Jefferson Bank and Trust v. U.S., 88-1985

• Citation: 894 F.2d 1241
• Decision Date: 05 February 1990
• Docket Number: No. 88-1985,88-1985
• Parties: -662, 90-1 USTC P 50,078 JEFFERSON BANK AND TRUST, Plaintiff-Appellee, v. UNITED STATES of America, Defendant-Appellant.
• Court: U.S. Court of Appeals — Tenth Circuit

Page 1241

894 F.2d 1241

65 A.F.T.R.2d 90-662, 90-1 USTC P 50,078

JEFFERSON BANK AND TRUST, Plaintiff-Appellee, v. UNITED STATES of America, Defendant-Appellant.

No. 88-1985.

United States Court of Appeals, Tenth Circuit.

Feb. 5, 1990.

John A. Lobus, John A. Lobus, P.C., Lakewood, Colo., for plaintiff-appellee.

Robert L. Baker, Tax Div., Dept. of Justice, Washington, D.C. (William S. Rose, Jr., Asst. Atty. Gen., Gary R. Allen, David English Carmack and Stuart E. Horwich, Tax Div., Dept. of Justice, Washington, D.C., and Michael J. Norton, U.S. Atty., Denver, Colo., with him, on the brief), for defendant-appellant.

Before HOLLOWAY and BRORBY, Circuit Judges and BOHANON, ^* District Judge.

BOHANON, Senior District Judge.

This appeal arises after the plaintiff, Jefferson Bank and Trust ("Jefferson Bank") commenced this action for wrongful levy to secure the return of $93,880.06 paid to the defendant through the Internal Revenue Service ("IRS") with interest thereon. The district court granted summary judgment in favor of Jefferson Bank. 684 F.Supp. 1542. We AFFIRM.

I.

The material facts of this case are undisputed.

On October 15, 1984, Jefferson Bank leant $300,000.00 to the taxpayer and executed a promissory note containing the following clause:

Any deposits or other sums at any time credited by or due from the holder to any maker, endorser or guarantor hereof and any securities or other property of the endorser or guarantor hereof in the possession of the holder may at all times be held and treated as collateral security for the payment of this obligation. The holder may apply or set off such deposits or other sums against said liabilities at any time in case of makers, but only with respect to matured liabilities in the case of endorsers or guarantors.

Prior to October 23, 1984, when the taxpayer opened three separate checking accounts with Jefferson Bank, the taxpayer had no accounts with that bank. On May 1, 1986, the maturity date of the taxpayer's obligation to the bank, the promissory note was extended with payment due on October 15, 1986.

On May 12 and October 27, 1986, the IRS made assessments against the taxpayer for unpaid federal employer's taxes. On November 6 and 17, 1986, notices of federal tax liens were duly filed with the Secretary of State of Colorado and were recorded with the Jefferson County Recorder. On December 12, 1986, notice of levy was served upon Jefferson Bank.

The bank monitored the accounts at all times to ensure that there was a balance sufficient to satisfy the delinquent note. The balances in the accounts were never less than the amount owed Jefferson Bank. Thus, the bank took no action to effect an offset against the accounts prior to the IRS's notice of levy.

Jefferson Bank paid $124,839.63 to the IRS pursuant to the IRS's final demand, of which $93,880.06 was paid under protest. Jefferson Bank brought this action for wrongful levy to secure the return of the $93,880.06 plus interest.

II.

The issue is whether the district court erred in holding that Jefferson Bank had a perfected "security interest" in the checking accounts and that such interest was choate at the time the notices of the federal tax liens were filed.

A grant of summary judgment is reviewable de novo by this court. Vibra-Tech Engineers, Inc. v. United States, 787 F.2d 1416, 1418 (10th Cir.1986); Boise City Farmers Co-op. v. Palmer, 780 F.2d 860, 866 (10th Cir.1985). We will affirm when there are no genuine issues of material fact and when the party in whose favor the judgment was rendered is entitled to judgment as a matter of law. United States v. Colorado, 872 F.2d 338, 339 (10th Cir.1989).

III.

When a taxpayer fails or refuses to pay taxes for which he is liable, the United States can impose a tax lien upon "all property and rights to property whether real or personal, belonging to [the taxpayer]." 26 U.S.C. Sec. 6321 (1987). The lien arises "at the time the assessment is made and ... continue[s] until the liability ... is satisfied or becomes unenforceable by reason of lapse of time." Id. at Sec. 6322. This lien is junior to any security interest acquired prior to the time when notice of the tax lien is filed by the IRS. Id. at Sec. 6323(a).

The defendant argues that (1) Jefferson Bank did not have a perfected security interest in the taxpayer's bank accounts and (2) the lien of the bank was not choate at the time the defendant notified Jefferson Bank of the tax lien. ¹

IV.

A judicial remedy is available to a person "who claims an interest in or lien on" property upon which the government wrongfully levied. 26 U.S.C. Sec. 7426(a)(1) (1987). "A levy is wrongful if it 'will or does effectively destroy ... [an] interest in property which is senior to the federal tax lien.' " Trust Company of Columbus v. United States, 735 F.2d 447, 448 (11th Cir.1984) quoting IRC Reg. Sec. 301.7426-1-(b)(iv)(d). A federal tax lien is not valid against a security interest until proper notice of the tax lien has been filed by the Secretary. 26 U.S.C. Sec. 6323(a) (1987). Under federal law, a security interest is defined as:

any interest in property acquired by contract for the purpose of securing payment or performance of an obligation or indemnifying against loss or liability. A security interest exists at the time (A) if, at such time, the property is in existence and the interest has become protected under local law against a subsequent judgment lien arising out of an unsecured obligation, and (B) to the extent that, at such time, the holder has parted with money or money's worth.

Id. at Sec. 6323(h)(1). The United States Supreme Court has interpreted this statute to require that the security interest be protected under state law and that the interest be choate at the time the government filed the tax lien. United States v. Pioneer American Insurance Company, 374 U.S. 84, 88, 83 S.Ct. 1651, 1654-55, 10 L.Ed.2d 770 (1962).

Since it is undisputed that the bank parted with money, the issue is whether the bank's interest in the taxpayer's account was protected at the relevant time by Colorado law "against a subsequent judgment lien arising out of an unsecured obligation," 26 U.S.C. Sec. 6323(h)(1), and whether the bank's interest was choate at the time. Pioneer American Insurance Company, 374 U.S. at 88, 83 S.Ct. at 1654-55.

V.

Under Colorado law, when money is deposited in an account, the title to the funds passes to the bank, a debtor-creditor relationship is created, and the money becomes a chose in action in favor of the depositor. United States v. Central Bank of Denver, 843 F.2d 1300, 1305 (10th Cir.1988); Cox v. Metropolitan State Bank, 138 Colo. 576, 336 P.2d 742 (1959). This chose in action is a property right to which a federal tax lien can attach. Central Bank of Denver, 843 F.2d at 1305.

"Under the common law, a creditor may protect its interest in a deposit account by means of a pledge or an assignment." Peoples National Bank of Washington v. United States, 777 F.2d 459, 461 (9th Cir.1985) cited with approval in Central Bank of Denver, 843 F.2d at 1305. In order for a pledge to be effective, an affirmative act, such as the transfer of an indispensable instrument, must have occurred. Central Bank of Denver, 843 F.2d at 1305. An assignment occurs if title to the property is transferred. Peoples National Bank of Washington, 777 F.2d at 462. Under Colorado law, title to the taxpayer's deposit accounts passed to the bank creating an effective assignment. And this assignment is a security interest protected by the local law. See Central Bank of Denver, 843 F.2d 1300.

The government relies on the court's decision in Peoples National Bank of Washington, 777 F.2d at 459. In that case, the court determined that an assignment had not occurred. The assignment was defeated because the agreement did not explicitly state that "the collateral was 'delivered, pledged, assigned, conveyed and transferred' to...