U.S. v. American Ins. Co., 93-3325

• Citation: 18 F.3d 1104
• Decision Date: 15 March 1994
• Docket Number: No. 93-3325,93-3325
• Parties: -1469, 94-1 USTC P 50,131 UNITED STATES of America v. AMERICAN INSURANCE COMPANY, Appellant.
• Court: U.S. Court of Appeals — Third Circuit

Page 1104

18 F.3d 1104

73 A.F.T.R.2d 94-1469, 94-1 USTC P 50,131

UNITED STATES of America v. AMERICAN INSURANCE COMPANY, Appellant.

No. 93-3325.

United States Court of Appeals, Third Circuit.

Argued Jan. 10, 1994.

Decided March 15, 1994.

Robert F. McCabe, Jr. (argued), Edward B. Lee, III, Lindsay, McCabe & Lee, Pittsburgh, PA, for appellant American Ins. Co.

Bruce R. Ellisen, Richard Farber, Edward T. Perelmuter (argued), Kevin M. Brown, Dept. of Justice, Tax Div., Washington, DC, for appellee U.S.

Before: STAPLETON, COWEN and ALITO, Circuit Judges.

OPINION OF THE COURT

COWEN, Circuit Judge.

Appellant American Insurance Company ("American") posted a surety bond guaranteeing payment of overdue tax obligations owed by the Wheeling-Pittsburgh Steel Corporation ("Wheeling-Pitt") to the United States. Upon Wheeling-Pitt's default, the United States obtained a judgment against American when it refused to honor its surety contract obligation. American concedes it is liable to the United States for interest on the judgment from the date of Wheeling-Pitt's default. This appeal raises the issue as to whether interest after default should be calculated at the rate established by the Internal Revenue Code as the district court determined, or whether it should be calculated under the terms of the Debt Collection Act of 1982 as American argues. We hold that American contracted to pay the taxpayer obligations of Wheeling-Pitt and, thus, the Internal Revenue Code interest rate applies.

I.

This is the second time this case has come before us. As was the case in the first appeal, the significant facts are stipulated and are not in dispute. In 1981 Wheeling-Pitt had an outstanding federal tax liability of nearly $5,000,000 for the years 1962 through 1973. In order to settle the resulting dispute with the Internal Revenue Service ("IRS") concerning payment, Wheeling-Pitt entered into a collateral agreement to pay its taxes and interest, including interest accruing in the future, in five annual installments commencing on August 20, 1982, and ending on August 20, 1986. This collateral agreement was signed by the Chairman of Wheeling-Pitt on October 27, 1981, and was signed by the District Director of the IRS on February 19, 1982.

The collateral agreement obligated Wheeling-Pitt to obtain "a bond in an amount equal to one and one-half the amount of the total outstanding tax and interest liability ... and payable on demand" to the IRS. Appendix ("App.") at 16. As Wheeling-Pitt made annual payments reducing its outstanding tax liability, the bond principal could be reduced. At the outset, Wheeling-Pitt obtained a bond from Federal Insurance Company ("Federal"), dated October 27, 1981, in the principal amount of almost $7,500,000. The bond is a relatively simple contract that obligated the surety to pay the IRS any money owed and not paid by Wheeling-Pitt under the collateral agreement. ¹ The bond further provided for a penalty sum limited to the face amount, which again would be reduced with each payment made by Wheeling-Pitt to the IRS.

After Wheeling-Pitt made its first payment, Federal canceled the bond. Thereafter on June 15, 1983, American provided a replacement bond which American acknowledges by way of stipulation contains "the same terms and conditions as the original bond," except for a reduced penalty amount. App. at 11. Hence, the replacement bond posted by American incorporates by reference the collateral agreement between Wheeling-Pitt and the IRS. The bond ultimately was reduced to a face (and penalty) amount of $2,124,003 as a result of Wheeling-Pitt's payments to the IRS under the terms of the collateral agreement. During this time period Wheeling-Pitt's financial condition was rapidly deteriorating, which resulted in the company filing a voluntary Chapter 11 bankruptcy petition in the United States Bankruptcy Court for the Western District of Pennsylvania on April 16, 1985. This filing constituted a default event under the terms of the collateral agreement and allowed the IRS to demand payment in full on the bond from American.

The IRS made a demand for $1,581,197.02 from American under the bond on May 6, 1985. American refused to honor the bond and notified the IRS that it was canceling the bond under the terms of a thirty-day cancellation provision contained in the bond. The United States brought a civil action against American in the United States District Court for the Western District of Pennsylvania for payment according to the terms of the bond. American defended its failure to pay on the theory that the bond only guaranteed timely payment according to the terms of the collateral agreement; since Wheeling-Pitt had made all payments when due, American retained the right to terminate the bond under the thirty-day cancellation provision prior to the next scheduled collateral agreement payment.

The district court entered judgment for American, which order was reversed on appeal by this court. United States v. American Ins. Co., 983 F.2d 1052 (3d Cir.1992) (table); see id., No. 92-3275, slip op. at 7-10 (3d Cir. Dec. 29, 1992) (unpublished opinion). We recognized that the bond expressly incorporates the collateral agreement and held that American agreed by the terms of its surety contract to allow the IRS to "make demand on the bond when Wheeling-Pitt petitioned in bankruptcy." Id., slip op. at 8. Since "that is exactly what happened," American effectively defaulted on its surety obligation to pay the United States when it made demand under the bond. Id. We remanded the case to the district court for determination of the total amount due, as well as for the district court to consider what amount of prejudgment interest was owed. Id., slip op at 10-11. American did not appeal our judgment and order in favor of the United States.

On remand, American first contended that it owed no interest on the obligation. Alternatively, if interest was owed, American argued that the rate should be determined according to Pennsylvania law. The IRS argued that interest should be computed pursuant to the Internal Revenue Code, I.R.C. Sec. 6621. ² The parties entered into a stipulation as to the amount of interest that would be due under Pennsylvania law and under the Internal Revenue Code, and they agreed that American's liability under any scenario could not exceed the penalty amount of the bond, $2,124,003. In a memorandum opinion filed on June 4, 1993, the district court concluded that interest was owed and that the applicable rate was that of the Internal Revenue Code. The district court stated:

[American] contracted, by issuance of the Bond, to pay the full liability of the taxpayer for unpaid taxes and interest should it become obligated on the bond. The interest liability surely is determined by 26 U.S.C. Sec. 6621 and not Pennsylvania law, since the defendant as a paid surety has contractually agreed to pay the taxpayer's liability which is computed by the Internal Revenue Code.

United States v. American Ins. Co., No. 87-1345, slip op. at 2, 1993 WL 643375 (W.D.Pa. June 4, 1993) (unpublished memorandum opinion), App. at 44. The district court expressly incorporated the Internal Revenue Code rate of interest into the judgment in favor of the United States. See App. at 45; see also infra note 5.

American then filed a motion for reconsideration, arguing that prejudgment interest could accrue only at the rate established by the Debt Collection Act of 1982, 31 U.S.C. Sec. 3717(a). ³ The district court entered an order rejecting this contention on June 24, 1993, from which American appeals.

II.

The district court had jurisdiction over this civil action brought by the United States against American pursuant to 28 U.S.C. Secs. 1340 and 1345. American appeals the final order of the district court awarding prejudgment interest to the United States at the Internal Revenue Code rate and rejecting American's contention that the Debt Collection Act should govern this interest determination. Thus, we have appellate jurisdiction pursuant to 28 U.S.C. Sec. 1291. ⁴

With this appeal, American presents the narrow issue as to what prejudgment interest rate should apply, given its concession that some interest is owed. ⁵ Our consideration of this issue turns on the appropriate legal construction of the terms of the bond, a contract, over which we have plenary review. USX Corp. v. Prime Leasing, Inc., 988 F.2d 433, 437 (3d Cir.1993); Vanguard Telecommunications, Inc. v. Southern New England Tel. Co., 900 F.2d 645, 650 (3d Cir.1990). Our task of construing the contract between the parties to determine which interest rate applies is distinguishable from situations where we review a district court's decision to grant or deny prejudgment interest altogether for abuse of discretion. See Ambromovage v. United Mine Workers of America, 726 F.2d 972, 982-84 (3d Cir.1984).

III.

American acknowledges that it is liable for prejudgment interest to the United States from the date when the IRS made its demand for payment under the bond. Furthermore, American concedes that the determination of the appropriate rate of interest is a "federal" issue to be governed by federal statute or by federal common law. Contrary to what the district court held, however, American argues that interest should be calculated under the terms of the Debt Collection Act of 1982, 31 U.S.C. Sec. 3717(a), rather than under the terms of the Internal Revenue Code, I.R.C. Sec. 6621. In support of this position, American contends that it is only a surety with respect to Wheeling-Pitt's liability under the collateral agreement, and thus should not be treated as the taxpayer, who would be subject to prejudgment interest as determined by the Internal Revenue Code.

American further develops this argument by noting that there is only one taxpayer involved in this dispute, and that taxpayer is Wheeling-Pitt, not American. Because American is only a surety, and not the...