Maxey v. Department of Labor & Industries of State of Wash., 56525-2

• Decision Date: 12 April 1990
• Docket Number: No. 56525-2,56525-2
• Citation: 789 P.2d 75,114 Wn.2d 542
• Court: Washington Supreme Court
• Parties: . MAXEY and Maxey Law Offices, P.S., Plaintiffs, v. DEPARTMENT OF LABOR & INDUSTRIES OF the STATE OF WASHINGTON and Internal Revenue Service, Defendants. Supreme Court of Washington, En Banc

Page 542

114 Wn.2d 542

789 P.2d 75

Certification From the United States District Court for the Eastern District of Washington in William C. MAXEY and Maxey Law Offices, P.S., Plaintiffs, v. DEPARTMENT OF LABOR & INDUSTRIES OF the STATE OF WASHINGTON and Internal Revenue Service, Defendants.

No. 56525-2.

Supreme Court of Washington En Banc.

April 12, 1990.

Kenneth O. Eikenberry, Atty. Gen., Stephen A. Eggerman, Asst. Atty. Gen., Seattle, for defendant State.

John E. Lamp, U.S. Atty., Gary R. Allen, David I. Pincus, Howard M. Soloman, Carroll D. Gray, William S. Estabrook, Asst. U.S. Attys., Spokane, Richard Thornburgh, U.S. Atty. Gen., Shirley D. Peterson, Asst. U.S. Atty. Gen., Washington, D.C., for defendant I.R.S.

BRACHTENBACH, Justice.

This case arises from a question of law certified by the United States District Court for the Eastern District of Washington. RCW 2.60; RAP 16.16. The issue involves competing claims by the State Department of Labor & Industries (Department) and the Internal Revenue Service (IRS). The claims are against a portion of the damage monies recovered in a third party action pursuant to RCW 51.24.030 by an injured worker who was covered by Industrial Insurance, RCW Title 51.

The question certified by Judge Justin L. Quackenbush is:

Where the money from a recovery against third parties pursuant to RCW 51.24.030 is being held separate from the injured worker's other assets, does the Washington State Department of Labor and Industries have an exclusive property interest in its statutory share of the recovery pursuant to RCW 51.24.060, which is not subject to claims by creditors of the injured worker, or is its interest limited to a creditor's interest subject to competing claims for priority?

Order, at 2-3.

We restate the question somewhat differently. As explained in our analysis hereafter, our inquiry is whether the injured worker had a property interest or a right to a property interest in the funds to which an IRS lien may attach. Because the funds at issue either belong to the worker or to the Department (to the extent of its right of reimbursement), by determining whether the worker has a property interest therein, we necessarily determine the nature of the Department's interest.

The worker here involved was injured on the job. He elected to seek damages from third parties as authorized by RCW 51.24.030. The worker received Industrial Insurance compensation and benefits despite the third party action, as authorized by RCW 51.24.040.

The third party action was settled. Distribution of such recovery is controlled by RCW 51.24.060. Under that statute there are four components to the mandatory scheme: (a) costs and reasonable attorney fees are paid proportionately by the worker and the Department; (b) the worker is paid 25 percent of the balance of the recovery; (c) the Department is paid the remaining balance of the recovery to the extent necessary to reimburse the Department for compensation and benefits paid to the worker; and (d) any remaining balance is paid to the worker. RCW 51.24.060(1)(a), (b), (c) and (d). Items (a) and (b) have been paid and are not involved here. Item (c) is at issue distributing items (a) and (b), referred to above, there remained $97,494.48, which is the fund interpleaded by the worker's attorney into federal court. The Department claims $56,863.49 as its reimbursement for compensation and benefits paid to the worker. IRS asserts a federal tax lien of $25,000.84, plus statutory additions. Neither amount is contested herein. A third person claims funds under an assignment from the worker/taxpayer. The amount claimed by the assignee is not clear from the record, but is great enough so that the three claims exceed the interpleaded amount. The assignee concedes the Department's priority over his claim. Apparently there is a priority contest between IRS and the assignee, but no issues related to the third claimant's rights are presented here.

We hold that the worker has no property right or interest in the interpleaded funds to the extent of the amount that the Department is to be reimbursed. The Department has a vested right thereto by virtue of the mandatory distribution which must be made to it under RCW 51.24.060(1)(c).

Hereafter we shall refer to the amount to which the Department and IRS make competing claims, i.e., the Department's reimbursement amount of $56,863.49, as the funds. We emphasize there is no dispute as to items (a) and (b) nor (d) (if any) as described above, see RCW 51.24.060(1)(a), (b), (c) and (d); nor do we express any opinion as to the claim by the third party/assignee in competition with IRS.

We turn to analysis of the parties' contentions. The Department claims an absolute right to reimbursement. IRS contends that the Department only has a statutory lien in competition for priority with the IRS lien.

The IRS lien is created by 26 U.S.C.A. § 6321 (1989):

If any person liable to pay any tax neglects or refuses to pay the same after demand, the amount ... shall be a lien in favor of the United States upon all property and rights to property, whether real or personal, belonging to such person.

(Italics ours.)

The obvious first inquiry is whether the funds represent "property and rights to property" of the worker/taxpayer within the meaning of 26 U.S.C.A. § 6321, supra. The answer is a matter of law to be made according to state law. Aquilino v. United States, 363 U.S. 509, 512-13, 80 S.Ct. 1277, 1279-80, 4 L.Ed.2d 1365 (1960). As a matter of federal law, the IRS stands in the shoes of the taxpayer and can have no greater right to the funds than he has. "Right to recover from the fund [the interpleaded fund] must be based on the strength of a claimant's title and not on the weakness of the title of another claimant." (Footnote omitted.) United States v. Chapman, 281 F.2d 862, 867 (10th Cir.1960).

"Property" is a comprehensive legal concept, but for our purposes it may be defined as the right to possession, the right of use and enjoyment, and the power to dispose of it. Ackerman v. Port of Seattle, 55 Wash.2d 400, 409, 348 P.2d 664 (1960); Great N. Ry. Co. v. Washington Elec. Co., 197 Wash. 627, 649, 86 P.2d 208 (1939).

The rights of an injured worker covered by Industrial Insurance are entirely statutory; all civil causes of action of the injured worker are abolished except as provided in the act. RCW 51.04.010. It follows that all rights of the worker, including any "property rights," must be found in RCW Title 51, specifically RCW 51.24 for our analysis.

RCW 51.24.060 provides a mandatory order of distribution from the recovery from a third party. The statute directs that first there shall be paid costs and reasonable attorney fees. Next, the worker is given an absolute right to 25 percent of the balance of the recovery. This is clearly a property right of the worker. After those two items have been distributed, the Department has an unqualified, unrestricted right to all of the balance to the extent of the amount of compensation and benefits paid and payable. There simply is nothing in the statute to indicate that the worker has any interest of any nature whatsoever in the reimbursement funds. Certainly the worker has no right to possess, use, enjoy or dispose of those funds. The exclusive nature of the Department's right to those funds is proved by the fact that the statute recognizes that there may be money remaining after distribution of the first three items. It provides that any balance remaining, after mandatory distribution to (a) costs and attorney fees, (b) 25 percent to the worker and (c) reimbursement of the Department shall be paid to the injured worker. RCW 51.24.060(1)(d).

Even if the entire recovery comes into the possession of the worker or his attorney, or indeed any person, there is a positive, mandatory duty to distribute in accordance with the statute. RCW 51.24.060(6).

The entire scheme of RCW 51.24 evidences the vital interest of the Department in a recovery from a responsible third party. If the worker elects to pursue the third party claim the Department may intervene "as a party in the action to protect its statutory interest in recovery." (Italics...