Law Offices of Jonathan Stein v. Cadle Co.

Decision Date07 April 1999
Docket NumberNo. CV 97-5551 SVW (JGX).,CV 97-5551 SVW (JGX).
Citation87 F.Supp.2d 1015
CourtU.S. District Court — Central District of California
PartiesLAW OFFICES OF JONATHAN STEIN, Plaintiff, v. CADLE CO., et al., Defendants.

Jonathan A. Stein, Santa Monica, pro se.

James W. Hodges, Marren J. Roy, Hinchy Witte Wod Anderson & Hodges, San Diego, CA, for Cadle Co.

Ronald J. Mandell, Moss Levitt & Mandell, Los Angeles, CA, for Harbro Inc.

Donald W. Schmidt, Donald W. Schmidt Law Offices, San Diego, CA, for Bruce Wilbanks.

Edward M. Robbins, Jr., Darwin Thomas, AUSA Office of US Atty., Los Angeles, CA, for U.S.

David E. Wulfsberg, David E. Wulfsberg Law offices, Long Beach, CA, for Fuerte Corp.


WILSON, District Judge.

I. Introduction

This case began when Plaintiff filed his complaint in interpleader in Los Angeles Superior Court on June 26, 1997. The United States removed the action to this Court. The complaint seeks a declaration of the rights of the various claimants to the interpled funds, which stem from the May 1997 settlement in the Indian Child case.1 While Plaintiff actually divided the fund into two parts, for present purposes, Plaintiff received all of the funds, slightly over $300,000, based on the claims of a corporation named Quicksilver in the Indian Child case.

The remaining claimants to the interpled fund consist of creditors of Quicksilver.2 These claimants include Cadle Company, Quicksilver Manufacturing, Inc., Har-Bro, Inc., Bruce Wilbanks, the United States, and Randall Welty.3 Most of these claimants are creditors of Quicksilver; some claim to have lien interests in the proceeds from the Indian Child case. The United States and Randall Welty claim an interest in the fund from the Indian Child case through their judgment lien notices filed in that case.

Briefly, the United States argues that it obtained a judgment against Quicksilver from a Court in this District in the amount of slightly over $370,000 — the payment of which would exhaust the interpled fund. That judgment arose from Quicksilver's failure to pay a levy against the salary of its President, Lyle Byrum's, after Byrum's failure to pay taxes. The United States now moves for summary judgment based on its asserted priority under federal law against the claims of the other creditors.4

II. Analysis
A. Summary Judgment Standard

The Court may grant summary judgment when the record reveals no genuine issue of material fact and the moving party is entitled to judgment as a matter of law. Celotex Corp. v. Catrett, 477 U.S. 317, 322, 106 S.Ct. 2548, 91 L.Ed.2d 265 (1986). The burden is on the moving party to establish both the nonexistence of a genuine issue of fact and that it is entitled to judgment. Id. The burden then shifts to the non-moving party to "make a showing sufficient to establish the existence of an element essential to that party's case, and on which that party will bear the burden of proof at trial." Id. at 323-24. The nonmoving party cannot rest on the allegations and denials in the pleadings, but must set forth specific facts establishing an issue for trial. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248, 106 S.Ct. 2505, 91 L.Ed.2d 202 (1986).

B. The Federal Insolvency Statute

If an entity does not possess enough assets to pay all of its creditors, the creditors receive payment in order of priority. The common law contains the priority principle that "`the first in time is the first in right.'" United States v. McDermott, 507 U.S. 447, 449, 113 S.Ct. 1526, 123 L.Ed.2d 128 (1993) (quoting United States v. City of New Britain, 347 U.S. 81, 85, 74 S.Ct. 367, 98 L.Ed. 520 (1954)). The federal government has passed a number of laws which supercede the default rule that first in time is first in right. One example, which has existed in some form "for nearly all of our nation's history," United States v. Golden Acres, Inc., 684 F.Supp. 96, 101 (D.Del.1988), the Federal Insolvency Statute, provides, in part, that

(a)(1) A claim of the United States Government shall be paid first when —

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


(iii) an act of bankruptcy is committed

31 U.S.C. § 3713.

In other words, if an entity is (1) insolvent and (2) it commits an "act of bankruptcy" then the entity must pay the government's claim first.5 The United States contends that it deserves the entire interpled fund based on its prior judgment against Quicksilver, for which the United States obtained a lien in the Indian Child action, because Quicksilver was insolvent and committed acts of bankruptcy. The United States argues that the declarations of Lyle Byrum, Quicksilver's former president, and Jonathan Stein, establish Quicksilver's insolvency in 1995. The United States then explains that either (1) assignments, to other creditors, of Quicksilver's chose of action in the Indian Child case or (2) Quicksilver's failure to discharge a lien within thirty days after a creditor obtained such a lien through legal proceedings while Quicksilver was insolvent amount to acts of bankruptcy.

The United States correctly describes the application of the Federal Insolvency Statute. If Quicksilver was insolvent at the time it committed an act of bankruptcy, then Quicksilver must pay the claim of the United States first, in this case by means of the interpled fund. Thus the Court must make two determinations: (1) was Quicksilver insolvent and (2) did it commit an act of bankruptcy? Because "the purpose of § 3713 is to `secure adequate revenue to satisfy burdens on the federal treasury, the provision is given a liberal interpretation in order to effectuate its purpose.'" Federal Trade Comm'n v. Crittenden, 823 F.Supp. 705, 707 (C.D.Cal. 1993) (quoting United States v. Cole, 733 F.2d 651, 654 (9th Cir.1984)).


For purposes of the Federal Insolvency Statute, a debtor falls into insolvency when its liabilities exceed its assets. See Lakeshore Apartments, Inc. v. United States, 351 F.2d 349, 353 (9th Cir.1965); Golden Acres, 684 F.Supp. at 101; United States v. Dyna-Tex, Inc., 372 F.Supp. 280, 281 (E.D.Tenn.1973). The Court cannot conclude that Quicksilver was insolvent at the relevant time because the other claimants have raised a factual dispute. The United States claims that Quicksilver had ceased operating and had significant liability versus very few assets. The United States offers the declaration of Lyle Byrum, Quicksilver's former president, which reports Quicksilver's insolvency. The other claimants counter that Byrum's declaration suffers from bias because he benefits if Quicksilver pays the government. The other claimants also argue that Quicksilver had an revenue stream at the relevant time and that Quicksilver also owns a valuable license to build a certain kind of ultra-light aircraft. The Court cannot conclude, for the purpose of summary judgment, that Quicksilver was insolvent at the relevant time. Accordingly, the Court will conduct an evidentiary hearing on this issue.

Act of Bankruptcy6

The Ninth Circuit has explained that an "`act of bankruptcy' is general and for the sole purpose of describing one of the three ways in which a debtor's insolvency may be manifested." United States v. Whitney, 654 F.2d 607, 610 (9th Cir. 1981). The term "act of bankruptcy" in the Federal Insolvency Statute refers to the definition contained in the now superceded Bankruptcy Act of 1898 (formerly 11 U.S.C. § 21(a)). See Jonathan's Landing, Inc. v. Townsend, 960 F.2d 1538, 1543 (11th Cir.1992); Golden Acres, 684 F.Supp. at 101. That Act included, as part of its definition of bankruptcy, having "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." 11 U.S.C. § 21(a)(3) (1976) (repealed 1978). Courts have considered debtors' failures to discharge such liens acts of bankruptcy under the Federal Insolvency Statute. See Jonathan's Landing, 960 F.2d at 1542-45 (outlining the principle but rejecting the application of the Federal Insolvency Statute after reasoning that the failure to discharge the lien that created the insolvency could not constitute an act of bankruptcy during insolvency); Dyna-Tex, Inc., 372 F.Supp. at 281 (utilizing statutory definition for "act of bankruptcy" under the Federal Insolvency Statute); Ideco Division of Dresser Industries v. Chance Drilling Co., 309 F.Supp. 305, 307 (S.D.Tex.1968), aff'd 422 F.2d 165 (5th Cir.1970).

The other claimants suggest that the Court cannot apply the Federal Insolvency Statute, but instead should look to the Federal Tax Lien Act, 26 U.S.C. § 6323, to determine the issue of priority.7 The claimants suggest that the Supreme Court decided that the specific provisions of the Tax Lien Act trump the more general requirements of the Insolvency Statute when both provisions would otherwise apply. See United States v. Estate of Romani, 523 U.S. 517, 118 S.Ct. 1478, 140 L.Ed.2d 710 (1998). The Court agrees that the provisions of the Tax Lien Act would trump the Insolvency Statute if the Tax Lien Act applied. Nevertheless, the Court concludes that the Tax Lien Act does not apply to this case. The Tax Lien Act provides that if a person fails to pay his or her taxes after a demand then the amount becomes a lien in favor of the government. 26 U.S.C. § 6321. In this case, the United States does not rely on a tax lien, or the failure to pay taxes owed by Quicksilver.8 Instead, the United States obtained a judgment against Quicksilver for Quicksilver's failure to pay a levy against the wages of Lyle Byrum, Quicksilver's president.9 Thus the judgment does not amount to a tax lien, because it does not rely on taxes owed by Quicksilver. Accordingl...

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