State Bank of Fraser v. U.S.

Decision Date29 December 1988
Docket Number87-1789,Nos. 87-1666,s. 87-1666
Citation861 F.2d 954
Parties-389, 88-2 USTC P 9592 The STATE BANK OF FRASER, Plaintiff-Appellee, Cross-Appellant, v. UNITED STATES of America, Defendant-Appellant, Cross-Appellee.
CourtU.S. Court of Appeals — Sixth Circuit

Gary R. Allen, Chief, Appellate Section (argued), Wm. Estabrook, Tax Div., Dept. of Justice, Douglas Coulter, William S. Rose, Jr., Washington, D.C., for plaintiff-appellee, cross-appellant.

G. Timothy Moore (argued), Mt. Clemens, Mich., for defendant-appellant, cross-appellee.

Before MARTIN and NELSON, Circuit Judges, and CONTIE, Senior Circuit judge.

CONTIE, Senior Circuit Judge.

The United States (the Government) appeals and The State Bank of Fraser (the Bank) cross appeals from the judgment of the district court in this wrongful levy action brought under 26 U.S.C. Sec. 7426 1 in which the Government counterclaimed for the purpose of enforcing a levy pursuant to 26 U.S.C. Sec. 6332(c). 2 For the following reasons, we affirm in part and reverse in part the judgment of the district court.

I.

On March 11, 1982, Cannon Electric Company 3 entered into a written security agreement with the Bank. Under the terms of the agreement, the Bank received a security interest in all of Cannon's existing and after acquired assets, including accounts and contract rights. 4 This agreement secured a promissory note executed by Cannon in favor of the Bank. At all relevant times, Cannon owed the Bank the principal sum of not less than $162,541.40.

On November 29, 1982, a delegate of the Secretary of the Treasury made an assessment against Cannon for social security and withheld income taxes due for the third quarter of 1982. Similar assessments were made for the fourth quarter of 1982 and the first two quarters of 1983. Despite notice and demand for payment, Cannon failed or refused to pay the assessed tax liabilities, which amounted to $150,853.11 exclusive of accrued interest and penalties.

On September 26, 1983, the Secretary filed a Notice of Federal Tax Lien with the Michigan Secretary of State with respect to the tax liabilities for the third and fourth quarter of 1982 and the first quarter of 1983. On November 1, 1983, a notice was filed with respect to the liabilities for the second quarter of 1983.

Commencing on September 12, 1983, the Secretary began serving notices of levy on various accounts receivable debtors of Cannon. Pursuant to these notices of levy, the Government received $88,447.24, which it applied to Cannon's outstanding assessments. The only documents served on the accounts receivable debtors were the notices of levy.

On November 4, 1983, the IRS delivered a notice of levy to the Bank on account of the outstanding tax liabilities of Cannon. At that time, Cannon maintained a checking account with the Bank which contained a balance of $21,225.14 and was in default on its loan with the Bank. After receiving the notice of levy, the Bank debited Cannon's account in the amount of $21,225 and offset the amount against the delinquent loan balance owed to the Bank. The Bank did not make any payment with respect to the November 4th notice of levy.

On October 2, 1984, the Bank made a formal written claim to the IRS for return of funds received by the IRS from Cannon's accounts receivable debtors. On October 23, 1984, the IRS denied the Bank's claim.

On April 19, 1985, the Bank filed a complaint seeking return of funds received by the Government pursuant to the notice of levy served on Cannon's accounts receivable debtors. The basis of its complaint was that its security interest in the accounts receivable took priority over the tax lien. On July 10, 1985, the Government answered and pled as one of its defenses that as to certain of the levies the statute of limitations had run. The Government also filed a counterclaim for enforcement of the November 4, 1983 levy. It sought $21,225.14, the amount in Cannon's checking account, and a fifty percent penalty for failure to honor the levy.

The Bank filed a motion for summary judgment and the Government filed a motion for partial summary judgment. A hearing was held, after which the district court made the following orders:

--The Bank was awarded a judgment of $22,957.22 plus interest. This amount represented the funds received by the Government pursuant to notices of levy served on or after January 2, 1984.

--The Government was awarded a judgment of $21,225.14 on its counterclaim for enforcement of the November 4, 1983 levy.

--The Government's claim for the fifty percent penalty was dismissed for the reason that the court found that the Bank had reasonable cause for failing to honor the levy.

--The Bank's claim for return of $34,370.49 which represented the funds received by the Government pursuant to notices of levy served prior to January 2, 1984 was dismissed.

--A trial was ordered to determine when three additional notices of levy were served, since there was a factual dispute over whether they were served prior to January 2, 1984.

The matter was tried on March 5, 1987, after which the court found that the three notices of levy in question were served prior to January 2, 1984 and, therefore, the Bank's action to recover funds received pursuant to these notices was time barred. Judgment for the Government was entered on May 12, 1987.

On July 9, 1987, the Government filed a notice of appeal. It appeals from the judgment for the Bank for return of the funds received by the Government pursuant to notices of levy served after January 2, 1984 and from the dismissal of the claim for the fifty percent penalty. On July 24, 1987, the Bank cross-appealed from the judgment in favor of the Government on its action to enforce the November 4, 1983 levy and from the dismissal of its claim to funds received by the Government pursuant to notices of levy served prior to January 2, 1984.

This case presents five issues. Three issues arise from the Government's action to enforce the November 4, 1983 levy. The Bank argues that since it exercised its right to setoff on Cannon's account after receiving the notice of levy it did not hold property or rights to property belonging to Cannon. The Bank also argues that the Government should have been estopped from asserting its counterclaim for enforcement of the levy. The Government argues that the Bank did not have reasonable cause for failing to honor the levy and, therefore, it should have been assessed the fifty percent penalty. The last two issues arise from the Bank's wrongful levy action. The Government argues that the Bank did not have a priority interest in Cannon's after acquired accounts receivables. Finally, the Bank argues that its wrongful levy action was not time barred.

II.

In United States v. National Bank of Commerce, 472 U.S. 713, 105 S.Ct. 2919, 86 L.Ed.2d 565 (1985), the Supreme Court summarized the statutory scheme whereby the Government collects taxes from recalcitrant taxpayers. Section 6321 of the Code, 26 U.S.C. Sec. 6321, provides: 'If any person liable to pay any tax neglects or refuses to pay the same after demand, the amount ... shall be a lien in favor of the United States upon all property and rights to property, whether real or personal, belonging to such person.' Under the succeeding Sec. 6322, the lien generally arises when an assessment is made, and it continues until the taxpayer's liability 'is satisfied or becomes unenforceable by reason of lapse of time.'

The statutory language 'all property and rights to property,' appearing in Sec. 6321 ..., is broad and reveals on its face that Congress meant to reach every interest in property that a taxpayer might have. 'Stronger language could hardly have been selected to reveal a purpose to assure the collection of taxes.'

A federal tax lien, however, is not self-executing. Affirmative action by the IRS is required to enforce collection of the unpaid taxes. The Internal Revenue Code provides two principal tools for that purpose. The first is the lien-foreclosure suit. Section 7403(a) authorizes the institution of a civil action in federal district court to enforce a lien 'to subject any property, of whatever nature, of the delinquent, or in which he has any right, title, or interest, to the payment of such tax.' Section 7403(b) provides: 'All persons having liens upon or claiming any interest in the property involved in such action shall be made parties thereto.' The suit is a plenary action in which the court 'shall ... adjudicate all matters involved therein and finally determine the merits of all claims to and liens upon the property.' Sec. 7403(c). The second tool is the collection of the unpaid tax by administrative levy. The levy is a provisional remedy and typically 'does not require any judicial intervention.' The governing statute is Sec. 6331(a). It authorizes collection of the tax by levy which, by Sec. 6331(b), 'includes the power of distraint and seizure by any means.'

In the situation where a taxpayer's property is held by another, a notice of levy upon the custodian is customarily served pursuant to Sec. 6332(a). This notice gives the IRS the right to all property levied upon, and creates a custodial relationship between the person holding the property and the IRS so that the property comes into the constructive possession of the Government. If the custodian honors the levy, he is 'discharged from any obligation or liability to the delinquent taxpayer with respect to such property or rights to property arising from such surrender or payment.' Sec. 6332(d). If, on the other hand, the custodian refuses to honor a levy, he incurs liability to the Government for his refusal. Sec. 6332(c)(1).

The administrative levy has been aptly described as a 'provisional remedy.' In contrast to the lien-foreclosure suit, the levy does not determine whether the Government's rights to the seized property are superior...

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