U.S. v. Hemmen

• Decision Date: 05 August 1994
• Docket Number: No. 93-35643,93-35643
• Parties: -1646, 63 USLW 2626, 95-1 USTC P 50,210, Bankr. L. Rep. P 76,451 UNITED STATES of America, Plaintiff-Appellant, v. Stephen C. HEMMEN, Defendant-Appellee.
• Court: U.S. Court of Appeals — Ninth Circuit

Page 883

51 F.3d 883

75 A.F.T.R.2d 95-1646, 63 USLW 2626,

95-1 USTC P 50,210,

Bankr. L. Rep. P 76,451

UNITED STATES of America, Plaintiff-Appellant, v. Stephen C. HEMMEN, Defendant-Appellee.

No. 93-35643.

United States Court of Appeals, Ninth Circuit.

Submitted, Aug. 5, 1994 ^*.

Decided April 7, 1995.

Gary R. Allen, Robert L. Baker and William S. Easterbrook, Tax Div., U.S. Dept. of Justice, Washington, DC, for plaintiff-appellant.

Stephen C. Hemmen, pro se, Tacoma, WA, for defendant-appellee.

Appeal from the United States District Court for the Western District of Washington.

Before: ALARCON, BEEZER and KLEINFELD, Circuit Judges.

BEEZER, Circuit Judge:

The United States, acting through the Internal Revenue Service ("Service"), appeals the entry of judgment for Stephen Hemmen, bankruptcy trustee for Flavor Fresh Meals, Inc. ("Flavor Fresh"), in its action seeking $13,535.91 and interest for Hemmen's failure to honor its levy with respect to the allowed administrative expense claims of the debtor's president, Falah Tuba Al-Hadid ("Al-Hadid" or "taxpayer"), pursuant to 26 U.S.C. Sec. 6332(c)(1). The Service contends that the district court erred as a matter of law in concluding that Al-Hadid's claims were "not a property right that was in Hemmen's possession or that he was obligated to pay" at the time the notice of levy was served. The district court had jurisdiction pursuant to 28 U.S.C. Secs. 1340 and 1345. We have jurisdiction pursuant to 28 U.S.C. Sec. 1291. We reverse.

I

On June 23, 1983, the Service assessed a $70,132.89 civil tax penalty against Al-Hadid for failure to remit the income and social security taxes withheld from Flavor Fresh employees for the quarter ending on September 30, 1982. At that time, Flavor Fresh was a Chapter 11 debtor. On May 30, 1984, the bankruptcy court entered an order allowing Al-Hadid's administrative expense claim in the amount of $18,000 for aiding in the preservation of the estate as debtor-in-possession. On September 5, 1984, the case was converted to a Chapter 7 liquidation, and Hemmen was appointed trustee. The bankruptcy court entered a second order on October 16, 1984, allowing an additional administrative expense claim in the amount of $12,000. The court's order indicated that no payment would be made "except upon further order of the court."

On December 17, 1985, Revenue agents served a notice of levy upon Hemmen pursuant to 26 U.S.C. Sec. 6332(a), demanding that he surrender all property or rights to property in his possession necessary to pay the tax liability, which by that time included statutory additions. As of that date, the estate had assets but had not been liquidated. Approximately 18 months later, on May 7, 1987, Hemmen, having during the interim liquidated the estate, filed his final report, indicating that he had $73,946.31 available for payment of administrative expense claims. The Service does not admit but does not contest that it received a notice of intent to distribute funds to Al-Hadid in the amount of $13,535.91 and that it failed to file an objection to this proposed distribution. Soon thereafter, the bankruptcy court ordered Hemmen to disburse the funds. On June 3, 1987, he paid $13,535.91 in satisfaction of Al-Hadid's claims. The court discharged Hemmen from his duties and closed the estate on August 25, 1987.

On September 16, 1987, Revenue agents served a Form 668-C Final Demand on Hemmen referencing the December 1985 notice of levy. Hemmen responded one week later, pointing out that no funds were due Al-Hadid at the time the notice of levy was served and that the Service was notified of the proposed distribution in May 1987 but failed to object.

On June 24, 1992, the Service brought this action in the district court, contending that Hemmen failed to honor the December 1985 notice of levy and was, thus, personally liable under Sec. 6332(c)(1) of the Internal Revenue Code. At the ensuing bench trial, Hemmen argued that he was not in possession of Al-Hadid's property at the time he received the notice of levy. He also contended that the levy violated the automatic stay provision, 11 U.S.C. Sec. 362(a), that he, as trustee, was entitled to quasi-judicial immunity and that the action was barred by laches or by other equitable principles. On May 5, 1993, the district court orally dismissed the action and entered judgment for Hemmen, concluding that he was not in possession of, or had no obligation with respect to, the taxpayer's property or rights to property at the time of levy. The court expressly rejected Hemmen's defense of laches but otherwise did not consider his alternative defenses. The Service timely appeals.

II

We review de novo the legal question whether the Service's levy with respect to a taxpayer's allowed administrative expense claim must be honored by a bankruptcy trustee. See In re American Bicycle Ass'n, 895 F.2d 1277, 1278-79 (9th Cir.1990).

The Service contends that the district court's conclusion rests on the faulty premise that Al-Hadid's allowed administrative expense claim was not "property or rights to property subject to levy" within the meaning of Secs. 6331(a) and 6332(a). Arguing that an allowed administrative expense claim is properly characterized as "property" or as a "right to property" under Washington law, the Service contends that Hemmen, as bankruptcy trustee, was personally liable under Sec. 6332(c)(1) for his failure to honor the December 17, 1985 notice of levy.

Title 26 U.S.C. Sec. 6321 gives the United States a lien for unpaid taxes against "all property and rights to property, whether real or personal, belonging ... [to a delinquent taxpayer]." The tax lien has a very broad scope. See, e.g., United States v. National Bank of Commerce, 472 U.S. 713, 719-720, 105 S.Ct. 2919, 2923-24, 86 L.Ed.2d 565 (1985) (concluding that the tax lien reaches "every interest in property that a taxpayer may have"); In re Kimura, 969 F.2d 806, 810 (9th Cir.1992) (same). We look to state law to determine whether a taxpayer's interest constitutes "property" and to federal law to determine the resulting consequences. United States v. Bess, 357 U.S. 51, 55, 78 S.Ct. 1054, 1057, 2 L.Ed.2d 1135 (1958). Tax liens arise upon assessment and continue in effect until the liability is paid or the statute of limitations expires. Glass City Bank v. United States, 326 U.S. 265, 267, 66 S.Ct. 108, 110, 90 L.Ed. 56 (1945); see 26 U.S.C. Sec. 6502(a) (providing that an enforcement action must begin within six years of assessment).

The Code provides for two methods by which the Service can enforce its lien. It can bring a foreclosure action pursuant to 26 U.S.C. Sec. 7403 or it can, as it did here, simply levy on the property pursuant to Sec. 6331(a). ¹ Unlike a foreclosure action, the levy is essentially a provisional, administrative procedure. National Bank of Commerce, 472 U.S. at 722, 105 S.Ct. at 2925. The levy reaches only "property possessed and obligations existing at the time of the levy." 26 U.S.C. Sec. 6331(b). The Service has interpreted this "present obligation" requirement as follows:

[l]evy may be made by serving a notice of levy on any person in possession of, or obligated with respect to, property or rights to property subject to levy, including receivables, bank accounts, evidences of debt, securities, and salaries, wages, commissions, or other compensation.... [A] levy extends only to property possessed and obligations which exist at the time of the levy. Obligations exist when the liability of the obligator is fixed and determinable although the right to receive payment thereof may be deferred until a later date.

26 C.F.R. Sec. 301.6331-1(a)(1) (emphasis added). A levy with respect to intangible property is made by service of a notice of levy. United States v. Donahue Industries, Inc., 905 F.2d 1325, 1330 (9th Cir.1990). Service of a notice of levy confers on the United States the right to all property levied upon and creates a custodial relationship so that the property comes into the constructive possession of the government. American Acceptance Corp. v. Glendora Better Builders, 550 F.2d 1220, 1222-23 (9th Cir.1977) (citing Phelps v. United States, 421 U.S. 330, 334, 95 S.Ct. 1728, 1731, 44 L.Ed.2d 201 (1975)).

Title 26 U.S.C. Sec. 6332(a) imposes a duty on third parties to honor the Service's notice of levy. ² Failure to honor the levy results in personal liability under 26 U.S.C. Sec. 6332(c)(1). ³ Section 6332(c)(2) further provides that the Service may assess an additional penalty against "any person" who "fails or refuses to surrender such property or rights to property without reasonable cause." 26 U.S.C. Sec. 6332(c)(2). We recognize only two defenses available to a party served with a notice of levy: (1) the party did not possess any property or rights to property of the taxpayer and (2) the property was subject to a prior attachment or execution. Bank of Nevada v. United States, 251 F.2d 820, 824 (9th Cir.1957), cert. denied, 356 U.S. 938, 78 S.Ct. 780, 2 L.Ed.2d 813 (1958).

A

The Service is correct that Al-Hadid's interest in his allowed administrative expense claims constituted "property" under Washington law. Washington defines "property" very broadly. See, e.g., Lee & Eastes, Inc. v. Public Serv. Comm'n, 52 Wash.2d 701, 328 P.2d 700, 702 (1958) (defining the term "property" as "embracing everything that has exchangeable value"). Accord Little v. United States, 704 F.2d 1100, 1106 (9th Cir.1983) (concluding that a right of redemption is "property" under Sec. 6321 when it represents an "economic asset" that has "pecuniary worth," notwithstanding its characterization as a "privilege" under California law). A party who holds an allowed claim against a bankruptcy estate clearly holds something of "exchangeable" value. The fact that an allowed claim can be satisfied only after certain events have transpired, such as the determination that the estate has sufficient assets to satisfy the...