Annotations- Summary
Judgment

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."