St. Louis Union Trust Co. v. U.S.

CourtUnited States Courts of Appeals. United States Court of Appeals (8th Circuit)
Writing for the CourtBefore LAY; McMILLIAN
Citation617 F.2d 1293
Parties80-1 USTC P 9282 ST. LOUIS UNION TRUST CO., a corporation, as Escrow Agent under Escrow Agreement dated
Decision Date24 July 1970

Page 1293

617 F.2d 1293
80-1 USTC P 9282
ST. LOUIS UNION TRUST CO., a corporation, as Escrow Agent
under Escrow Agreement dated July 24, 1970,
between Andrew L. Stone, United States
of America and St. Louis Union
Trust Co.
Andrew L. Stone, Appellant,
UNITED STATES of America, acting by and through the
Assistant Attorney General in charge of the Civil Division
of the United States Department of Justice, R. C. Voskuil,
District Director of Internal Revenue, and James M. Sanders,
Revenue Officer, both of St. Louis, Missouri, for the
Secretary of Treasury, Barbara Allen Babcock, Appellees.
No. 79-1319.
United States Court of Appeals,
Eighth Circuit.
Submitted Nov. 6, 1979.
Decided March 11, 1980.

Page 1296

Michael I. Saltzman, New York City, for appellant; Gerald F. Hempstead, Susman, Stern, Heifetz, Lurie, Sheehan, Popkin & Shervitz, Clayton, Mo., on brief.

Michael J. Roach, Tax Division, Appellate Section, Dept. of Justice, Washington, D. C., for appellee; M. Carr Ferguson, Asst. Atty. Gen., Gilber E. Andrews, Crombie J. D. Garrett, Attys., Washington, D. C., Robert D. Kingsland, U. S. Atty., St. Louis, Mo., on brief.

Before LAY, Chief Judge, * and BRIGHT and McMILLIAN, Circuit Judges.

McMILLIAN, Circuit Judge.

This is an interpleader action commenced by St. Louis Union Trust Company (the Trust Company) for declaratory and other relief as a consequence of conflicting claims made by the Internal Revenue Service (IRS) and Andrew L. Stone to funds the Trust Company received under an escrow agreement (the Escrow Agreement) to which the Civil Division of the United States Department of Justice (the Civil Division), Stone and the Trust Company were parties. Stone appeals from a district court 1 order granting summary judgment in favor of the United States and requiring the Trust Company to pay the accumulated income as well as all future income from the funds to the IRS. We affirm.

Beginning in about 1963, Stone and Francis N. Rosenblum, through their controlled corporation, Chromcraft Corporation and its successor, Alsco, Inc., perpetrated a multi-million dollar fraud on the United States in connection with certain contracts to supply rocket launchers to the Department of the Navy. In 1968, Stone was convicted on a plea of guilty to criminal charges stemming from his involvement in this fraud. In 1969, the Civil Division brought two separate civil actions arising out of the rocket launcher fraud, 2 one in the United States District Court for the District of Columbia and the other in the Eastern District of Missouri against Stone and Harvard Industries, the corporate successor to Alsco, Inc., alleging violations of the False Claims Act, 31 U.S.C. §§ 231-235, and the Anti-Kickback Act, 41 U.S.C. §§ 51-54. In these actions the United States claimed single damages of over $6,000,000 and double that amount for violation of the False Claims Act.

To ensure payment of any judgment it might ultimately obtain against Stone in the Missouri action, in about February, 1970, the Civil Division, through its attorney Lawrence Lippe, and Stone's attorneys engaged in negotiations on an agreement in lieu of attachment of Stone's property. On July 24, 1970, the Escrow Agreement was entered into by Stone, the Civil Division and the Trust Company. Pursuant to the Escrow Agreement, Stone deposited $2,500,000 par value of short-term bonds and United States Treasury Bills and 21,600 shares of the stock of Concord Control, Inc., representing 100 percent of the outstanding stock of that company, into an escrow account at the Trust Company. Pending resolution of the civil action, the Trust

Page 1297

Company agreed to hold the escrowed securities (the Principal) and to reinvest any proceeds collected. The Trust Company further agreed that it would deposit any dividends and interest (the Income) received on the Principal in Stone's account at the First National Bank in St. Louis.

Stone retained approximately $1,500,000 in property. As to the property not transferred to the escrow account and the Income, Stone was prohibited from making a "sale, transfer or any other disposition," with two exceptions. First, Stone was permitted to dispose of property for "reasonable living expenses" to maintain his standard of living with only the following limitations: he could spend no more than $100,000 per year for legal fees, and he was not permitted to make a gift or charitable contribution in excess of $25,000 to any single person or charity in any calendar year without giving prior notice and securing the consent of the Civil Division. Second, although Stone was permitted to sell, transfer or dispose of his property "for full and valuable consideration," he had to give prior written notice to the Civil Division and secure its prior consent. Stone was required to permit representatives of the Civil Division to inspect books, records and other documents that related to the unescrowed assets "at reasonable periods from time to time, as they may desire."

With respect to the Civil Division the Escrow Agreement provided:

7. The United States agrees that, so long as Stone shall not be in default under any of his agreements hereunder, the Civil Division of the United States Department of Justice will not institute attachment proceedings against the property and assets of Stone, and shall use its best internal efforts to dissuade any other agency of the United States from proceeding by way of attachment or other lien against the property and assets of Stone.

On February 7, 1972, after some newspaper criticisms of the Escrow Agreement, the IRS made assessments on the ground that the ultimate collection of tax was in jeopardy. On February 8, 1972, the IRS filed a notice of lien reflecting unpaid assessments of income taxes due from Stone for the years 1963 through 1967 in the amount of $7,108,861.73 and served a notice of levy on the Trust Company. The revenue officer who served this notice of levy did not demand immediate payment of either the Principal or the Income but instead instructed the Trust Company to retain the Principal and to withhold any further payments of Income to Stone. Since then, the Trust Company has accumulated the Income in a separate account.

In August of 1974, Stone filed a complaint against the IRS, in the United States District Court for the Southern District of New York (the New York Action), seeking to enjoin collection from him under the jeopardy assessment. During the pendency of the New York Action, the IRS made a second levy in the amount of $10,601,053.91 3 against the Principal and Income. On July 30, 1975, a notice of levy was served on the Trust Company, and again oral instructions were given for the Trust Company to continue to hold the Principal and Income. On December 2, 1975, the New York Action was dismissed on the ground that, by virtue of the Anti-Injunction Act, 26 U.S.C. § 7421, the district court lacked subject matter jurisdiction to enjoin the IRS from enforcing a jeopardy assessment. Stone v. United States, 405 F.Supp. 642 (S.D.N.Y.1975), aff'd without opinion, 538 F.2d 314 (2d Cir.), cert. denied, 429 U.S. 921, 97 S.Ct. 317, 50 L.Ed.2d 288 (1976).

On March 9, 1976, the IRS served a third notice of levy in the amount of $11,535,357.40, 4 seizing the Principal and Income held by the Trust Company. A final demand was served on March 11, 1976. At this point, the Trust Company contacted

Page 1298

Stone; and, on March 12, 1976, Stone's attorney demanded by telegram that the Trust Company refuse to honor the levy and threatened legal action against the Trust Company if any funds were turned over to the IRS.

Accordingly, on March 15, 1976, the Trust Company instituted this interpleader action in the Eastern District of Missouri, naming Stone and the United States (as represented by the Assistant Attorney General of the Civil Division, the District Director of the IRS, and the Revenue Officer who served the notice of levy). Before any answer or other pleading had been filed, the IRS released the Principal from the levy on April 22, 1976. In his answer, Stone contended that he was entitled to the Income on the basis of the Escrow Agreement. The United States moved to dismiss the interpleader action and Stone's cross-claim for breach of contract. On March 17, 1977, the district court granted the motion on the ground that it lacked subject matter jurisdiction because there was neither minimal diversity under the federal interpleader statute, 28 U.S.C. § 1335, nor complete diversity or a federal question under Rule 22, Fed.R.Civ.P. St. Louis Union Trust Co. v. Stone, 428 F.Supp. 988 (E.D.Mo.1977).

One month after that decision, by letter dated March 31, 1977, the IRS notified Stone that he and his wife owed additional income tax for the years 1973-75, which was due in substantial part as a result of the inclusion in the Stones' taxable income of the Income held by the Trust Company. They have filed a petition in the United States Tax Court contesting the deficiency, but no decision has yet been rendered.

Stone appealed the dismissal of the interpleader action, and this court reversed and remanded, holding that the district court did have jurisdiction under the interpleader statute. St. Louis Union Trust Co. v. Stone, 570 F.2d 833 (8th Cir. 1978). On remand of the interpleader action, Stone repeatedly attempted to depose Lawrence Lippe, the attorney who represented the Civil Division in the negotiation and preparation of the Escrow Agreement, concerning the parties' intentions. The Civil Division opposed discovery and finally filed a Rule...

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