U.S. v. Citizens and Southern Nat. Bank
| Decision Date | 15 September 1976 |
| Docket Number | Nos. 75-2549,75-3571,s. 75-2549 |
| Citation | 538 F.2d 1101 |
| Parties | 76-2 USTC P 9665, 20 UCC Rep.Serv. 713 UNITED STATES of America, Plaintiff-Appellant, v. CITIZENS AND SOUTHERN NATIONAL BANK, Defendant-Appellee. UNITED STATES of America, Plaintiff-Appellant, v. CITIZENS AND SOUTHERN NATIONAL BANK, Defendant-Appellee. |
| Court | U.S. Court of Appeals — Fifth Circuit |
Ronald T. Knight, U. S. Atty., John D. Carey, Asst. U. S. Atty., Macon, Ga., R. Jackson B. Smith, Jr., U. S. Atty., Edmund A. Booth, Jr., Asst. U. S. Atty., Augusta, Ga., Scott P. Crampton, Asst. Atty. Gen., Gilbert E. Andrews, Chief, Appellate Section, Elmer J. Kelsey, Murray S. Horwitz, Tax Div., Dept. of Justice, Washington, D. C., for plaintiff-appellant.
William M. Fulcher, Augusta, Ga., E. S. Sell, Jr., Macon, Ga., for defendant-appellee.
Appeals from the United States District Courts for the Southern and Middle Districts of Georgia.
Before WISDOM, GODBOLD and LIVELY, * Circuit Judges.
In these two cases the government appeals from judgments in favor of banks which had refused to pay to the Internal Revenue Service the balances in bank accounts upon which levies were made for federal taxes previously assessed. In each instance the bank contended that the depositor-taxpayer in whose name the account stood had no property or rights to property in the account either at the time of the assessment of taxes or the time of the levy. In each case the government brought suit to enforce the levy, and the district courts, on somewhat different reasoning, entered judgments for the banks (separate offices of Citizens and Southern).
Section 6321 of the Internal Revenue Code of 1954 (26 U.S.C. § 6321) creates a lien in favor of the United States "upon all property and rights to property, whether real or personal, belonging to . . ." a person liable for any tax who has not paid it after demand. Section 6331(a) of the Code (26 U.S.C. § 6331(a)) gives to the Secretary of the Treasury or his delegate authority "to collect such tax . . . by levy upon all property and rights to property . . . belonging to such person or on which there is a lien provided in this chapter for the payment of such tax."
The facts in both cases were stipulated. In No. 2549 the Internal Revenue Service (IRS) made an assessment for unpaid wagering excise taxes against Robert W. Best, a customer of Citizens and Southern National Bank (the bank), on May 2, 1973. At noon on May 3, 1973, when the checking account 1 of Best reflected a credit balance in excess of $57,000, officers of the bank determined that the bank was "insecure" with respect to indebtedness of Best to the bank in excess of $60,000 and determined to take all reasonable steps to protect the bank. At 3:05 p. m., May 3, 1973 an agent of IRS served a notice of levy directing the bank to surrender to the government the balance in the Best account. On May 4, 1973, the bank wrote Best that as of that date it had applied the balance in his account to his outstanding indebtedness to the bank. On May 8, 1973 the bank actually made the transfer entries, charging the Best account and crediting the Best notes.
Prior to the time of both the assessment and the levy Best had executed several promissory notes to the bank, each of which contained the following language:
To secure the payment of this Note and all other indebtedness or liabilities of the undersigned to Holder, however and whenever incurred or evidenced, whether direct or indirect, absolute or contingent, or due or to become due (hereafter with this Note, collectively called "Liabilities"), undersigned transfers and conveys to Holder any and all balances, credits, deposits, accounts, items and monies of the undersigned now or hereafter with the Holder, and the undersigned agrees that the Holder shall have a lien upon, security title to and a security interest in all property of the undersigned of every kind and description now or hereafter in the possession or control of the Holder for any reason, including all dividends and distributions on or other rights in connection therewith.
In the event of nonpayment when due of any amount payable on any Liabilities, or if the Holder shall feel insecure for any reason whatsoever (1) any and all Liabilities may, at the option of Holder and without demand or notice of any kind be declared and thereupon immediately shall become due and payable, (2) the Holder may exercise from time to time any of the rights and remedies available to Holder under the Uniform Commercial Code as in effect at that time in Georgia, or otherwise available to Holder and (3) the Holder may, at any time, without demand or notice of any kind, appropriate and apply toward the payment of such Liabilities, and in such order of application as the Holder may from time to time elect, any balances, credits, deposits, accounts, items and monies of the undersigned with the Holder.
The "personal checking account signature form" which Best signed when the checking account was opened contained the following language:
Should Bank receive any process, summons, order, injunction, execution, distraint, levy, lien, or notice, "Process," which in Bank's opinion affects this deposit, Bank may, at its option and without liability, thereupon refuse to honor orders to pay or withdraw sums from this account and may either hold the balance herein until Process is disposed of to Bank's satisfaction, or pay the balance over to the source of the Process.
To secure any and all indebtedness and liability of (either or both) Depositors to Bank, however and whenever incurred or evidenced, whether direct or indirect, absolute or contingent, due, or to become due, Depositors (jointly and severally) hereby transfer and convey to Bank all balances, credits, deposits, monies and items now or hereafter in this account and Bank is authorized at any time to charge such indebtedness or liability against this account, whether or not the same is then due, and Bank shall not be liable for dishonoring items where the making of such a charge results in there being insufficient funds in this account to honor such items.
The district court held that under Georgia law the relationship of a depositor to a bank is one of creditor and debtor and that funds which are deposited are transformed into a chose in action. The district Court further held that in Georgia a chose in action is property or rights to property within the meaning of 26 U.S.C. § 6321. However, the court entered judgment for the bank upon finding that, under Georgia law, the language quoted herein from the promissory note constituted an assignment of Best's chose in action as collateral security for the debts evidenced by these promissory notes and operated as a valid assignment of all Best's rights as creditor of the Bank, existing by reason of his deposits, until the notes were paid. See Macon National Bank v. Smith, 170 Ga. 332, 338, 153 S.E. 4 (1930). Thus, C & S was not in possession of property or rights to property of the taxpayer at the time it received notice of the tax levy. For this reason, it cannot be held liable under section 6332(c) for its failure to turn over the funds deposited in Best's account.
In a footnote the district court quoted the assignment language from the signature form and stated that it granted "similar contract rights" to the bank.
The taxpayer in No. 3571 is B&G Wrecker (B&G) which borrowed from the bank and opened a checking account on March 20, 1968. The collateral installment note which B&G executed provided that
. . . the Holder may, at any time, without demand or notice of any kind, appropriate and apply toward the payment of such of the Liabilities, and in such order of application, as the Holder may from time to time elect, any balances, credits, deposits, accounts, items or monies of the undersigned with the Holder.
B&G also executed a "deposit agreement" which contained language substantially identical to that quoted from the personal checking account signature form in No. 2549. In addition B&G gave the bank other collateral for the loan.
On June 10, 1969 IRS made an assessment of taxes against B&G and on June 13th a tax lien was filed in the proper recorder's office. On June 23, 1969 a notice of levy with respect to the B&G account was served on the bank. Immediately thereafter the bank made a setoff, crediting the B&G note for the full amount of the balance then carried in its account.
The district court held that under Georgia law when a person makes a general deposit in a bank, title to the money immediately passes to the bank and "the depositor simply has a claim against the Bank, which claim is not considered 'property' or a 'right to property.' " The court further held that since B& G's indebtedness to the bank was greater than the sum on deposit at the time of the levy "B&G had no claim of any nature which it could have successfully asserted against the Bank . . . ." Relying on United States v. Bank of Shelby, 68 F.2d 538 (5th Cir. 1934), the district court stated,
. . . since the Government's lien rights are derivative of those of the depositor, the Government takes subject to the defenses and equities affecting the depositor, so that even if the depositor has a claim, if it is not a claim which could have been maintained successfully by him, the Government is in no better position.
The court reasoned that the bank had both common law and statutory rights of setoff "and further, that this set-off could be made by the Bank either before it had knowledge of the Government's tax lien or after it became aware of it." The court concluded that the bank had "a contractual lien and security interest in the deposit which was created by the instruments taken by the Bank at the time the account was opened by the depositor." The district court found that the quoted language in the deposit agreement was a "specific transfer and conveyance of bank deposits as security...
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