United States v. Nat. Bank of Commerce, PB-C-81-340.

• Decision Date: 16 December 1982
• Docket Number: No. PB-C-81-340.,PB-C-81-340.
• Citation: 554 F. Supp. 110
• Parties: UNITED STATES of America, Plaintiff, v. NATIONAL BANK OF COMMERCE, Defendant.
• Court: U.S. District Court — Eastern District of Arkansas

554 F. Supp. 110

UNITED STATES of America, Plaintiff, v. NATIONAL BANK OF COMMERCE, Defendant.

No. PB-C-81-340.

United States District Court, E.D. Arkansas, Pine Bluff Division.

December 16, 1982.

George W. Proctor, U.S. Atty., Little Rock, Ark., Lawrence Sherlock, Attorney, Tax Div., Dept. of Justice, Washington, D.C., for plaintiff.

Stephen A. Matthews, Terry F. Wynne, Pine Bluff, Ark., for defendant.

MEMORANDUM AND ORDER

EISELE, Chief Judge.

Pending before the Court are the plaintiff's and defendant's cross-motions for summary judgment and the defendant's motion to dismiss. The facts of the case are these. The Secretary of the Treasury has due and owing from Roy Reeves an unpaid balance of $856.61 in income tax liabilities. On June 13, 1980, in order to collect the sum due, the government filed a notice of levy upon the accounts of Roy Reeves with the defendant, National Bank of Commerce (Bank). At that time the Bank had two separate accounts, one checking and the other savings, both in the names of "Roy Reeves or Ruby Reeves or Neva R. Reeves." The combined balances in both accounts totaled $1,563.26. The government wants the Bank to surrender $856.61 of that amount, but the Bank refuses to do so.

The arguments made by both sides are straightforward. The government concedes that it can levy only upon that portion of the joint funds that belongs to Roy Reeves. Nevertheless, it contends that applicable law imposes a presumption that all funds in such a joint bank account are prima facie the property of the taxpayer and, ergo, subject to levy, and, therefore, absent appearance and proof by each co-depositor of his or her actual ownership interest in the joint funds, the bank must turn over the funds in such accounts to the tax collector. Because there is no evidence in this record that any of the co-depositors other than Roy Reeves have some individual and separate ownership interest in the funds in the accounts, the government concludes that it is entitled to judgment as a matter of law. It further contends that the statutory defenses are inapplicable here and, furthermore, that the Bank cannot raise the ownership-interest defense of the third-party co-depositors because they are not parties to the present suit.

The Bank argues that before it can release any of the joint funds, the government must prove that Roy Reeves is the actual owner of the portion of the funds levied upon. In order to do this, the Bank contends, the government must join the co-depositors in this suit because they are indispensable parties for the resolution of the ownership issue. Since the co-depositors were not so joined, the Bank would have the Court dismiss the case.

The Internal Revenue Code, 26 U.S.C. §§ 6331 and 6332, permits the imposition of a levy in favor of the United States upon all "property and rights to property ... belonging to the delinquent taxpayer." Furthermore, section 6332 imposes an obligation on any person in possession of property subject to levy to surrender that property upon notice and demand, subject to certain defenses not relevant here.

It is equally clear, however, that property cannot be levied upon and required to be surrendered unless it is actually owned by the taxpayer. Raffaele v. Granger, 196 F.2d 620 (3d Cir.1952) (refusing to allow levy upon bank accounts of taxpayer-husband where accounts were held by husband and wife as tenants by the entirety); United States v. Stock Yards Bank of Louisville, 231 F.2d 628 (6th Cir. 1956) (holding distraint unavailable where property interests are unclear in the property levied upon). Stuart v. Willis, 244 F.2d 925 (9th Cir.1957) (levy against property of joint venturers in order to satisfy tax liability of one venturer was void).

While the action for enforcement of the levy is properly within the jurisdiction of this Court, it must look to the law of the State of Arkansas to determine the ownership rights in a joint bank account. Poe v. Seaborn, 282 U.S. 101, 51 S.Ct. 58, 75 L.Ed. 239 (1930) (ownership of property for tax purposes is determined by state law). See also United States v. Mitchell, 403 U.S. 190, 91 S.Ct. 1763, 29 L.Ed.2d 406 (1971) (upholding the rule as applied to the Internal Revenue Code of 1954).

The case on point is Hayden v. Gardner, 238 Ark. 351, 381 S.W.2d 752 (1964), in which the Arkansas Supreme Court clarified the rules with respect to the ownership interests in a joint bank account subject to a garnishment proceeding. The rule laid down in that case is as follows:

The joint account should be garnishable only in proportion to the debtor's ownership of the funds, as to which parol evidence is admissible to show the respective contributions of each depositor, as well as any intent of one to make a gift to the other.

Hayden, 238 Ark. at 353, 381 S.W.2d at 753 (quoting from Note, Garnishment, 71 Harv. L.Rev. 557, 558 (1958)).

The Arkansas Supreme Court then set out the order and allocation of proof for a case where a joint bank account is garnished. First, the joint account is prima facie subject to garnishment, and the burden is on each joint depositor to show what portion of the funds in the account he or she owns. Second, if not already joined, each joint depositor should be made party to the suit to afford him or her an opportunity to present evidence of ownership in the account. Third, the garnishment will then be allowed to the extent of the portion of the joint account that is owned by the debtor. Id. at 354, 383 S.W.2d at 754.

Other courts are in agreement that the government can levy against a joint bank account only to the extent of the delinquent taxpayer's ownership interest in the account. See, e.g., Raffaele v. Granger, supra.

The parties in this case agree that only the portion of the joint account owned by the delinquent taxpayer can be levied upon. And, both parties agree that the co-depositors of the joint account are entitled to make known their respective ownership interests in the joint account in order to insure that only that portion of the account belonging to the taxpayer is seized by way of levy. At this point, however, the parties part company and disagree as to the procedure by which the co-depositors should be notified and allowed to represent, and make proof of, their interests in such accounts.

What the Court is left with then is the fundamental issue in this case: by what procedure, if any, should the ownership interests of the co-depositors in a joint bank account be protected when the government levies upon the entire account to obtain the funds owned by only one co-depositor, the delinquent taxpayer?

In beginning its analysis, the Court is mindful of the distinction between cases involving levy where the ownership interest of the property in question is undisputed and those cases where multiple ownership interests are facially present. The point was well made in the case of United States v. Stock Yards Bank of Louisville, 231 F.2d at 631, where the court stated:

It should be pointed out, however, that distraint is a rough and ready remedy. This short cut form of self-help developed by the common law has been available to the government in pursuit of delinquent taxpayers since the eighteenth century. See United States v. Metropolitan Life Ins. Co., 2 Cir., 1942, 130 F.2d 149. Where the value and nature of the taxpayer's property rights are not in question, distraint is no doubt a useful tool in the effective enforcement of the Internal Revenue laws. But it is a blunt instrument, ill-adapted to carve out property interests where their nature and extent are unclear.

Where a levied-against bank account is in the taxpayer's name only, it is reasonable that the bank should be required to comply immediately with the demand to surrender the funds. But in the case of a joint account, there is facial evidence of some co-ownership by others, although the actual extent of their undivided ownership interests is not usually known. Thus, the holding and reasoning of the Arkansas Supreme Court in the Hayden case makes practical as well as judicial sense.

In these joint account cases, the National Bank of Commerce would require the joinder of the co-depositors in any suit to enforce a levy. This argument presumes, of course, that every time a notice and demand for levy is brought against a joint bank account, the bank will automatically refuse to surrender the funds, thereby defeating the extra-judicial aspect of the levy procedure and forcing the government to bring a lawsuit for enforcement of the levy. The Bank would avoid assuming the burden of proving the ownership interests of the co-depositors in the joint account by requiring that the government name the co-depositors as co-defendants in the enforcement suit.

The government, on the other hand, would require the Bank to surrender the funds levied upon, relying on the presumption of ownership in the taxpayer set forth in Hayden. To protect the co-depositors, the government would neither notify them of the levy, name them as co-defendants in an enforcement suit, nor allow the bank to assert their ownership interests in its defense, but would have them pursue a post-seizure remedy of bringing suit against the government for the return of their proportionate interest in the levied-upon property under 26 U.S.C. § 7426.

This Court sees merit in both of the parties' arguments, but finds that neither side has offered the best legally acceptable solution to this important problem.

At the outset, the levy and distraint proceeding under the Code may involve two parts: (1) the notice and demand of levy, an extra-judicial proceeding, and (2) the enforcement of the levy when the demand is contested, a judicial proceeding. A case such as the one before the Court has already reached the judicial stage, yet the parties argue about the rules that ought to be applied at both stages. The real issue raised is: what should the rules be at the notice and...