Capuano v. U.S.
| Decision Date | 17 March 1992 |
| Docket Number | No. 89-3813,89-3813 |
| Citation | 955 F.2d 1427 |
| Parties | -1034, 92-1 USTC P 50,163, 22 Fed.R.Serv.3d 461 Nicholas J. CAPUANO, Plaintiff-Appellant. v. UNITED STATES of America, Defendant-Appellee. |
| Court | U.S. Court of Appeals — Eleventh Circuit |
Nicholas J. Capuano, pro se.
K.M. Moore, Asst. U.S. Atty., Pensacola, Fla., Carol Koehler Ide, Trial Atty., Tax Div., U.S. Dept. of Justice, Gary R. Allen, Chief, Janet Kay Jones, Patricia Bowman, Brian C. Griffin, Anne B. Durney, Appellate Section, Tax Div., Dept. of Justice, Washington, D.C., for defendant-appellee.
Appeal from the United States District Court for the Northern District of Florida.
Before HATCHETT, Circuit Judge, JOHNSON * and SMITH **, Senior Circuit Judges.
Appellant Capuano, an attorney, brought a wrongful levy action pursuant to 26 U.S.C. § 7426 against the Internal Revenue Service (IRS) to recover from seized funds the $25,000 fee due him as result of settlement of a forfeiture action between his client, Agustin Santana, and the United States. (United States District Court for the Northern District of Florida, Pensacola Division, No. 89-30023 WEA.) Judgment was entered on 20 September 1989 in favor of the government. Capuano appeals. We reverse.
Appellant contends that the trial court erred in finding that the agreement for payment of his fee could not take precedence over the IRS claim, for taxes against proceeds of the check issued in payment of the settlement, and erred further in concluding that the government could negotiate the check, on which Capuano, the non-taxpayer, was one of the named payees, without consent or endorsement by appellant.
The government contends that although it proceeded through the formalities of levy, it did not levy on taxpayer's property but actually exercised its common law right of set-off and therefore the district court lacked subject matter jurisdiction to hear a wrongful levy claim; further, that if jurisdiction does lie, the IRS had priority over taxpayer's lawyer in the seized fund, and the IRS properly obtained and negotiated the $100,000.00 check settling taxpayer's interest in the federal forfeiture action.
The facts were essentially fully stipulated; those pertinent to the appeal are as follows:
On 1 June 1986 the Florida Highway Patrol arrested Santana and seized $543,875 in United States currency from the trunk of his car. The next day Santana retained Capuano to represent him. Also on 2 June 1986 Santana and the State released $268,367 of the seized funds to the IRS to be applied against Santana's 1986 estimated federal income tax. On 24 June 1986 the retainer agreement was reduced to writing. Under its terms appellant was to receive a fee of $25,000 contingent upon the return to Santana of part or all of the seized funds. State criminal charges were brought against Santana in June 1986 and dismissed in August. State forfeiture action against the seized funds was brought in July 1986. On 9 December 1986 the United States, pursuant to 21 U.S.C. § 881, filed a civil forfeiture in rem action against the seized funds, and the $543,875 in currency was seized by the United States Marshal pursuant to a Warrant and Notice of Seizure. (United States District Court for the Northern District of Florida, Tallahassee Division, No. TCA 86-7318.) The next day, 10 December 1986, the State of Florida dismissed the state forfeiture action.
On 8 June 1988 a settlement conference with respect to the forfeiture action still pending in federal court was held in Tallahassee in the office of George W. Blow, III, Assistant United States Attorney. Present were Mr. Blow representing the United States, Wayne Evans representing the Florida Highway Patrol, and Nicholas J. Capuano, appellant herein. At that conference Capuano was asked as to the amount of fee he was claiming and was advised by Mr. Evans that the amount of appellant's fee would have a bearing on the amount of the settlement that Mr. Evans would recommend to the department. Further negotiations were had on 8 and 9 June 1988, including an offer by telephone by Mr. Evans to settle the case for $100,000, a counteroffer by appellant which was rejected by Evans, and an agreement by Blow to Evans' and Capuano's agreement that the settlement check in the amount of $100,000 would be made payable jointly to Agustin R. Santana and Nicholas J. Capuano in order to protect Capuano's fee.
Following these negotiations, on 9 June 1988 a written Stipulation for Entry of Final Judgment of Forfeiture was executed and filed in the district court setting forth that the amount of settlement ($100,000.00) shall be paid by the U.S. Marshal by a check payable jointly to Agustin R. Santana and Nicholas J. Capuano. A release in full of all claims against the State of Florida and the United States of America was also executed by Capuano and Santana.
On or about 7 July 1988 IRS made a jeopardy assessment against Santana for the taxable period ended 30 June 1988 and on 12 July 1988 caused a Notice of Levy to be served upon the United States Marshal who had not at that time issued the settlement check as ordered by the Final Judgment entered by the district court on 9 June 1988. Thereafter, on 14 July 1988 appellant was advised that the $100,000.00 settlement check had been issued by the United States Marshal on 12 July 1988 and made payable on the same day to Agustin R. Santana, Nicholas J. Capuano and the Internal Revenue Service.
Capuano never endorsed the check on which he was a named payee. It was not until later that he was informed that the IRS had subsequently endorsed and negotiated the check and credited the entire $100,000.00 to Santana's account without contacting Capuano, and had negotiated the check without Capuano's consent or endorsement. Capuano made immediate demand upon the IRS for payment of his fee.
Appellant filed the wrongful levy action on 25 January 1989 following denial of his motion, pursuant to Federal R.Civ.P. 60(b), to set aside final judgment. At the Rule 16 1 pretrial conference the district court found that there were no genuine issues of material fact and granted judgment in favor of the government, sua sponte. This appeal followed.
A federal tax lien is placed on all property and rights to property when a person who is liable to pay any tax does not do so after the Government demands payment. 2 The Supreme Court, in United States v. Nat'l Bank of Commerce, 3 has delineated three customary methods of forced collection. There are two principal tools for the purpose of the collection of unpaid taxes. The first is the lien foreclosure action brought pursuant to I.R.C. sec. 7403. This action can be instituted in federal district court to enforce a lien on property; all persons claiming an interest in the property must be made party.
The second tool used to collect unpaid tax is the administrative levy. Levy is a provisional remedy which includes the power of distraint and seizure without requiring any judicial intervention. If the taxpayer's property is in the hands of another, a notice of levy may be served on the custodian pursuant to I.R.C. sec. 6332(a). Consequently the Government obtains constructive possession of the property even though it is in the hands of a custodian. If the custodian honors the levy he is discharged from liability to the delinquent taxpayer. However, if the custodian chooses not to honor the levy he incurs liability to the government for his refusal. Although levy is a forceful remedy it is also provisional, so the priority of interests in the seized property is determined in a Section 7426 wrongful levy action after the levy is executed. 4
The set-off is indeed a third way to collect unpaid taxes, available to the government in limited situations. The right of set off "belongs to every creditor to apply the unappropriated moneys of his debtor, in his hands, in extinguishment of the debts due him." 5 The right of set-off is within the equitable power of a court to offset mutual debts running between two parties. 6 In the present context where the government owes a debt to a delinquent taxpayer, the government can apply the debt it owes to the taxpayer against the taxes owed by the taxpayer to the government. In principle, the party owed the greater debt is due the remainder of the debt owed him after offset of the debt he owes to the other party. It goes without saying that neither party may offset moneys in its hands belonging to some other party.
The government asserts that it actually exercised its right to set off Santana's tax debt even though the IRS obtained the $100,000 settlement amount from the U.S. Marshal by process of levy. The government maintains that the $100,000 forfeiture settlement due Santana and Capuano which was in the hands of the United States Marshal was simply turned over to the IRS in order to set off the tax liability that Santana owed the government. The government argues that because it exercised its right to set off the settlement judgment against Santana's tax debt, there was no levy that can support Capuano's Section 7426 wrongful levy action. Therefore, the government exhorts that there is no subject matter jurisdiction.
In United Sand and Gravel Contractors, Inc. v. United States, 7 the IRS served a notice of levy upon the Army Corps of Engineers (Army) on account of money owed by the government to a prime contractor. The subcontractor who also had an interest in the money which was owed to the prime contractor filed an action for wrongful levy against the United States. The district court dismissed the action because the subcontractor did not file it within the nine-month period established by I.R.C. sec. 6532(c). 8 On appeal to the Fifth Circuit, the subcontractor argued that the time bar does not operate because the government had conducted a set-off and not a levy. The court concluded that "if the IRS goes...
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...actions pursuant to 26 U.S.C. § 7426, whereas there is no jurisdiction under § 7426 to challenge a setoff. See Capuano v. United States, 955 F.2d 1427, 1429-1432 (11th Cir.1992); 26 C.F.R. § 301.7426-1(a)(1)(ii). If a wrongful levy action can be brought, the plaintiff must do so within nine......
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