Jonathan's Landing, Inc. v. Townsend

Decision Date13 May 1992
Docket NumberNo. 90-5533,90-5533
Citation960 F.2d 1538
PartiesJONATHAN'S LANDING, INC. Plaintiff-Appellee, v. Jack TOWNSEND and Nancy Townsend, Defendants-Appellants, Blue Water Truss, Inc., et al., Defendants.
CourtU.S. Court of Appeals — Eleventh Circuit

Domenic L. Massari, III, Kass, Hodges & Massari, Tampa, Fla., for defendants-appellants.

Gary R. Allen, Chief, Teresa T. Milton, Appellate Section, Tax Div., Dept. of Justice, Brian C. Griffin, Elizabeth K. Wickstrom, David I. Pincus, Washington, D.C., for plaintiff-appellee.

Appeal from the United States District Court for the Southern District of Florida.

Before HATCHETT and DUBINA, Circuit Judges, and CLARK, Senior Circuit Judge.

CLARK, Senior Circuit Judge:

This is an action in interpleader filed by plaintiff Jonathan's Landing, Inc. to require the defendants to litigate their claims to funds in the amount of $46,483.97 deposited into the district court's registry. This amount represents the debt owed by Jonathan's Landing to defendant Blue Water Truss, Inc. ("Blue Water") for materials supplied to Jonathan's Landing by the now insolvent corporation. The district court granted summary judgment in favor of the United States. We vacate and remand.

I. FACTS
A. Prior Proceedings.

In its complaint, plaintiff alleged that defendant Blue Water had supplied trusses to Jonathan's Landing for homes developed by plaintiff within the Jonathan's Landing planned unit development. During the months of approximately June and July 1988, defendant Blue Water supplied materials to plaintiff resulting in an indebtedness to Blue Water of $46,483.87.

On August 5, 1988, the defendant United States, through the Department of the Treasury-Internal Revenue Service, served plaintiff Jonathan's Landing with a Notice of Levy seeking all property, rights to property, money, credits and bank deposits then in plaintiff's possession to the credit of, belonging to or owned by Blue Water. On August 30, 1988 the plaintiff received a letter from defendant, Jack Townsend, notifying it that the Townsends held a first lien on all accounts receivable of Blue Water. On September 2, 1988, the Townsends, claiming status as first secured creditors and assignee of lien rights, filed claims of lien in the public records of Palm Beach County, Florida against properties for which Blue Water supplied materials to plaintiff Jonathan's Landing. The liens recorded against the property totalled $61,034.80. On September 14, 1988, the United States served plaintiff with a Final Demand dated September 6, 1988.

Unable to determine whom to pay, Jonathan's Landing filed this interpleader action, depositing the sum of $46,483.87--the amount held and in which all defendants claim an interest--into the court registry.

By order dated March 8, 1989, the district court dismissed the plaintiff from the action and ordered the parties to file claims in interpleader. Defendants Jack and Nancy Townsend and the United States, through the Internal Revenue Service and the Treasury Department, filed interpleader claims. The Townsends claimed priority to the interpled funds pursuant to U.C.C. filing statements and security interests they obtained in Blue Water's receivables on February 1, 1988, financing statements for which were filed on June 6, 1988. The Townsends also alleged a superior claim to the funds by virtue of an assignment of Florida National Bank's perfected security interest in Blue Water's inventory and accounts receivable. According to the U.C.C. assignment form, the bank's original financing statement was filed on January 8, 1987. The United States claimed priority pursuant to the federal insolvency statute, 31 U.S.C. § 3713, as a result of a lien obtained for unpaid federal employment taxes assessed against Blue Water during the period beginning March 7, 1988 and ending July 5, 1988.

The parties filed cross-motions for summary judgment. The government, in its motion, relied exclusively on 31 U.S.C. § 3713(a)(1)(A), which provides:

A claim of the United States Government shall be paid first when--

(A) a person indebted to the Government is insolvent and--

(i) the debtor without enough property to pay all debts makes a voluntary assignment of property,

(ii) the property of the debtor, if absent, is attached; or

(iii) an act of bankruptcy is committed.

(Emphasis added). The government argued that because the requirements of § 3713 were met, the United States had absolute priority over the interpled funds.

B. District Court Judgment.

The district court agreed, and, on May 28, 1990, granted the government's motion for summary judgment and denied the Townsend's cross-motion. In so concluding, the district recognized that the Internal Revenue Code, 26 U.S.C. § 6321 (also referred to as the "Federal Tax Lien Act"), creates a lien in favor of the United States upon "all property or rights to property, whether real or personal, belonging to" any taxpayer who fails to pay any tax after demand. 1 The tax lien arises at the time of assessment 2 and is perfected by filing, which in this case occurred on July 19, 1988. Pursuant to § 6323(a), the "first in time, first in right" priority applies to tax liens. In this case, however, the court held that although the taxpayer, Blue Water, claimed "first in time" priority, the insolvency statute, 31 U.S.C. § 3713(a)(1)(A), controlled because the company was insolvent.

To obtain priority under § 3713, the district court reasoned, the government must establish (1) that Blue Water was insolvent, and (2) that at least one of the three predicate acts in subsections (a)(1)(A)(i) through (A)(iii) had occurred. Here, the court found that no genuine issue of material fact existed as to Blue Water's insolvency. The court stated that while the issue of Blue Water's insolvency prior to August 5, 1988, the date upon which I.R.S. served notice of levy on Blue Water's property, was in dispute, the Townsends agreed that after the I.R.S. levied on the company's property, the company was insolvent. Specifically, the court found that "[a]fter IRS served its Notice of Levy on August 5, 1988 and seized Blue Water's property, the company was insolvent." 3

As to the requisite predicate act, the district court again relied on the government's August 5, 1988 levy on Blue Water's property to find that Blue Water committed an "act of bankruptcy" as required under subsection (a)(1)(A)(iii). In determining the meaning of "act of bankruptcy," which is undefined in the statute, the court surmised that the statute apparently intended to incorporate the definition from the Bankruptcy Act of 1898, 11 U.S.C. § 21(a), which provides in pertinent part:

Acts of bankruptcy by a person shall consist of his having ... (3) suffered or permitted, while insolvent, any creditor to obtain a lien upon any of his property through legal proceedings or distraint and not having vacated or discharged such lien within thirty days from the date thereof or at least five days before the date set for any sale or other disposition of such property.

Reasoning that a "distraint" is a "seizure," the court concluded:

Under the facts of this case, Blue Water's property was seized on August 5, 1988 when the Notice of Levy was served on the company. Section 6331(b), Title 26 of the U.S. Code, explicitly provides that a levy "includes the power of distraint and seizure by any means." Further, a Notice of Levy effected a transfer of legal possession from Blue Water to the United States. See United States v. Whiting Pools, Inc., 426 U.S. 198, 209-212, 210 n. 18, [103 S.Ct. 2309, 2315-2317, 2316 n. 18, 76 L.Ed.2d 515] (1983). Further, it is undisputed that the IRS levy was not removed within thirty days after the Notice was served on August 5. 4

On this basis, the district court determined that when the government levied on August 5, 1988, the taxpayer Blue Water became insolvent and, concurrently, committed an "act of bankruptcy." The absolute priority of the government pursuant to 31 U.S.C. § 3713 having been established, the court granted summary judgment in favor of the United States as a matter of law.

II. DISCUSSION

The sole issue on appeal is whether the district court properly concluded that the requirements of 31 U.S.C. § 3713 were satisfied and the government was entitled to the interpled funds (the debt owed by Jonathan's Landing to the taxpayer Blue Water) based on an absolute priority of its tax lien.

Appeal from a grant of summary judgment as a matter of law is subject to de novo review. 5 After viewing factual inferences most favorably toward the nonmoving party, 6 we then must ask whether the district court correctly has analyzed the substantive law to determine if the grant of summary judgment was proper. 7

A. District Court Improperly Relied on § 3713 in Granting Summary Judgment

As noted above, 26 U.S.C. § 6321 creates a lien in favor of the United States for the amount of tax that an individual neglected to pay upon "all property and rights to property, whether real or personal, belonging to such person." Section 6323(a), however, provides in pertinent part:

The lien imposed by section 6321 shall not be valid as against any ... holder of a security interest ... until notice thereof which meets the requirements of subsection (f) has been filed by the Secretary or his delegate.

The government, in moving for summary judgment, did not challenge the Townsends claimed priority as secured parties without notice of the government's tax lien under § 6323. Instead the government, relying exclusively on 31 U.S.C. § 3713, argued that because Blue Water, as one "indebted to the Government" 8 was insolvent (as defined by that statute), the United States' tax lien, under the terms of that statute, "shall be paid first." 9

While it is clear that taxes due to the United States are "debts" for purposes of § 3713, 10 the threshold question regarding application of the statute in the instant action is whether the...

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