Fidelity and Deposit Co. of Maryland v. City of Adelanto

• Decision Date: 21 June 1996
• Docket Number: No. 95-55344,95-55344
• Citation: 87 F.3d 334
• Parties: -5069, 65 USLW 2025, 96-2 USTC P 50,332, 96 Cal. Daily Op. Serv. 4484, 96 Daily Journal D.A.R. 7310 FIDELITY AND DEPOSIT COMPANY OF MARYLAND, Plaintiff-Appellant, v. CITY OF ADELANTO; United States Internal Revenue Service, Defendants-Appellees.
• Court: U.S. Court of Appeals — Ninth Circuit

Page 334

87 F.3d 334

78 A.F.T.R.2d 96-5069, 65 USLW 2025,

96-2 USTC P 50,332,

96 Cal. Daily Op. Serv. 4484,

96 Daily Journal D.A.R. 7310

FIDELITY AND DEPOSIT COMPANY OF MARYLAND, Plaintiff-Appellant, v. CITY OF ADELANTO; United States Internal Revenue Service,

Defendants-Appellees.

No. 95-55344.

United States Court of Appeals, Ninth Circuit.

Argued and Submitted June 3, 1996.

Decided June 21, 1996.

David C. Veis, Long & Levit, Los Angeles, California, for plaintiff-appellant.

Curtis C. Pett, United States Department of Justice, Tax Division, Washington, D.C., for defendant-appellee United States of America.

Appeal from the United States District Court for the Central District of California, Gary L. Taylor, District Judge, Presiding. D.C. No. CV-93-00516.

Before: BRUNETTI and RYMER, Circuit Judges, and TANNER, ^* Senior District Judge.

RYMER, Circuit Judge:

Fidelity and Deposit Company of Maryland (F & D) claims an interest in funds held by the City of Adelanto upon which the Internal Revenue Service issued a notice of levy. A contractor for whom F & D was surety had defaulted, F & D stepped up to the plate and paid to complete the project, and it wanted reimbursement from funds held by the City otherwise due the contractor who had also failed to pay taxes. F & D sued, but not until after the nine month statute of limitations for claims against the IRS for wrongful levy under 26 U.S.C. § 7426(a)(1) ¹ had run. It therefore turned to 28 U.S.C. § 2410(a)(1), ² alleging that the federal court had jurisdiction and the United States had waived sovereign immunity for an action to quiet title to the contractor's funds held by the City.

The problem is that we held in Winebrenner v. United States, 924 F.2d 851 (9th Cir.1991), that the exclusive remedy for a third party whose property has been levied upon by the IRS is an action under 26 U.S.C. § 7426(a)(1) for wrongful levy (which has a nine months statute of limitations), and that an action under 28 U.S.C. § 2410(a)(1), to quiet title (which has a six years period of limitations), is not available. Recognizing this, the district court dismissed F & D's second amended complaint with prejudice.

The question is whether Winebrenner, which otherwise squarely controls, remains good law in light of United States v. Williams, --- U.S. ----, 115 S.Ct. 1611, 131 L.Ed.2d 608 (1995), which held that a third party who paid a tax under protest to remove a lien on her property has standing to bring a refund action under 28 U.S.C. § 1346(a)(1), and WWSM Investors v. United States, 64 F.3d 456 (9th Cir.1995), which also held that 26 U.S.C. § 7426 was not the exclusive remedy for a claim for refund from the IRS. We hold that where suit is by a nontaxpayer third party and § 7426(a)(1) applies, and the alternative basis proffered for waiver of sovereign immunity is an action to quiet title under § 2410(a)(1), Winebrenner continues to control and § 7426 is the exclusive remedy.

We therefore affirm.

I

In December 1989, the City hired Cates Construction to act as the primary contractor on a project to build a "Return to Custody Center." Cates purchased a Public Works Performance Bond from F & D guaranteeing faithful performance of its contract with the City, and a Payment Bond, guaranteeing prompt payment of certain material and labor costs.

A year later, Cates abandoned the project and failed to pay numerous subcontractors, material suppliers, and laborers, to the tune of several hundred thousand dollars. The City wanted to complete the project, and looked to F & D for the money to do so. F & D obliged, as it had to do under the bonds, and spent almost two million dollars in the process. But that wasn't the end of its troubles.

The IRS entered the picture because Cates owed half a million dollars for unpaid withholding and FICA taxes. On February 27, 1991, the IRS filed a notice of federal tax lien against all of Cates's property and rights to property. The next day, the IRS served a notice of levy on the City for any money the City owed Cates (roughly $600,000).

Meanwhile, F & D had asked the City to reimburse some of what it had spent to complete the project, but the City now couldn't do so because of the outstanding federal tax levy on the remaining contract funds the City was holding. Therefore, on May 10, 1993, F & D filed this action against the City and the IRS seeking a declaration that Cates had no property or rights to property in the funds levied upon by the IRS and that F & D had a super priority right to the funds over the IRS's liens, as well as an order directing the City to hand over the contract funds to F & D instead of the IRS.

The original complaint failed to allege a statutory basis upon which the government waived sovereign immunity and was dismissed with leave to amend. F & D's first amended complaint averred that the court had jurisdiction under 28 U.S.C. §§ 1340 and 1346 and that sovereign immunity had been waived by 26 U.S.C. § 2410(a)(1) (suits to "quiet title"). After the district court again dismissed, F & D filed its second amended complaint alleging that sovereign immunity is waived by virtue of either § 2410(a)(1) or § 7426. Having afforded F & D two opportunities to amend, the district court concluded that the facts alleged are insufficient to come within the sovereign immunity waiver of § 2410 and that any claim under § 7426 is time barred under Winebrenner and Sessler v. United States, 7 F.3d 1449 (9th Cir.1993).

F & D appeals. Although the district court's order dismissed the complaint only as against the IRS, we have jurisdiction under 28 U.S.C. § 1291 because F & D has since dismissed its claims against the City, the last remaining defendant. Anderson v. Allstate Ins. Co., 630 F.2d 677, 680-81 (9th Cir.1980).

II

Our review here is de novo because we must address whether the United States waived its sovereign immunity, E.J. Friedman Co., Inc. v. United States, 6 F.3d 1355, 1357 (9th Cir.1993), and the district court's ruling on the appropriate limitations period, Winebrenner, 924 F.2d at 855, questions that both involve review of the district court's interpretation of statutes. Batchelor v. Oak Hill Medical Group, 870 F.2d 1446, 1447 (9th Cir.1989).

III

F & D concedes that its action was filed after the nine-month limitations period for bringing a claim for wrongful levy under § 7426(a)(1) expired. If, therefore, Winebrenner controls and § 7426(a)(1) is the exclusive remedy for wrongful levy, F & D is out of luck. However, F & D says that the government has waived sovereign immunity under 28 U.S.C. § 2410 for actions challenging the procedural validity of tax liens as well as tax levies, which is what it contends that it is really doing. F & D also argues that the government's waiver under § 2410 extends to suits by third party nontaxpayers regardless of Winebrenner because Winebrenner is wrong, distinguishable, undermined if not overruled, and limited in any event to situations where a levy has issued and an actual seizure of property has occurred.

The IRS counters that 26 U.S.C. § 7426 provides the exclusive procedural channel for a suit of this kind, as it permits any person other than the taxpayer itself to file a wrongful levy action seeking to have a levy invalidated on the ground that the property subject to the levy belongs to the complainant and not the taxpayer. Because such an action must be brought within nine months after the date the notice of levy is served, 26 U.S.C. §§ 6532(c), 7426(h), F & D's complaint was time-barred and cannot be resuscitated by characterizing it as a claim to quiet title. The IRS further submits that Winebrenner has not been overruled as to § 2410, since Williams and WWSM simply hold that § 7426 is not exclusive with respect to 28 U.S.C. § 1346(a)(1), which provides a different type of relief (refund) from the action to quiet title upon which F & D relies. In any event, the IRS maintains that F & D's claim isn't a genuine quiet title action, as it never had title or possession of the property to begin with.

A

We examined the interplay between 26 U.S.C. § 7426(a)(1) and 28 U.S.C. § 2410(a)(1) in Winebrenner. There, the IRS recorded notices of federal tax liens, naming a residence that it believed the delinquent taxpayer owned, and then served the taxpayer and Winebrenner (the record owner of the home) with a notice of levy upon and seizure of the property. Slightly more than nine months later, Winebrenner filed a lawsuit against the United States, seeking a quiet title order and removal of the tax liens on the residence pursuant to §§ 2410 and 7426. We held that Winebrenner's claim under § 7426(a)(1) was time-barred because the suit was filed more than nine months after the notice of levy and notice of seizure. We also affirmed the district court's grant of summary judgment for the IRS on the § 2410 claim, concluding that "[b]ecause we find that the exclusive remedy by a third party whose property has been levied upon or sold by the Internal Revenue Service is an action pursuant to Section 7426, Winebrenner's claims for quiet title under Section 2410" are barred. Winebrenner, 924 F.2d at 855. As we explained, the general six-year statute of limitations found in § 2401 merely establishes an outside limit. Nothing in its language precludes Congress from enacting a shorter limitation period for certain classes of actions....

If persons who claim an interest in property seized by the United States to satisfy a third person's taxes can challenge an I.R.S. levy by a cause of action which falls within 28 U.S.C. § 2410, the intent of Congress to set a short time limit for wrongful levy actions will be completely undercut.

Id. at 854 (quoting United Sand and Gravel Contractors, Inc. v. United States, 624 F.2d 733, 738 (5th Cir.1980)).

We followed Winebrenner in Sessler, 7 F.3d 1449 (9th Cir.1993), where innocent third-party purchasers challenged an IRS levy on their property for failure to give...