Palmiter v. Action, Inc.

• Decision Date: 09 May 1984
• Docket Number: No. 82-2708,82-2708
• Parties: Ivel PALMITER, Plaintiff-Appellant, v. ACTION, INC., Defendant-Appellee, and Richard S. Schweiker, Secretary of Health and Human Services, and State of Indiana ex rel. Indiana Office of Community Services Administration, Intervening Defendants-Appellees.
• Court: U.S. Court of Appeals — Seventh Circuit

Page 1244

733 F.2d 1244

Ivel PALMITER, Plaintiff-Appellant, v. ACTION, INC., Defendant-Appellee, and Richard S. Schweiker, Secretary of Health and Human

Services, and State of Indiana ex rel. Indiana

Office of Community Services

Administration, Intervening

Defendants-Appellees.

No. 82-2708.

United States Court of Appeals, Seventh Circuit.

Argued Dec. 2, 1983.

Decided May 9, 1984.

James F. Groves, Lee, Groves & Cotter, South Bend, Ind., for plaintiff-appellant.

Barbara J. Marvel, Deputy Atty. Gen., Indianapolis, Ind., James R. Goeser, Asst. Regional Atty., Dept. of Health & Human Services, Chicago, Ill., for defendant-appellee.

Before CUMMINGS, Chief Judge, CUDAHY, Circuit Judge, and MAROVITZ, Senior District Judge. ^*

CUMMINGS, Chief Judge.

This is an appeal from an order of the United States District Court for the Northern District of Indiana dismissing Ivel Palmiter's post-judgment garnishment proceeding against Action, Inc., an Indiana non-profit community service organization substantially funded by direct and indirect federal grants. ¹ Originally Palmiter maintained an Indiana state court personal injury suit against Action after his leg was crushed by a car driven by an Action employee. Because Palmiter recovered only a small part of his $209,000 judgment award from the employee's insurance company, he initiated the garnishment proceeding in Indiana state court seeking to attach twelve Action bank accounts. ² Pursuant to 28 U.S.C. Secs. 1442(a)(1) and 1446(e), the United States, although not named by Palmiter as a party, filed a petition for removal to the district court, alleging that it was the real party in interest to the extent that the proceedings were "directed at garnishing, attaching or freezing the federal Headstart funds" in Action's bank accounts (Pet. for Removal p 5). Subsequently, District Judge Allen Sharp granted the separate motions of the Secretary of the United States Department of Health and Human Services ("HHS") and of the State of Indiana ex rel. the Indiana Office of Community Services Administration ("IOCSA") ³ to intervene as a matter of right pursuant to Fed.R.Civ.P. 24(a). After a hearing on the merits, Judge Sharp dismissed Palmiter's claim because substantially all the funds which Palmiter sought to attach were the property of the federal government and therefore immune from garnishment or attachment. 548 F.Supp. 1166. Judge Sharp also determined that because all the funds were federal, it was irrelevant to the result that Action had commingled its direct and indirect federal grant monies. The United States held an equitable lien on all the funds, since both types of grants were conditioned on the use of the funds for specific statutorily-mandated purposes. This lien gave rise to a trust relationship between Action and the federal government. Any burden on the federal government as lienholder to identify or trace its funds was satisfied because it had "trace[d] those trust funds into an identifiable mass of commingled funds * * * and Action's 12 accounts with the garnishee-defendant Bank so constitute such a specific mass of funds." Id. at 1172. Furthermore, the court noted that Palmiter had not met his burden as a judgment creditor under Indiana law to show affirmatively that the bank accounts he sought to garnish were subject to execution. Id.

On appeal, Palmiter does not challenge the district court's finding that virtually all the funds in Action's bank accounts were federal funds. He also concedes that the $21,074.04 general fund account (supra note 2) which has been identified as containing only federal direct grant Headstart funds is immune from attachment (Br. 12).

With regard to the $193,957.96 in Action's remaining frozen accounts (see supra note 2), Palmiter raises several claims, but they are reducible to only two significant arguments supporting his position that he may attach them. First, he insists that despite their federal origins the funds are now Action's property because Action received them from Indiana pursuant to reimbursement contracts. Second, he continues to raise his district court argument that even if these remaining accounts contain direct grant money, the United States cannot maintain an equitable lien for these funds, because it has failed to meet the burden imposed on the holder of such a lien to identify the specific dollars in the commingled accounts which were received by Action under direct grant programs or owed by Action to those programs.

I

A

It is well settled that federal monies are not subject to garnishment proceedings until they have been paid out for the purposes for which they were appropriated. In Buchanan v. Alexander, 45 U.S. (4 How.) 20, 11 L.Ed. 857, the Supreme Court explained its rationale and stated the rule:

The funds of the government are specifically appropriated to certain national objects, and if such appropriations may be diverted and defeated by State process or otherwise, the functions of the government may be suspended. So long as money remains in the hands of a disbursing officer, it is as much the money of the United States as if it had not been drawn from the treasury. Until paid over by the agency of the government to the person entitled to it, the fund cannot, in any legal sense, be considered a part of his effects.

45 U.S. at 20-21. While it is true that Action is not a federal agency, any contention that this in itself makes the funds in Action's accounts garnishable is meritless.

As the district court noted, Action is "only one link in the bureaucratic chain necessary to move funds from the United States Treasury to local communities" pursuant to the intricate grant system developed by Congress. 548 F.Supp. at 1168. Even though Action is not a federal agency, its management of the federal funds it received nevertheless was governed by pervasive federal legislation and regulations which specified the purposes for which the funds could be used. For instance, its authority to make expenditures under the direct grant program was delineated under Congressional legislation and regulations of the Headstart Program (42 U.S.C. Secs. 9831-9852; 45 C.F.R. Secs. 1301-1305), the Energy Crisis Intervention Program (42 U.S.C. Sec. 2809(a)(5), repealed by 95 Stat. 519; 45 C.F.R. Subparts 1061.30, 1061.31, 1061.51 and Parts 1050, 1060, 1067-1069), and the Community Action Program (42 U.S.C. Sec. 2808(a), repealed by 95 Stat. 519; 45 C.F.R. Parts 1050, 1060, 1067-1069). Similarly, Action's authority to make expenditures under its indirect grant programs was spelled out under the federal legislation establishing the Community Services Block Grant program (42 U.S.C. Secs. 9901-9912) and the Energy Conservation and Production Act (42 U.S.C. Secs. 6851-6892). ⁴

This pervasive federal supervision of Action's expenditures of grant funds makes Action similar to the Mississippi Action for Progress ("MAP"), a Mississippi non-profit organization which received federal funds under the Headstart Program. The Fifth Circuit refused to allow the garnishment of funds in MAP bank accounts to satisfy a state court judgment, deciding that the United States had an equitable, reversionary interest in those funds, at least to the extent that the funds were not paid out "for the narrow purposes specified in the Act and regulations." Henry v. First National Bank of Clarksdale, 595 F.2d 291 309 (5th Cir.1979), certiorari denied sub nom. Claiborne Hardware Co. v. Henry, 444 U.S. 1074, 100 S.Ct. 1020, 62 L.Ed.2d 756. Even where the organization disbursing federal grant funds is not a governmental agency, the principle long ago established in Buchanan applies to prevent garnishment of federal funds not yet "paid over * * * to the person entitled to it." Buchanan v. Alexander, supra, 45 U.S. at 21; see also Johnson v. Johnson, 332 F.Supp. 510 (E.D.Pa.1971). Consequently, the Action funds which Palmiter seeks to garnish are immune to the extent they have not yet been spent for their federally authorized purpose.

B

Palmiter suggests that Buchanan and Henry apply only to prevent his garnishment of the $21,074.04 General Account which contained only Headstart monies. However, it is clear that the Buchanan-Henry principle prevents his satisfying his state court judgment by garnishing any Action funds of federal origin not yet expended for their statutorily-authorized purpose. As judgment creditor, Palmiter had the burden of proving which funds are either not federal or have been finally expended for their statutory purpose. Hopple v. Star City Elevator Co., 140 Ind.App. 561, 224 N.E.2d 321 (1967); see also In re Teltronics, Ltd., 649 F.2d 1236, 1241 (7th Cir.1981). Palmiter has not met his burden as to either of these prongs.

Palmiter claims that the Buchanan-Henry rule does not prevent garnishment of federal funds Action received pursuant to indirect grants administered by the state of Indiana because Action's contract with the state agency specified that Action would receive the funds only in reimbursement for funds actually spent for authorized grant purposes. ⁵ Because under the indirect grant contracts Action was to make expenditures before receiving the grant funds for those expenditures, Palmiter says that the money Action received from the state replaced funds Action previously spent and therefore was being "paid over * * * to [Action as] the person [finally] entitled to it" under Buchanan. He claims that the reimbursement funds "lost their public character" when deposited in Action's accounts and, because the federal government no longer had any legal or equitable interest in it, that money was properly garnishable by Palmiter (Br. 14).

This theory simply is not supported by the record. First, although Palmiter speculates that Indiana would not have paid Action absent proof of actual expenditures, it is undisputed that not all state payments to Action were actually made on a reimbursement-only basis. ⁶ Action's Executive...