Annotations- Summary Judgment

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6332 Annotations: Summary Judgment- Levy

 

Penalty for Failure to Surrender Property: Summary Judgment

 

[43-1 USTC ¶9476] United States of America v. National Bank of Middlesboro, Middlesboro , Ky.

United States District Court, Eastern District of Kentucky, at London., No. 143., 05/13/43

Charges in distraint and seizure cases: Summary judgment.--The Court allowed the Government's motion for a summary judgment against a bank which was the depositary of funds of the assignee of a corporation against which a deficiency had been assessed on the ground that the assignee was conducting the business of the corporation, the deed of assignment not effecting a distribution of the assets of the corporation in kind to its stockholders.

John T. Metcalf, U.S. District Attorney, for plaintiff. H.L. Bryant, Pineville, Ky., F.R. Whalin, Middlesboro, Ky., and W.T. Davis, Pineville, Ky., for defendants.

FORD, D.J.:

This cause having been assigned for hearing at London, Kentucky on May 12, 1943 upon plaintiff's motion for a summary judgment and the intervenor's motion for summary judgment and the Court having heard arguments and having considered the pleadings, exhibits and briefs, finds that, upon the record, there is no genuine issue as to any of the material facts hereinafter stated and therefore the Court makes the following findings of fact and conclusions of law:

Findings of Fact

 

1. That an additional or re-assessment of $2,139.08 and interest in the amount of $261.61 for the year 1937 was made against the Louisville Property Company, H.C. Williams, Assignee, Middlesboro, Kentucky, by the Commissioner of Internal Revenue as shown on that portion of the March 1940 Income Tax Assessment List--Kentucky Collection District, No. 529,000.

2. That the Commissioner of Internal Revenue mailed to the Louisville Property Company, H.C. Williams, Assignee, a 90 day letter notifying the said taxpayer of said deficiency assessment hereinabove referred to.

3. That H.C. Williams, Successor Assignee, Louisville Property Company, filed with the Board of Tax Appeals on October 27, 1939 a petition challenging the validity of said re-assessment or deficiency tax.

4. That on November 27, 1939, the Commissioner of Internal Revenue filed a motion to dismiss said petition, which was sustained on December 20, 1939.

5. That no appeal was taken from the action of the Board of Tax Appeals in dismissing the petition of H.C. Williams, Successor Assignee.

6. That on May 23, 1941 a notice of levy was served upon the defendant, National Bank of Middlesboro, Kentucky, notifying said bank that all property or monies or bank deposits in its possession belonging to Louisville Property Company, H.C. Williams, Assignee, were seized and levied upon for the payment of taxes aggregating $2,131.58, together with penalties and interest and at the time thereof there was on deposit in defendant bank funds to the credit of and in the name of H.C. Williams, Assignee, Louisville Property Company.

7. That on May 24, 1941 a final notice and demand was served upon the defendant, National Bank of Middlesboro, demanding that said bank pay over, surrender and deliver to the Collector of Internal Revenue, for the District of Kentucky, or his deputy, the funds levied upon on May 23, 1941.

8. That thereafter the defendant, National Bank of Middlesboro, declined and refused to surrender to the United States of America , any funds on deposit to the credit of H.C. Williams, Assignee, Louisville Property Company.

9. That on March 31, 1942 the Honorable Guy T. Helvering, Commissioner of Internal Revenue, authorized and requested the Attorney General to institute a civil action against the National Bank of Middlesboro pursuant to Section 3710 of the Internal Revenue Code to enforce the surrender of funds levied on for taxes for the year 1937 assessed against the Louisville Property Company, H.C. Williams, Assignee.

10. That on April 20, 1942, John T. Metcalf, United States Attorney, for the Eastern District of Kentucky, was authorized and directed by the Attorney General to institute this suit against the defendant, National Bank of Middlesboro , Kentucky .

11. That the funds on deposit in the National Bank of Middlesboro, Middlesboro, Kentucky, which have been levied upon are proceeds realized from rents, royalties and the sale of assets conveyed by Louisville Property Company, Incorporated, to the United States Trust Company as Assignee by deed of assignment dated November 6, 1919 and which passed to H.C. Williams as Successor Assignee, pursuant to order of the Whitley Circuit Court entered in May 1935.

12. That pursuant to and by virtue of the aforesaid deed of assignment, H.C. Williams, Successor Assignee of Louisville Property Company, since his appointment and qualification as such, has sold and leased lands so acquired and the timber and coal rights thereon, has received the income therefrom and has incurred expenses in so doing.

Conclusions of Law

 

The Court makes the following conclusions of law:

1. That H.C. Williams, Assignee, Louisville Property Company, at the time of the assessment of the taxes herein, was conducting the business of the Louisville Property Company and that the deed of assignment dated November 6, 1919 and subsequent proceedings did not effect a distribution of the assets of the Louisville Property Company in kind to its stockholders. Hellebush v. Commissioner of Internal Revenue, 65 Fed. (2d) 902 [3 USTC ¶1136].

2. That the funds on deposit in the National Bank of Middlesboro, Middlesboro, Kentucky, represent proceeds derived from rents, royalties and sale of assets embraced in the aforesaid deed of assignment, and are subject to the taxes assessed by the Commissioner of Internal Revenue on March 29, 1940 against Louisville Property Company, H.C. Williams, Assignee.

3. That the order of the Board of Tax Appeals dismissing the petition of H.C. Williams, Successor Assignee, for lack of jurisdiction, Docket No. 100,467, entered December 20, 1939 is not res judicata of this action.

4. That the funds levied upon by the plaintiff, United States of America, which are on deposit in defendant bank, in the name and to the credit of H.C. Williams, Assignee, Louisville Property Company, were properly levied upon and are subject to the payment of the tax claim asserted herein and should be paid to the plaintiff, United States of America.

5. That the motion for summary judgment herein filed by the plaintiff, United States of America , should be sustained and the motion for summary judgment herein filed by the intervening petitioner, H.C. Williams, Assignee, Louisville Property Company, should be overruled.

6. That the intervening petition filed herein by H.C. Williams, Assignee, Louisville Property Company, on May 26, 1943 should be and same is hereby dismissed.

7. That the plaintiff, United States of America, is entitled to a judgment against the defendant, National Bank of Middlesboro, in accordance with the prayer of its complaint.

8. The Court has jurisdiction of the parties and the subject matter of this action.

Let judgment be prepared and submitted in accordance with these findings and conclusions, to all of which rulings the defendant, National Bank of Middlesboro, and the intervenor, H.C. Williams, Assignee, Louisville Property Company, object and are allowed exceptions.

 

[79-1 USTC ¶9250] United States of America , Plaintiff v. New England Merchants National Bank, Defendant

U. S. District Court, Dist. Mass., Civil Action No. 72-1345-G, 465 FSupp 83, 1/29/79

[Code Sec. 6332]

Levy and distraint: Bank safety deposit box: Failure to surrender: Property of taxpayer: Ownership: Seizure.--Judgment was entered ordering the defendant bank to permit removal of the contents of a taxpayer's safety deposit box, subject to a notice of levy and seizure, following failure of the taxpayer to pay a jeopardy assessment upon demand. (1) The bank could not defend its refusal to turn over the contents of the box because it may have lacked "possession" under state law. State law cannot bar application of federal law if applying state law would frustrate the controlling federal statutory scheme. (2) The government's failure to join the taxpayer was not applicable to the seizure of leviable property but only to foreclosure of the tax lien, which the government did not pursue. (3) The bank did not rebut the presumption of the taxpayer's ownership of the safety deposit box evidenced by the lease of the box by the taxpayer. The bank was, therefore, compelled to cooperate and summary judgment was entered for the government.

Wayne B. Hollingsworth, Assistant United States Attorney, Boston , Mass. 02109 , for plaintiff. Harry T. Daniels, Hale and Dorr, 28 State St. , Boston , Mass. 02109 , for defendant.

Memorandum of Decision

GARRITY, District Judge:

This case is now before the court on the Government's motion for summary judgment seeking an order that would direct the defendant, New England Merchants National Bank, to permit access by authorized representatives of the District Director of Internal Revenue into a safe deposit box rented by a delinquent taxpayer. The established facts can be briefly summarized as follows. On February 8, 1971, a delegate of the Secretary of the Treasury made an assessment in the amount of $47,360 against Jeffrey F. Perreault for upaid marihuana transfer tax, made a finding that the collection of the assessment was in jeopardy, gave the taxpayer notice of the assessment and demanded payment. The Government has been able to collect only $305 of the delinquent amount; the taxpayer has failed to pay the remaining $47,055 as well as accrued interest from February 8, 1971 and a $6 lien filing fee.

The taxpayer on February 8, 1971 was the lessee of a safe deposit box located at the defendant bank. Upon the taxpayer's failure to pay the assessment following demand, a notice of federal tax lien issued on February 9, 1971, and a copy was delivered to the defendant. Also on February 9 a notice of levy and a notice of seizure covering the contents of the safe deposit box were served on the defendant.

Believing that it contains leviable property of the taxpayer, plaintiff seeks access to the box. Although the Government has the taxpayer's key, the box can be opened only with the combined use of another key held by the bank, and the bank refuses to cooperate.

The United States commenced this action to compel the defendant's cooperation. The defendant moved to strike its answer and to file an amended answer, which motion was granted at a hearing held on February 27, 1978. The plaintiff filed this motion for summary judgment, ¹ which was also debated at the February 27 hearing. Upon considering the parties' briefs, affidavits and oral argument, the motion is granted for the reason that there is no genuine issue of material fact in dispute and the Government is entitled to judgment as a matter of law. Fed. R. Civ. P., Rule 56(c).

At the outset it will be helpful briefly to summarize the statutory background. The Internal Revenue Code affords the federal government two options for collecting taxes due and owing after the taxpayer has failed to pay following formal assessment and demand for payment. The taxpayer's failure to pay upon demand gives rise to a tax lien, in favor of the United States, which attaches to "all property and rights to property, whether real or personal, belonging to such person [the delinquent taxpayer]." 26 U. S. C. §6321. The United States may at this stage initiate a plenary civil proceeding pursuant to 26 U. S. C. §7403 to foreclose the tax lien or to subject property in which the taxpayer has any right, title or interest to payment of the tax; and all persons with liens in or claiming an interest in the property must be joined. 26 U. S. C. §7403(b).

Alternatively, the United States may pursue the administrative option provided by 26 U. S. C. §§ 6331-6344 and collect the tax by levy upon "all property and rights to property . . . belonging to such person [delinquent taxpayer] or on which there is a lien provided in this chapter for the payment of the tax." 26 U. S. C. §6331(a) (emphasis added). Levy is the equivalent of seizure, and the government is authorized physically to seize the property. 26 U. S. C. §6331(b). In the event "property or rights to property subject to levy upon which a levy has been made" are in the "possession" of someone other than the taxpayer, that person is obligated to surrender the property upon demand, 26 U. S. C. §6332(a) (emphasis added), or face personal liability for the unpaid assessment and a possible penalty. 26 U. S. C. §6332(c).

In the instant case, the United States chose the second alternative--levy and distraint--a remedy that operates, for the most part, extra-judicially. See, G. M. Leasing Corp. v. United States , 1977, [77-1 USTC ¶9140] 429 U. S. 338. A court order is sought pursuant to 26 U. S. C. §7402(a) only because inspection and seizure of the contents of the safe deposit box requires access to the box, which access is blocked by the defendant bank.

The defendant presses three objections to the Government's motion: (1) that the absence of possession by the defendant of the contents of the safe deposit box removes the defendant from the reach of 26 U. S. C. §6332(a) and thus renders improper any order based on a failure to comply with the obligations created by that Section, (2) that the action cannot proceed at all without the taxpayer being joined as a party-defendant, and (3) that the presence of a factual dispute as to the ownership of the contents of the safe deposit box, if any, precludes summary judgment. We discuss each of these arguments in turn.

Defendant's first point--the bank's lack of possession of the contents of the safe deposit box--raises a question of law, not one of fact, and, therefore, does not prevent us from granting summary judgment, since we decided the issue in the Government's favor. The defendant argues as follows: first, 26 U. S. C. §6332(a), which imposes a duty on third parties to surrender property subject to levy, applies by its terms only when the third party is in "possession" of the property; second, the issue of "possession" is decided by reference to state law, and finally according to Massachusetts law the lessor of a safe deposit box is not in possession of the contents of that box. This tripartite argument is defective in both its second and third premises. Although state law creates the legal interests and rights, federal law controls as to which of those interests and rights are subject to federal tax. Morgan v. Commissioner, 1940, [40-1 USTC ¶9210] 309 U. S. 78, 80-81. By the same token, it would appear that federal law should govern the determination of whether property subject to levy is in the "possession" of a third party, for any other result would permit states to frustrate the collection of federal taxes. Cf. Aquilino v. United States, 1960, [60-2 USTC ¶9538] 363 U. S. 509, 512-14. Even if "possession" were in general a question of state law, state law should give way to federal law in circumstances, like those present here, where following the state's rule would frustrate the purposes, terms and uniformity of the controlling federal statutory scheme. See R. F. C. v. Beaver County , 1946, 328 U. S. 204, 210.

Massachusetts law on the question of the bank's possession is unclear. See Hurley v. Noone, 1964, 347 Mass. 182, 187, n. 7; cf., 5 Op. Atty. Gen. ( Mass. ) 688 (1920). See generally, Annot. 138 A. L. R. 1137, 1142 (1942); Annot. 133 A. L. R. 279, 280-82 (1940) (majority rule is that lessor of safe deposit box is bailee in possession of contents); Annot. 40 A. L. R. 874 (1926). However, in this case the bank would appear to have sufficient control over the safe deposit box and the surrounding area, to give it "possession" of the contents of the box for purposes of applying 26 U. S. C. §6332(a). See United States v. First National City Bank, S. D. N. Y. 1974, [74-1 USTC ¶9361] 388 F. Supp. 1044, 1045-46, aff'd, 2 Cir. 1977, [77-1 USTC ¶9198] 568 F. 2d 853; cf., Carples v. Cumberland Coal & Iron Co., 1945, 240 N. Y. 187, 148 N. E. 185, 186. Otherwise, a taxpayer could insulate his property from levy simply by placing it in a safe deposit box prior to its seizure. First National City Bank, supra, 388 F. Supp., at 1046.

Regarding defendant's second ground of opposition to the instant motion, viz., failure to join the taxpayer as a party required for just adjudication, Fed. R. Civ. P. Rule 19, it is enough to note that the weight of authority opposes treatment of the taxpayer as a Rule 19 party. The summary nature of the administrative levy and seizure process, justified by the need for speedy collection of taxes and the desirability of encouraging voluntary compliance, see, Matter of Carlson, 10 Cir. 1978, [78-2 USTC ¶9562] 580 F. 2d 1365, 1368, ought not be further complicated by making the taxpayer a necessary party to any court action brought pursuant to 26 U. S. C. §7402(a) only to make possible the seizure of leviable property. First National City Bank, supra, 568 F. 2d, at 857-58; United States v. Mellon Bank, N. A., 3 Cir. 1975, [75-2 USTC ¶9690] 521 F. 2d 708, 711, n. 11. The final judgment in such an action settles no rights in the property subject to seizure, and the owner of the property has an opportunity for a prompt post-seizure hearing to protect his interests. First National City Bank, supra, 388 F. Supp. at 1045; see, e.g., 26 U. S. C. §§ 7422, 7426.

Before treating defendant's third contention involving ownership of the contents of the safe deposit box, we consider first a rather difficult threshold question of timing: whether the defendant ought to be permitted to raise the ownership issue as a defense to an action like the instant one brought by the government to seize property or whether assertion of the defense ought to be postponed until post-seizure judicial proceedings. On the one hand, it is well established that a defendant in an analogous action brought by the United States under 26 U. S. C. §6332(c) to enforce a levy by holding the defendant personally liable for the unpaid assessment may defend by showing that none of the levied-upon property possessed by him belongs to the taxpayer or is subject to a tax lien. E.g., United States v. Third Nat. Bank & Trust Co., M. D. Pa., 1953, [53-1 USTC ¶9255] 111 F. Supp. 152, 155. Furthermore, the government may search for and seize levied-upon property pursuant to a judicially authorized warrant based on probable cause. See, G. M. Leasing Corp. v. United States , 1977, [77-1 USTC ¶9140] 429 U. S. 338; Matter of Carlson, 10 Cir. 1978, [78-2 USTC ¶9562] 580 F. 2d 1365. Permitting an ownership defense in an action like the instant case brought under Section 7402(a), therefore, would not unduly hamper speedy collection of taxes by the government.

On the other hand, it can be argued that allowing a defendant to dispute the ownership of levied-upon property complicates and delays the summary administrative process which was intended to be a speedy method of tax collection. Moreover, unlike an enforcement proceeding under Section 6332(c), an action brought under Section 7402(a) to facilitate seizure of property results in no personal liability on the part of the defendant. Hence a showing of probable cause to believe that levied-upon property possessed by the defendant belongs to the taxpayer or is subject to a tax lien ought to be sufficient to obtain an order opening the safe deposit box to government inspection. Cf. G. M. Leasing Corp., supra; United States v. Mellon Bank, N. A., 3 Cir. 1975, [75-2 USTC ¶9690] 521 F. 2d 708, 711, n. 15 (dictum). The owner of the property would then be limited to his post-seizure remedies.

Bearing these arguments in mind, we conclude that on the facts of this case consideration of the ownership defense is appropriate. The ownership issue in a case involving seizure of contents of a safe deposit box is relatively simple, and the available evidence is limited. Moreover, because the United States possesses the key to the safe deposit box, the taxpayer is unable to purloin its contents. The need for rapid action, thus, is not as pronounced as in some other cases. Finally, our granting the Government's motion in the face of the ownership defense makes a decision of this question less crucial. On the whole, we feel that thorough analysis of the timing issue should await a case of more urgency, in which the competing policies are in sharper focus.

Turning now to the merits of defendant's third argument, it is clear that Section 6332(a) imposes an obligation on the defendant to surrender only property subject to levy and that according to Section 6331 the property subject to levy is property belonging to the taxpayer or to which a federal tax lien has attached. Therefore, the taxpayer's ownership of property in the safe deposit box (or the presence of property subject to a lien) is a necessary condition to any duty on the part of the bank to surrender that property to the United States .

Massachusetts law creates a rebuttable presumption that the contents of a safe deposit box are owned by the lessee of the box, a presumption which is especially strong when the property is currency. Hurley v. Noone, 1964, 347 Mass. 182, 187-88 states the rule: ²

Possession of property, with the exercise of the rights of ownership, is evidence of title. . . . Proof of Beatrice's [the lessee's] possession of the currency in the box (or of the bank's possession as her bailee for safekeeping) thus established a prima facie case of her ownership.

The Government introduced evidence that the taxpayer leased the safe deposit box at defendant bank. Affidavit of Michael B. Dickman, February 26, 1974, at ¶6. We do not understand the defendant to dispute this fact. The Government having made a showing sufficient to support the presumption of ownership, the defendant, in order to avoid summary judgment, must offer evidence that the contents of the box are not owned by the taxpayer or submit a so-called 56(f) affidavit explaining its inability to present, by affidavit, facts essential to justify its opposition. Fed. R. Civ. P., Rule 56(e), (f). Although it had notice of the existence of the presumption, see, Defendant's Memorandum In Support Of Motion To Strike and File Amended Answer and In Opposition to Motion for Summary Judgment, at p. 10, the defendant has failed to identify any evidence that it might have in rebuttal, nor has it submitted a 56(f) affidavit justifying this evidentiary gap. Instead it merely asserts its ignorance of the contents of the box. In the face of the presumption of ownership, this showing is quite clearly inadequate. See, First National Bank v. Cities Service, 1968, 391 U. S. 253, 288-89.

There being no genuine issue of material fact for trial and the Government being entitled to judgment as a matter of law, the motion for summary judgment is hereby granted. Judgment shall enter ordering the defendant to allow the Government access to Safe Deposit Box No. 4298 as though the Government were the lessee of that box and to permit removal of its contents.

¹ The standard governing summary judgment in this Circuit is summarized in Gottlieb v. Isenman, 1 Cir. 1954, 215 F. 2d 184, 186:

The plaintiffs have a right to a trial ". . . where there is the slightest doubt as to the facts." Peckham v. Ronrico Corporation, 1 Cir. 1948, 171 F. 2d 653, 657: Landy v. Silverman, 1 Cir. 1951, 189 F. 2d 80.

² Although Hurley invokes the familiar proposition that possession is evidence of title, it does not make the presumption of the lessee's ownership depend on the technicalities of the relationship between the bank and the lessee relative to who has possession of the contents of the box. The bank is treated as a sort of agent of the lessee for purposes of the presumption.

 

[82-1 USTC ¶9237]United States of America, Plaintiff v. Fred B. Fontana, Virginia Fontana, Great Lakes Carbon Corporation and the Sheriff of Westchester County, Defendants Great Lakes Carbon Corporation, Plaintiff v. Fred B. Fontana, Virginia Fontana, Material Handling Consultants, and The United States of America, Defendants

U. S. District Court, So. Dist. N. Y., Nos. 80 Civ. 1527 (LBS), 80 Civ. 4105 (LBS), 528 FSupp 137, 10/14/81

[Code Sec. 6332]

Lien for taxes: Money held by sheriff: Motion for summary judgment: Existence of constructive trust.--Because a material question of fact existed as to whether the taxpayers had a sufficient property interest in money held by a county sheriff for the government's tax lien to attach, summary judgment was inappropriate. The existence of a constructive trust in favor of the taxpayer's former employer was not determinable without further proceedings.

John S. Martin, Jr., United States Attorney, J. D. Pope, Assistant United States Attorney, New York , New York 10007 , for plaintiff. Stuart Potter, David K. Fiveson, Butler, Fitzgerald & Potter, 200 Park Avenue, New York, New York 10166, for Great Lakes Carbon Corporation, Samuel S. Yasgur, Brian Powers, 600 County Office Building, White Plains, New York 10601, for Sheriff of Westchester County, Dennis M. Fox, Two William Street, White Plains, New York 10601, for Fred B. Fontana, Virginia Fontana and Material Handling Consultants.

Opinion

SAND, District Judge:

The United States has, by order of this Court dated July 8, 1981, obtained a judgment against the Fontanas in the amount of $102,404.92. The underlying debt which gives rise to this judgment represents unpaid federal income taxes owed for the years 1974 and 1975, plus statutory additions, interest and penalties.

[Background]

Prior to obtaining judgment, the United States attempted to levy upon a fund of money held by the Sheriff of Westchester County which money, the Government contends, belongs to the Fontanas. The Sheriff has refused to relinquish the fund because it is subject to a competing claim asserted by Great Lakes Carbon Corporation (" Great Lakes "). Great Lakes is the former employer of Fred Fontana, and it has asserted, in prior litigation in state court and in a currently pending action removed from state court and consolidated with this proceeding, that the fund in question is traceable to wrongful acts by Fontana in breach of his fiduciary obligations as an employee and that such fund should be found to be held in constructive trust for the benefit of Great Lakes. Great Lakes disputes the Government's claim to priority of lien over the fund on the grounds that the taxpayers were not the beneficial owners of the fund but held bare legal title for the benefit of Great Lakes . See Aquilino v. United States [60-2 USTC ¶9538], 363 U. S. 509 (1960).

The Government now moves for summary judgment, and Great Lakes moves for an order directing that an inquest be held to determine whether such a constructive trust exists.

[Jurisdiction]

I. Subject Matter Jurisdiction. Initially, this Court must address the question of subject matter jurisdiction. In its Memorandum of Law at pp. 8-12, the Government argued that the expiration of the time within which Great Lakes could sue the Government for wrongful levy deprives this Court of subject matter jurisdiction over Great Lakes' claim to the Fontana fund. Although the Government has since withdrawn its argument at the request of the Internal Revenue Service, letter of J. D. Pope, Assistant United States Attorney, dated June 11, 1981, the Court is nevertheless compelled to consider the issue because it raises a question of subject matter jurisdiction, not waivable by the parties. See Fed. R. Civ. P. 12(h).

Prior to the enactment of I. R. C. §7426(a)(1), sovereign immunity, which bars suit against the Government except to the extent that the Government has consented, prevented persons other than the taxpayer from suing the Government to recover their property after the Government had wrongfully levied upon it in satisfaction of the taxpayer's liability. United Sand & Gravel Contractors, Inc. v. United States [80-2 USTC ¶9626], 624 F. 2d 733, 739 (5th Cir. 1980) (citing S. Rep. No. 1708, 89 Cong., 2d Sess., reprinted in [1966] U. S. Code Cong. & Admin. News, pp. 3722, 3750-55). The nine month limitation period governing §7426, I. R. C. §6532(c), represents the legislative definition of the extent of the sovereign's consent to suit. Id. Thus, the Court would lack subject matter jurisdiction over an action pursuant to §7426(a)(1) commenced more than nine months after the cause of action accrued.

The United States and Great Lakes disagree as to whether the cause of action ever accrued. The raise the issue whether a levy actually occurred when the IRS served notice of levy on the Sheriff in November, 1977. The United States argues that service of notice of levy upon the person in possession of the property constitutes a levy. Great Lakes argues that the Government is merely stating the general rule, to which there is an exception when the property is in custodia legis. Great Lakes Memorandum at 18-23. Neither party cites authority directly dealing with this issue. But it is not necessary to determine whether in fact a levy took place, and therefore this Court refrains from deciding this unclear issue.

[Nongovernmental Entity]

The jurisdictional issue is simply resolved by the recognition that Great Lakes is not attempting to sue the United States . In one of the two cases presently before the Court, Great Lakes is suing the Fontanas to recover property it alleges they wrongfully hold. The Government has intervened in that proceeding on the ground that its rights to the Fontana fund might be impaired thereby. In the second action, the Government is suing Great Lakes , the Fontanas, and the Sheriff to enforce its claimed levy on the fund. Great Lakes is not availing itself of the wrongful levy remedy provided by §7426(a)(1), so the nine month's limitation is irrelevant. The Government stated, however, that "the remedy provided by section 7426, which in effect waives the sovereign immunity of the United States in cases where third persons are challenging the propriety of tax levies, is exclusive. United Sand & Gravel Contractors, Inc. v. United States [80-2 USTC ¶9626], 624 F. 2d 733, 739 (5th Cir. 1980)." Government Memorandum at 9. But more accurately, §7426 is the third person's "exclusive remedy against the United States ." 624 F. 2d at 739 (emphasis added). When the property is in the hands of a nongovernmental party, other remedies may be available. Id. For example, in World Marketing, Ltd. v. Hallam, 608 F. 2d 392 (9th Cir. 1979), the alleged owner of a sailing vessel levied upon and sold by the Government in satisfaction of a taxpayer's liability had sued the transferee of the vessel to quiet title. Reversing the district court's determination that I. R. C. §7426 was the exclusive remedy for property wrongfully seized and sold by the United States, the court found that the alleged owner could seek a state law remedy against the transferee. Id. at 394-95. In Crow v. Wyoming Timber Products Co. [70-2 USTC ¶9561], 424 F. 2d 93, 96 (10th Cir. 1970), the court held that the suit for replevin against the purchaser of timber at a tax sale originally brought in state court by the alleged owner of the timber was not merely a concealed §6426 action, and therefore not removable to federal court. The court noted that although §7426 was the exclusive remedy against the United States , "nothing in §7426 purports to cover" a suit against the purchaser in a federal tax sale, and remanded the case to the state court. Id.

The Government presented no theory explaining how a non-governmental entity could cloak itself in sovereign immunity. The fact that Great Lakes' right to sue the Government may have expired does not mean that its property rights arising under state law have expired and that the Sheriff is now obligated to surrender the property to the Government despite the corporation's competing claim. A statute of limitations governs the times in which a particular remedy may be sought in court, not the underlying rights, which may command other remedies. United States v. Studivant, 529 F. 2d 673, 675 (3d Cir. 1976). Section 6532(c) and §7426(a)(1), taken together, do not reveal any legislative purpose to foreclose other avenues of relief or to extinguish underlying rights. ¹

The vindication of Great Lakes ' property rights, which are the subject of its litigation, does not depend upon the availability of a remedy against the Government. The property in question remains in the possession of the Sheriff, in accordance with I. R. C. §6332(a), which exempts him from the obligation to surrender the property subject to levy while it is "subject to an attachment or execution under any judicial process." ² If at the close of this litigation, Great Lakes were adjudged the beneficial owner of the fund, or some portion of it, the Sheriff would release the fund to Great Lakes. ³ At that point, it would be clear that the Government's lien could not have attached, since the lien can only attach to the taxpayer's property. The Government's only argument that Great Lakes would then be forced to use §7426(a)(1) would be that even though no lien could have attached, and thus its levy--assuming a levy has occurred--is known to have been wrongful, the Court should nevertheless enforce a wrongful levy and order the disposition of the fund to the Government. Clearly, there is a difference between the Government's inadvertently levying on a third person's property without the aid of any court and a court's enforcing what it knows is a wrongful levy on property it has adjudged to belong to another. The Court is not compelled to do wrong simply because it could no longer remedy the wrong if it had occurred in the past. Therefore, the Court finds that §7426(c) is not Great Lakes' exclusive means to recover its property and that sovereign immunity does not deprive the Court of jurisdiction over Great Lakes' suit for a state law remedy against the Fontanas.

The only real issue remaining ⁴ upon which the appropriateness of summary judgment depends is whether the Fontanas had a sufficient interest in the fund to which the Government's tax lien could have attached.

[Ownership of Funds]

II. Ownership of the Fontana Fund Great Lakes Claim. The history of the Great Lakes ' state court litigation is somewhat complex. For these purposes, however, it suffices to note that the first action was commenced by Great Lakes on May 16, 1975. This action was discontinued by stipulation entered into between Great Lakes and the Fontanas on June 17, 1975. However, on June 20, 1975, Great Lakes commenced a second action against the Fontanas and a corporation they controlled alleging the same basic allegations they had previously asserted in the initial action, plus a claim that the stipulation discontinuing that action had been fraudulently induced. On April 25, 1978, Great Lakes moved for judgment by default on the grounds that the Fontanas had wilfully failed to obey certain disclosure orders of the court and on September 5, 1978, the Supreme Court issued an order which awarded Great Lakes judgment against Mr. Fontana in the sum of $31,997.03, plus interest, costs and disbursements, and granted other relief, including a direction that an inquest be held for the purpose of enabling Great Lakes to establish its damages on various causes of action asserted by it. On September 18, 1978, a formal judgment in the amount of $38,460.42 on Great Lakes' third cause of action was filed in the County Clerk 's Office in New York County . Potter Affidavit, ¶19-20. By order entered May 1, 1980, the Supreme Court of New York County ordered that the inquest be held to ascertain the damages in the action in which the Fontanas had defaulted. It is this action which was removed to this Court on application of the United States , which intervened in the state court action asserting a claim to the fund. And it is that proceeding (80 Civ. 4105 (LBS)) in which Great Lakes seeks an order setting a date for the inquest which the state court had ordered.

[Attachment Orders]

In December, 1975, in connection with the claims it was pursuing against the Fontanas in state court, Great Lakes obtained two orders of attachment against the assets of the Fontanas. "Pursuant to the first order of attachment, the Sheriff of Westchester County levied upon and reduced to possession $78,131.39 contained in the bank accounts of the Fontanas and M. H. C. [the Fontanas' corporation] at the National Bank of Westchester." Potter Affidavit, ¶14, p. 8.

As noted, fn. 4, supra, the Government filed its notices of tax liens in Texas in February and April of 1978. Its notice is thus some three years subsequent to the Great Lakes ' December 1975 attachment. It is, however, prior to the September 1978 judgment against the Fontanas, obtained by Great Lakes in the state court.

The Government asserts and the law is clear that an attachment lien is subordinant to a tax lien, because an attachment lien is contingent and inchoate and therefore insufficient to defeat a choate federal tax lien. 26 C. F. R. §301.6323(h)-(1)(g), United States v. Acri [55-1 USTC ¶9138], 348 U. S. 211, 213-14 (1955). Great Lakes has never obtained execution on its judgment. The Government urges that under both federal and state law, its prejudgment attachment does not give rise to a specific, presently enforceable lien.

The Government asserts that, viewing Great Lakes' case in its most favorable light, that is, assuming the September 1978 default judgment had been perfected, the priority question posed by this case would be: "[W]hether a tax lien of the United States is prior in right to an attachment lien where the federal tax lien was recorded subsequent to the date of the attachment lien but prior to the date the attaching creditor obtained judgment." United States v. Security Trust & Savings Bank [50-2 USTC ¶9492], 340 U. S. 47, 48 (1950); see also United States v. Acri [55-1 USTC ¶9138], 348 U. S. 211, 213 (1955). In both of these cases, the Supreme Court has answered the question by ruling that the federal tax lien has priority. ⁵

Although Great Lakes cannot have had any lien prior to the Government's tax lien, using a constructive trust theory, Great Lakes could show that the Government has no lien because the fund was the property of Great Lakes and not the taxpayer.

[Property Interest]

Constructive Trust Theory. A tax lien creates no property rights in itself. Aquilino v. United States , 363 U. S. 509, 513 (1960). Federal law merely determines the priority of liens once the federal tax lien attaches. Id. But whether the tax lien has attached depends on the state law question of ownership, since the lien can only attach to property that the taxpayer owns. When title to property is bifurcated, so that the taxpayer owns mere legal title and serves as the trustee for the benefit of a third party, the taxpayer's interest is insufficient for the tax lien to attach. Id.

In Aquilino v. United States, 10 N. Y. 2d 271, 219 N. Y. S. 2d 254, 176 N. E. 2d 826 (1961), the New York Court of Appeals, deciding the question of state property law on remand from the Supreme Court, found a direct trust created by statute to protect the interests of subcontractors in funds in the hands of general contractors. In the present case, the Court is presented with no New York statute expressly creating a trust, but the same bifurcation of title occurs in a constructive trust and would deprive the taxpayer of sufficient property interest for a tax lien to attach. A constructive trust is not a true trust: it is not intended, but it is treated as if it were intended, to avoid unjust enrichment; and it does not impose extensive fiduciary duties on the trustee, but only the duty to make restitution. 5 Scott, Trusts [3d ed.] §462.4. It is, however, analogous to a trust with respect to the bifurcation of title. 4 Pomeroy's Equity Jurisprudence §1044 (1941).

The crucial question in determining whether the Government is entitled to summary judgment is: when does a constructive trust arise? For unless the bifurcation of title, if a constructive trust should be found to exist, would have preceded the attachment of the federal tax lien, the Government must prevail. The parties present two different theories.

[Bare Title Held]

Great Lakes' analysis of the constructive trust theory is as follows: the Fontanas hold bare legal title to the fund; the corporation owns the beneficial title and the right to compel the Fontanas to convey legal title to it, which would unify the bifurcated title; the Government's tax lien, capable of attaching only to the taxpayers' property, never attached to the property beneficially owned by the corporation. Therefore, the disposition of the fund depends upon the unresolved question whether the fund is subject to a constructive trust, and the Government's motion for summary judgment must be denied.

[Trust Is Judicial Remedy]

The Government contends that a constructive trust is merely a remedy imposed by a court, and does not exist until a court declares it to exist. Its analysis produces a different result: since no court has yet imposed the remedy, no bifurcation of legal and equitable title has taken place; ⁶ and the Fontanas possessed a sufficient property interest to which the tax lien attached. Since the tax lien attached, the Government argues, no subsequent action divesting the Fontanas can defeat the Government's claim to the fund, and it is entitled to summary judgment.

The Government cites numerous cases, none of which directly states that a constructive trust arises only when a court declares its existence. It relies entirely on the interpretation of language selected from a case in which the outcome did not depend on the timing of the bifurcation of title. It quotes the seminal New York case written by Judge Cardozo, Beatty v. Guggenheim Exploration Co., 225 N. Y. 380, 386, 122 N. E. 378, 380 (1919) (citing Moore v. Crawford, 130 U. S. 122, 128 (1888)): "When property has been acquired in such circumstances that the holder of legal title may not in good conscience retain the beneficial interest, equity converts him into a trustee." The Government emphasizes the word "retain" and concludes: "the trustee has title, but he may not retain it--through the remedy of a constructive trust the court finds and enforces an 'equitable duty' to convey that title." Government's Reply Memorandum at 11. But the meaning of even this quotation is susceptible to another interpretaion. Judge Cardozo wrote that "equity converts [the holder of legal title] into a trustee" (emphasis added), not that the court of equity converts him into a trustee. The word "equity" connotes broad principles of fairness and justice. See Simonds v. Simonds, 45 N. Y. 2d 233, 239, 380 N. Y. 2d 189, 192, 408 N. Y. S. 2d 359, 362 (1978). This connotation indicates that it is the circumstance of unfairness which causes the bifurcation of title. ⁷

[Timing of Title Bifurcation]

Other language in Beatty itself supports this view. Judge Cardozo, analyzing the facts of that case, wrote that an excessive payment procured by the plaintiff "was a breach of the plaintiff's duty to his employer. The payment, thus unlawfully swollen, was subject to a constructive trust." He did not write that the breach compelled the court to create a constructive trust. In addition, he wrote that the employer, not the court, faced with a contract made in breach of the employee's fiduciary duties, "would have the right, if he so elected, to hold the plaintiff as trustee." Id. at 385, 122 N. E. at 380 (emphasis added) (the employer might instead consent to the contract). Taken as a whole, Beatty does not support the Government's interpretation. The rest of the Government's citations merely point to repetitions of Judge Cardozo's language.

Other New York cases support Great Lakes ' interpretation. In cases in which the New York Court of Appeals has found a legatee involved in fraud or misdoing obligated to turn property over to the testator's intended beneficiary, the court has repeated that the constructive trust "acts upon the gift itself as it reaches the possession of the legatee, or as soon as he is entitled to receive it." Trustees of Amherst College v. Ritch, 151 N. Y. 282, 324, 45 N. E. 876, 887 (1897) (emphasis added), quoted in Latham v. Father Divine, 299 N. Y. 22, 30, 85 N. E. 2d 168, 172 (1949); Ahrens v. Jones, 169 N. Y. 555, 561, 62 N. E. 666, 668 (1902). ⁸ In that context, the court has indicated that a constructive trust, similar to an express trust, "springs from the intention of the testator and the promise of the legatee," Trustees of Amherst College v. Ritch, 151 N. Y. at 323, 45 N. E. at 887, quoted in Ahrens v. Jones, 169 N. Y. at 561, 62 N. E. at 668, and not from any act of the court.

In Coane v. American Distilling Co., 298 N. Y. 197, 81 N. E. 2d 87 (1948), the Court of Appeals discussed the constructive trust remedy in the context of a shareholder derivative suit in which directors were charged with misappropriation of corporate assets and opportunities. The court spoke of bifurcation of title preexisting any court decree: "While legal title [to the misappropriated property] is in the individual defendants, the res actually belongs, by operation of law, to American Distilling." Id. at 206, 81 N. E. 2d at 90. The intervention of the court of equity was essential to "strip the individual wrongdoers of specific property and to decree its restitution to its proper and equitable owner." Id. In other words, the court's role is to specifically enforce the trust, not to create it. ⁹

[Recent State Decision]

The New York State Court of Appeals' most extensive recent discussion of constructive trusts appeared in Simonds v. Simonds, 408 N. Y. 2d 233, 380 N. E. 2d 189, 408 N. Y. S. 2d 359 (1978). In this case, a finding of constructive trust required the second wife of a decedent to pay the proceeds of life insurance policies, in which the second wife had been the named beneficiary, to the decedent's first wife. The second wife's equitable duty arose out of the decedent's breach of a promise, contained in his separation agreement with his first wife, to maintain certain insurance policies naming the first wife as beneficiary. The court noted that the first wife was not limited to her now worthless legal right against her former husband, but "due to the husband's failure to do what he should have done [she] . . . also [had] an equitable right in the policies, a right which, upon the husband's death, attached to the proceeds." Id. at 240, 380 N. E. 2d at 193, 408 N. Y. S. 2d at 363. Significantly, the court reached the property that the husband wrongfully diverted from the first wife in the hands of the second wife who was innocent of any wrongdoing, applying the traditional equitable principle: "equity regards as done that which should have been done." Id. , 380 N. E. 2d at 193, 408 N. Y. S. 2d at 362. ¹⁰

In the case at hand, if Great Lakes' allegations are proven, the same principle would direct regarding the money in the Fontana fund as the property of the corporation as of the time of Fontana 's wrongful act. Moreover, equitable principles in general urge this result. The Government's argument is intended to achieve a result which is fundamentally unfair: to seize property that, should Great Lakes prevail on the merits in its underlying claim, good conscience would convey to Great Lakes . It is this Court's opinion that the New York Court of Appeals would reject such a result. That court recently affirmed the traditional importance of equity in avoiding injustice and stated that "to evolve formalisms narrowing the broad scope of equity is to defeat its purpose."