Montavon v. US, Civ. A. No. 94-265-A.

Decision Date11 October 1994
Docket NumberCiv. A. No. 94-265-A.
Citation864 F. Supp. 519
CourtU.S. District Court — Eastern District of Virginia
PartiesMichael C. MONTAVON, et al., Plaintiffs, v. UNITED STATES of America, Defendant.

Richard A. Lash, Buonassissi, Henning, Campbell & Moffet, David Leo Duff, Law Offices of David L. Duff, PC, Fairfax, VA, for plaintiffs.

Gerard J. Mene, U.S. Dept. of Justice, Tax Div., Washington, DC, Dennis E. Szybala, Asst. U.S. Atty., Alexandria, VA, for defendant.

MEMORANDUM OPINION

ELLIS, District Judge.

This is a contest of liens, an attorney's lien for services rendered in winning an attorney's fee award against the General Services Administration (GSA), versus an IRS lien on the award based on taxes owed by the attorney's client, the recipient of the award. Ordinarily, the IRS tax lien would prevail, as it is the first in time. Congress, however, has set aside the first in time rule for certain attorney's liens, granting them "superpriority" over prior tax liens.1 An exception to superpriority exists when the attorney's lien rests on a judgment rendered against the United States, in which case the United States may avoid paying the judgment by offsetting the amount payable against the tax liability of the attorney's client. 26 U.S.C. § 6323(b)(8). At issue here is whether this exception applies when the IRS acts to offset the judgment and the taxes owed by means of one particular tax collection device, a levy, rather than another, a setoff.

The matter is before the Court on cross motions for summary judgment. The only factual matter in dispute—the terms of plaintiff's agreement with his client concerning his compensation for the fee award litigation—is immaterial unless plaintiff's lien is superior to that of the IRS. Given this, and because the parties have had ample opportunity to address the issues, the matter is now ripe for disposition. For the reasons stated herein, summary judgment is granted for the defendant, the United States.

I

In 1985, Spectrum Leasing Corporation ("Spectrum") had six contract claims against GSA pending before the GSA Board of Contract Appeals ("the Board"). Plaintiff, Michael C. Montavon, is a Virginia attorney who agreed to represent Spectrum on the claims.2 A written fee contract dated June 25, 1985 memorialized this agreement. It provided that Montavon would receive a flat fee of $25,000 plus twenty percent of "all amounts collected as a result of these matters, whether by settlement, hearing, judgment or otherwise." The agreement specified that the contingency fee provision applied only to "the services described in this paragraph," namely the six contract claims pending before the Board. In the event of an appeal of those claims, the agreement stated the parties would "endeavor to reach a new agreement." The agreement also provided that Montavon would bill Spectrum at his normal hourly rates for all services other than the handling of the six contract claims.

From March 1989 to April 1990, while Spectrum was pursuing its GSA claims, the IRS assessed tax deficiencies against Spectrum totalling approximately $280,000. In May 1990, the Board found in Spectrum's favor on the contract claims without determining the amount of GSA's liability. At the Board's direction, Spectrum and GSA began negotiating to settle all claims. Soon after the Board's decision, Montavon commenced an action on behalf of Spectrum for an award of attorneys' fees under the Equal Access to Justice Act, 5 U.S.C. § 504 ("EAJA"). Montavon and Spectrum's officers, Michael Wueste and Linda J. Wueste,3 now disagree about what compensation Montavon was to receive in connection with prosecuting the EAJA claim. Montavon contends that he discussed the matter with the Wuestes prior to instituting the action, and that all agreed he would receive twenty percent of any recovery of legal fees pursuant to the written fee agreement.4 The Wuestes, by contrast, deny that either agreed, orally or in writing, to pay Montavon twenty percent of the EAJA award. Instead, they contend that there was no discussion of Montavon's compensation, and that they reasonably assumed the work would be billed to Spectrum on an hourly basis.

As the contract settlement negotiations and the EAJA litigation progressed, the IRS took steps to prevent disbursement of any funds by GSA to Spectrum. Specifically, the IRS filed its Form 4793, entitled "Request for Offset—Government Contracts," on November 18, 1991. This Form informed GSA of Spectrum's outstanding tax liability, and requested that any disbursements to be made to Spectrum be withheld to satisfy that liability. The form specifically pertains only to Spectrum's six contract claims, and does not mention the EAJA litigation or award.

The Board-directed settlement negotiations ultimately bore fruit. In early 1992, Spectrum and GSA agreed to settle the contract claims for approximately $3.9 million. GSA rejected the IRS request via Form 4793 for offset, determining that prior to the tax periods in question, Spectrum had fully performed the contracts and assigned its claims thereunder to its lender, Fidelity Bank, N.A. Montavon received twenty percent of the settlement amount, $779,156, pursuant to his fee agreement with Spectrum.

In July 1992, the Board awarded Spectrum $185,699 in attorney's fees.5 On September 15, 1992, the IRS sent a notice of levy to GSA. A week later, GSA complied with this notice and issued a check to the IRS in the full amount of Spectrum's fee award.6 Thus, the entire $185,699 was applied in partial satisfaction of the IRS lien against Spectrum.7

Montavon commenced the present action in order to recover one-fifth of the EAJA award, to which he claims entitlement under the 1985 fee contract. Cross motions for summary judgment have been filed. Summary judgment, of course, is inappropriate if a genuine issue of material fact exists. Celotex Corp. v. Catrett, 477 U.S. 317, 323-24, 106 S.Ct. 2548, 2552-53, 91 L.Ed.2d 265 (1986). And the parties do dispute the nature of the fee agreement between Montavon and Spectrum pertaining to the EAJA claim. Montavon argues that he is entitled to receive twenty percent of the EAJA award, or $37,189, under the contingent fee provision of the written fee agreement, or alternatively, under an oral contract with the Wuestes. The IRS, taking Spectrum's position on this issue, argues that Spectrum is obligated to pay Montavon only an amount representing time spent on the EAJA litigation billed at his normal hourly rate.8 Yet, in the final analysis, this disputed factual issue is not material unless Montavon's lien on the EAJA award is superior to the IRS lien. If the IRS lien is superior, then the contract issue is immaterial and the United States is entitled to summary judgment. Analysis thus properly begins with the rules determining the priority of such liens.

II

The United States has a lien under the Internal Revenue Code upon "all property and rights to property" of any person who does not pay taxes due. 26 U.S.C. § 6321. Federal law governs the priority of that lien as against liens created by state law, according to the principle of "first in time is the first in right." United States v. City of New Britain, 347 U.S. 81, 85, 74 S.Ct. 367, 370, 98 L.Ed. 520 (1954); see also Pine Builders, Inc. v. United States, 413 F.Supp. 77, 80 (E.D.Va.1976). A tax lien arises when the tax is assessed. 26 U.S.C. § 6322.

By contrast, an attorney's lien is a creature of state law. Under Virginia law,9 such a lien comes into existence on the making of the contract of employment between the client and attorney,10 but then remains inchoate until judgment or recovery is obtained. See New Britain, 347 U.S. at 84, 74 S.Ct. at 369-70 (lien becomes choate only when "identity of the lienor, the property subject to the lien, and the amount of the lien are established").

In this case, the tax lien sprang into existence when the IRS made a series of assessments against Spectrum between March 1989 and April 1990. This was long before the Board granted the attorney's fee award in July 1992, at which time the attorney's lien arose. Thus, relative to Montavon's lien, the IRS lien was first in time, and would ordinarily enjoy priority.

But the first in time principle is not always controlling. Congress has given "superpriority" to certain categories of liens, including attorneys' liens on judgments, such that they trump a federal tax lien even when they arise and become choate after the tax is assessed. See 26 U.S.C. § 6323(b)(8). Specifically, this statute provides that a federal tax lien will not be valid:

With respect to a judgment or other amount in settlement of a claim or of a cause of action, as against an attorney who, under local law, holds a lien upon or a contract enforceable against such judgment or amount, to the extent of his reasonable compensation for obtaining such judgment or procuring such settlement....

26 U.S.C. § 6323(b)(8). At first glance, this statute appears solely to benefit attorneys. Yet, a closer look reveals that Congress enacted the statute "as a simple matter of good business sense" for the "principal purpose of collecting taxes, not bestowing benefits on attorneys." Hill, Christopher & Phillips, P.C. v. United States Postal Service, 535 F.Supp. 804, 810 (D.D.C.1982). Congress granted attorney's liens superiority to encourage attorneys to bring suits that may benefit the Treasury.11 Without superpriority, an attorney would have less incentive to represent a client subject to an unsatisfied tax lien, for even if the client had a valid claim and eventually recovered a judgment, the IRS would take the entire amount under its lien, leaving the attorney with nothing for her efforts. To avoid this result, Congress enacted the superpriority statute, which allows the attorney to recover her fees from the judgment, after which the IRS takes the remainder of the award. Simply put, Congress recognized that part of...

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