United States v. Intermountain Region Concrete Co., NC 84-0030J.

• Decision Date: 27 May 1986
• Docket Number: No. NC 84-0030J.,NC 84-0030J.
• Citation: 636 F. Supp. 280
• Parties: UNITED STATES of America, Plaintiff, v. INTERMOUNTAIN REGION CONCRETE COMPANY, INC., and Cache Valley Bank, Defendants.
• Court: U.S. District Court — District of Utah

636 F. Supp. 280

UNITED STATES of America, Plaintiff, v. INTERMOUNTAIN REGION CONCRETE COMPANY, INC., and Cache Valley Bank, Defendants.

No. NC 84-0030J.

United States District Court, D. Utah, N.D.

May 27, 1986.

Glen Dawson, Asst. U.S. Atty., Salt Lake City, Utah, for plaintiff.

N. George Daines, Logan, Utah, for defendants.

AMENDED AND CORRECTED MEMORANDUM OPINION AND ORDER

JENKINS, Chief Judge.

This action was initially brought to enforce an Internal Revenue Service levy served on the defendant Cache Valley Bank as successor in interest to the North Park Bank of Commerce. The plaintiff filed an amended complaint seeking, under its second cause of action, to foreclose its tax liens against certain property of the defendant Intermountain Region Concrete Company then in possession of the defendant bank. The matter is now before the court on cross-motions for summary judgment on that second cause of action.

A hearing was held on August 21, 1985. Glen Dawson appeared on behalf of the plaintiff, and N. George Daines appeared on behalf of the defendant Cache Valley Bank. After hearing oral arguments, the court took the matter under advisement and requested that the parties furnish supplemental briefs on the narrow issue of the scope of the property to which the federal tax lien allegedly attached in this case. Now, having received and considered those supplemental memoranda and having reviewed the pertinent authorities, the court renders this memorandum opinion and order denying the plaintiff's motion for summary judgment and granting the defendant's cross-motion.

The facts are undisputed. The defendant Intermountain Region Concrete Company ("Intermountain" or "the taxpayer") was involuntarily dissolved on December 31, 1983. Prior to that time, the Internal Revenue Service made a series of tax assessments against Intermountain for unpaid federal employment taxes. The assessments totalled $92,256.70. The first assessment was made on September 1, 1980. The government properly filed notice of a tax lien arising from that assessment on December 17, 1980. Intermountain failed to pay the assessments upon demand.

More than two years before the first tax assessment, on May 5, 1978, the North Park Bank of Commerce, the defendant bank's predecessor in interest, authorized a secured loan to Intermountain for $70,000 (the "secured loan"). A financing statement listing the collateral for the secured loan was duly filed with the Secretary of State for the State of Utah on May 15, 1978. The collateral included equipment, inventory and accounts receivable, as well as the proceeds thereof. On October 8, 1980, and on January 16, 1981, the North Park Bank authorized two more loans of $12,500 and $25,000 (respectively, loans "269 U" and "270 U", or, collectively, the "unsecured loans").¹ The loan documents for the unsecured loans provide that the bank "may offset" against those loans "any bank account or any other amounts owed by Bank in any capacity" to Intermountain. Intermountain maintained both a checking account and a savings account with the defendant bank. The bank claims the right to apply any balance in those accounts toward the balance of the unsecured loans.

At or about 9:20 a.m. on July 27, 1981, the bank received notice of an IRS levy purporting to attach all property of Intermountain then in the bank's possession. The bank's vice president, Michael Gomm, examined Intermountain's accounts and determined that its funds on deposit at that time were negligible.² Accordingly, Mr. Gomm returned the notice of levy to the IRS with the notation, "7/27/81, 9:30 a.m.; MG, NO FUNDS AVAILABLE." Later that same day, deposits totalling $28,416.06 were made to Intermountain's checking account. Those deposits included a check for $27,000 from Interwest Construction Company in payment for services rendered by Intermountain. Understandably alarmed by the notice of levy, the bank on July 28, 1981, offset the entire amount in Intermountain's checking account — $29,614.41 — against loans 269 U and 270 U.³ The IRS now seeks to recover that amount from the bank.

Section 6321 of the Internal Revenue Code (the "IRC") provides in part as follows:

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.

26 U.S.C. § 6321. The federal tax lien, however, is not self-executing. Thus the IRC authorizes the institution of a civil action in district court to enforce a lien by subjecting "any property, of whatsoever nature, of the delinquent, or in which he has any right, title, or interest, to the payment of such tax." 26 U.S.C. § 7403(a). An alternative to the lien foreclosure suit is the administrative levy. See 26 U.S.C. § 6331(a).

In this case, the government understandably does not seek to enforce its levy. Under the IRC, a levy extends "only to property possessed and obligations existent at the time thereof," 26 U.S.C. § 6331(b)). As recited above, the funds on deposit in Intermountain's accounts when the levy was served were negligible. Instead, the government seeks to foreclose its lien against the funds that the bank, subsequent to the levy, offset against the unsecured loans. The government's position is that its lien "attached to the full amount of funds deposited in the taxpayer's account undiminished by any right of setoff by the bank." Plaintiff's Supplemental Memorandum at 2.

The government concedes that a levy is effective only against "amounts in the taxpayer's account which have not previously been removed by actual exercise of the bank's right to setoff." Id. at 5. The government would give a much broader effect, however, to a lien foreclosure action. The government argues that because its lien attached to all "property" or "rights to property" of the taxpayer from and after September 1, 1980, by foreclosing that lien it can recover any such "property" in the bank's possession, regardless of the right of offset. In short, the government seeks to create a continuing levy out of an ordinary lien simply by changing its pleadings.

The government's pleading strategy brings to this court's attention two relatively recent decisions of the United States Supreme Court that discuss and illustrate the differences between a lien foreclosure suit and an administrative levy. In United States v. Rodgers, 461 U.S. 677, 103 S.Ct. 2132, 76 L.Ed.2d 236 (1983), the Court allowed the IRS to foreclose a federal tax lien and force the sale of certain property in which the delinquent taxpayer's spouse had a vested homestead interest. The Court emphasized that section 7403, on its face, applies to "property ... in which the taxpayer has any right, title, or interest," while section 6331, on its face, applies only to "property and rights to property ... belonging to the taxpayer." 461 U.S. at 695-96, 103 S.Ct. at 2143-44. It was beyond question that the taxpayer had some interest in the property, even if it did not "belong to" him. Thus the broader language of the foreclosure provision permitted the sale of the entire property.⁴

In United States v. National Bank of Commerce, 472 U.S. ___, 105 S.Ct. 2919, 86 L.Ed.2d 565 (1985) (NBC), the Court allowed the IRS to levy upon a joint bank account even though the IRS did not know whether the delinquent taxpayer, one of the joint depositors, actually had any money in the account at all. All of the money might well have "belonged to" the delinquent taxpayer's joint depositors. The Court emphasized that the administrative levy is a "provisional remedy" which does not purport to determine the rights of third parties who also claim an interest in the property levied upon; those rights are to be determined "after the levy is made, in postseizure administrative or judicial hearings." 472 U.S. at ___, 105 S.Ct. at 2930, 86 L.Ed.2d at 581 (emphasis in original) (footnote omitted).⁵

Neither Rodgers nor NBC supports the government's contention that a lien foreclosure action entitles the government to recover something that a levy could not attach. The government's position is entirely overbroad. A lien foreclosure action, like an administrative levy, must be directed against specific property. Here, the government could have levied against Interwest Construction and thus intercepted the check for $27,000. Or the government could have repeatedly levied against the bank and thus attached whatever sums were on deposit in Intermountain's accounts at the time of the levy. Instead, the government has chosen to foreclose its lien against Intermountain's bank accounts. The government can succeed only if, as of July 27, 1981, Intermountain had an interest in its bank accounts that can be foreclosed by a federal tax lien.

Neither Rodgers nor NBC helps the government. It was not disputed in Rodgers that the taxpayer had a property interest under Texas law that could be foreclosed by a valid federal tax lien, but Texas homestead law is irrelevant here. NBC does not apply here for two reasons. First, this is an action to foreclose a lien, not to enforce a levy. Second, the Court in NBC merely reaffirmed the holding of an "overwhelming majority" of courts that an "unrestricted state law right to withdraw constitutes `property' or `rights to property' subject to provisional IRS levy." 472 U.S. at ___, 105 S.Ct. at 2926, 86 L.Ed.2d at 576. One must assume, construing tax provisions in pari materia, that such a right also constitutes "property" or "rights to property" to which a lien can attach under section 6321. However, Intermountain does not have an unrestricted right to withdraw its funds on deposit. In fact, under Utah law, as more fully explained below, Intermountain's right to withdraw, in the particular circumstances of this case, is severely restricted. So long as Intermountain is indebted to the bank, and the bank has the power...