Cps Electric, Ltd. v. U.S.

• Decision Date: 24 August 2001
• Docket Number: No. 2001-2 USTC 50610.,No. 88 AFTR2D 2001-5747.,No. 5:01-CV-199.,5:01-CV-199.,88 AFTR2D 2001-5747.,2001-2 USTC 50610.
• Citation: 166 F.Supp.2d 727
• Parties: CPS ELECTRIC, LTD. and American Manufacturers Mutual Insurance Company, Plaintiffs, v. UNITED STATES of America; Internal Revenue Service; Amdursky, Pelky, Fennell, & Wallen, P.C.; and Dean P. Koski, Defendants.
• Court: U.S. District Court — Northern District of New York

166 F.Supp.2d 727

CPS ELECTRIC, LTD. and American Manufacturers Mutual Insurance Company, Plaintiffs, v. UNITED STATES of America; Internal Revenue Service; Amdursky, Pelky, Fennell, & Wallen, P.C.; and Dean P. Koski, Defendants.

No. 5:01-CV-199.

No. 88 AFTR2D 2001-5747.

No. 2001-2 USTC 50610.

United States District Court, N.D. New York.

August 24, 2001.

Greene, Hershdorfer & Sharpe, Ronald V. Sharpe, of counsel, Syracuse, NY, for Plaintiffs.

United States Department of Justice, Tax Division, Karen Wozniak, of counsel, Washington, DC, for United States and the Internal Revenue Service.

Amdursky, Pelky, Fennell and Wallen, P.C., Joseph E. Wallen, of counsel, Oswego, NY, for Amdursky, Pelky, Fennell and Wallen, P.C., Dean P. Koski.

MEMORANDUM-DECISION AND ORDER

SCULLIN, Chief Judge.

I. INTRODUCTION

On February 8, 2001, CPS Electric, Ltd. ("CPS") and American Manufacturers Mutual Insurance Company ("AMMIC") filed this interpleader action seeking to determine the interests of the United States, Amdursky, Pelky, Fennell and Wallen, P.C. ("Amdursky") and Dean P. Koski in $300,000, representing the gross proceeds of a settlement by and between CPS, AMMIC and Koski of a negligence action Koski had filed in state court on March 24, 1995. The Complaint also named the Internal Revenue Service ("IRS") as a Defendant.

The complaint in this action provides that "[j]urisdiction is founded on the existence of a Federal question arising under the Internal Revenue Code of 1986, Chapter 64 Collection. The question raised is whether or not the Tax Lien as well as the subsequent Tax Levy of the defendants USA and/or IRS, attached to certain funds now held by the plaintiff, AMMIC." See Complaint at ¶ 5.

Presently before the Court is the United States' motion for judgment on the pleadings pursuant to Rule 12(c) of the Federal Rules of Civil Procedure. In support of its motion, the United States raises two grounds for dismissal. First, it asserts that the claims against the IRS must be dismissed because the IRS is not a suable entity. Second, the United States argues that this Court does not have subject matter jurisdiction over this action because the resolution of a state law question could decide the action and, thus, there is no federal question jurisdiction.

On August 8, 2001, the Court heard oral argument in support of, and in opposition to, this motion. At that time, Plaintiffs acknowledged that the IRS is not a suable entity, and therefore, they conceded that the Court must dismiss their complaint against the IRS. Accordingly, the Court granted the United States' motion with respect to the IRS. At the conclusion of oral argument, the Court denied the United States' motion for judgment on the pleadings and informed the parties that a written decision would be forthcoming. The following constitutes the Court's resolution of this motion.

II. DISCUSSION

The only question that remains is whether this Court has subject matter jurisdiction over this matter. A party may bring an interpleader action under either the Federal Interpleader Act, 28 U.S.C. § 1335 ("statutory interpleader"), or Rule 22 of the Federal Rules of Civil Procedure ("rule interpleader"). In this case, Plaintiffs rely upon both of these provisions as a basis for their action. Thus, the Court must determine whether Plaintiffs have met the requirements for either or both of these provisions.¹

It is clear that statutory interpleader is not applicable to this case. Pursuant to § 1335,

[t]he district courts shall have original jurisdiction of any civil action of interpleader or in the nature of interpleader filed by any person, firm, or corporation, association, or society having in his or its custody or possession money or property of the value of $500 or more, or having issued a note, bond, certificate, policy of insurance, or other instrument of value or amount of $500 or more, ..., if ...

[t]wo or more adverse claimants, of diverse citizenship as defined in section 1332 of this title, are claiming or may claim to be entitled to such money or property, or to any one or more of the benefits arising by virtue of any note, bond, certificate, policy or other instrument, or arising by virtue of any such obligation; ...

28 U.S.C. § 1335.

In the present case Amdursky and Koski are both residents of New York and the United States is not a citizen of any state for purposes of diversity jurisdiction. See General Ry. Signal Co. v. Corcoran, 921 F.2d 700, 703 (7th Cir.1991). Therefore, there are not "[t]wo or more adverse claimants, of diverse citizenship," claiming title to the funds Plaintiffs are holding. Accordingly, the Court concludes that Plaintiffs cannot rely upon § 1335 as a basis for their interpleader action.

Rule 22 of the Federal Rules of Civil Procedure "`is merely a procedural device; it confers no jurisdiction on the federal courts.'" Commercial Union Ins. Co. v. United States, 999 F.2d 581, 584 (D.C.Cir. 1993) (quoting Morongo Band, 858 F.2d at 1382). Therefore, "an interpleader brought under Rule 22 must fall within one of the general statutory grants of federal jurisdiction." Id. (citation omitted). This may include diversity jurisdiction under 28 U.S.C. § 1332, which "requires diversity between the plaintiff-stakeholder and the claimants." Id. (citing Charles A. Wright, Arthur R. Miller & Mary Kay Kane, FP & P § 1710, at 537-39). In the alternative, it may include federal question jurisdiction under 28 U.S.C. § 1331. See id. at 585.

Plaintiffs may not rely upon § 1332 in the present case because one of the Plaintiffs, CPS, is a New York corporation with its principal place of business in New York, see Complaint at ¶ 2, and two of the Defendants, Amdursky and Koski, are citizens of New York, see Complaint at ¶¶ 7-8. Thus, the complete diversity between Plaintiffs and Defendants, required by § 1332, is lacking.

Nonetheless, Rule 22 interpleader may still be possible under this Court's general federal question jurisdiction, 28 U.S.C. § 1331, if this action arises under federal law. The Supreme Court has established two standards to determine whether an action "arises under" federal law. "One looks to whether federal law `creates the cause of action.'" Banco de Ponce v. Hinsdale Supermarket Corp., 663 F.Supp. 813, 816 (E.D.N.Y.1987) (citation omitted). "Where state law creates the cause of action, the other standard asks whether a `substantial' question of federal law is a necessary element of that cause of action." Id. (citations omitted).

In an interpleader action, "although the plaintiff's claim does not raise a federal question, it may stake the federal court's jurisdiction on `a defense to a claim that would raise a federal question and that defendant could have asserted in a coercive action.'" Commercial Union Ins., 999 F.2d at 585 (quoting Bell & Beckwith, 766 F.2d at 912). In other words, in an interpleader action, "`federal question jurisdiction exists if such jurisdiction would have existed in a coercive action by the defendant.'" Id. (quotation and citations omitted).

In the present case, the United States bases its claim to the funds on the IRS' July 1995 notice of federal tax levy with respect to the outstanding income tax liabilities of Koski. The IRS' letter accompanying that notice of levy stated that the notice attached to any funds due to Koski as a result of the alleged injury which was the subject of the negligence action which he filed in state court in March 1995. See United States' Memorandum of Law at 2.² Nonetheless, the United States contends that there is no federal question jurisdiction because a threshold question exists as to what rights Koski had in the subject fund when the notice of the federal tax lien was served upon CPS in July 1995. See United States' Memorandum of Law at 4.

In support of its claim that this Court does not have subject matter jurisdiction over this action, the United States relies upon the Sixth Circuit's decision in Bell & Beckwith v. United States of Am., Internal Revenue Serv., 766 F.2d 910 (6th Cir.1985). That case arose from an effort to collect the tax liabilities of a Dr. Zimmer. The IRS levied a tax lien on an investment account in the name of Donna Cannon and managed by Bell & Beckwith. The United States contended that Ms. Cannon was merely acting as the nominee of Dr. Zimmer, who provided the funds to set up the account. Therefore, the United States demanded that Bell & Beckwith turn over the property in the investment account. Shortly thereafter, Bell & Beckwith received a letter from Ms. Cannon claiming ownership of the property and demanding full payment. Bell & Beckwith then brought an interpleader action to resolve the adverse claims to the property in question.

The court began its analysis by noting that an interpleader action is similar to a declaratory judgment action in that "federal question jurisdiction exists if such jurisdiction would have existed in a coercive action by the defendant." Id. at 914. Nonetheless, although acknowledging that a coercive action by the United States against Bell & Beckwith for failure to honor a tax levy without reasonable cause would have arisen under federal law, the court concluded that because the real controversy was between Ms. Cannon and the United States over ownership of the funds in the account, which "was purely a question of state law, federal question jurisdiction would not exist in an action between those parties." Id. at 916. Thus, the court dismissed the interpleader action for lack of subject matter jurisdiction.

The present case is clearly distinguishable from Bell & Beckwith. In that case, two of the claimants, Ms. Carron and Dr. Zimmer, claimed ownership of a brokerage account, against which the United States asserted a tax lien. If the issue of ownership were resolved in favor of Ms. Carron, there would be no need to reach the issue of the tax lien because the United States was asserting its lien against Dr....