Baddour, Inc. v. U.S.

• Decision Date: 17 October 1986
• Docket Number: No. 85-4595,85-4595
• Citation: 802 F.2d 801
• Parties: -6035, 86-2 USTC P 9748 BADDOUR, INC. and BMC Sales, Inc., Plaintiffs-Appellees-Appellants, v. UNITED STATES of America, Defendant-Appellant, Michael E. Posey, Defendant-Appellee.
• Court: U.S. Court of Appeals — Fifth Circuit

Page 801

802 F.2d 801

58 A.F.T.R.2d 86-6035, 86-2 USTC P 9748

BADDOUR, INC. and BMC Sales, Inc., Plaintiffs-Appellees-Appellants, v. UNITED STATES of America, Defendant-Appellant Michael E. Posey, Defendant-Appellee.

No. 85-4595.

United States Court of Appeals Fifth Circuit.

Oct. 17, 1986.

Nancy G. Morgan, William D. Holmes, Ann Bellandger Durney, Michael L. Paup, Chief, Appellate Sec., Tax Div., Dept. of Justice, Washington D.C., Glen H. Davidson, U.S. Atty., Thomas W. Dawson, Asst. U.S. Atty., Oxford, Miss., for defendant-appellant.

Eugene Greener, Jr., Goodman, Glazer, Greener, Schneider & McQuiston, Memphis, Tenn., Troutt & Moore, Nat G. Troutt, Senatobia, Miss., for plaintiffs-appellees-appellants.

Appeals from the United States District Court for the Northern District of Mississippi.

Before GEE and ROBERT MADDEN HILL, Circuit Judges, and EDWIN F. HUNTER, Jr., ^* District Judge.

OPINION

EDWIN F. HUNTER, Jr., District Judge:

Baddour, Inc., brought this wrongful levy suit against the United States of America and Michael Posey, an IRS agent. Damages are claimed for losses allegedly sustained when its property, certain soft goods located in a taxpayer's plant, was seized to satisfy taxpayer's liability. Following a bench trial, the district court concluded that recovery against Posey, individually was barred by the doctrine of qualified immunity. It held, however, that Baddour was entitled to recover under 26 U.S.C.A. Sec. 7426(b)(2) (West 1967), amended by 26 U.S.C.A. Sec. 7426(b)(2) (West Supp.1986), in an amount equal to the fair market value of the property at the time that it should have been sold pursuant to 26 U.S.C.A. Sec. 6335 (West 1967). ¹ This value was fixed at $64,775. The United States appeals. Baddour appeals from the Posey dismissal.

We AFFIRM in all respects.

I.

Baddour, Inc. entered into a contract with Brame Manufacturing Co., Inc., the "taxpayer", pursuant to which it periodically shipped raw material for athletic clothing from its facility in Memphis, Tennessee, to the Brame factory in Batesville, Mississippi. Brame manufactured the raw material into finished garments, shipped them to Baddour's pre-arranged purchasers, and received a portion of the purchase price as payment for its manufacturing work.

In late 1981 and early 1982, the IRS assessed Brame for tax delinquencies of more than $170,000. The IRS filed tax liens in Batesville where the Brame factory was located and in Sardis, Mississippi. The IRS agent in charge of the case, cross-appellee Michael E. Posey, then met with Julius Brame, the president and owner of Brame, to ascertain what property was available to satisfy Brame's tax liability. Posey learned that Brame's plant in Batesville contained certain soft goods, work in progress, and completed garments. Based both upon Brame's description of the business arrangement and the absence of a U.C.C. filing statement, Posey concluded that Brame actually had title to the goods. On April 23, 1982, the IRS issued a levy and a Notice of Seizure to Brame and seized the goods in the Batesville factory by placing a padlock on the outside door. ² Some if not all of the goods inside, seized to satisfy Brame's tax liability, belonged to Baddour.

Following the seizure, Charles S. Vail, corporate secretary of Baddour, wrote a letter to Posey detailing their ownership of the property. Vail insisted that the taxpayer "had no interest in the goods," that Baddour "bought the goods, paid for the goods, and had them shipped" to the taxpayer's plant; that the taxpayer was "to do certain work to said goods and ship them" to Baddour's customers, and that "the transaction was never intended as a security transaction" because the goods were Baddour's at all times. Posey then reached an understanding with Brame and Fred Klyce, president of Panola County Bank (the holder of a security interest), that if the seizure were released, the goods would be transported to Mississippi Mills in Sardis, Mississippi, where manufacture would be completed. The finished goods would be sold, and the net proceeds disbursed 50 percent to the Internal Revenue Service, 25 percent to Panola County Bank and 25 percent to Brame for sales expenses. The understanding was memorialized in a letter to Posey from Klyce dated May 25, 1982. On that same day, Posey removed the padlock and seizure notice from taxpayer's premises and signed the notice indicating that the goods had been released from the seizure. The document was also signed by Klyce, as "Agent for Brame," acknowledging receipt of the property and that the property was in the same condition as it had been prior to seizure. The soft goods were then removed to Mississippi Mills where some of the goods were made into finished products and sold. The United States eventually received $1,502 as its share of the sale proceeds pursuant to the agreement with Brame and Klyce.

Following the "release," Baddour discovered that its goods were no longer in the Brame factory. They immediately contacted Posey to ascertain its whereabouts. Posey replied merely that the goods had been "released to the taxpayer." Only after the commencement of litigation did Baddour learn of the contemporaneous agreement for manufacture and sale.

The district court held that there had been a wrongful levy and that the strings-attached release was not a release under 26 U.S.C.A. Sec. 6343(a) (West Supp.1986). It then analyzed the relationship between a "deemed sale" under 26 U.S.C.A. Sec. 6335(e) regarding the manner and conditions of the sale of seized property, and the recovery provisions of 26 U.S.C.A. Sec. 7426(b)(2)(C). The district court concluded that if the provisions of 26 U.S.C.A. Sec. 6335(e) are not followed and no "minimum" price is set, then the fair market value at the time that the property should have been sold pursuant to statute shall be considered the minimum price.

II.

26 U.S.C.A. Sec. 7426(a)(1) provides in part:

If a levy has been made on property or property has been sold pursuant to a levy, any person (other than the person against whom is assessed the tax out of which such levy arose) who claims an interest in or lien on such property and that such property was wrongfully levied upon may bring a civil action against the United States in a district court of the United States.

This statute constitutes a waiver by the United States of its sovereign immunity to suit; if the wrongful levy is released prior to the filing, no waiver exists and the court acquires no jurisdiction. See Nickerson v. United States, 513 F.2d 31 (1st Cir.1975). To assess the jurisdictional issue, we are obliged to answer this inquiry: Was the levy released prior to the filing of this suit?

26 U.S.C.A. Sec. 6343(a), entitled "Release of Levy," provides:

It shall be lawful for the Secretary or his delegate, under regulations prescribed by the Secretary or his delegate, to release the levy upon all or part of the property or rights to property levied upon where the Secretary determines that such action will facilitate the collection of the liability, but such release shall not operate to prevent any subsequent levy.

Unfortunately, the statute and the regulations, see Treas.Reg. Secs. 301.6343-1(a)(1)-(b)(3), delineate only circumstances in which a levy may be released. They do not establish a procedure for release. Cf. 26 U.S.C.A. Sec. 6325 (West Supp.1986) (procedure for release of tax lien). Although the genesis of the Mississippi Mills-Posey-Brame arrangement is murky, the levy clearly would not have been "released" in the absence of the contemporaneous agreement for manufacture and sale. The issue quickly narrows. Does the strings-attached release constitute a "release of levy" under Sec. 6343(a)?

Plaintiff strenuously argues that a "release" is a giving up or an abandonment and therefore may not be conditioned upon an agreement for transportation, manufacture, and sale. The regulations under Sec. 6343, clearly indicate that a release may be conditioned upon the provision of a substitute for the property levied on, see, e.g., Treas.Reg. Secs. 301-6343-1(a)(2)(i)-(v) (release of levy conditioned respectively on escrow arrangement, bond, payment of amount of United States' interest in property, assignment of salaries and wages, and installment payment arrangements) or the performance of some other action. There are sound reasons for permitting a release to be conditioned upon the taxpayer agreeing to send his own property to another factory for manufacture, sale, and satisfaction of a tax liability. However, neither reason, common sense nor equity can justify a strings-attached release of property which was owned by a third party. We fully agree with the district court that a strings-attached release is not a "release" under Sec. 6343(a). The property was not validly released. Jurisdiction exists under 26 U.S.C.A. Sec. 7426(a)(1).

The statute in effect at the time of the wrongful levy on April 23, 1982 provided in pertinent part:

(b) Adjudication.--The district court shall have jurisdiction to grant only such of the following forms of relief as may be appropriate in the circumstances:

* * *

* * *

(2) Recovery of property.--If the court determines that such property has been wrongfully levied upon, the court may--

(A) order the return of specific property if the United States is in possession of such property;

(B) grant a judgment for the amount of money levied upon; or

(C) grant a judgment for an amount not exceeding the amount received by the United States from the sale of such property.

For the purposes of subparagraph (C), if the property was declared purchased by the United States at a sale pursuant to section 6335(e) (relating to manner and conditions of sale), the United States shall be treated as having received an amount equal to the minimum price determined pursuant to such section or (if larger) the amount received by the United States from the resale of such property.

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