Extension

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[93-2 USTC ¶50,619] Blue Cross of Western Pennsylvania and Pennsylvania Blue Shield, Plaintiffs v. United States of America, Internal Revenue Service; Commonwealth of Pennsylvania, Department of Revenue; Commonwealth of Pennsylvania, Department of Labor and Industry; and Fairman Drilling Company, Defendants

U.S. District Court, West. Dist. Pa. , Civ. 92-2236, 8/9/93

[Code Sec. 6323 ]

Bankruptcy: Tax lien: Accounts receivable: Priority: Attorneys' fees.--A federal tax lien had priority over a creditor's security interest in accounts receivable and other assets. The creditor failed to demonstrate that it acquired the receivables within the 45-day extension period from the date of the filing of the tax lien. Further, no attorneys' fees were awarded because the tax lien was far in excess of the interpleaded funds and the IRS lien had priority.

MEMORANDUM OPINION

BLOCH, District Judge:

Plaintiffs, Blue Cross of Western Pennsylvania and Pennsylvania Blue Shield, have brought this interpleader action. At the time of filing, plaintiffs owed the Business and Educational Benefit Association, Inc. (BEBA) the sum of $63,655.30 representing insurance commission proceeds. At the time that plaintiffs attempted to make these payments to BEBA, BEBA was in the midst of Chapter 7 bankruptcy proceedings. The court-appointed trustee informed plaintiffs that he would not admin ister these funds to BEBA's creditors, and the funds were returned to plaintiffs. Plaintiffs concede that this amount is owed and, as stakeholder of those funds, have filed the instant action.

The only parties alleging claims for these funds are Fairman Drilling Company (Fairman) and the United States of America , Internal Revenue Service (IRS). Fairman is a creditor of BEBA, whose loan notes are secured by an interest in "accounts receivable, cash, contracts, choses in action, and generally other assets." Fairman asserts that it is entitled to the funds and that its interest was perfected prior to the tax liens recorded by the IRS. Fairman has filed a motion for summary judgment on this claim.

Also before the Court is plaintiffs' motion for attorney's fees, which has been opposed by the IRS.

I. Summary Judgment

Summary judgment may only be granted if "the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to judgment as a matter of law." Fed. R. Civ. P. 56(c). "Rule 56 mandates the entry of summary judgment, after adequate time for discovery and upon motion, against the party who fails to make a showing sufficient to establish the existence of an element essential to that party's case, and on which that party will bear the burden of proof at trial." Celotex Corp. v. Catrett, 477 U.S. 317, 322 (1966). In considering a motion for summary judgment, this Court must examine the facts in a light most favorable to the party opposing the motion. International Raw Materials, Ltd. v. Stauffer Chemical Corp., 898 F.2d 946, 949 (3d Cir. 1990).

The burden is on the moving party to demonstrate that the evidence creates no genuine issue of material fact. Chippollini v. Spencer Gifts, Inc., 814 F.2d 893, 896 (3d Cir.) (en banc), cert. dismissed, 483 U.S. 1052 (1987). Where the non-moving party will bear the burden of proof at trial, the party moving for summary judgment may meet its burden by showing that the "evidentiary materials of record, if reduced to admissible evidence, would be insufficient to carry the non-movant's burden of proof at trial." Id. See also Celotex, 477 U.S. at 322.

In that there are no genuine issues of material fact, summary judgment is appropriate in the instant case.

A federal tax lien is a perfected, choate lien on the date the lien arises. United States v. Fidelity-Philadelphia Trust Co. [72-1 USTC ¶9394 ], 459 F.2d 771, 773 (3d Cir. 1972) (citing United States v. Security Trust and Savings Bank [50-2 USTC ¶9492 ], 340 U.S. 47, 71 (1950)). The lien arises at the time of assessment and continues until the liability is satisfied or becomes unenforceable. 26 U.S.C. §6322 . However, when competing against a purchaser, holder of a security interest, mechanics lienor, or judgment lien creditor, the IRS's interest does not attach until notice of the tax lien is filed. 26 U.S.C. §6323(a) . Further, 26 U.S.C. §6323(c) provides that a federal tax lien is not valid against a security interest in accounts receivable where the accounts receivable are actually acquired by the taxpayer within 45 days after a tax lien filing. 26 U.S.C. §6323(c)(2)(B) . See United States v. McDermott [93-1 USTC ¶50,164 ], 61 USLW 4282, 4283 (1993); Congress Talcott Corp. v. Gruber [93-1 USTC ¶50,283 ], 993 F.2d 315, 322-25 (3d Cir. 1993) (Greenberg, J., dissenting); Shawnee State Bank v. United States [84-1 USTC ¶9513 ], 735 F.2d 308, 310-311 (8th Cir. 1984). In the instant case, it is uncontroverted that the IRS filed its notice of federal tax lien on October 13, 1991 . Therefore, assuming that Fairman is entitled to the 45-day extension provided in §6323(c) , Fairman must demonstrate that it actually acquired the accounts receivable prior to November 28, 1991 . ¹

In the instant case, there is no question that plaintiffs did not begin issuing the commission checks until February 19, 1992, well after the 45-day safe-harbor provided by 26 U.S.C. §6323(c) . Therefore, the lien of the IRS has priority under §6323(a) , and judgment will be entered in favor of the IRS and against Fairman and the remaining defendants.

II. Attorney's fees

Generally, courts have discretion to award attorney's fees to a disinterested stakeholder in an interpleader action. Abex Corp. v. Ski's Enterprises, Inc. [85-1 USTC ¶9144 ], 748 F.2d 513, 516 (9th Cir. 1984). However, the existence of superior federal tax liens gives the government a statutory priority over the interpleader plaintiffs' ability to diminish the fund by an award of attorney's fees. United States v. Wilson [64-1 USTC ¶9396 ], 333 F.2d 147, 149 (3d Cir. 1964). See also Cable Atlantic, Inc. v. Project, Inc., 749 F.2d 626, 627 (11th Cir. 1984); Abex [85-1 USTC ¶9144 ], 748 F.2d at 516.

Because the government's tax lien is far in excess of the interpleaded funds, and because the IRS prevailed in the interpleader action, plaintiffs are not entitled to an award of attorney's fees.

¹ Fairman's interest in the accounts receivable was not perfected prior to the issuance of the commission checks since "the amount of the lien" was not established until that time. McDermott [93-1 USTC ¶50,164 ], 61 USLW at 4282 (citing United States v. City of New Britain [54-1 USTC ¶9191 ], 347 U.S. 81, 84 (1954)).

 

 

[55-2 USTC ¶9701]In the matter of William E. Moody, individually and trading as Edward S. Moody & Son, Bankrupt

In the United States District Court for the Eastern District of Pennsylvania, In Bankruptcy. Cause No. 24017, July 1, 1955

[1939 Code Sec. 3672--substantially unchanged in 1954 Code Sec. 6323]

Liens for unpaid tax: Priority over chattel mortgage.--Taxpayer William E. Moody, individually and trading as Edward S. Moody & Son was adjudicated bankrupt on February 23, 1954 . After the sale of his personal property, the sum of $2,078.85 was available for distribution. The referee allowed the claim of J. G. Braun, a creditor, in full, and ordered that the balance be paid to the United States on tax liens for which notices had been properly filed. Two creditors of taxpayer filed a petition for review, claiming priority over the United States ' claim for taxes. The holder of a chattel mortgage was denied priority since under the Pennsylvania Chattel Mortgage Act, his chattel mortgage lien was good for only five years from date of filing, unless extended. Accordingly, his lien, which was filed on September 27, 1948 , expired on September 27, 1953 and was no longer valid.

[1939 Code Secs. 3670 and 3672--substantially unchanged in 1954 Code Secs. 6321 and 6323, respectively]The landlord's claim for rent for property occupied by the taxpayer was based on a distraint issued on taxpayer's personal property on February 1, 1954, whereas, the notice of tax liens had been filed on three dates in 1952. The Court denied the landlord's claim for priority based on the contention that because taxpayer was a bailee under a bailment lease, his interest was of a nature which could not be reached by a tax lien. The Court was of the opinion that a bailee under a bailment lease has a property interest which can be subjected to a lien for federal taxes, under 1939 Code Sec. 3670, and held that the United States ' lien did attach and was superior to the lien created by the landlord when he made a distraint for rent.

Samuel Marx, Philadelphia , Pa. , for trustee. Holl, Taylor & Holl, Media , Pa. , for landlords. Butler , Beatty, Greer & Johnson, Media , Pa. , for chattel mortgagee. Thomas J. Curtin, Philadelphia , Pa. , is the referee in bankruptcy.

Opinion

[Facts]

GRIM, District Judge:

William E. Moody, individually and trading as Edward S. Moody & Son, was adjudicated a bankrupt by this court on February 23, 1954 . The Referee permitted the trustee to sell the bankrupt's personal property, the various lien claimants being relegated to the fund realized from the sale.

At the time of the adjudication, Moody had creditors who had claims against his personal property as follows:

1. J. G. Braun, who was the holder of a valid bailment lease on which a balance of $295.13 was due.

2. United States Government, which filed a claim for taxes totalling $5,077.44. Notice of its tax liens had been filed in the office of the Prothonotary of Delaware County, Pennsylvania, by the United States as follows:

June 5, 1952
, #2674 in sum of .....          $ 865.72

July 18, 1952
, #2707 in sum of ....            518.52

Oct. 31, 1952
, #2801 in sum of ....            696.70

                                            $2,080.94

 

3. J. Earle Suter and Ada W. Suter, who had claims for rent for the property in Media, Delaware County, Pennsylvania, which had been occupied by the bankrupt. The rent covered the period from May 1, 1952 , to February 1, 1954 , and totalled $700. A distraint was issued on Moody's personal property on February 1, 1954 .

4. First National Bank of Delaware County , which held a chattel mortgage against Moody's personal property which had been recorded in Delaware County , Pennsylvania , on September 27, 1948 .

[Priority of Liens]

The sum of $2,078.85 is available for distribution as a result of the sale of the personal property after the payment of admin istration expenses. The Referee has entered an order of distribution allowing J. G. Braun's claim on the bailment lease in full. No one contests this. He has ordered that the balance of the fund available for distribution, after payment to the bailment lessor, be paid to the United States on its tax liens as to which notices had been filed with the Prothonotary of Delaware County. The holder of the chattel mortgage and the landlord have filed petitions for review.

The holder of the chattel mortgage contends that its claim should be given priority over the claim of the United States for taxes, and the landlord contends that its claim for rent should be given priority over the claim of the United States .

[ Pennsylvania Law]

The Pennsylvania Chattel Mortgage Act of June 1, 1945 , P. L. 1358, 21 P. S. Sec. 940.1 provides:

"Any chattel mortgage executed pursuant to this act shall be a lien upon the property therein described, which lien shall be good and valid against and superior to all rights of subsequent purchasers . . . other lienors and encumbrances, and all persons dealing with the mortgaged property or subsequently acquiring an interest therein from the time of filing of the mortgage . . ."

It also provides that:

". . . as to third parties [it] shall not remain a lien for a longer period than five (5) years, unless the lien thereof is extended by filing, prior to the expiration of the said lien, with the prothonotary an affidavit of the mortgagee or his assignee stating the amount then secured by the mortgage in which case the said mortgage shall remain a lien for an additional period of five (5) years from the date of the filing of such affidavit . . ."

[Chattel Mortgagee's Lien]

The chattel mortgage against Moody's property was filed on September 27, 1948 . At no time within five years thereafter and indeed never has anything been done by the mortgagee to extend the lien of the mortgage beyond September 27, 1953 . The Referee was correct in deciding that the lien of the chattel mortgage expired on September 27, 1953 . The First National Bank of Delaware County had no lien against the personal property at the time of the adjudication or the sale and is not entitled to participate in the distribution of the fund.

[Landlord's Lien]

The landlord admits that if Moody had been the owner rather than the bailee of the personal property in his possession the claim of the United States for taxes would be given a preference over the landlord's claim under United States v. Scovil, 348 U. S. 218 (1955) [55-1 USTC ¶9137] and In Re Litt, 128 Fed. Supp. 34 (E. D. Pa. 1955) [55-1 USTC ¶9187]. But the landlord contends that because Moody was a bailee under a bailment lease rather than an owner the lien for taxes could not attach to his personal property.

[Referee Sustained]

The Act of Congress provides (26 U. S. C. Sec. 3670) that tax liens shall attach "upon all property and rights to property, whether real or personal" belonging to the taxpayer. The bailee in a bailment lease has a property interest which can be levied upon. Packard Motor Car Co. v. Mazer, 77 Pa. Sup. Ct. 348. In my opinion a bailee under a bailment lease has a property interest which also can be subjected to a lien for federal taxes. The Referee was correct in deciding that the liens of the United States could and did attach to the interest of the bailment lessee in the personal property and that these liens were superior to the lien created by the landlord when he made a distraint for rent.

The balance due on the bailment lease and the claim of the United States for taxes took all the proceeds of the sale. The Referee was correct in denying the claim of the holder of the chattel mortgage and the claim of the landlord.

The order of the Referee will be affirmed.