In re Weninger

• Citation: 119 BR 238
• Decision Date: 12 June 1990
• Docket Number: Bankruptcy No. 89-B-03463-A.
• Parties: In re Roman G. WENINGER and Mary Madeleine Weninger, Debtors.
• Court: United States Bankruptcy Courts. Tenth Circuit. U.S. Bankruptcy Court — District of Colorado

119 B.R. 238 (1990)

In re Roman G. WENINGER and Mary Madeleine Weninger, Debtors.

Bankruptcy No. 89-B-03463-A.

United States Bankruptcy Court, D. Colorado.

June 12, 1990.

Justin L. Garrett II, Washington, D.C., and Donald R. Wrobetz, Denver, Colo., for U.S.

ORDER ON STIPULATED MOTION FOR SETOFF

SIDNEY B. BROOKS, Bankruptcy Judge.

THIS MATTER is before the Court upon a Stipulated Motion for Setoff ("Motion") filed by World Savings & Loan Association ("World Savings") and the Chapter 7 Trustee on December 22, 1989. An objection to the Motion was filed January 8, 1990 by the United States on behalf of the Internal Revenue Service ("IRS"). World Savings filed a response to the objection on January 17, 1990. A hearing was set for April 18, 1990 at which time the Court took the matter under advisement.¹

I. Background.

On or about May 24, 1988, Roman G. Weninger borrowed some $22,553.76 from World Savings. In connection with the loan, he executed two Savings Account Loan Note and Security Agreements ("the Agreements").² Under the terms of the Agreements, World Savings was given security interests in two savings accounts deposited with World Savings ("the Accounts").³ Each of the Accounts was to secure $11,276.88, one-half of the total loan amount. Lump-sum payment in full was due on November 24, 1988.

The IRS made assessments against the Weningers for unpaid federal income taxes on August 10, 1988. The IRS gave notice and demanded payment of the taxes, but the taxes remain unpaid. On August 11, 1988, the IRS filed notices of the federal tax liens against the Weningers.

The Weningers filed a Petition for relief under Chapter 11 of the Bankruptcy Code on March 20, 1989. The case was converted to Chapter 7 by this Court's Order entered September 29, 1989.

The Motion requests that World Savings be allowed to set off the amount due it under the Agreements against the amounts on deposit in the Accounts. World Savings alleges that an excess balance would exist in the Accounts following a setoff and agrees that such balance would be turned over to the Trustee accompanied by an accounting of the amounts set off.

The IRS objects on the ground that the Motion raises material questions regarding the priority of their lien interest in the Accounts. They request that the Motion be denied because they allege that the IRS possesses a prior choate lien on the funds at issue. World Savings' response asserts that their lien is superior to that held by the IRS.

II. Analysis.

A. Did the Debtors possess property or rights to property to which the tax lien could attach?

This Court must first ascertain whether, and to what extent, the Accounts represent property or rights to property of the Debtors to which the IRS' lien could attach. See, U.S. v. Cache Valley Bank, 866 F.2d 1242, 1244 (10th Cir.1989); U.S. v. Central Bank of Denver, 843 F.2d 1300, 1303 (10th Cir.1988); U.S. v. Wingfield, 822 F.2d 1466, 1472 (10th Cir.1987); cert dismissed sub nom Boulder County, Colo. v. U.S., 486 U.S. 1019, 108 S.Ct. 1762, 100 L.Ed.2d 222 (1988); Aquilino v. U.S., 363 U.S. 509, 512, 80 S.Ct. 1277, 1280, 4 L.Ed.2d 1365 (1960). Since the Internal Revenue Code creates no property rights but merely attaches federally defined consequences to rights created under state law, we must examine Colorado law. See, e.g. Wingfield, supra at 1472; U.S. v. Nat'l Bank of Commerce, 472 U.S. 713, 722, 727, 105 S.Ct. 2919, 2925, 2928, 86 L.Ed.2d 565 (1985); Aquilino, supra 363 U.S. at 513, 80 S.Ct. at 1280.

In Colorado, when funds are deposited into a general account, title to the funds passes to the bank.⁴ Jefferson Bank & Trust v. U.S., 894 F.2d 1241, 1243 (10th Cir.1990) (Jefferson Bank & Trust II); Glenn Justice Mortgage Co., Inc. v. First Nat'l Bank of Fort Collins, 592 F.2d 567, 569 (10th Cir.1979); Isenhart v. Monty, 161 Colo. 589, 592, 423 P.2d 836, 838 (1967) (funds became part of the bank's general assets); Cox v. Metropolitan State Bank, Inc., 138 Colo. 576, 584, 336 P.2d 742, 747 (1959) (ownership of funds is transferred to the bank); Boettcher v. Colo. Nat'l Bank, 15 Colo. 16, 21, 24 P. 582, 584 (1890), overruled on other grounds, 138 Colo. 576, 336 P.2d 742 (1959) (same).

The relationship that is created between the bank and the depositor is generally described as debtor-creditor. Jefferson Bank & Trust II, supra at 1243-1244; Central Bank of Denver, supra at 1304; Isenhart, supra 161 Colo. at 592, 423 P.2d at 838; Rivera v. Central Bank & Trust Co., 155 Colo. 383, 385, 395 P.2d 11, 13 (1964); Cox, supra 138 Colo. at 584, 336 P.2d at 747; American Nat'l Bank of Denver v. First Nat'l Bank of Denver, 130 Colo. 557, 562, 277 P.2d 951, 954 (1954); Boettcher, supra 15 Colo. at 21-22, 24 P. at 584. Accord, Anderson Nat'l Bank v. Luckett, 321 U.S. 233, 242, 64 S.Ct. 599, 604, 88 L.Ed. 692 (1944). In this relationship the depositor retains a right to withdraw funds, which right is held to be a chose in action. Jefferson Bank & Trust II, supra at 1244; Boettcher, supra 15 Colo. at 22, 24 P. at 584 (depositor retains a chose in action not the specific money or a right to any specific money which was deposited). The incidents of ownership of a chose in action are the rights or privileges to deal with it as one may deal with his own property. In re Hamilton's Estate, 113 Colo. 141, 148, 154 P.2d 1008, 1011 (1945).

A chose in action constitutes property or rights to property within the meaning of the Internal Revenue Code. 26 U.S.C. §§ 6321, 6331(a).⁵ Jefferson Bank & Trust II, supra at 1244; Central Bank of Denver, supra at 1304; Nat'l Bank of Commerce, supra 472 U.S. at 721, 105 S.Ct. at 2925; Hamilton's Estate, supra 113 Colo. at 148, 154 P.2d at 1011. Congress, by using the broad term "all property and rights to property," revealed that it meant to reach every interest in property that a taxpayer might have. Nat'l Bank of Commerce, supra 472 U.S. at 719-720, 105 S.Ct. at 2924; Glass City Bank of Jeanette, Pa. v. U.S., 326 U.S. 265, 267, 66 S.Ct. 108, 110, 90 L.Ed. 56 (1945) ("stronger language could hardly have been selected to reveal a purpose to assure the collection of taxes.").

Under the Internal Revenue Code, a federal lien is created at the time unpaid taxes are assessed. The lien attaches⁶ to all property and rights to property held by the taxpayer when the taxpayer refuses or neglects to pay the taxes after the IRS demands such payment. 26 U.S.C. §§ 6321, 6322.⁷Jefferson Bank & Trust II, supra at 1243; Cache Valley Bank, supra at 1244; Nat'l Bank of Commerce, supra 472 U.S. at 719, 105 S.Ct. at 2924; U.S. v. Pioneer American Insurance Co., 374 U.S. 84, 88, 83 S.Ct. 1651, 1654, 10 L.Ed.2d 770 (1963); U.S. v. City of New Britain, Conn., 347 U.S. 81, 83, 74 S.Ct. 367, 369, 98 L.Ed. 520 (1954).⁸ Since a chose in action is property within the meaning of the Internal Revenue Code, the August 1988 assessment created a lien on the Accounts.

Once it has been determined that a tax lien has attached to a state-created interest, we enter the province of federal law. Central Bank of Denver, supra at 1304; Wingfield, supra at 1472; Nat'l Bank of Commerce, supra 472 U.S. at 722-723, 105 S.Ct. at 2925; U.S. v. Rodgers, 461 U.S. 677, 683, 103 S.Ct. 2132, 2137, 76 L.Ed.2d 236 (1983); Pioneer American Insurance, supra 374 U.S. at 88, 83 S.Ct. at 1655; Aquilino, supra 363 U.S. at 513-514, 80 S.Ct. at 1280-1281. This approach maintains the proper balance between the legitimate and traditional interests of a state in creating and defining the property interests of its citizens and the necessity of uniform administration and enforcement of federal revenue statutes. Aquilino, supra 363 U.S. at 514, 80 S.Ct. at 1281; Bull v. U.S., 295 U.S. 247, 259, 55 S.Ct. 695, 699, 79 L.Ed. 1421 (1935) ("taxes are the lifeblood of government and their prompt and certain availability an imperious need."). The effect of a tax lien is that a third-party holds property of the taxpayer, or a property interest in the taxpayer, subject to the tax lien unless the third-party has a prior lien or comes within one of the exceptions in 26 U.S.C. § 6323. Cache Valley Bank, supra at 1244.

B. Does World Savings have a superior interest in the property?

World Savings asserts that it had a prior perfected security interest in the Accounts as of May 24, 1988, well before the IRS assessment and notice in August 1988. C.R.S. § 4-9-305 (1989 Cum.Supp.). According to the Internal Revenue Code, a security interest exists when (1) the subject property is in existence at the time the IRS' notice is filed, (2) the interest has become protected under local law against subsequent judgment liens arising out of unsecured obligations, and (3) the holder has parted with money or money's worth. 26 U.S.C. § 6323(h)(1). It is undisputed that the savings accounts existed at the time that the IRS filed their notice. It is also apparent that World Savings parted with money. The only remaining issue involves whether or not World Savings' interest had become protected under Colorado law before the IRS' lien attached.

Colorado has adopted the Uniform Commercial Code but its provisions regarding the perfection of security interests do not apply to interests in deposit accounts. C.R.S. §§ 4-9-104(L), 4-9-105(1)(e) (1989 Cum.Supp.). Accord, Jefferson Bank & Trust v. U.S., 684 F.Supp. 1542, 1545 (D.Colo.1988), aff'd 894 F.2d 1241 (10th Cir. 1990) (Jefferson Bank & Trust I); Central Bank of Denver, supra at 1308. Accord, People's Nat'l Bank of Washington v. U.S., 777 F.2d 459 (9th Cir.1985). It becomes necessary, therefore, to look to Colorado common law to determine whether or not World Savings' security interest was perfected.

Under the common law, a creditor may protect its interest in a deposit account by means of a pledge or an assignment. Jefferson Bank & Trust II, supra at 1244; People's Nat'l Bank of Washington, supra at 461; U.S. v. Third Nat'l Bank of Nashville, Tenn., 589 F.Supp. 155, 158 n. 3 (M.D.Tenn.1...