Pittsburgh Nat. Bank v. United States

• Decision Date: 30 September 1980
• Docket Number: Civ. A. No. 78-1409.
• Parties: PITTSBURGH NATIONAL BANK, Plaintiff, v. UNITED STATES of America, Defendant.
• Court: U.S. District Court — Eastern District of Pennsylvania

498 F. Supp. 101

PITTSBURGH NATIONAL BANK, Plaintiff, v. UNITED STATES of America, Defendant.

Civ. A. No. 78-1409.

United States District Court, W. D. Pennsylvania.

September 30, 1980.

Anthony P. Picadio, Donald L. Very, Tucker, Arensberg, Very & Ferguson, Pittsburgh, Pa., for plaintiff.

James R. Hall, Jr., Tax Division, U. S. Dept. of Justice, Washington, D. C., Robert J. Cindrich, U. S. Atty., Pittsburgh, Pa., for defendant.

MEMORANDUM OPINION

DIAMOND, District Judge.

On September 14, 1977, the Internal Revenue Service IRS served notice of levy upon Pittsburgh National Bank PNB to seize monies held in a delinquent taxpayer's bank account. PNB, claiming superior right to the funds, commenced this action for wrongful levy pursuant to 26 U.S.C. § 7426 and 28 U.S.C. § 1340. Presently before the court are cross-motions for summary judgment based on, inter alia, the following stipulated facts.

From March 1975, until September 14, 1977, the taxpayer maintained a checking account with PNB. On March 17, 1975, PNB loaned the taxpayer $10,400, and he signed a ninety-day note which the parties renewed at the end of each ninety-day period until it expired on September 12, 1977. The terms of the note included a provision wherein, as security for his outstanding loan, the taxpayer gave the bank a lien on all monies which he had on deposit with it in an amount equal to the unpaid balance of the indebtedness evidenced by the note.¹ On March 24, 1975, the IRS assessed a tax lien upon all of taxpayer's "property and rights to property." On September 14, 1977, the IRS served notice of levy on PNB, at which time the taxpayer owed the bank a balance of $7,400 on the March 17, 1975, loan and had deposits on hand at PNB of $2,514.97.

PNB contends that under Pennsylvania law the taxpayer's account at the time of the notice of levy on September 14, 1977, constituted neither the property nor the rights to property of the taxpayer and therefore was not subject to levy and seizure by the IRS. To evaluate this theory, we consider the nature of the government's power to assess tax liens and to enforce those liens through levy.

The Internal Revenue Code creates a tax lien upon "all property and rights to property" of a taxpayer who, being "liable to pay any tax neglects or refuses to pay the same after demand ...." 26 U.S.C. § 6321. To enforce this lien, the IRS may levy "only ... property possessed and obligations existing at the time thereof." 26 U.S.C. § 6331(b). The focus, thus, is on the taxpayer's property interests at two distinct times: (1) taxpayer's property at time of assessment for purpose of priority and (2) taxpayer's property at the time of an attempt to enforce a lien through levy.²

Establishing that property held by a third party is in fact the property of the taxpayer obviously is crucial to the government's successful distraint of that property. "Although the tax lien will apply to after-acquired property, the levy will apply only to such property or property rights as actually exists at the time the levy is made." (emphasis supplied) 9 J. Mertens, Law of Federal Income Taxation ¶ 54.52 (1977 revision). Thus, since the government served notice upon a third party, PNB, that it must surrender the taxpayer's property which it held on September 14, 1977, it is necessary to determine whether the taxpayer had an ownership interest in this property on that day. Since the government can at best succeed to the property rights of the taxpayer, obviously the rights of the government vis-a-vis the garnishee bank can rise no higher than those of the taxpayer. St. Louis Trust Co. v. United States, 617 F.2d 1293 (8th Cir. March 11, 1980); Wagner v. United States, 573 F.2d 447 (7th Cir. 1978). Finally, although by federal law, i. e., the Internal Revenue Code, the government succeeds to the taxpayer's property interests against the garnishee, the question of just what property interests the taxpayer in fact possesses vis-a-vis garnishee is determined by state, rather than federal law. Aquilino v. United States, 363 U.S. 509, 80 S.Ct. 1277, 4 L.Ed.2d 1365 (1960).

Under Pennsylvania law, the applicable state law here, a borrower may contract with a lending bank to pledge the borrower's deposits in that bank as security for his outstanding loan. It has long been the law in Pennsylvania that where a demand note exceeds the debtor's deposits in which the bank has been given a security interest, the bank may setoff, at anytime against the note, the debtor's deposits on hand. Duffy v. Building and Loan Association, 325 Pa. 127, 189 A. 307 (1937); Aarons v. Public Service Building and Loan Association, 318 Pa. 113, 178 A. 141 (1935); General Electric Credit Corp. v. Tarr, 457 F.Supp. 935 (W.D.Pa.1978). And the Pennsylvania Supreme Court has held that this right of setoff actually extinquishes the "depositor's rights to draw on the deposit leaving nothing `belonging to' defendant (depositor)." Aarons, supra 318 Pa. at 116, 178 A. at 142. The Pennsylvania Supreme Court has further stated that:

the bank is not required to make book entries charging one account and crediting the other before asserting its right to priority. The Defalcation Act has been in force for more than 200 years, since 1705. The effect of this statute and of the doctrine of set-off is to extinquish by operation of law all but the balance due between the debtor and creditor. Duffy, supra, 325 Pa. at 130-1, 189 A. at 309.

The fact that the bank in the case sub judice chose not to exercise the right of setoff at the time the debt exceeded the security does not prejudice the bank's right of setoff. Tarr, supra at 938. The bank's right of setoff amounts to no more than an open-ended credit arrangement. Monies that the depositor has...