Lowndes Bank v. MLM Corp.

• Decision Date: 26 June 1990
• Docket Number: No. 19186,19186
• Citation: 183 W.Va. 339,395 S.E.2d 762
• Parties: The LOWNDES BANK v. MLM CORPORATION, et al.
• Court: West Virginia Supreme Court

Page 762

395 S.E.2d 762

183 W.Va. 339

The LOWNDES BANK v. MLM CORPORATION, et al.

No. 19186.

Supreme Court of Appeals of West Virginia.

June 26, 1990.

Syllabus by the Court

1. When a creditor is entitled to money previously assigned to it by a taxpayer, which money is in the hands of a third party against whom a federal tax lien has been filed to satisfy the taxpayer's tax obligations, the creditor may bring an action in state court under 28 U.S.C. § 2410 to determine the priority of liens as a suit "to quiet title" to property or as a suit "of interpleader or in the nature of interpleader" if the creditor prays that the third party stakeholder be required to interplead and no challenge is made to the validity of the tax obligation.

2. When the United States makes a general appearance in state court, technical defects relating to the service of process will not result in the dismissal of the suit unless the United States shows prejudice resulting from the improper service.

David English Carmack, Asst. U.S. Atty., Washington, D.C., for U.S.

Thomas W. Kupec, Michael & Kupec, Clarksburg, for Lowndes Bank.

James A. Liotta, Tharp, Liotta & Janes, Fairmont, W.Va., for Country Club Co., Inc., Michael & Patricia Yanero, W.Va. Fuels, Inc.

NEELY, Chief Justice:

This case requires us to engage in a difficult exercise in federal statutory construction. The appellant is the Internal Revenue Service (United States) which maintains that the Circuit Court of Harrison County did not have jurisdiction to entertain a claim by The Lowndes Bank (Bank), the appellee, to certain monies in the hands of a third party that the United States also claimed.

The Lowndes Bank filed a complaint asking the circuit court to determine that Lowndes' claim to certain funds held by the Buckhannon Sales Company, Inc. (BSC), for Richard N. White and Lynna S. White (taxpayers) was entitled to priority over all other claimants named as defendants, including the United States. The United States moved to dismiss on the ground that the circuit court lacked jurisdiction over the United States. By order entered 27 July 1988, the circuit court denied the Government's motion and ordered that the funds held or thereafter acquired by BSC for taxpayers be paid over to The Lowndes Bank.

The Lowndes Bank lent $860,000 to MLM Corporation (MLM) in June, 1980. As security for the corporation's notes, taxpayer Richard N. White, who was president of MLM and his wife, Lynna S. White, gave their personal guarantees and provided deeds of trust to certain properties owned by them in Lewis County, West Virginia. Thereafter, MLM filed for bankruptcy, and on 31 August 1983 taxpayers entered into an agreement with the Bank to pay off the Corporation's note. As security for that agreement, taxpayers assigned to the Bank the right to receive certain note payments and royalties due to taxpayers from Appalantic Corporation. The amounts due from Appalantic Corporation were paid through BSC, which acted as taxpayer's agent.

The Internal Revenue Service filed notice of a federal tax lien against taxpayers in Lewis County, West Virginia in the amount of $861,029.18. On or about 24 January 1986 the Internal Revenue Service served a notice of levy for those taxes on BSC. Thereafter, BSC did not pay over to either the Bank or the United States any of the monies it received for taxpayers from Appalantic Corporation; rather, BSC kept the funds in its possession.

On 11 January 1988, the Bank filed a complaint in the Circuit Court of Harrison County requesting, inter alia, that the court determine "the relative rights, entitlements and interests of the respective parties in and to the funds" held by BSC. The Government moved to dismiss the suit for lack of subject matter jurisdiction, claiming that, once the notice of levy was served, the Bank's exclusive remedy against the United States was a wrongful levy action filed in federal district court under § 7426 of the Internal Revenue Code (26 U.S.C.). The United States contended that 28 U.S.C. § 2410(a)(5), upon which the Bank relied, did not confer jurisdiction over the United States in this case because this was not a suit "in interpleader or in the nature of interpleader." The United States asserted that the Bank was not a stakeholder in possession of property subject to conflicting claims. Alternatively, the United States argued, the suit should be dismissed because the United States had not been served in accordance with 28 U.S.C. § 2410(b). The circuit court denied the government's motion, and ordered that the funds held or thereafter acquired by BSC for taxpayers be paid over to the Bank.

On appeal the United States assigns as error only the circuit court's ruling on its motion to dismiss. The United States does not assert that the circuit court decided the issue before it concerning the priority of liens incorrectly on the merits.

I.

This case hinges on whether the suit by the Bank is proper under 28 U.S.C. § 2410(a) which provides:

Under the conditions prescribed in this section and section 1444 of this title [28 USCS § 1444] for the protection of the United States, the United States may be named a party in any civil action or suit in any district court, or in any State court having jurisdiction of the subject matter--

(1) to quiet title to,

(2) to foreclose a mortgage or other lien upon,

(3) to partition,

(4) to condemn, or

(5) of interpleader or in the nature of interpleader with respect to, real or personal property on which the United States has or claims a mortgage or other lien.

It is § 2410(a)(1) and (5) that are at issue here. If the Bank's action fits either provision, then the United States has waived sovereign immunity as to the suit.

The Bank's action can easily be seen as an action to quiet title to personal property. Federal courts have read 28 U.S.C. § 2410 broadly, particularly when faced with an action to quiet title. Often, the courts have looked beyond the label placed on the action, and seen the substance of "an action to quiet title to real or personal property on which the United States has or claims a mortgage or other lien", to which Congress expressly waived sovereign immunity when it enacted § 2410(a)(1). Lowndes Bank seeks to quiet title to funds held by Buckhannon Sales Co. for Richard and Lynna White, who have assigned their rights to the funds to the Bank, and on which funds the United States claims a tax lien.

In Aqua Bar and Lounge v. United States Dept. of Treasury, 539 F.2d 935 (3d Cir.1976), a taxpayer whose liquor license had been seized and sold by the IRS for nonpayment of taxes brought an action to invalidate the seizure and sale and to enjoin the transfer of the license to the buyer. The court saw the action as an action to quiet title to personal property, allowed under § 2410(a)(1).

The taxpayer in Aqua Bar, like the Lowndes Bank in the case before us, did not attempt to use § 2410 to challenge the underlying tax assessment on which the lien was based. The court distinguished Aqua Bar from cases in which the taxpayers attempted to use § 2410 to circumvent the "pay first, and litigate later" principle of our tax system. 539 F.2d at 938, 939. If the Lowndes Bank were asserting that the taxpayers do not owe the United States the money it says they owe, the suit would be barred. Such is not the case here, so the suit was proper.

In Hudson County Bd. of Chosen Freeholders v. Morales, 581 F.2d 379 (3d Cir.1978), where a county sought a judgment invalidating a federal tax lien and declaring money seized in an arrest forfeited to the county, the Third Circuit applied its Aqua Bar reasoning and saw an action to quiet title to personal property, in that case, money on deposit. The court saw no reason under § 2410 that money on deposit should be treated any differently from other forms of personal property, such as a liquor license. 581 F.2d at 384.

The role of the modern court often involves looking past the form to the substance of the action. In De Rewal v. United States, 572 F.Supp. 1124 (E.D.P.A.1983), trust beneficiaries brought an equity suit in state court to restrain the IRS from obtaining possession of property. On removal, the federal court allowed the case to proceed under 28 U.S.C. § 2410(a)(1), saying, "[a]lthough the plaintiffs do not specifically seek to quiet title to property, the clear intention of their complaint is to remove the cloud of the IRS levy from their title." 572 F.Supp. at 1129.

We see no reason to depart from the sound approach federal courts have taken in this area. The case before us is clearly an action to quiet title to personal property, specifically permitted under 28 U.S.C. § 2410(a)(1).

II.

We also believe the Bank's action could be entertained under 28 U.S.C. § 2410(a)(5) as an action of interpleader. The cases involving actions of interpleader or in the nature of interpleader ¹ under § 2410(a)(5) are few, and contradictory. Moreover, all the cases directly on point come from trial courts.

The two leading cases in this area are Johnson Service Co. v. H.S. Kaiser Co., 324 F.Supp. 745 (N.D.Ill.1971) and Citizen's Bank and Trust Co. of Maryland v. United States, 344 F.Supp. 866 (D.Md.1972). In Johnson, the plaintiff was owed money by a subcontractor who, in turn, was owed money by a general contractor. The subcontractor assigned the plaintiff the money he was to receive from the general contractor but, thereafter, the general contractor became insolvent and his obligations were taken over by an insurance company. The United States served the insurance company with a notice of levy, at which point the plaintiff sued the insurance company, the subcontractor, the contractor, and ultimately the United States in state court to have his lien determined superior. In a removal proceeding, the district court found that the plaintiff's complaint was neither an action in interpleader nor in the nature of interpleader under 28 U.S.C. § 2410(...