Pima Financial Serv. v. Intermountain Home Systems

• Decision Date: 10 March 1992
• Docket Number: Civ. A. No. 88-K-176.
• Parties: PIMA FINANCIAL SERVICE CORPORATION, an Arizona Corporation, Plaintiff, v. INTERMOUNTAIN HOME SYSTEMS, INC., a Colorado corporation, Federal Deposit Insurance Corporation, a corporation organized under the laws of the United States of America, and Department of Revenue, State of Colorado, Defendants.
• Court: U.S. District Court — District of Colorado

786 F. Supp. 1551

PIMA FINANCIAL SERVICE CORPORATION, an Arizona Corporation, Plaintiff, v. INTERMOUNTAIN HOME SYSTEMS, INC., a Colorado corporation, Federal Deposit Insurance Corporation, a corporation organized under the laws of the United States of America, and Department of Revenue, State of Colorado, Defendants.

Civ. A. No. 88-K-176.

United States District Court, D. Colorado.

March 10, 1992.

Mitchell B. Davis, Denver, Colo., for plaintiff.

Antony B. Dyl, Asst. Atty. Gen., Mary D. Metzger, Denver, Colo., for defendants.

ORDER ON MOTIONS FOR SUMMARY JUDGMENT

KANE, Senior District Judge.

This is an interpleader action in which the Federal Deposit Insurance Corporation (FDIC) and the Department of Revenue of the State of Colorado (State) have both asserted an interest in funds held by the stakeholder, the PIMA Financial Service Corporation. The FDIC and the State have filed cross motions for summary judgment, each claiming its interest takes priority. On March 15, 1991, both parties filed a joint stipulation of facts. The FDIC has also moved for leave to submit citations of supplemental authority. That motion is granted.

The overriding issue in this case is whether the FDIC is a federal instrumentality whose action against the State is not barred by the Eleventh Amendment or the Tax Injunction Act and whose claim is entitled to priority under the Federal Insolvency Act. Despite recent legislation comprehensively amending the structure and role of the FDIC, Congress has failed to provide clear guidance on this question. Because of the lacuna Congress has created, I hold that the FDIC's claim against the State for the interplead funds is barred and its lien is not entitled to priority. I grant the State's motion for summary judgment and deny the FDIC's motion for summary judgment.

I. Facts.

Intermountain Home Systems was a wholesale and retail outlet for fireplaces and stoves. Between September and November 1987, Intermountain installed fireplaces for PIMA at two construction sites in Colorado. As a result of this work, PIMA owed Intermountain $17,893.91.

On November 24, 1987, the FDIC, as liquidator of the former South Denver National Bank and a creditor of Intermountain, made demand on PIMA for these funds. The FDIC claimed its right to the funds under a security agreement originally filed on November 19, 1985.

On December 2, 1987, the State served PIMA with a notice of lien and garnishment under distraint for collection of delinquent state taxes, directing PIMA to pay to it any funds PIMA held for the benefit of Intermountain to satisfy partially Intermountain's delinquent sales and income withholding tax liability. On January 14, 1988, the State issued an order to PIMA to pay to it the funds PIMA owed to Intermountain. Unable to determine which party, the FDIC or the State, had priority in these funds, PIMA commenced this interpleader action on February 3, 1988, paying into the registry of the court the disputed $17,893.91. PIMA was dismissed without prejudice from further participation in the action on March 18, 1988.

Both the FDIC and the State now move for summary judgment, each arguing that it has priority to the interplead funds. The FDIC claims priority under the Federal Insolvency Act, 31 U.S.C. § 3713. Alternatively, the FDIC argues that if the Act does not apply, its interest takes priority under the federal common law rule of "first in time, first in right." See United States v. City of New Britain, Conn., 347 U.S. 81, 74 S.Ct. 367, 98 L.Ed. 520 (1954). The State, on the other hand, contends that this action is barred by the Eleventh Amendment and the Tax Injunction Act, 28 U.S.C. § 1341, and that the Federal Insolvency Act does not apply to the FDIC. Even if the action is not barred, it asserts that under United States v. Kimbell Foods, Inc., 440 U.S. 715, 99 S.Ct. 1448, 59 L.Ed.2d 711 (1979), priority must be determined with reference to state law, not federal common law, which would give priority to the State's tax lien. Since the parties have submitted a joint stipulation of facts and there are no disputed factual issues, I must determine as a matter of law which party will prevail. Fed.R.Civ.P. 56(c).

II. Merits.

The fundamental issue in this case is whether the FDIC, acting in its corporate capacity, can be considered an arm of the federal government so as to permit it to circumvent the protection afforded to the State under the Eleventh Amendment and the Tax Injunction Act, and to entitle the FDIC to a superior claim to the interplead funds under the Federal Insolvency Act.¹ Although the court ruled previously that this action is not barred by the Tax Injunction Act because the FDIC is an agency of the government, (see Order, entered June 6, 1988; Order, entered Aug. 8, 1988), a more reasoned analysis of this issue is in order.

The Eleventh Amendment bars suits in federal court against a state by citizens of another state or a foreign state. U.S. Const. amend. XI. It does not bar actions brought by the federal government against a state. Employees of Dept. of Public Health & Welfare, Mo. v. Department of Public Health & Welfare, Mo., 411 U.S. 279, 93 S.Ct. 1614, 36 L.Ed.2d 251 (1973); United States v. Mississippi, 380 U.S. 128, 140, 85 S.Ct. 808, 814, 13 L.Ed.2d 717 (1965); Marquardt Corp. v. Weber County, Utah, 360 F.2d 168 (10th Cir.1966). Similarly, the Tax Injunction Act provides that "the district courts shall not enjoin, suspend or restrain the assessment, levy or collection of any tax under State law where a plain, speedy and efficient remedy may be had in the courts of such State." 28 U.S.C. § 1341. Like the Eleventh Amendment, it is "inapplicable to suits brought by the United States `to protect itself and its instrumentalities from unconstitutional state exactions.'" Moe v. Confederated Salish & Kootenai Tribes, 425 U.S. 463, 470, 96 S.Ct. 1634, 1640, 48 L.Ed.2d 96 (1976) (citing Department of Employment v. United States, 385 U.S. 355, 358, 87 S.Ct. 464, 466, 17 L.Ed.2d 414 (1966)). "In such cases, the government is permitted to pursue its action in federal court, notwithstanding the Tax Injunction Act." FDIC v. State of N.Y., 928 F.2d 56, 58 (2d Cir.1991). Finally, the Federal Insolvency Act provides:

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

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

(i) the debtor without enough property to pay all debts makes a voluntary assignment of property;

(ii) property of the debtor, if absent, is attached; or (iii) an act of bankruptcy is committed; or

(B) the estate of a deceased debtor, in the custody of the executor or administrator, is not enough to pay all debts of the debtor.

31 U.S.C. § 3713(a)(1). This statute likewise benefits only agencies that are part of the federal government. See Small Business Admin. v. McClellan, 364 U.S. 446, 448-50, 81 S.Ct. 191, 194-95, 5 L.Ed.2d 200 (1960) (construing predecessor statute).

To determine whether to apply the federal instrumentality exception to the Eleventh Amendment and the Tax Injunction Act, or the priority rule of the Federal Insolvency Act, the inquiry is essentially the same: I must consider whether the FDIC is an integral part of the federal system so as to benefit from the protection afforded the federal government. I take to heart the Supreme Court's observation that "there is no simple test for ascertaining whether an institution is so closely related to governmental activity" to be considered a federal instrumentality. Department of Employment v. United States, 385 U.S. 355, 358-59, 87 S.Ct. 464, 466-67, 17 L.Ed.2d 414 (1966).

Courts have consistently looked to several factors in making this determination. First, it is clear that the agency's status as a federally-chartered corporation is not dispositive. See Cherry Cotton Mills, Inc. v. United States, 327 U.S. 536, 539, 66 S.Ct. 729, 730, 90 L.Ed. 835 (1946) ("That Congress chose to call the Reconstruction Finance Corporation a corporation does not alter its characteristics so as to make it something other than what it actually is, an agency selected by Government to accomplish purely governmental purposes."); In re Agricultural Business Co., 613 F.2d 783, 785-786 (10th Cir.1980) (irrelevant "whether the United States conducts its governmental business through an unincorporated administrative agency or through a federal corporation created by Act of Congress and wholly owned by the United States"). What is more important is whether the entity performs a governmental or a private function. See, e.g., Department of Employment, 385 U.S. at 358-60, 87 S.Ct. at 466-67; Cherry Cotton Mills, 327 U.S. at 539, 66 S.Ct. at 730; FDIC v. Harrison, 735 F.2d 408, 411 (11th Cir.1984)(distinguishing between proprietary and sovereign governmental functions for purposes of estoppel defense); Federal Land Bank of Wichita v. Board of County Comm'rs, 582 F.Supp. 1507, 1511 (D.Colo.1984) ("where the instrumentality exists primarily to perform governmental functions" it may take advantage of the exception to the Tax Injunction Act).

In assessing whether an agency performs a governmental function, courts have often focused on the impact of the agency's activities on the federal fisc, see, e.g., United States Dept. of Agriculture v. Remund, 330 U.S. 539, 542, 67 S.Ct. 891, 892, 91 L.Ed. 1082 (1947) (Farm Credit Administration, by administering and lending funds from U.S. treasury, an integral part of the federal mechanism for purposes of claim priority); Cherry Cotton Mills, 327 U.S. at 539, 66 S.Ct. at 730 (Reconstruction Finance Corporation's money comes from government, its profits go to the government and its losses are borne by government); cf. United States v. Vermont, 377 U.S. 351, 358, 84 S.Ct. 1267, 1271, 12 L.Ed.2d 370 (1964) (goal of Federal Insolvency Act is to protect the federal revenues); 28 U.S.C. § 451 (defining the term "agency" under Title 28 as "any corporation in which...