U.S. v. Central Bank of Denver

• Decision Date: 31 March 1988
• Docket Number: No. 84-1050,84-1050
• Citation: 843 F.2d 1300
• Parties: -936, 88-1 USTC P 9256 UNITED STATES of America, Plaintiff-Appellant, v. CENTRAL BANK OF DENVER, Defendant-Appellee.
• Court: U.S. Court of Appeals — Tenth Circuit

Page 1300

843 F.2d 1300

61 A.F.T.R.2d 88-936, 88-1 USTC P 9256

UNITED STATES of America, Plaintiff-Appellant, v. CENTRAL BANK OF DENVER, Defendant-Appellee.

No. 84-1050.

United States Court of Appeals Tenth Circuit.

March 31, 1988.

Murray S. Horwitz, Tax Div., Dept. of Justice, Washington, D.C. (Glenn L. Archer, Jr., Asst. Atty. Gen., Washington, D.C., Michael L. Paup, and Carleton D. Powell, Tax Div., Dept. of Justice, Washington, D.C., were also on the brief, Robert N Miller, U.S. Atty., Denver, Colo., of counsel), for plaintiff-appellant.

Alice L. Parker, Denver, Colo. (Cheryl A. Crandall, Denver, Colo., was also on the brief), for defendant-appellee.

Before HOLLOWAY, Chief Judge, LOGAN, Circuit Judge, and BRETT, District Judge ^*.

HOLLOWAY, Chief Judge.

The plaintiff-appellant, the United States of America, appeals from the district court's memorandum opinion and judgment holding that the appellee, the Central Bank of Denver, properly refused to honor an Internal Revenue Service, levy served upon the bank because it had a perfected security interest in the delinquent taxpayer's bank account. The appellant (the "Government") filed a timely appeal. We reverse.

I

A. The factual background

On March 2, 1979, Mile-Hi Auto Interiors, Inc. ("taxpayer") executed a promissory note to the appellee, Central Bank of Denver ("Central"). The note was secured by a security agreement of the same date. Central filed a financing statement on March 6, 1979 with the Office of the Secretary of the State of Colorado. The statement identified Central as the secured party and the taxpayer as the debtor and covered "all accounts and contract rights now due or hereafter to become due."

Subsequently the Secretary of the Treasury made assessments for unpaid federal income withholding and Federal Insurance Contributions Act taxes, including penalties and interest, against the taxpayer. The amount assessed is $8,878.96 plus accrued but unassessed interest, penalties and statutory additions. The dates of assessment, notice and demand were stated in a stipulation as June 11, September 17, September 24 and November 19, 1979. R. 27. On August 24 and 27, 1979, the Government filed notices of federal tax liens against the taxpayer with the Secretary of State of Colorado and the Clerk and Recorder, City and County of Denver, Colorado for the tax assessment of June 11, 1979, showing a $7,841.26 total. R. 27.

The IRS served via mail a notice of an administrative levy (Treasury Form 668-A) upon Central on October 10, 1979 pursuant to Sec. 6331(a). ¹ The notice stated the taxpayer's outstanding tax liabilities and requested that Central remit to the IRS any funds belonging to the taxpayer. Central received the notice on October 15, 1979.

When the notice was received by Central, the balance in the taxpayer's account was $3,526.91. The stipulation stated that "the balance consisted of funds deposited to said account in payment for certain receivables owed to taxpayer by various customers, and as such represented proceeds of accounts receivable." R. 29. At this time the taxpayer was also in default on its note to Central. The note signed by the taxpayer placed no restrictions on its right to withdraw funds from the bank account. R. 31, 42. This access to the account was used by the taxpayer to make deposits and withdrawals even after it was in default to Central. R. 42, 43.

On October 17 Central made a setoff of $3,521.90 in the taxpayer's bank account, applied it to the amount taxpayer owed the bank ($3,826.74), and debited the account for a $5 processing fee. Central then responded to the notice of levy by stating that "no funds were available" to remit to the IRS. The Government made a final demand on Central for the funds in the taxpayer's account on December 7, 1979, but the bank refused to honor the levy.

B. The procedural history

The Government filed this suit against Central in January 1983. It claimed that Central had in its possession the day after the notice of levy was served, property or rights to property belonging to the delinquent taxpayer amounting to at least $3,526.91; that Central had refused to surrender the funds and was liable under 26 U.S.C. Sec. 6332; ² and judgment for $3,526.91 and interest was sought. Cross-motions for summary judgment were filed.

The district court denied the Government's motion, but granted Central a summary judgment. In so holding, the court concluded that Central's perfected security interest in the taxpayer's account had priority over the federal tax lien and that Central's setoff of the account's funds against the taxpayer's outstanding debt to the bank was not wrongful. R. 75. Additionally, the court found that Central's claim and defense--that the levy was wrongful pursuant to 26 U.S.C. Sec. 7426--was time barred by the terms of Sec. 7426 as it was raised more than nine months from the date of levy. The Government appealed.

The Government contends that the district court erred in not holding Central liable as the lien was properly asserted in accordance with 26 U.S.C. Sec. 6331 and that Central fails to demonstrate any of the defenses which excuse a failure to comply with the federal demand, i.e., that Central was not in possession of the property or rights to property belonging to the delinquent taxpayer or that the property was subject to a prior judicial attachment or execution. See 26 U.S.C. Sec. 6332. The latter defense was not raised in the district court. Since state law determines the nature of the property which is subject to federal tax liens, Central contends that the taxpayer's account does not constitute property under Colorado law and, therefore, is not subject to a lien under Secs. 6321 and 6331. The Government challenges this contention.

The Government urges that, derived from the concomitant principle that federal law determines the consequences ensuing from a tax levy, Central's security interest does not have priority over the federal lien, nor does the security interest or setoff right excuse Central's failure to honor the tax levy. Even if the account is property or the right to property, Central argues that it is entitled to the account funds. This claim is based on Central's allegedly superior security interest and, alternatively, on Central's exercise of its right to setoff as provided by Colorado law. Central also contends that the Government executed a wrongful levy which Central can raise as a defense, not a claim in an action, which is not time barred under Sec. 7426, despite the delay exceeding nine months from the date of the notice of the levy.

II

State law and the nature of property

We must initially determine whether the taxpayer's account constituted property or the right to property as state law determines the nature of property subject to federal tax liens. See United States v. Rodgers, 461 U.S. 677, 683, 103 S.Ct. 2132, 2137, 76 L.Ed.2d 236 (1983); United States v. Bess, 357 U.S. 51, 55, 78 S.Ct. 1054, 1057 2 L.Ed.2d 1135 (1958); United States v. Wingfield, 822 F.2d 1466, 1472, 1473 (10th Cir.1987). Here this determination is of concern as Central argues as its first defense that the taxpayers' account did not constitute property under Colorado law in light of its perfected security interest and the taxpayer's indebtedness exceeding the account balance. The district court reached its holding without an explicit determination on this question. We feel we should decide this question first. We think that here Central's only defense would be that the account in these circumstances did not constitute "property or rights to property" within the meaning of Sec. 6331(a). United States v. National Bank of Commerce, 472 U.S. 713, 722, 105 S.Ct. 2919, 2923, 86 L.Ed.2d 565 (1985). Then, once a court rules that property or the rights to it exist under state law, the consequences are governed by federal law. Aquilino v. United States, 363 U.S. 509, 513, 514, 80 S.Ct. 1277, 1280, 1281, 4 L.Ed.2d 1365 (1960); Wingfield, 822 F.2d at 1473; United States v. Hunt, 513 F.2d 129, 133 (10th Cir.1975). When a taxpayer neglects or refuses to pay any tax after demand, the amount "shall be a lien in favor of the United States upon all property and rights to property" belonging to the person liable to pay the tax. 26 U.S.C. Sec. 6321.

Central argues that under Colorado law the ownership of the money in the bank account was transferred to Central when the taxpayer deposited the funds. Consequently the IRS through its levy could not reach or succeed to the taxpayer's property or the right to property. Central relies upon the general principle, established in Colorado law, that "the simple deposit of money on account is a general deposit, ³ and transfers the ownership of the money to the bank." Boettcher v. Colorado National Bank, 15 Colo. 16, 24 P. 582, 584 (1890), overruled on other grounds, 138 Colo. 576, 336 P.2d 742, 749 (1959). The bank and its customer enter into a debtor and creditor relationship which is generally recognized at common law. Id. 24 P. at 584; accord, Rivera v. Central Bank and Trust Co., 155 Colo. 383, 395 P.2d 11, 13 (1964); Cox v. Metropolitan State Bank Inc., 138 Colo. 576, 336 P.2d 742, 747 (1959); American National Bank of Denver v. First National Bank of Denver, 130 Colo. 557, 277 P.2d 951, 954 (1954), Sherberg v. First National Bank of Englewood, 122 Colo. 407, 222 P.2d 782, 785 (1950). As established by the Colorado Supreme Court in Boettcher, "Thereafter the depositor has only a debt owing him from the bank--a chose in action,--not any specific money, or a right to any specific money." Boettcher, 24 P. at 584 (emphasis added). Central argues the ownership element while ignoring the importance of the chose in action which is a necessary element of the relationship.

The chose in action or claim against the bank retained by the depositor is a form of property recognized under Colorado law. In determining the scope of the power...