, awarded attorneys' fees and costs. See e.g., Prudential Ins. Co. v. Boyd, 781 F.2d 1494 (11th Cir. 1986). The United States objects to Plaintiff's discharge on two grounds. First, the United States argues that Plaintiff should not be discharged until he accounts for the money in his client trust accounts. Specifically, the United States would like an accounting "regarding the genesis of the source of the funds, any disposition of the funds, the interest accrued on the principal, and any attorney's fees paid to Plaintiff." Second, the United States argues that Plaintiff cannot be discharged because the United States has the right to bring a claim against Plaintiff for failure to honor the United States ' federal tax lien, filed against the property of Richard Holtan.

The United States already has the information it seeks regarding the funds in Plaintiff's trust accounts. The pleadings and motions up to this point detail the origin, amount, and subsequent disposition of the funds. Plaintiff stated that the funds were held in his trust accounts from the time they were received and that they have not accrued any interest. Furthermore, Plaintiff stated that he is waiving any right to attorney's fees in this interpleader action. Finally, Plaintiff stated that he does not hold any other funds for Richard Holtan.

As for the United States ' claim that it has the right to bring an action against Plaintiff for violating a federal tax lien, pursuant to 26 U.S.C. §6332(d) , the Court does not agree. The United States claims that Plaintiff was served with a levy on February 9, 1995, and that Plaintiff has failed to comply with said levy. The Supreme Court has stated that interpleader is a remedial device which is to be applied liberally. State Farm Fire & Casualty Co. v. Tashire, 386 U.S. 523, 533 (1967). If Plaintiff legitimately and in good faith feared exposure to competing claims to the disputed funds, as Plaintiff claims here, Plaintiff should not be subject to suit for failure to turn over the disputed funds to the government, opening himself up to litigation from the other claimants. This is exactly the type of multiple liability interpleader was designed to prevent.

Title 26 U.S.C. §6332(e) may provide a shield against liability to those honoring federal tax liens; however, that is insufficient to override the purpose behind the interpleader rule and statute. First International Bank of Oregon v. United States , 891 F. Supp. 543 (D. Or. 1995). Interpleader gives the disinterested party the ability to bow out, leaving the actual parties with real interests at stake to litigate their claims. See id.; New York Life Ins. Co. v. Connecticut Dev. Auth., 700 F.2d 91,96 (2d Cir. 1983).

The Court recognizes that a person who wrongfully disburses funds after being put on notice of a government lien is not an innocent stakeholder and not entitled to the equitable remedy of interpleader. See Hughes Supply, Inc. v. A.C. Electric Corp., 145 F.R.D. 590 (M.D. Fla. 1993). However, the United States has not alleged facts to prove Plaintiff engaged in improper conduct. According to its response, the United States ' alleged right against Plaintiff is based solely on Plaintiff's bringing the present action instead of turning over the $104,107.21 to the Government. Therefore, this Court has no reason to deny the dismissal of Plaintiff from this action after the disputed funds are deposited into the registry of the Court. Plaintiff claims that he did not release any of the funds held in his trust accounts after he was put on notice of the Government's lien. Plaintiff seeks interpleader only for those funds in his possession at the present time and has denied any interest in the trust account funds.

III. Continued Representation

As for the United States ' claim that Plaintiff should be unable to continue to represent FS&IC if he is discharged from the present action, this Court also disagrees. The United States cites two rules of Professional Responsibility and states that a conflict of interest could arise if Plaintiff is allowed to represent FS&IC. After reviewing the rules and the relevant cases, the Court determines that any potential conflict is too remote to discern at this time. Therefore, Plaintiff should be allowed to represent FS&IC. However, should a conflict arise during representation, Plaintiff would of course have to excuse himself from representing FS&IC at that time.

The Court found only one case with facts somewhat similar to this case, a Connecticut appellate decision, Crozier v. Zaboori, 541 A.2d 531 (Conn. App. Ct. 1988). Crozier represented the buyer of a small dry cleaning business and acted as the escrow agent for the transaction. The buyer deposited $8550 into an escrow account as a down payment on the business. The deal fell through, and both the buyer and the seller claimed the down payment. The attorney interplead the two claimants and the trial court decided in favor of the seller. Thereafter, the attorney moved to open the judgment to reargue the facts of the interpleader action. The trial court denied the motions and the attorney appealed. The appellate court stated in a footnote that the attorney had no standing to raise any claims of error and the fact that he did so, raised the question of whether he was really indifferent between the claimants. Id. at 531 n.2.

Although the possibility for conflict is present, the Court finds that Plaintiff should be allowed to represent FS&IC after he deposits the funds. Accordingly, it is

ORDERED that Plaintiff David Kurland's Motion requesting acceptance of the interpleaded funds into the registry of the court is GRANTED; Plaintiff's request to permit further representation is GRANTED; and the Court orders the discharge of Plaintiff from this action and enjoins Defendants from further action against Plaintiff in connection with the disputed funds, upon the deposit in accordance with this order.

 

[97-1 USTC ¶50,282] United States of America , Plaintiff v. Robert Scher, Esquire, and Scher & Eliasberg, P.C., Defendants

U.S. District Court, East. Dist. N.Y. , 94-CV-3763 (DRH), 2/21/97

[Code Secs. 6323 and 6332 ]

Liens and levies: IRS: Attorney: Priority: Attachment: Choate: Doctrine of Laches.--Simultaneously a federal tax lien attached and the rights assigned to an attorney from a taxpayer became choate to funds held in escrow by the attorney. Therefore, the IRS's lien had priority because the attorney's lien was not "prior" to the IRS lien. The taxpayer's right to the escrow funds, which were part of sale price for the transfer to a third party of her right to purchase her apartment upon its conversion to a cooperative, became fixed upon confirmation of the conversion. Under state ( New York ) law, the transfer of a conditional right creates merely an equitable lien. Thus, pursuant to an IRS levy, the attorney had to turn over the escrow funds to the IRS. Finally, the IRS was not barred by the doctrine of laches or by the state's six-year statute of limitations for contract actions.

[Code Sec. 6323 ]

Liens and levies: IRS: Individual liability: Corporate obligation: Estoppel.--An attorney, who was president of a law firm that was a corporation, could be called on individually to answer to an IRS levy that was served on the firm relating to funds held in escrow for a taxpayer. He asked the IRS to take no action to derail the taxpayer's real estate closing based on his assurance the funds would remain in escrow pending resolution of this issue. Accordingly, he was estopped from asserting any right that could insulate himself from liability for his act performed as a corporate officer.

Zachary W. Carter, United States Attorney, Brooklyn, N.Y. 11201-2744, Thomas A. McFarland, Assistant United States Attorney, Tamara H. Lindquist, Jennifer M. Blunt, Department of Justice, Washington, D.C. 20530, for plaintiff. Scher & Scher, P.C., 111 Great Neck Rd. , Great Neck , N.Y. 11021 , for defendants.

MEMORANDUM AND ORDER

HURLEY, District Judge:

The United States has moved for summary judgment pursuant to Rule 56 of the Federal Rules of Civil Procedure based on the defendant, Robert Scher's ("Scher" or "defendant") failure to honor an IRS levy. In response, Scher moved to dismiss the complaint upon the grounds that: (1) at the time he was served with the levy, he was not in possession of an asset owned by Stephanie Winston ("taxpayer"); (2) he may not be held personally responsible for the obligations of Scher & Eliasberg, P.O. ("Scher & Eliasberg"); and (3) the statute of limitations and doctrine of laches preclude any recovery by the United States.

FACTS

The facts which bear on the question presently before the Court are not in dispute. A recitation of those facts, however, is necessary to place the legal arguments in context. The relevant facts are as follows:

(1) On June 24, 1985, an assessment in the amount of $101,138.55 was made against the taxpayer. The legitimacy of that assessment is not at issue in this action.

(2) Some time prior to December of 1985, the taxpayer assigned to Scher & Eliasberg $10,000 of the $20,000 that she anticipated receiving from Micon Industries of New York ("Micon"). The $20,000 was to be paid by Micon in consideration of the taxpayer transferring her right to purchase the apartment in which she was living upon its conversion to cooperative status. Under her agreement with Micon, she was to be paid the $20,000 thusly:

25% of the consideration shall be placed into the [taxpayer's] attorney's escrow account upon signing of this agreement. An additional 25% of the consideration will be placed into the applicant's attorney's account upon confirmation that the building will convert to Co-operative status. Upon closing of 250 Mercer Street Co-operative status, the 50% consideration will be released to the applicant. The remaining balance of the consideration which is 50%, will be released to the applicant's attorney upon the applicant vacating the apartment.

( See Pl. 's Rule 3(g) Statement, Ex. 4.)

(3) The purpose of the assignment by the taxpayer to defendant was to compensate Scher & Eliasberg, at least in part, for legal services that the firm had provided to her apparently over a fairly extended period of time. ( See Pl. 's Reply Mem. Ex. 2.)

(4) On April 24, 1986, the IRS served a Notice of Levy on Scher and the law firm of Scher & Eliasberg.

(5) The first two $5,000 payments under the Micon contract were received by defendant in December, 1985 and March, 1986.

(6) Defendant, in a letter dated April 18, 1986 to the IRS: (a) stated that at the time the levy was served, he was not in possession of any taxpayer assets, given her prior assignment of the $10,000 in question to his law firm; (b) asked that the IRS not interfere with the scheduled closing with Micon and; (c) indicated that the firm would hold "the money . . . in escrow pending an amicable attempt to resolve the differences with your office." The closing thereafter did occur. Micon paid the remaining $10,000 directly to the IRS pursuant to a levy which was served upon them. The dispute between the IRS and Scher regarding the other $10,000 was not resolved, leading to the present lawsuit.

DISCUSSION

I. Attachment of the Federal Tax Lien

A federal tax lien arises when unpaid taxes are assessed which in this case, was June 24, 1985. See 26 U.S.C. §6321. Such liens "continue in full force and effect until the tax liability is extinguished (26 U.S.C. §6322) and attach to all after acquired property of the taxpayer." Seaboard Surety Company v. United States [62-2 USTC 9653], 306 F.2d 855, 859 (9th Cir. 1962).

The attachment of a tax lien to after acquired property, however, does not occur until the taxpayer's right to the property is "fixed" in the sense of not being contingent or uncertain in nature. See Wagner v. United States [78-1 USTC ¶9340], 573 F.2d 447, 454 (7th Cir. 1978); City of New York v. United States [60-2 USTC ¶9767], 283 F.2d 829, 832 (2d Cir. 1960). ¹ See also Corwin Consult. v. Interpublic Group of Companies, Inc. [74-1 USTC ¶9401], 375 F Supp. 186 (S.D.N.Y. 1974) ("It is settled that although tax liens do not attach to contingent rights . . . pre-existing liens do attached as soon as the taxpayer gains a fixed right to property.") (emphasis in original). Prior to that time, the property does not "belong[]" to the taxpayer within the meaning of Section 6321. See United States v. Long Island Drug Company [41-1 USTC ¶9140], 115 F.2d 983, 986 (2d Cir. 1940).

Here, it is debatable precisely when the taxpayer's rights to the subject $10,000 became fixed, but it would seem to be "upon confirmation that the building will convert to Co-operative status." After that, there were no remaining contingencies, nor was there anything further for the taxpayer to do to be entitled to the escrowed monies at closing. Id.

Confirmation of the conversion, and the corresponding second $5,000 payment to defendant (in his role as attorney), both occurred in March 1996. At that point, the government's interest in the taxpayer's after acquired property attached to the $10,000 received from Micon.

The taxpayer, however, had assigned her interest in that property to defendant "sometime prior to December 1995." And that brings us to the gravamen of the present dispute. Although triggered by defendant's receipt of a levy, it is in essence a claim by him of lien priority.

The government's lien "takes priority over competing liens unless the competing lien was choate prior to the attachment of the federal lien. . .." MDC Leasing v. New York Property Ins. Underwriting [79-1 USTC ¶9122], 450 F. Supp. at 181. See also PPG Industries Inc. v. Hartford Fire Ins., Co. [74-2 USTC ¶9823], 384 F. Supp. 91, 94 (S.D.N.Y. 1974), aff'd [76-1 USTC ¶9257], 531 F.2d 58 (2d Cir. 1976).

Had the earlier assignment transferred the legal right to the $10,000 to defendant, his lien would have been superior to that of the government. Defendant's interest did not become choate, or fixed, however, until "confirmation that the building will convert to Co-operative status." Under the law of the State of New York the transfer of a conditional right creates merely an equitable lien. See, e.g., PPG Industries [74-2 USTC ¶9823], 384 F. Supp. at 95; MDC Leasing [79-1 USTC ¶9122], 450 F. Supp. at 181. In sum, the federal tax lien attached, and the rights assigned to defendant became choate, simultaneously in March of 1986. Defendant's lien not being "prior," it is subordinate. See, e.g., United States v. McDermott [93-1 USTC ¶50,164], 113 S. Ct. 1526 (1993); MDC Leasing [79-1 USTC ¶9122], 450 F. Supp. at 181.

In conclusion of this point, the defendant, at the time he was served with the tax levy on April 24, 1986, was in possession of an asset of the taxpayer, and was required to remit the $10,000 to plaintiff.

II. Additional Issues Raised by Defendant

Defendant also claims that the levy was served on Scher & Eliasberg, and that he may not be called upon individually to answer for a corporate obligation.

Some background information is required at this juncture. Scher was the president of the corporation, which apparently is no longer operational. As such, he dealt with the IRS regarding the levy. He asked plaintiff to take no action to derail the Micon closing based on his assurance that the monies would remain in escrow pending resolution of the dispute. It was he who wrote the October 2, 1987 letter indicating that:

[i]f the District Court tells us to pay it, we'll do so. You may be assured that since we promised Mr. Demetriou that we would hold the money pending the outcome, that we have, indeed done so.

(Pl.'s Reply, Ex. 3.)

Given the defendant's involvement with plaintiff regarding the levy, including his assurances that the $10,000 would be escrowed until the claim was resolved, his disavowance of responsibility is without merit. He was the one of the two lawyer/shareholders in the corporation who handled the levy. Under the circumstances, he is estopped to assert any right that he might otherwise have, arguendo, to insulate himself from liability for his act performed as a corporate officer.

Short shrift may be made of defendant's final argument. The present claim by the United States is not barred by the doctrine of laches or by New York 's six year statute of limitations for contract actions. See, e.g., United States v. Weintraub [80-1 USTC ¶9172], 613 F.2d 612, 619 (6th Cir. 1979), cert. denied, 447 U.S. 905 (1980); United States v. Incorporated Village of Island Park, 791 F. Supp. 354, 369 (E.D.N.Y. 1992).

CONCLUSION

Plaintiff's motion for summary judgment is granted, and defendant's motion to dismiss the complaint is denied.

Plaintiff shall submit a proposed order consistent with this opinion on or before March 7, 1997, with at least five days prior notice to defendant.

SO ORDERED.

¹ In MDC Leasing V. New York Property Ins. Underwriting [79-1 USTC ¶9122], 450 F. Supp. 179 (S.D.N.Y. 1978), aff'd 603 F.2d 213 (2d Cir. 1979), however, the Court indicated that the federal tax lien took effect as of the filing of the assessment, even though the amount of the proceeds due under a fire insurance policy had not yet come "into existence." Id.