Escrow2

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[2002-2 USTC ¶50,734] T. Whitney Strickland, Jr., Plaintiff v. Virginia Daire and the United States of America on behalf of the Department of the Treasury, Internal Revenue Service, Defendants

U.S. District Court, No. Dist. Fla. , Pensacola Div., 4:01cv153/RV, 9/30/2002 , 2002 U.S. Dist. LEXIS 20230.

[Code Sec. 6323 ]

Tax liens: Validity and priority against third parties: Escrow agent: Escrow agreement: Interpleader.--The government was not entitled to priority over the claim of an escrow agent with respect to funds from the settlement of a lawsuit that were held in escrow in connection with a federal tax lien against an individual. The government contended that it had priority over the escrow agent, who had brought an interpleader action for his fees, attorney's fees, and court costs, because he did not perfect a lien prior to perfection of the tax lien. However, the government was not entitled to the funds because the delinquent taxpayer could not recover them under the contractual provisions of the escrow agreement. The agreement provided that the agent was the first to be paid from the escrow funds, and the taxpayer had no property interest in that portion of the funds necessary to pay his fees and costs. The government could not levy on property in which the taxpayer had no interest.

[Code Sec. 6321 ]

Tax lines: Attorney's fees: Charging lien: Summary judgment.--The government was not entitled to summary judgment with respect to a claim by an attorney who created an escrow fund that she was entitled to superpriority to collect her fees from the fund. The funds arose from the settlement of a lawsuit and were held in escrow in connection with a federal tax lien against an individual. Although the government claimed that the attorney did not timely perfect her attorney's charging lien, the tax code does not require a charging lien before attorney's fees may be given priority, and an issue of fact existed as to whether the parties intended for the attorney's fees to be paid from any recovery obtained by the attorney on the taxpayer's behalf.

[Code Sec. 7430 ]

Attorney's fees: Creditor v. prevailing party.--The government was entitled to summary judgment with respect to a claim by an attorney who created an escrow fund that she was entitled to recover attorney's fees for defending an interpleader action. The attorney was a creditor of the taxpayer and, thus, not a prevailing party under Code Sec. 7430 .

T. Whitney Strickland, Jr., T. Whitney Strickland, Jr., P.A., Tallahassee, Fla., pro se. Richard Errol Johnson, Richard E. Johnson, P.A., Tallahassee, Fla., for Virginia Daire. Wendy K. Vann, Department of Justice, Washington , D.C. 20530 , for U.S.

ORDER

VINSON, Chief District Judge:

Defendant United States of America has moved for summary judgment (doc. 69).

Plaintiff filed this interpleader action pursuant to Title 28, United States Code, Section 2410. Defendants Daire and United States of America have conflicting claims over the funds being held in escrow by plaintiff Strickland, who also claims fees and costs from those escrowed funds. Except as otherwise stated, the parties agree that the following material facts are not disputed.

I. BACKGROUND

By December 18, 2000 , the Internal Revenue Service ("IRS") had assessed tax liabilities against O.C. Allen ("Allen") in the total amount of $87,074.06 for unpaid taxes in eight different tax years going back to 1989. ¹ This case involves $73,244.19 held in escrow by plaintiff Strickland. After the IRS attempted to levy on the funds, Strickland brought this interpleader action and deposited the funds into the registry of this Court.

The funds held in escrow resulted from the settlement of a lawsuit brought by Allen in 1998 against Michael J. Read and John D. Hallstrom in the Circuit Court of Leon County, Florida. Defendant Daire was Allen's attorney in that state court action, and Allen agreed to pay Daire's fees at a rate of $200 per hour, with "payment in full upon the conclusion of this matter." On October 7, 1999 , after mediation, Allen, Read, and Hallstrom reached a contingent settlement of their lawsuit, which required Read and Hallstrom to place $70,000 into an escrow account. This "Contingent Settlement Agreement" acknowledged that the IRS had filed a notice of levy against Allen, and payment of the escrow fund was contingent upon Allen settling with the IRS for $30,000, "or such other amount as [Allen] negotiates."

On October 12, 1999 , after the contingent settlement was reached, Daire presented Allen with a bill for $41,920 in attorney's fees and costs. The contingency upon which the "Contingent Settlement Agreement" was based--settlement of the amount due the IRS by Allen--was not timely resolved, so on December 30, 1999 , the parties to the state court litigation entered into an "Amendment to Settlement Agreement and Escrow Agreement." This second agreement names plaintiff Strickland as escrow agent and calls for dismissal of the case upon payment by Read and Hallstrom of $70,000 into the escrow account "to or for the benefit of [Allen]." The agreement also sets out a strict limitation upon payment of the escrow fund by the escrow agent:

2. Payment of Escrow Fund. Upon written notification from the IRS that all Notices of Levy including that certain Notice of Levy dated July 7, 1999, a copy of which is attached hereto as Exhibit "A", and associated tax lien have been fully satisfied, the Escrow Agent shall disburse the Escrow Fund to the IRS, and then to O.C. Allen, to the extent payment of the tax lien to the IRS does not exhaust the escrow fund.

Under this agreement, which remains in effect, the escrow agent cannot disburse funds to either the IRS or to Allen until the escrow agent first receives written notification from the IRS of full satisfaction of all Notices of Levy and associated tax liens of Allen's. In paragraph (3), the amended agreement specifically provides for the escrow agent's fees to be paid first from any interest accrued on the escrow fund, and then from the escrow fund itself. The second agreement also provides for the reimbursement of any expenses, including attorney's fees and costs, that the escrow agent may incur in any litigation, and paragraph (5) expressly authorizes the escrow agent to file an interpleader action to be fully indemnified for all costs of such an action, including reasonable attorney's fees. Pursuant to this amended agreement, the state court ordered the parties to comply with the settlement agreements and dismissed the action with prejudice on February 9, 2000 . On August 15, 2000 , Daire filed a verified petition in state court for an attorney's charging lien against the escrow funds [i]n the amount of $41,920.

On February 27, 2001, the IRS served Strickland with a "Notice of Levy," asserting a lien against the escrow funds, as well as a "Release of Levy" as to $30,000 to be paid to Daire (apparently as a part of a negotiated settlement of her fee), and a request that Strickland pay the remaining $40,000 and accrued interest to the IRS. An accompanying letter from the IRS's Compliance Group Manager, Dennis L. Lister, indicated that all prior notices of levy were released. The letter made no reference to Strickland's fees as escrow agent. Strickland attempted to negotiate with the IRS regarding his fee and the IRS's payment instructions, but was unsuccessful. Strickland then filed this interpleader action on April 27, 2001 , and deposited the escrow funds into the registry of this Court. The IRS, through the United States , now moves for summary judgment, contending that it has priority over all of the funds.

II. DISCUSSION

A. Summary Judgment Standard

The Rules of Civil Procedure make it plain that a motion for summary judgment should be granted when "the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue of material fact and that the moving party is entitled to judgment as a matter of law." Rule 56(c), Fed. R. Civ. P. As the Supreme Court of the United States has instructed, "the plain language of Rule 56(c) mandates the entry of summary judgment, after adequate time for discovery and upon motion, against a party who fails to make a showing sufficient to establish the existence of an element essential to that party's case, and on which that party will bear the burden of proof at trial." Celotex Corp. v. Catrett, 477 U.S. 317, 322, 106 S.Ct. 2548, 2553, 91 L.Ed.2d 265, 273 (1986). See also Morisky v. Broward County, 80 F.3d 445, 447 (11th Cir. 1996).

However, summary judgment is improper "if a reasonable fact finder could draw more than one inference from the facts, and that inference creates a genuine 1995). An issue is "material" if it might affect the outcome of the case under the governing law. See Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248, 106 S.Ct. 2505, 2510, 91 L.Ed.2d 202, 211 (1986). It is "genuine" if the record taken as a whole could lead a rational trier of fact to find for the nonmoving party. See id.; see also Matsushita Electric Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 586, 106 S.Ct. 1348, 1356, 89 L.Ed.2d 538, 552 (1986).

The moving party bears the initial burden of "informing the district court of the basis for its motion, and identifying those portions of 'the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any,' which it believes demonstrate the absence of a genuine issue of material fact." Celotex Corp., supra, 477 U.S. at 323, 106 S.Ct. at 2552, 91 L.Ed.2d at 274 (1986).

On a summary judgment motion, the record and all inferences that can be drawn from it must be viewed in the light most favorable to the nonmoving party. See Evans v. McClain of Georgia, Inc., 131 F.3d 957, 961 (11th Cir. 1997). However, conclusory allegations based on subjective beliefs are insufficient to create a genuine issue of material fact. See Leigh v. Warner Bros., Inc., 212 F.3d 1210, 1217 (11th Cir. 2000); Ramsey v. Leath, 706 F.2d 1166, 1170 (11th Cir. 1983). The nonmoving party must provide more than a mere "scintilla" of evidence supporting his position, for if the evidence is merely colorable, or is not significantly probative, summary judgment may be granted. Anderson, supra, 477 U.S. at 249-50, 106 S.Ct. at 2510-11, 91 L.Ed2d at 212; Johnson v. Fleet Finance, Inc., 4 F.3d 946 949 (11th Cir. 1993). Although the nonmoving party must designate "specific facts showing that there is a genuine issue for trial," the court must also consider the entire record in the case, not just those pieces of evidence which have been singled out for attention by the parties. See Hargett v. Valley Fed. Sav. Bank, 60 F.3d 754, 763 n.9 (11th Cir. 1995) (quoting Celotex Corp., supra, 477 U.S. at 324, 106 S.Ct. at 2553, 91 L.Ed.2d at 274, (1986)); Clinkscales v. Chevron USA, Inc., 831 F.2d 1565, 1570 (11th Cir. 1987). "Where the record taken as a whole could not lead a rational trier of fact to find for the nonmoving party, there is no 'genuine issue for trial.' " Matsushita Electric Indus. Co. v. Zenith Radio Corp., 475 U.S. at 587, 106 S.Ct. 1356, 89 L.Ed.2d at 552.

B. Analysis

When a taxpayer is delinquent in paying taxes, Section 6321 of the Internal Revenue Code places the government in the position of a secured creditor and empowers it to impose a tax lien on "all property and rights to property" belonging to the taxpayer. ² Section 6323(a) requires that "any person in possession of (or obligated with respect to) property or rights to property subject to levy upon which a levy has been made shall, upon demand of the Secretary, surrender such property or rights to property" to the Secretary. The threshold question in such a case is whether and to what extent the taxpayer has "property" or "rights to property" to which the tax lien could attach. Aquilino v. United States [60-2 USTC ¶9538 ], 363 U.S. 509, 512, 80 S.Ct. 1277, 4 L.Ed.2d 1365, 1368 (1960). State law governs the inquiry into the taxpayer's property or rights to property. ³ Id. ; United States v. Rodgers [83-1 USTC ¶9374 ], 461 U.S. 677, 683, 103 S.Ct. 2132, 76 L.Ed.2d 236, 246-47 (1983). Once it is established that a cognizable property interest exists, federal law then determines the priority of all existing liens. Aquilino [60-2 USTC ¶9538 ], supra, 363 U.S. at 513-14, 80 S.Ct. 1277, 4 L.Ed.2d at 1368-69.

(1) Priority of the United States with respect to plaintiff Strickland. Plaintiff Strickland, the escrow agent, contends that he is entitled to his fees as escrow agent, as well as to his attorney's fees and costs for bringing this interpleader action. The United States argues that it has priority over Strickland because Strickland did not perfect a lien prior to the perfection of the tax lien and cannot claim superiority with an attorney charging lien under Section 6323(b)(8) of the Internal Revenue Code. However, the Government's analysis of Strickland's rights to the escrow funds prematurely examines Strickland's rights under federal law. Before such an inquiry can take place, state law must be examined to determine Allen's rights to the escrow funds.

A federal tax lien under Section 6321 of the Internal Revenue Code "cannot extend beyond the property interests held by the delinquent taxpayer." Rodgers [83-1 USTC ¶9374 ], supra, 461 U.S. at 690-91, 103 S.Ct. 2132, 76 L.Ed.2d at 251. If "a delinquent taxpayer shares his ownership interest in property jointly with other persons, rather than being the sole owner, his 'property' and 'rights to property' to which the federal tax lien attaches under [Section] 6321, and on which federal levy may be had under [Section] 7403(a), involve only his interest in the property, and not the entire property." [83-1 USTC ¶9374 ], Id. at 690, 103 S.Ct. 2132, 76 L.Ed.2d at 251 (quoting United States v. Rodgers [81-2 USTC ¶9536 ], 649 F.2d 1117, 1125 (5th Cir. Unit A 1981)) (emphasis added) (internal citations omitted). The position of the United States is that the entire amount held in escrow constitutes "property and rights to property" of Allen. Strickland, on the other hand, contends that he has a priority contractual right to his escrow fees from the escrow fund that cannot be abridged. The briefs of the parties regarding this matter are not particularly helpful, but this is understandable considering the lack of relevant law. ⁴ Nevertheless, property interests are created and defined by state law, so state law must be examined. Butner v. United States , 440 U.S. 48, 55, 99 S.Ct. 914, 59 L.Ed.2d 136, 142 (1979).

For purposes of federal tax liens, the Government must step into the shoes of Allen, the taxpayer, and its rights to property can go no further than Allen's. Rodgers [83-1 USTC ¶9374 ], supra, 461 U.S. at 690, 103 S.Ct. 2132, 76 L.Ed.2d at 251. The Government's claim to the entire escrow fund would be stronger if it could be clearly established that Allen was entitled to all of the money in escrow. ⁵ However, the escrow is created by contract, and the funds held in escrow, including Allen's rights to the funds, are controlled by the contractual provisions of the escrow agreement. The contingent settlement agreement and its amendment appear to be valid and enforceable contracts under Florida law, and the state court appears to have ongoing jurisdiction to enforce the settlement agreement. The Government can levy upon the escrow funds only to the extent that Allen has a contractual property right in that fund, with all of its limitations.

The terms of the escrow agreement provide Allen with an interest in the escrow funds after Strickland is paid his escrow fees. ⁶ The United States dismisses this notion, arguing that the "Amendment to Settlement Agreement and Escrow Agreement provides that the full amount of the payment, $70,000, was to be paid 'to or for the benefit of O.C. Allen' " through the escrow agent. (emphasis added) However, this ignores all of the other detailed provisions and misconstrues this provision. All of the terms of the contract must be considered. The settlement agreement explicitly provides that Strickland "shall be entitled to a fee for its services hereunder, to be paid for from any interest accrued on the Escrow Fund and then from the Escrow Fund, if necessary. . . ." The escrow fund is created by the agreement and is subject to its complete conditions. Obviously, Allen cannot have rights to the "full amount of the payment," as the Government contends, if the escrow agreement provides that Strickland is first to be paid from the escrow fund for his services as an escrow agent. The terms of the agreement give Strickland a fee; if Allen cannot receive the Strickland fee portion of the escrow fund for himself, then the tax lien cannot be applied against it. Zell v. Cobb, 566 So. 2d 806, 809 (Fla. 3d DCA 1990) (until the happening of the event that would allow the amount held in escrow to be delivered to the promissee, the instrument deposited in escrow does not take effect as a fully executed contract). See Miller v. Alamo [92-2 USTC ¶50,524 ], 975 F.2d 547, 552 (8th Cir. 1992) ("Miller I") (as government lien can only attach to property in which the delinquent taxpayer had an ownership interest, tax lien cannot attach where state law does not grant the taxpayer an ownership interest). Cf. United States v. Bess [58-2 USTC ¶9595 ], 357 U.S. 51, 55-56, 78 S.Ct. 1054, 2 L.Ed.2d 1135, 1141 (1958) (tax lien cannot attach to proceeds of a life insurance policy insuring the life of a taxpayer, beyond its cash surrender value, because the taxpayer could not receive the proceeds himself, even though he possessed the right to direct to whom the proceeds would be paid).

The contract requires that Strickland be paid first, and Allen has no property interest in that portion of the fund necessary to pay Strickland's fees and costs. ⁷ See Miller I [92-2 USTC ¶50,524 ], supra, 975 F.2d at 552 (federal law would not permit a lien to be placed on funds where taxpayer had no rights to the funds, could not direct where they were paid, and could not expect to receive any part of the funds). That portion of the fund necessary to pay Strickland belongs to Strickland, not Allen, and the IRS, standing in Allen's shoes, cannot levy upon property in which Allen has no interest.

(2) Strickland's rights to attorney's fees and costs. The Government's argument that Strickland is not entitled to attorney's fees for bringing this action also must fail. The Government correctly points out that a stakeholder who brings an interpleader action is normally entitled to attorney's fees and costs for bringing the action, to be paid out of the fund, unless such an award would diminish the amount due on a tax lien. Cable Atlanta, Inc. v. Project, Inc. [85-1 USTC ¶9268 ], 749 F.2d 626, 627 (11th Cir. 1984); Millers Mutual Ins. Ass'n of Illinois v. Wassall [84-2 USTC ¶9621 ], 738 F.2d 302, 303 (8th Cir. 1984) ("It is well established that the Internal Revenue Code . . . prohibits an award of attorney fees where the effect of such an award would be to diminish the amount recovered by the United States under a prior [in time] federal tax lien"); Spinks v. Jones [74-2 USTC ¶9657 ], 499 F.2d 339, 340 (5th Cir. 1974) ("The judicial prerogative to award stakeholders their attorney's fees must give way to the supremacy of the federal tax lien law whenever an award would invade the amount subject to tax lien"); United States v. State Nat'l Bank of Connecticut [70-1 USTC ¶9209 ], 421 F.2d 519, 521 (2d Cir. 1970) ("a disinterested bank-stakeholder is not entitled to attorney's fees from a fund when the total amount in the fund is insufficient to satisfy prior federal tax liens"). In the absence of some agreement, the law authorizes the escrow agent to let a court decide his entitlement, as well as his attorney's fees and costs for having to do so. However, in this case, there is no stakeholder seeking an "award" of attorney's fees by virtue of bringing an interpleader action. Instead, the contract which creates the fund and sets conditions for rights to the fund by its terms authorizes the interpleader and expressly provides that Strickland is entitled to reimbursement for his attorney's fees and costs. Just as Strickland has a property right to his fee to be paid from the escrow account, he has a similar priority entitlement to his attorney's fees and costs, even if it reduces the amount available to Allen and the IRS under the federal tax lien--the contractual provisions determine Allen's interest (and derivatively, the IRS's). It appears that Strickland had a legal reason to bring this interpleader in accordance with the terms of the escrow agreement. Therefore, Strickland is also entitled to reasonable attorney's fees and costs for bringing this action, to be paid out of the escrow fund before Allen's interest can vest.

(3) Priority of the United States with respect to defendant Daire. To the extent that Allen has a cognizable property interest in the escrow fund after deducting amounts due Strickland for his services as escrow agent, federal law must be examined to determine the priority of all existing liens on Allen's property interest. Defendant Daire contends that her fee as the attorney creating the fund has superiority over the Government's tax liens. The Government argues that Daire did not timely perfect her attorney's charging lien. However, the Code does not necessarily require a charging lien before attorney's fees may be given superiority.

Section 6321 of the Internal Revenue Code creates a lien in favor of the Government over the "property and rights to property" owned by a delinquent taxpayer. The relative priority of such a tax lien as opposed to competing liens is determined under federal law. Litton Indus. Automation Systems, Inc. v. Nationwide Power Corp. [97-1 USTC ¶50,236 ], 106 F.3d 366, 371 (11th Cir. 1997). Generally, a "first in time--first in right" rule applies when determining the priority of competing liens under federal law. Capuano v. United States [92-1 USTC ¶50,163 ], 955 F.2d 1427, 1433 (11th Cir. 1992). However, Section 6323 provides that a tax lien imposed by Section 6321 is not valid "with respect to a judgment or other amount in settlement of a claim or of a cause of action, as against an attorney who, under local law, holds a lien upon or a contract enforceable against such judgment or amount, to the extent of his reasonable compensation for obtaining such judgment or procuring such settlement. . . ." 26 U.S.C. §6323(b)(8) (emphasis added). Section 6321 provides such a superiority because an attorney who procures such a judgment or settlement amount which benefits the taxpayer ultimately provides a benefit to the IRS.

A "contract enforceable against such judgment or amount" ordinarily would apply to any contract which would allow the attorney to enforce payment against the ultimate recovery under state law. See, e.g., Warner v. United States [95-2 USTC ¶50,560 ], 1995 U.S. Dist. LEXIS 15391, 1995 WL 693188 (E.D. Ark. September 19, 1995). Daire and Allen reached an oral agreement regarding Daire's representation of Allen, and the essential terms of this agreement were set out in a retaining letter on March 24, 1998 , signed by both Daire and Allen. This is the contract applicable here. It provided that Daire would bill $200 per hour for her services in the litigation against "Mr. Hallstrom and Mr. Reed" [sic], and that Allen would pay that hourly fee. It specifically provided for "payment in full upon the conclusion of this matter."

Several things about the contract between Daire and Allen are important. First, the retaining letter was not a general retainer--instead, it only applied to Allen's litigation against Hallstrom and Read. The letter also referenced the fact that the hourly fees were to be paid "in full upon the conclusion of this matter." This is unusual because fees billed on an hourly basis are normally paid throughout the course of the litigation, not at the conclusion of the matter. Additionally, at the time of this agreement, the IRS had already assessed numerous tax liabilities against Allen, indicating that Allen was probably not financially able to pay his attorney during the course of the litigation. Daire was undoubtedly aware of all this. Daire was being paid an hourly fee and not on a contingent basis. Therefore, Allen would be obligated to pay Daire, regardless of whether Allen ultimately prevailed in the litigation. For that reason, it would appear that the letter did not specifically provide that payment would be from the recovery--to do so would foreclose Daire's right to payment if Allen should lose--but there is evidence in the record which supports the conclusion that the parties intended for Daire's fees to be paid from any recovery if there was a recovery. Such an agreement would give Daire superiority over the Government pursuant to Section 6323 by virtue of an enforceable contract. ⁸ This creates a genuine issue of material fact, precluding summary judgment.

(3) [(4)] Daire's claim for attorney's fees and costs in this interpleader. Finally, the Government argues that Daire is not entitled to attorney's fees or costs for defending this interpleader action. The Government argues that the "American Rule" applies in this case, that there is no statutory authority to permit an entitlement of fees in this action, and that a statutory award of attorney's fees cannot reduce the amount to be recovered by the IRS under a federal tax lien.

The traditional "American Rule" provides that attorney's fees are not awardable to the prevailing party in an action--each party must bear its own costs and attorney's fees. Marek v. Chesny, 473 U.S. 1, 8, 87 L.Ed.2d 1, 105 S.Ct. 3012, (1985). However, Section 7430 of the Internal Revenue Code acts as an exception to the American Rule and provides for an award of attorney's fees to a "prevailing party" "in any admin istrative or court proceeding which is brought by or against the United States in connection with the determination, collection, or refund of any tax, interest, or penalty under this title. . . ." 26 U.S.C. §7430(a). A "prevailing party" is "any party in any proceeding to which subsection (a) applies (other than the United States or any creditor of the taxpayer involved). . . ." 26 U.S.C. §7430(c)(4) (emphasis added). The Government respond that Daire cannot collect under Section 7430 because she is a "creditor of the taxpayer." To the extent that her fee is not entitled to exemption under Section 6328(b)(8), it appears that the Government is correct. Similarly, it appears that in the absence of a contractual authorization of such fees and costs from the escrow fund (and I find none with respect to Daire), there is no other authority entitling her to fees and costs for this litigation. Therefore, the United States is entitled to summary judgment on this issue. ⁹

III. CONCLUSION

For the foregoing reasons, defendant United States of America's motion for summary judgment (doc. 69) is GRANTED only with respect to Daire's claim for attorney's fees and costs for defending this interpleader action; it is otherwise DENIED.

DONE AND ORDERED.

¹ On November 19, 1990 , the IRS assessed tax liabilities against defendant Allen in the amount of $29,151.18 for tax year 1989. A tax liability in the amount of $22,462.39 was assessed on November 30, 1992 , for tax year 1991. A lien in the amount of $347.80 was assessed on December 5, 1994 , for tax year 1993. A tax liability in the amount of $7,623.75 was assessed on November 25, 1996 , for tax year 1995. A tax liability in the amount of $6,081.00 was assessed on November 24, 1997 for tax year 1996. A tax liability in the amount of $2,435.40 was assessed on November 23, 1998 , for tax year 1997. A tax liability in the amount of $8,137.64 was assessed on September 20, 1999 , for tax year 1998. A tax liability in the amount of $10,834.90 was assessed on December 18, 2000 , for tax year 1999. The total of $87,074.06 does not include further interest and statutory additions that may have accrued subsequent to the dates of assessment. Notices of the federal tax liens were filed as follows: On September 17, 1991 , for 1989 liabilities; on November 9, 1993 for the 1989 liabilities, and 1991 liabilities; on July 31, 1997 , for the 1995 tax liabilities; on August 3, 1998 , for the 1993 and 1996 tax liabilities; and on May 6, 1999 for the 1997 tax liabilities. Apparently, no notices were filed for the 1998 and 1999 tax years.

² Section 6321 of the Internal Revenue Code provides: If any person liable to pay any tax neglects or refuses to pay the same after demand, the amount (including any interest, additional amount, addition to tax, or assessable penalty, together with any costs that may accrue in addition thereof) shall be alien in favor of the United States upon all property and rights to property, whether real or personal, belonging to such person.

³ As the Eleventh Circuit explained in United States v. Ruff [97-1 USTC ¶50,130 ], 99 F.3d 1559, 1563 (11th Cir. 1996):

A court assessing a levy on a taxpayer's intangible interest in property held by third parties must determine first the nature of the taxpayer's interest in the property. This is a question of state law. . . . Once the court has determined that a delinquent taxpayer has rights to property, federal law determines whether the custodian of the property is obligated to surrender the property to the IRS.

(quoting United States v. Metropolitan Life Ins. [89-1 USTC ¶9362 ], 874 F.2d 1497, 1500 (11th Cir. 1989)).

⁴ After extensively researching the issue, I have found no cases directly on point. There are a few cases involving a tax levy upon escrowed funds in which the escrow agent's fees were denied because the escrow agreement failed to provide for such compensation. See, e.g., United States v. J.H.W. & Gitlitz Deli & Bar, Inc. [80-2 USTC ¶9743 ], 499 F.Supp. 1010, 1016 (S.D. N.Y. 1980) ("Because the escrow agreement under which [the escrow agent] held the fund provided only for payments to [the grantee], [(the escrow agent] has no right to draw upon the fund to compensate him for his escrow services"). Here, the document establishing the escrow fund plainly provides for such fees, as well as for costs and attorney's fees involved in interpleader.

⁵ Of course, even if Allen was entitled to all of the funds held in escrow, the IRS cannot simply levy on the funds held in escrow because of the provisions of the escrow agreement. Placing funds in escrow indicates that the transfer of ownership of the funds to the promissee cannot occur until the happening of a conditional event. See Mizuna, Ltd. v. Crossland Fed. Savings Bank, 90 F.3d 650, 659 (2d Cir. 1996). While the IRS may have priority over Allen's interest in those escrow funds, Allen does not have "property or rights to property" with respect to the escrow fund until the escrow's conditions are met. If the conditions that allow the funds to be distributed never occurs, Allen's interest in those funds will never vest and the IRS will not be able to levy upon those funds. See note 7, infra.

⁶ The agreement plainly gives priority in payment from the escrow fund to the agent's fees and costs. Without such priority, no reasonable person would assume the responsibilities of escrow agent under the circumstances known to exist when the escrow was established.

⁷ Reading the terms of the settlement agreement literally, it is not entirely clear whether the IRS has any claim to the amount held in escrow. As it stands, Allen has no right to the funds held in escrow because the terms of the original contingent settlement agreement provided that the settlement creating the res is made "provided that the Internal Revenue Service (IRS) agrees to resolve its tax notice levy regarding plaintiff within $30,000, or such other amount as plaintiff negotiates with the IRS," i.e., no settlement unless the condition is met. The amendment to the settlement agreement removes that condition to the settlement, but creates another (apparently unintended) condition to any payment from the fund: that payment of the escrow fund may not commence until the tax liens "have been fully satisfied." Thus, under these specific contractual terms, Allen has no right to the funds held in escrow until the tax levies and liens are first satisfied. If the IRS cannot first satisfy its tax lien against Allen, then no funds may be disbursed to either the IRS or Allen, and Allen's (and the IRS's) rights to the funds held in escrow will not vest. Theoretically, it appears that Strickland could hold the funds in escrow indefinitely, and simply apply the interest earned periodically to his fees.

⁸ The Government argues that Daire did not have the understanding that her fees would come directly from the recovery in the case. The Government cites to a deposition where Daire stated that she understood that she would be paid regardless of whether Allen "achieved anything from this at all" and from "whatever source of funds he had." However, this testimony does not necessarily mean that Daire did not expect to be paid from the recovery, if there was one. Payment in full upon "conclusion" necessarily implies that the payment will be made from the recovery at the conclusion of the case, if there was a recovery. However, if there was no recovery, Allen would still be required to pay Daire from whatever source of funds he may have.

⁹ Daire also seeks to hold the IRS to its written agreement to have her fee to the extent of $30,000 paid to her. It is clear that the IRS did so agree and it does not deny it. Instead, it simply asserts the principle that equitable estoppel cannot be applied against the Government in its sovereign capacity. This order does not address that issue, which is reserved for trial. I do note that the Government's failure to stand by its agreement now exposes it to the full amount of Daire's fees and costs ($41,920), plus interest, as well as Strickland's fees and costs--which may leave nothing for the IRS.

 

 

[86-1 USTC ¶9214] United States of America, Plaintiff v. Deanne F. Skirko a/k/a, Deanne F. Berrett, Dale W. Sterner, and E. Arlene Sterner, Defendants

U.S. District Court, Dist. Wyo., C84-501-K, 12/16/85

[Code Secs. 6321 and 6323 ]

Collection: Lien for taxes: Licenses: Validity of lien: Recordation of interest.--In ruling that the U.S. was entitled to foreclose its federal tax lien upon a liquor license, the court held that a federal tax lien could attach to the license because under state (Wyoming) law such a license is considered property to which a security interest can attach. Further, the court found that the reassignment of the liquor license from the delinquent taxpayer to the individuals that had initially held the license was insufficient to defeat the government lien where the reassignment was held in escrow and not recorded until after the federal lien attached.

Tosh Suyematsu, Assistant United States Attorney, Cheyenne, Wyo. 82003, John D. Steffan, Department of Justice, Washington, D.C. 20530, for plaintiff. Susan K. Overeem, 239 West First St. , Casper , Wyo. 82601 , for defendants.

ORDER RULING ON MOTIONS FOR SUMMARY JUDGMENT WITH FINDINGS

KERR, District Judge:

The above-entitled matter coming on regularly for hearing before the Court on defendants Sterners' motion for summary judgment and plaintiff's cross-motion for summary judgment; plaintiff appearing by and through its attorney, John D. Steffan, Trial Attorney, Tax Division, United States Department of Justice, and defendants Sterners appearing by and through their attorney, Susan K. Overeem; and the Court having heard the arguments of counsel and having fully and carefully reviewed the briefs, affidavits, exhibits, and memoranda on file herein, and being fully advised in the premises, FINDS as follows:

This is an action to reduce a federal tax assessment to judgment, foreclose a federal tax lien, and sell an item of personal property.

This Court has jurisdiction over the subject matter and the parties pursuant to 28 U.S.C. §§1340 and 1345 and 26 U.S.C. §§7402(a) and (e) and 7403 . Venue is proper in this district under 28 U.S.C. §§1391(b) and 1396 .

The United States filed the complaint herein naming as defendants Deanne F. Skirko a/k/a Berrett (hereinafter Skirko or the taxpayer) and Dale W. Sterner and E. Arlene Sterner (hereinafter the Sterners). The complaint seeks to have $59,746.71 in assessed, unpaid 1980 federal income taxes of Deanne Skirko, plus statutory additions, reduced to judgment and to foreclose a federal tax lien against specific property, Liquor License Number Two issued by the Town of Mills , Wyoming .

Skirko failed to respond to the complaint and default judgment was entered against her on May 7, 1985 , reducing $81,466.65 in taxes and statutory additions to judgment and granting plaintiff the right to foreclose on seized properties belonging to Skirko.

The Sterners responded to the complaint asserting that Liquor License Number Two is their property and not that of Skirko by reason of a reassignment of the license from Skirko to them.

The plaintiff and the Sterners filed cross-motions for summary judgment under Rule 56 of the Federal Rules of Civil Procedure and oral argument was heard.

Prior to November 12, 1980 , the Sterners were the owners and operators of the Hideaway Bar and Package Store and the holders of retail Liquor License Number Two issued by the Town of Mills , Wyoming .

On or about November 12, 1980, defendant Sterners entered into a Sale and Escrow Agreement with Marie Forsberg and the Bull Pen Restaurant, Inc. (hereinafter Bull Pen) for the sale of the business, including Liquor License Number Two. As part of the terms of the sale, Bull Pen executed a reassignment of Liquor License Number Two in favor of the Sterners. The reassignment was placed in escrow, along with the other documents of sale, with the State Bank of Mills, Wyoming . Liquor License Number Two was thereafter transferred to Bull Pen.

On or about May 12, 1981 , Forsberg and Bull Pen assigned their interest in the Sales and Escrow Agreement to Skirko who had executed a reassignment of Liquor License Number Two in favor of the Sterners dated April 1, 1981 . The reassignment was first recorded by the Sterners on May 14, 1984 , and, even then, only with the Mills Town Clerk. In consonance with the Sale and Escrow Agreement, and upon approval of defendant Skirko's application to the Town of Mills , Liquor License Number Two was transferred to and in the name of Deanne [sic] Berrett. Skirko thereafter operated the business as a sole proprietorship.

On July 19, 1982 , the Internal Revenue Service assessed taxpayer $59,746.71 in unpaid 1980 Form 1040 taxes. Notice and demand for payment was made and on March 2, 1983 , a Notice of Federal Tax Lien was filed with the Clerk and Recorder of Natrona County, Wyoming.

By letter dated January 9, 1984 , pursuant to the Sale and Escrow Agreement's default provisions, the Sterners notified Skirko that she was in default under the purchase contract. Pursuant to those default provisions, the Sterners could declare the Sale and Escrow Agreement terminated and unilaterally break escrow if Skirko failed to pay and discharge the entire balance of the obligation within sixty days after the notice of default was given.

On May 8, 1984 , the Internal Revenue Service served a levy on Skirko to collect her outstanding tax liabilities and statutory additions.

On May 9, 1984 , Internal Revenue Service agents seized Liquor License Number Two from the wall at the Hideaway Bar. Also on May 9, 1984 , the Sterners terminated the Sale and Escrow Agreement by removing the documents from escrow.

On May 11, 1984 , the Sterners filed a Liquor License and/or Permit Application with the Town of Mills for the transfer of ownership of Liquor License Number Two from Skirko to themselves.

On May 14, 1984 , Sterners filed Skirko's reassignment of Liquor License Number Two with the Mills Town Clerk.

On July 3, 1984 , the Sterners again filed a Liquor License and/or Permit Application with the Town of Mills for the renewal of Liquor License Number Two. On September 5, 1984 , Sterners' applications were approved by the Town of Mills and thereafter the requisite licensing fee was paid by the Sterners.

A number of subsidiary issues must be determined before this Court can order foreclosure and sale of Liquor License Number Two in favor of the United States: (1) Whether a federal tax lien can attach to a liquor license; (2) whether defendant Skirko held an interest in Liquor License Number Two at the time the federal tax lien attached to all her property and rights to property; (3) whether the Sterners have a claim to Liquor License Number Two which primes any interest of the United States; and, (4) whether the United States has forfeited its interest in Liquor License Number Two.

The United States Court of Appeals for the Tenth Circuit, this Court, and the Wyoming Supreme Court have expressly held that a liquor license issued under the Wyoming Liquor laws is property to which a security interest can attach. Bogus v. American National Bank of Cheyenne , 401 F.2d 458, 461 (10th Cir. 1968) (affirming this Court); Johnson v. Smith, 455 P.2d 244, 251 ( Wyo. 1969). This is predicated on the adoption of the Uniform Commercial Code by the Wyoming legislature, effective January 1, 1962 , which broadened previously existing law and made liquor licenses subject to security interests, as well as the Bogus court's holding that a liquor license has specific characteristics of an item of property, i.e. transferability and unique value. Bogus, 401 F.2d at 461. The court concluded: "To that extent, then, it [the Uniform Commercial Code] must be considered as overriding any inference that otherwise might be drawn from the liquor control act that an encumbrance may not be placed on a liquor license issued thereunder." Id.

Federal law dictates to what property a federal tax lien can attach. Aquilino v. United States , 363 U.S. 509 at 513; United States v. Bess, 357 U.S. 51, 55 (1958). Congress has expressly provided that a federal tax lien attaches to all property and rights to property, whether real or personal, belonging to a taxpayer:

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 .

A section 6321 lien arises at the time the tax assessments are made against the taxpayer, 26 U.S.C. §6322 , which is the date the liabilities are recorded by the Secretary of the Treasury or his delegate, 26 U.S.C. §6203 .

The Internal Revenue Service records regarding defendant Skirko show that the assessment was recorded in the records of the Internal Revenue Service on July 19, 1982 , Skirko having filed her 1980 Form 1040 on June 3, 1982 . Therefore, on July 19, 1982 , a federal tax lien was impressed upon all property and rights to property in the taxpayer as of that date. See United States v. Vermont, 377 U.S. 351, 353 n.3 (1964).

The question becomes what, if any, interest did defendant Skirko hold in Liquor License Number Two as of July 19, 1982 . Again, state law controls this question and the applicable state law is the Wyoming Uniform Commercial Code.

Here, after the assignment from Forsberg and Bull Pen of their interest in the Sale and Escrow Agreement to Skirko on or about May 12, 1981 , Liquor License Number Two was transferred to and issued in Skirko's name where it remained without question until, at the earliest, the Sterners' termination of the Sale and Escrow Agreement in 1984. The taxpayer held the liquor license in her name subject to an unfiled reassignment held in escrow.

It is necessary to the extent the taxpayer's reassignment of the liquor license was intended to create a security interest in the liquor license in favor of the Sterners, to determine under the Wyoming Uniform Commercial Code the interest in Liquor License Number Two held by the Sterners and the extent that interest is protected against the subsequently arising interest of the United States in the license.

A liquor license is a general intangible as defined in W.R.S. §34 -21-906; U.C.C. §9-106; see Bogus, 401 F.2d at 460. A security interest in a general intangible must be recorded in order to protect it from the claims of third parties. W.R.S. §34 -21-931; U.C.C. §9-302; see W.R.S. §34 -21-930(a); U.C.C. §9-301(1)(b).

Here, since the Sterners failed to properly file their security interest until well after the fact, they only had an unperfected interest in Liquor License Number Two.

Pursuant to W.R.S. §34 -21-930(a)(ii); U.C.C. §9-301(1)(b), an unperfected security interest is subordinate to the rights of a third party who becomes a lien creditor before that security interest is perfected. That is, the subsequent lien asserted by the third party preempts the earlier but unperfected lien.

A lien creditor is a creditor who has acquired a lien on the property by attachment, levy, or the like. W.R.S. §34 -21-930(c); U.C.C. §9-301(3). The United States qualifies as a lien creditor under this definition. United States v. Trigg, 465 F.2d at 1268; L.B. Smith v. Foley, 341 F.Supp. at 813-814 (W.D.N.Y. 1972) (and cases cited therein). Therefore, the federal tax lien attached to the collateral in its entirety without any diminution caused by the Sterners' unperfected security interest in Liquor License Number Two. ¹

The Sterners contend that their unperfected security interest primes the federal tax lien. Therefore, it must be determined which interest in Liquor License Number Two is entitled to priority. This determination is controlled by federal law. Aquilino, 363 U.S. at 513-514 (and cases cited therein).

The issue is whether the Sterners' unperfected security interest can prime the Government's tax lien filed on March 2, 1983 . Section 6323(a) of Title 26 controls the priority issue:

The lien imposed by section 6321 shall not be valid as against any purchaser, holder of a security interest, mechanic's lienor, or judgment lien creditor until notice thereof which meets the requirements of subsection (f) has been filed by the Secretary.

The Wyoming Uniform Commercial Code provides that a security interest in general intangibles must be perfected to prevail over a subsequent lien creditor. W.R.S. §34 -21-930 (a)(iii); U.C.C. §9-301(1)(b).

Therefore, absent perfection, the Sterners' security interest in Liquor License Number Two is not entitled to the protections afforded security interests in §6323(a) and does not prime the federal tax lien.

The Sterners contend that any interest of plaintiff in Liquor License Number Two expired at the end of the year-long term of the license.

Liquor License Number is descriptive of a particular license by number, location, and the extent of the authority granted thereby: License Number Two, for sale of alcoholic beverages at the Hideaway Lounge. The license can be (1) renewed, (2) transferred to new ownership, (3) transferred to a new location, or (4) transferred to a new location and ownership upon approval by the licensing authority. It is pertinent to note that all of the subsequent activities relating to this license beginning with the sale of the Hideaway Bar to Forsberg and Bull Pen, the assignment to taxpayer, the reassignment to the Sterners and subsequent activities regarding the license, to date have all involved transfer or renewal of the license as required by state law. At no time was a new license issued.

The transfers and renewals do not show a demise or cancellation of Liquor License Number Two itself. The source of Liquor License Number Two can be traced chronologically from its issuance through subsequent transfers to that of September 6, 1984 to the Sterners. The source of the Sterners' present right to serve alcoholic beverages at the Hideaway Lounge stems directly from their transfer of the license to Bull Pen and Forsberg in 1980; from Bull Pen and Forsberg to Skirko in 1981; and from Skirko to the Sterners in 1984. The Sterners' claim and right to transfer of Liquor License Number Two is premised on their claim of right as the original transferors and the subsequent reassignments.

The Liquor License and/or Permit Applications before the Court show that the activity regarding Liquor License Number Two constituted transfers and renewals rather than requests for issuance of a new license. The very reassignment upon which the Sterners stake their claim to the license authorizes transfer of the license from Skirko to them.

NOW, THEREFORE, IT IS ORDERED that plaintiff's motion for summary judgment be, and the same is, hereby granted; it is

FURTHER ORDERED that the United States is entitled to foreclosure of the federal tax lien attached to Liquor License Number Two and to sell the license subject to the approval of the successful bidder by the appropriate Wyoming authorities; it is

FURTHER ORDERED that defendant Sterners' motion for summary judgment be, and the same is, hereby denied.

¹ One of the valuable rights inherent in a liquor license is "the 'first chance' or opportunity to apply to the licensing authority for continuation or renewal" of the license. Johnson v. Smith, 455 P.2d 244, 251 (1969); W.R.S. §12 -4-104(c). It is, of course, this right that the Internal Revenue Service hopes to sell--the purchaser having the first right to petition the licensing authority for transfer of the license to him.

 

 

[82-1 USTC ¶9321] United States of America , Plaintiff v. James David Brooks, Defendant

U. S. District Court, So. Dist. Ala. , So. Div., Civil No. 81-0210-H, 3/15/82

[Code Sec. 6323]

Lien for taxes: Priority: Client's funds in attorney's escrow account: Attorney's interest in funds.--A tax lien asserted against funds held in escrow by the taxpayer's attorney following the release of the cash to the attorney by DEA agents who had seized the funds during an arrest had priority over the attorney's interest in the money. Although the attorney asserted that the power of attorney executed by the taxpayer gave him the authority to apply the funds against his own bill for legal services, the tax lien accompanying the termination assessment had priority because the power of attorney merely created a security interest in the funds.

Ginny S. Granade, Assistant United States Attorney, Mobile, Alabama 36601, Karl L. Kellar, Department of Justice, Washington, D. C. 20530, for plaintiff. John R. Nix, Reams, Wood, Vallmer, Philips, Killion & Brooks, 3662 Douphin Street , Mobile , Alabama 36608 , for defendant.

Findings of Fact and Conclusions of Law

HAND, Chief Judge.

This action came on to be heard on February 16, 1982 . After full consideration of the evidence produced at trial of this action, as well as the agreed Facts stipulated to by the parties, the Court makes the following Findings of Fact and Conclusions of Law.

Findings of Fact

1. On May 11, 1980 , agents of the Federal Drug Enforcement Administration (DEA) arrested Bobby Gene Pruitt at the Hilton Hotel in Mobile , Alabama , and seized $12,000.00 in cash from him.

2. The DEA contacted the Internal Revenue Service and informed an Internal Revenue Service Agent of the arrest and seizure, whereupon steps were undertaken to terminate the current taxable year of Bobby Gene Pruitt pursuant to Section 6851 of the Internal Revenue Code.

3. Defendant James David Brooks was contacted by Mr. Pruitt and agreed to serve as his attorney. He met with Mr. Pruitt on May 12, 1980 , at which time Mr. Pruitt prepared a handwritten letter authorizing the DEA to turn over the money seized from him to defendant Brooks. ¹

4. Mr. Pruitt never made an assignment of the $12,000.00 to Mr. Brooks either orally or in writing, at the meeting referred to in paragraph 3 above or at any later date.

5. Mr. Brooks talked to Willard Rutledge of the DEA by telephone on May 12, 1980 , in an attempt to get Mr. Rutledge to release the $12,000.00. At that time Mr. Rutledge refused to release the money.

6. The next day, May 13, 1980 , Mr. Brooks met with Mr. Rutledge and presented the letter referred to in paragraph 3 above to Mr. Rutledge. Mr. Rutledge once again refused to turn over the money to Mr. Brooks, until authorized to do so by the State authorities. Thereupon Mr. Brooks contacted Ray Action of the Alabama Department of Public Safety, who informed Mr. Rutledge that, as far as the State was concerned, the funds could be released.

7. Mr. Rutledge then agreed to turn over the funds, if Mr. Brooks agreed that he