Interfirst Bank Dallas, N.A. v. U.S.

• Decision Date: 26 August 1985
• Docket Number: 84-1571,Nos. 84-1412,s. 84-1412
• Citation: 769 F.2d 299
• Parties: -5891, 85-2 USTC P 9635 INTERFIRST BANK DALLAS, N.A., Plaintiff-Appellant, v. UNITED STATES of America, and Internal Revenue Service, Defendants- Appellees.
• Court: U.S. Court of Appeals — Fifth Circuit

Page 299

769 F.2d 299

56 A.F.T.R.2d 85-5891, 85-2 USTC P 9635

INTERFIRST BANK DALLAS, N.A., Plaintiff-Appellant, v. UNITED STATES of America, and Internal Revenue Service Defendants- Appellees.

Nos. 84-1412, 84-1571.

United States Court of Appeals Fifth Circuit.

Aug. 26, 1985.

Winstead, McGuire, Sechrest & Minick, J. Maxwell Tucker, Jay J. Madrid, Dallas, Tex., for plaintiff-appellant.

William W. Guild, Glenn L. Archer, Jr., Asst. Atty. Gen., Michael L. Paup, Richard Farber, Gayle P. Miller, Tax Div., Dept. of Justice, Dallas, Tex., for defendants-appellees.

Appeals from the United States District Court for the Northern District of Texas.

Before GOLDBERG, POLITZ and WILLIAMS, Circuit Judges.

GOLDBERG, Circuit Judge:

This case requires us to apply the hoary and oft-criticized doctrine of sovereign immunity. On November 4, 1982, Interfirst Bank Dallas filed suit against the United States and the Internal Revenue Service alleging that the IRS, in collecting delinquent taxes from the Condor Drilling Company, wrongfully levied upon property in which Interfirst had a perfected security interest. After severing part of Interfirst's claim, the district court dismissed the remaining portion of the claim on the ground that sovereign immunity applied. Because we agree that the government is immune from suit, we affirm.

I

On April 8, 1981, Interfirst Bank Dallas entered into an agreement with the Condor Holding Company and its wholly-owned subsidiaries ("the Condor Group") under which Interfirst agreed to loan the Condor Group $9,000,000. The loan was secured, in part, by the equipment, drilling rigs, and accounts receivable of the Condor Drilling Company ("Condor"), a member of the Condor Group engaged in the oil and gas drilling business. Interfirst claims that this security interest was perfected by the filing of financing statements with the Texas Secretary of State on April 13, 1981. ¹

In December 1981, the Condor Group defaulted on its initial installment payment to Interfirst of principal and interest. Interfirst gave notice of default on January 29, 1982. By coincidence, on the same day the IRS assessed unpaid employment and withholding taxes against the Condor Drilling Company in the amount of $769,868. According to Interfirst, certain directors and officers of Condor faced the spectre of individual liability for the delinquent taxes, pursuant to 26 U.S.C. Sec. 6672 (1982).

On February 11, 1982, Condor's drilling equipment was liquidated at auction to pay its obligations to Interfirst. Immediately following the auction, however, the IRS served a "Notice of Levy" on the auctioneers to compel payment of Condor's tax assessment, and the auctioneers later surrendered the auction proceeds to the IRS. The IRS also requested that Condor surrender its accounts receivable, including several receivables due from Post Petroleum worth $240,000, and threatened to file a tax lien if the accounts were not surrendered. In response to this request, Condor paid the proceeds of the Post Petroleum receivables to the IRS by endorsing over three cashier's checks from Post; $70,000 was surrendered on March 1, 1982, and $170,000 on March 4.

In the meantime, Interfirst was blissfully unaware of the IRS's collection activities. On February 26, 1982, the Bank served notice on Condor of its intention to foreclose on all collateral, including Condor's accounts receivable from Post Petroleum. The notice indicated that foreclosure was to occur on March 9, 1982. Despite this notice, Condor failed to inform Interfirst that it was surrendering its Post accounts receivable to the IRS and Interfirst did not consent to this transfer.

On March 9, 1982, Condor commenced Chapter 11 bankruptcy proceedings. Interfirst alleges that its claims against Condor exceed the value of Condor's collateral by more than $6,000,000, and that this deficiency remains unpaid.

Interfirst brought suit against the government on November 4, 1982, alleging common law conversion and wrongful levy, 26 U.S.C. Sec. 7426, and claiming damages of $438,466. $198,466 of Interfirst's claim was for the proceeds of the auction of Condor's drilling equipment; the remaining $240,000 was for the accounts receivable from Post Petroleum. In a memorandum opinion, the district court granted the government's motion to dismiss the claims relating to the accounts receivable on the ground of sovereign immunity. After severing the claim relating to the auction proceeds, ² the court entered final judgment in favor of the government on the accounts receivable claim. In these consolidated appeals, Interfirst challenges both the district court's non-final order dismissing the accounts receivable claim as well as the resulting final judgment on that claim. ³

II

Decried as irrational and immoral by some, see, e.g., Muskopf v. Corning Hospital District, 55 Cal.2d 211, 11 Cal.Rptr. 89, 359 P.2d 457 (1961) ("an anachronism without rational basis that has existed only by virtue of inertia"), criticized on historical grounds by others, see Borchard, Government Liability in Tort, 34 Yale L.J. 1, 2-4 (1924), recognized by all to have little doctrinal coherence, the doctrine of sovereign immunity has nonetheless retained the endorsement of the two institutions that matter--the Supreme Court and Congress. The origins of the doctrine in English law are obscure, ⁴ and its importation to the United States unreasoned. ⁵ Borchard, supra, at 4. However, since its adoption in Cohens v. Virginia, 19 U.S. (6 Wheat.) 264, 411-12, 5 L.Ed. 257 (1821), and Hill v. United States, 50 U.S. (9 How.) 386, 389, 13 L.Ed. 185 (1850), the doctrine, though occasionally criticized, ⁶ has been repeatedly upheld by the Supreme Court, ⁷ and though limited by Congress, has never been waived generally. Therefore, in reviewing suits against the federal government, we must determine initially whether one of the enumerated waivers of sovereign immunity applies. If not, the government is immune from suit and we lack subject matter jurisdiction. United States v. Mitchell, 445 U.S. 535, 538, 100 S.Ct. 1349, 1351, 63 L.Ed.2d 607 (1980); United States v. Sherwood, 312 U.S. 584, 586-88, 61 S.Ct. 767, 770, 85 L.Ed. 1058 (1941).

In the present case, Interfirst advances three reasons why sovereign immunity does not apply. First, Interfirst contends that its claim falls within the scope, express or implied, of 26 U.S.C. Sec. 7426, which waives immunity in suits by third-party creditors claiming an interest in property that has been wrongfully levied by the IRS. Second, Interfirst argues that its suit is permitted under the Federal Tort Claims Act ("FTCA"), 28 U.S.C. Secs. 1346(b), 2674. Finally, Interfirst asserts that the doctrine of sovereign immunity, as it relates to this case, is irrational and should be waived on constitutional grounds. We disagree with all three of these arguments and therefore affirm the district court's dismissal.

A

Section 110(a) of the Federal Tax Lien Act of 1966, Pub.L. No. 89-719, 80 Stat. 1142 (codified at 26 U.S.C. Sec. 7426(a)(1)), provides in pertinent part:

If a levy has been made on property ..., any person (other than the person against whom is assessed the tax out of which such levy arose) who claims an interest in or lien on such property and that such property was wrongfully levied upon may bring a civil action against the United States in a district court of the United States. Such action may be brought without regard to whether such property has been surrendered to or sold by the Secretary or his delegate.

Prior to the enactment of this statute, a person claiming an interest in property that was levied upon to satisfy the tax liability of another person had no direct cause of action against the government. 26 U.S.C. Sec. 7426 remedies this situation by allowing creditors to bring actions challenging the lawfulness of governmental levies made against property in which they claim an interest. Interfirst argues that this waiver of sovereign immunity applies in the present case on the ground that the IRS made a levy upon Condor's accounts receivable. ⁸

Clearly, the IRS did make a levy upon the proceeds of the February 11 auction of Condor's drilling equipment; it even filed a specific "Notice of Levy" upon the auctioneers to compel payment. For this reason, the court below properly severed Interfirst's claim for the proceeds of the auction, and permitted suit against the government based on this claim. See supra note 2. The question before us now is whether Section 7426 also applies to Interfirst's claim regarding Condor's accounts receivable. In contrast to the collection by the IRS of the auction proceeds, the IRS filed no "notice of levy" on Condor to collect the accounts receivable. Although the IRS agent did threaten to impose tax liens on Condor if Condor did not deliver the accounts receivable, ultimately Condor surrendered these accounts voluntarily, without any judicial compulsion.

In order for Section 7426 to apply, the IRS must have made an actual "levy" upon the property in question; a threatened levy is insufficient. This is clearly indicated by the legislative history of Section 7426, see H.R.Rep. No. 1884, 89th Cong., 2d Sess. 75 (1966-2 Cum.Bull. 869) ("[I]n no case may [an] action be brought prior to the time that the Secretary of the Treasury or his delegate has in fact levied upon the property."), and the courts have so held, e.g., Nickerson v. United States, 513 F.2d 31, 33 (1st Cir.1975); Hamilton National Bank v. United States, 367 F.Supp. 1110, 1112-13 (E.D.Tenn.1972), aff'd mem., 486 F.2d 1405 (6th Cir.1973); American Pacific Investment Corp. v. Nash, 342 F.Supp. 797, 799 (D.N.J.1972). The question thus is whether the IRS's collection activities constituted a constructive levy.

A "levy" is defined in 26 U.S.C. Sec. 6331(b) as "the power of distraint and seizure by any means"--a definition which connotes compulsion. See also Black's Law Dictionary 816 (5th ed....