GULF COAST GALVANIZING v. Steel Sales Co., Inc.

• Decision Date: 07 May 1993
• Docket Number: Civ. A. J92-0301(L)(C).
• Citation: 826 F. Supp. 197
• Parties: GULF COAST GALVANIZING, INC., Plaintiff, v. STEEL SALES CO., INC., Defendant, v. TRUSTMARK NATIONAL BANK, Garnishee-Defendant, v. INTERNAL REVENUE SERVICE, Defendant.
• Court: U.S. District Court — Southern District of Mississippi

826 F. Supp. 197

GULF COAST GALVANIZING, INC., Plaintiff, v. STEEL SALES CO., INC., Defendant, v. TRUSTMARK NATIONAL BANK, Garnishee-Defendant, v. INTERNAL REVENUE SERVICE, Defendant.

Civ. A. J92-0301(L)(C).

United States District Court, S.D. Mississippi, Jackson Division.

May 7, 1993.

Jeffrey Webb, Heidelberg & Woodliff, Jackson, MS, for plaintiff.

William D.M. Holmes, U.S. Dept. of Justice, Tax Div., Washington, DC, E. Clark Rumfelt, Trustmark Nat. Bank, Lemuel Augustus Smith, U.S. Attys. Office, Jackson, MS, for defendants.

MEMORANDUM OPINION AND ORDER

TOM S. LEE, District Judge.

This case originated as a garnishment action brought by Gulf Coast Galvanizing, Inc. (Gulf Coast) in the Chancery Court for the First Judicial District of Hinds County, Mississippi to collect on a judgment against Steel Sales Co., Inc. from funds in Steel Sales' checking account with Trustmark National Bank (Trustmark or the Bank). The Internal Revenue Service (IRS), claiming an interest in the funds held by Trustmark in Steel Sales account due to an assessment against Steel Sales' for outstanding federal tax liability, removed the action to this court pursuant to 28 U.S.C. §§ 2410 and 1444. Thereafter, the United States of America was substituted as a party in place of the IRS. This cause is now before the court on cross-motions of Gulf Coast and the United States by which each seeks to establish that it is entitled to recover the sum of $9,140.18 being held by the garnishee-defendant Trustmark.¹ Having reviewed the parties' submissions together with the applicable law, the court concludes that the United States' motion should be granted and Gulf Coast's motion denied.

FACTUAL BACKGROUND

On June 24, 1991 and September 2, 1991, respectively, the United States assessed Steel Sales for unpaid federal taxes due for the first and second quarters of 1991 in the collective amount of $133,301.60, including interest and statutory additions. The government recorded a notice of the federal tax liens with the office of the Chancery Clerk of Hinds County, Mississippi on September 30, 1991.

Thereafter, on November 21, 1991, Gulf Coast filed suit against Steel Sales in the Circuit Court of the First Judicial District of Hinds County seeking to recover the unpaid balance of a promissory note executed by Steel Sales. Gulf Coast obtained a default judgment against Steel Sales in the amount of $21,771.81 on January 8, 1992. On March 2, 1992, after securing its judgment, Gulf Coast served a writ of garnishment on Trustmark seeking to collect its judgment from any funds which Steel Sales had in its checking account with Trustmark. On March 30, 1992, the Bank mailed its answer to the writ of garnishment to the court and to counsel for Gulf Coast, advising that Steel Sales had $9,028.82 in its account with the Bank.² But no sooner than that answer was mailed, the IRS served on the Bank a notice of levy to collect Steel Sales' tax liability from any property of Steel Sales which was in the Bank's possession.

The Bank's original answer to Gulf Coast's writ of garnishment was received and stamped "filed" by the Hinds County Circuit Clerk on April 1, 1992. On that same day, though, the Bank, having been served with the IRS's notice of levy, prepared and mailed to the clerk for filing an amended answer to the writ of garnishment, requesting that summons be issued against the IRS for an interpleader action.³ The amended answer was filed with the court on April 6, 1992. Though the Bank moved quickly to notify the court of the IRS's claim to the fund, Gulf Coast was quicker. On the same day the Bank's original answer was filed, Gulf Coast filed with the Circuit Clerk a motion for judgment on answer of garnishee-defendant and secured from the circuit judge an order authorizing and directing the Bank to release the funds to Gulf Coast.

ANALYSIS

The question of priority of a judgment lien in competition with a federal tax lien presents a question of federal law. Under federal law,

federal tax liens do not automatically have priority over all other liens. Absent provision to the contrary, priority for purposes of federal law is governed by the common-law principle that "`the first in time is the first in right.'" United States v. New Britain, 347 U.S. 81, 85, 74 S.Ct. 367, 370, 98 L.Ed. 520 (1954).

United States v. McDermott, ___ U.S. ___, 113 S.Ct. 1526, 123 L.Ed.2d 128 (1993); see also United States v. National Bank of Commerce, 472 U.S. 713, 722-23, 105 S.Ct. 2919, 2925-26, 86 L.Ed.2d 565 (1985). In determining the issue of the which of the two competing liens at issue in the case sub judice — the federal tax lien or Gulf Coast's judgment lien — was "first in time," the court looks to 26 U.S.C. §§ 6321, 6322 and 6323. These statutes establish that a lien is created in favor of the United States at the time of the assessment by the government for unpaid federal taxes.⁴ That lien attaches to all property or property rights the taxpayer then holds or subsequently acquires, and continues until the underlying tax liability is satisfied or the statute of limitations expires.⁵

The lien, however, is not valid against a judgment lien creditor "until notice thereof.⁶

In this case, the government's tax lien arose on the date of June 24, 1991, the date of the initial assessment.⁷ And notice was given of the government's lien on September 30, 1991 by the IRS's recording of such notice in the records of the Hinds County Chancery Clerk. Gulf Coast's suit against Steel Sales was not commenced until November 21, 1991, almost two months later, and Gulf Coast did not secure its judgment against Steel Sales until January 8, 1992. "A competing state lien is deemed to be in existence for `first in time' purposes only when it has been `perfected' in the sense that `the identity of the lienor, the property subject to the lien, and the amount of the lien are established.'" McDermott, ___ U.S. at ___, 113 S.Ct. at 1528 (quoting New Britain, 347 U.S. at 84, 74 S.Ct. at 369). As Gulf Coast's lien had not even arisen at the time the IRS acquired and gave notice of its lien, manifestly, the government's lien was "first in time." The question presented by the parties' motions, though, is whether it should be "first in right." Plaintiff advances three arguments in support of its claim that it should not. First, plaintiff contends that the United States failed in this proceeding to timely assert a claim to the funds and that consequently, the court must conclude that plaintiff, in the absence of a competing claim, is entitled to receive the funds. Plaintiff next argues that because a judgment was entered in the Circuit Court of Hinds County authorizing Trustmark to relinquish the funds in the Steel Sales account to Gulf Coast, Gulf Coast is entitled to the funds in the account. Finally, according to plaintiff, because Steel Sales lost any interest in the funds in the account upon Gulf Coast's filing of the March 2, 1992 writ of garnishment, the notice of levy thereafter served upon Trustmark by the United States on March 30, 1992 was ineffective since Steel Sales had no property interest to which the government's lien could attach. These positions will be considered seriatim.

A.

Mississippi law provides by statute for interpleader by a garnishee which has notice that there is a competing claim to the debt or property that is the subject of a garnishment action. Specifically, Miss.Code.Ann. § 11-35-41 (1972) provides if a garnishee,

at any time before final judgment against him, or after such judgment if he had no such notice before the judgment was rendered, shall show that he has been notified that another person claims title to or an interest in the debt or property, which has been admitted by him, or found on trial to be due or to be in his possession, the court shall suspend all further proceedings, and cause a summons to issue or publication to be made for the person so claiming to appear and contest with the plaintiff the right to such money, debt, or property. In such case, if the answer admits an indebtedness, and the garnishee pays the money into court, he shall thereupon be discharged from further liability to either party for the sum so paid. And whenever such garnishee shall by said answer or affidavit show that he has been notified that another person claims title to or interest in such debt or property, it shall be lawful for such third person of his own motion to come in and claim the debt or property, and the claim shall be tried as other claimant's issues are tried whether summons or publication has been made to bring him in or not.

Further, Miss.Code Ann. § 11-35-43 provides that where this interpleader procedure is utilized,

If the claimant, being duly summoned, fails to appear, the court shall adjudge the money, debt, or property to the plaintiff. If he appears, he shall propound his claim to the money, debt, or property in writing under oath; and the plaintiff may take issue thereon, and the same shall be tried and determined as other issues. If the issue be found in favor of the plaintiff, judgment shall be rendered for him against the garnishee, and also for the costs of the interpleader against the claimant; but if the issue be found for the claimant, judgment shall be rendered in his favor against the garnishee, and against the plaintiff for costs. Where the garnishee has paid money into court, the judgment shall direct its payment to the party entitled thereto, and a judgment therefore shall not go against the garnishee.

Under federal law, and in particular 28 U.S.C. § 2410, the United States may be named as a party in a civil action, in state or federal court, "of interpleader or in the nature of interpleader with respect to, real or personal property on which the United States has or claims a mortgage or other lien." This statute, which operates as a waiver of sovereign immunity for the types of actions identified therein, prescribes the...