Interpleader
Page2
[84-2 USTC
¶9621]Millers Mutual Insurance Association of Illinois, Appellee v.
Richard Wassall; Dorothy Frazier; Charles E. Hansen, Trustee for E. L.
Howald and Gladys Howald; Eli Howald and Gladys Howald, Appellees,
United States of America, Appellant
(CA-8),
U. S. Court of Appeals, 8th Circuit, No. 83-2078-EM, 738 F2d 302,
6/29/84, Reversing and remanding unreported District Court decision
[Code Secs. 6321 and 6323; 28 USC 2412(b)]
Collection: Validity of lien: Lien for taxes: Priority of creditors:
Interpleader: Attorney's fees: Equal Access to Justice Act.--A
federal tax lien attached to the taxpayer's property prior to the
commencement of an interpleader action and, thus, had priority over any
inchoate claim for attorney fees arising out of such action. The Code
prohibits an award of attorney fees where the effect of such award would
be to diminish the amount recovered by the
U. S.
under a prior federal tax lien. An insurance company filed an
interpleader action, deposited the sum of money which was subject to the
conflicting claims with the court, and requested and received costs and
attorney fees. Such sum of money represented the proceeds under an
insurance policy for fire damage to the insured taxpayer's property
which was subject to the federal tax lien. The court rejected the
insurance company's argument that the award of attorney fees and costs
was sanctioned under the Equal Access to Justice Act. The court held
that even if the Equal Access to Justice Act created a discretionary
claim for costs and attorney fees by an interpleading party, it does not
give such party a priority to the sum superior to that of the
U. S.
based on its prior federal tax lien.
Daniel E.
Wilke, Brinker, Doyen & Kovacs, 226 S. Meramec,
Clayton
,
Missouri
63105
, for appellee. Glenn L. Archer, Jr., Assistant Attorney General,
Michael L. Paup, William S. Estabrook, Farley P. Katz, Department of
Justice, Washington, D. C. 20530, for appellant.
Before ROSS,
BENNETT, *
and ARNOLD, Circuit Judges.
BENNETT,
Circuit Judge:
The government
appeals from a judgment of the district court 1
awarding plaintiff-stakeholder, Millers Mutual Insurance Association of
Illinois (Millers Mutual), attorney fees in an interpleader action, the
effect of which was to reduce the amount recovered by the United States
under prior federal tax liens. We reverse and remand.
I. Background.
On
April 6, 1978
, Millers Mutual brought an interpleader action under 28
U. S.
C. §1332 and FED. R. CIV. P. 22, and named as defendants Richard
Wassall; the United States Department of Treasury, District Director of
Internal Revenue R. C. Voskuil; Charles E. Hansen, trustee for E. L. and
Gladys Howald; Eli and Gladys Howald; and other private parties. Millers
Mutual admitted liability to Wassall in the amount of $30,000,
representing the proceeds under an insurance policy for fire damage to
the insured's property. Millers Mutual alleged that conflicting claims
were made by the Treasury Department and other defendants, and that the
claims exceeded the $30,000 owed Wassall. Millers Mutual further alleged
that it had no claim to that sum, tendered $30,000 to the court 2
pending resolution of the conflicting claims, and requested costs and
attorney fees. The
United States
filed an answer, alleging that it was entitled to the $30,000 on the
basis of numerous tax liens against Wassall in an amount exceeding the
interpleaded fund.
On
June 9, 1983
, the district court entered final judgment. The court had previously
determined that defendants Hansen and Howald, under a first priority,
were entitled to $7,934.33 of the interpleaded fund, but reduced that
amount by $810, which was awarded to Millers Mutual for attorney fees
and costs. The court also set aside an additional $1,590 from the fund
for attorney fees and costs to Millers Mutual, despite the government's
claim that such an award could not reduce the amount recovered under its
prior tax liens. 3
The court determined that the
United States
was entitled to the remainder of the fund, consisting of $22,475.67.
On this
appeal, the sole remaining issue is the propriety of the $1,590 award of
attorney fees and costs to Millers Mutual. No challenge is made to the
determination of priority to the fund or the $810 in fees granted to
Millers Mutual from the amount awarded to Hansen and Howald.
II. Discussion.
It is well established that the Internal Revenue Code of 1954, 26 U. S.
C. §§ 6321, 6322 (1982), 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 federal tax lien. See, e.g., United
States v. Equitable Life, 384 U. S. 323 (1966); United States v.
Ball Construction Co. [58-1 USTC ¶9327], 355 U. S. 587 (1958)
(summary reversal of an award of attorney fees to an interpleader where
a federal tax lien had previously attached to the fund); United
States v. Liverpool & London Insurance Co. [55-1 USTC ¶9136],
348 U. S. 215, 217 (1955); Katsaris v. United States, 684 F. 2d
758, 763 (11th Cir. 1982); Campagna-Turano Bakery, Inc. v. United
States [80-2 USTC ¶9725], 632 F. 2d 39 (7th Cir. 1980); Spinks
v. Jones [74-2 USTC ¶9657], 499 F. 2d 339 (5th Cir. 1974). In the
present case, it is undisputed that the federal tax liens attached prior
to the commencement of the interpleader action and thus had priority
over any inchoate claim for attorney fees arising out of that action.
The award of $1,590 in attorney fees and costs to Millers Mutual was
therefore in error, as the effect of this award was to reduce the amount
recovered by the
United States
under its paramount federal tax liens.
Millers Mutual
asserts that the award of attorney fees and costs is sanctioned under
the Equal Access to Justice Act (EAJA), 28 U. S. C. §2412 (1982),
presumably because the Act overruled prior law. Assuming arguendo
the applicability of the EAJA to this case, 4
our result would not differ. Millers Mutual relies upon the section of
the EAJA that provides for a discretionary award of attorney fees
against the United States "to the same extent that any other party
would be liable under the common law or under the terms of any statute
which specifically provides for such an award," subject to the
proviso "[u]nless expressly prohibited by statute." 28 U. S.
C. §2412(b). See H. R. REP. NO. 1418, 96th Cong., 2d Sess. 8-9, 17, reprinted
in 1980 U. S. CODE CONG. & AD. NEWS, 4984, 4986-87, 4999. Under the
common law, courts have long awarded attorney fees and costs to a
disinterested stakeholder out of an interpleaded fund. See generally 3A
J. MOORE & J. LUCAS,
MOORE
'S FEDERAL PRACTICE ¶22.16[2] (2d ed. 1984); 7 C. WRIGHT & A.
MILLER, FEDERAL PRACTICE & PROCEDURE §1719 (1972).
Even if the
EAJA, 28 U. S. C. 2412(a) and (b), arguably creates a discretionary claim
for costs and attorney fees by Millers Mutual, as against a defense of
sovereign immunity, nothing in the Act gives the stakeholder a priority
to the fund superior to that of the United States, based on its prior
federal tax liens. Here, the claim of the
United States
to the fund is based upon the statutory authority of 26
U. S.
C. §§ 6321, 6322. 5
In the cases cited supra the courts denied an award of attorney
fees and costs on the basis of this statutory authority, and not upon a
general claim of sovereign immunity. See also United States v.
Pioneer American Insurance Co. [63-2 USTC ¶9532], 374
U. S.
84 (1963); Bank of America National Trust & Savings Association
v. Mamakos [75-1 USTC ¶9211], 509 F. 2d 1217 (9th Cir. 1975); United
States v. State National Bank of Connecticut [70-1 USTC ¶9209], 421
F. 2d 519 (2d Cir. 1970). There is nothing in the statute or the
legislative history of the EAJA to indicate that Congress intended to
override the priority of the
United States
to interpleaded funds under prior federal tax liens.
Accordingly,
the award of $1,590 in attorney fees and costs to Millers Mutual was
contrary to law.
Reversed and
remanded.
*
The Hon. Marion T. Bennett, United States Circuit Judge for the Federal
Circuit, sitting by designation.
1
The Hon. H. Kenneth Wangelin, United States District Judge for the
Eastern District of Missouri.
2
This amount was later increased by $2,000 to reflect liability under the
living expenses coverage of the policy.
3
In an earlier ruling, the court denied Millers Mutual's motion for
attorney fees on the ground that such an award "cannot diminish the
portion of the interpleaded fund to which the
United States
is entitled by virtue of its tax lien. . . ." (Memorandum and
Order, filed Sept. 27, 1979.) It is not clear from the record why the
court departed from its earlier ruling.
4
Before the district court, neither the parties nor the court made
reference to the EAJA as a basis for an award of attorney fees to
Millers Mutual.
5
In Campagna-Turano Bakery, Inc. v. United States [80-2 USTC ¶9725],
632 F. 2d 39, 41 (7th Cir. 1980), the court stated that "[26
U. S.
C.] [s]ection 6323 of the Federal Tax Lien Act of 1966 is the exclusive
source of exceptions to the priority of federal tax liens. Unfortunately
for [the stakeholder], §6323 creates no exception to the superiority of
federal tax liens for the claims of interpleading plaintiffs who incur
expenses for court costs and attorneys' fees."
[99-2 USTC
¶50,985] Foxborough Savings Bank, Plaintiff v. Saha S. Petrosian,
Dorothy L. Petrosian, Sims and Sims, P.C., Internal Revenue Service, and
Commonwealth of Massachusetts (Department of Revenue), Defendants
U.S.
District Court, Dist. Mass., CIV. 99-11435-REK, 10/29/99, 84 FSupp 2 d
172
[Code Sec.
6323 ]
Liens: Priority of creditors: Attorneys' fees: Interpleader.--A
bank that foreclosed on a debtor's mortgage was allowed to interplead
excess funds that were subject to competing federal and state
(Massachusetts) tax liens. It could withhold from the funds reasonable
compensation for attorneys' fees and expenses that it incurred in
connection with the interpleader action. The bank was a disinterested
stakeholder that, by reason of its possession of the funds, became
subject to the competing claims; thus, the government's claim that its
lien was superior to the allegedly inchoate state lien for attorneys'
fees and costs was rejected.
Memorandum and Order
I.
KEETON,
District Judge:
Foxborough's
Motion for Leave to Deposit Surplus Funds (Docket No. 4, filed September
3, 1999) seeks leave to deposit a sum in the registry of this court.
Plaintiff Foxborough Savings Bank ("Foxborough") alleges in
the complaint in this case that it foreclosed on a mortgage and
determined that it had in its possession funds in excess of the amount
necessary to satisfy the obligations of the debtor to Foxborough. It
asks the court to treat this as an interpleader action because
conflicting claims are made by the defendants to the funds in
Foxborough's possession.
Foxborough's
pending Motion and supporting papers allege that it is holding
$83,693.49 as the balance in excess of the amount required to satisfy
the debt to Foxborough under the mortgage and that it wishes to retain
$2,142.05 from the sum for legal fees and costs of interpleader and
place in the registry of the court the remaining $81,551.44. As
clarified at the Case Management Conference of
October 22, 1999
, Foxborough's position is that it is not willing to place the entire
$83,693.49 in the registry of the court unless ordered to do so.
No party
disputes that regardless of what amount Foxborough tenders to the Clerk
for deposit, Foxborough will be free to argue to the court that some
part of the amount it deposits should be paid, before termination of
this case, to its attorney as legal fees for work performed on its
behalf in this interpleader action.
II.
All parties
were represented by counsel at the Case Management Conference of
October 22, 1999
, except Sahag Petrosian, who answered pro se, was given notice
of this conference, and failed to appear.
III.
The
United States
has filed an Opposition (Docket No. 5) to the Motion to Deposit Surplus
Funds. In its papers, the United States claims that on August 17, 1992,
"a lien arose in favor of the United States against all property
and rights to property of the Petrosians" such that after the
foreclosure by Foxborough Bank of the Petrosian's mortgage "the
United States may be entitled to receive the surplus proceeds" from
the mortgage sale. See Docket No. 5 at 2. The position of the
United States was somewhat clarified at the Case Management Conference
of October 22, 1999, as being an acknowledgment that Foxborough's
attorneys are entitled to a reasonable fee that reduces the amount left
for some claimant but a contention that a share going to the United
States should be the last share reduced for this purpose. This
hard-and-fast position of the
United States
makes it impossible for the stakeholder to settle and pay without
running a risk that it would later be hauled into expensive litigation
and possibly double payment in the final outcome. It is no answer to
this dilemma that the
United States
also makes a concession of allocation of a share of the proceeds to
Dorothy L. Petrosian, since her counsel contests the position of the
United States
regarding allocation of attorney fees. Thus, the effect of the position
of the United States is that if the court allows Foxborough to
interplead the entire amount over opposition by the United States,
Foxborough must run the risk incident to the possibility that this or a
higher court may later determine that the interpleader order was
erroneous, that the United States should get it all and that if as a
practical matter Foxborough could not recover amounts allowed to be paid
to Dorothy L. Petrosian or others, then Foxborough would simply have to
bear that duplicative loss. In other words, the
United States
says, in effect, that if any interim payments are made, with or without
court order, Foxborough must bear the risk of double payment incident to
uncertainty about the final outcome of this case.
In support of
its position, counsel for the United States has called this court's
attention, first, to an opinion that says that for the purpose of
determining priority between a federal tax lien and a state-created
lien, a court must treat the state lien as perfected only when it is
choate, i.e., "when the identity of the lienor, the property
subject to the lien, and the amount of the lien are established." U.S.
v. Equitable Life Assurance Society [66-1 USTC ¶9444], 384 U.S.
323, 327-28 (1966). Predictably, then, the United States argues that it
has priority over the allegedly inchoate state-created lien securing
payment of Foxborough's attorney's fees and costs--fees and costs
generated by their representing Foxborough in contending that this court
has equitable jurisdiction over the interpleader action and that this is
the most appropriate way to resolve fairly the dispute among claimants
and between them and the stakeholder. For the proposition that the
state-created lien of fees and costs is inchoate, the
United States
cites also Nason v. Taylor, 351 Mass. 386 (1966) and U.S. v.
Pioneer Am. Ins. Co. [63-2 USTC ¶9532], 374 U.S. 84, 88-92 (1963).
Although the
cases cited by the
United States
remain good law, their proposed application to the facts of this case is
awkward at best. Furthermore, the law of this circuit regarding
interpled funds and attorney's fees and costs arising out of an
interpleader action is quite clear. The general practice in this circuit
is that "[a]n interpleader fee is usually awarded out of the fund
to compensate a totally disinterested stakeholder who has been, by
reason of the possession of the fund, subjected to competing claims
through no fault of his own." Ferber Co. v. Ondrick, 310
F.2d 462, 467 (1st Cir. 1962), cert. denied, 373 U.S. 911 (1963)
(footnote omitted).
It is my
present view, in the exercise of discretion, that Foxborough, as a
stakeholder subjected to the conflicting claims of all of the
defendants, should be allowed the benefit of an application of the
customary practice in this circuit of conducting proceedings in the
nature of interpleader, and that Foxborough should be allowed to claim
reasonable compensation from the impleaded fund for reasonable
attorney's fees and actual expenses incurred in seeking judicial
instructions on how to dispose of the surplus foreclosure proceeds. See
id. at 467 & nn. 5-6; Centex-Simpson Construction Co. v.
Fidelity & Deposit Company of
Maryland
, 795 F. Supp. 35, 41-42 (D.
Me.
1992). See also 7 C. Wright, A. Miller & M. Kane, Federal
Practice and Procedure §1719, at 629-30, 632-33 (2d ed. 1986).
To put the
point most mildly, the court finds disquieting the hard-edged position
of the
United States
. After all, the
United States
is, under our form of government, committed to liberty and justice for
all. Thus, I am not persuaded that Foxborough should be prevented from
being reimbursed for its fees and costs in invoking the equitable
jurisdiction of this
United States
district court to conduct proceedings in the nature of interpleader for
the purpose of protecting the legitimate interests of all the claimants
and the stakeholder in these circumstances. The executive branch of the
federal government may choose in its exercise of discretion to place
firm limits on how much it does in efforts to resolve the matter without
imposing on any claimant the necessity and burdens of legal proceedings
in some state or federal forum to protect its legitimate interests in
the stake held by the stakeholder. It does not follow that the executive
branch exercise of discretion divests the judicial branch of
jurisdiction to consider whether what has been done constitutes
reasonable efforts sufficient to justify imposing a risk of double
payment upon the stakeholder.
IV.
In these
circumstances, I conclude it is appropriate to make the Order recited
below.
ORDER
For the
foregoing reasons, it is ORDERED:
Without
undertaking to rule at this time on entitlements to all or part of the
funds proposed to be deposited in the registry of this court, the court
allows the Motion to Deposit Surplus Funds (Docket No. 4) to the
following extent only:
Foxborough
Savings Bank is authorized to make a deposit in the registry of this
court, within a reasonable time after this date and in a manner and on
terms satisfying the requirements of the Administrative Office of the
United States Courts and the Clerk of the United States District Court
for the District of Massachusetts. This is not an Order that Foxborough
deposit the sum of $83,693.49, and it is not an Order that Foxborough
will lose no rights if instead it deposits a sum less than $83,693.49.
The court is not deciding at this time conflicting contentions that may
depend upon the precise amount Foxborough chooses to deposit.
[85-1 USTC
¶9330]Ronald H. Schock, dba Environmental Systems and Services,
Plaintiff v. Internal Revenue Service of United States of America, M
& T Sperling, Inc., Thomas Sperling, Andrew Quick, John A. Paro,
Wesco and Does I through X, inclusive, Defendants
U.
S. District Court, No.
Dist.
Calif.
, No. C-84-0033 WWS (FSL), 1/10/85
[Code Secs. 6321 and 6323]
Lien for taxes: Property subject to: Fraudulent conveyances:
Priority: Interpleader: Attorney's fees.--Federal tax liens with
respect to a company's delinquent employment taxes had priority over
other judgment creditors as to proceeds of a promissory note originally
given to the company in exchange for its operating assets. The transfer
of the note by the company to third parties was set aside as a
fraudulent conveyance under
California
law because fair consideration was not given for the note and the
company was rendered insolvent by the transfer. The court awarded
attorney's fees to the stakeholder in this interpleader action, to be
paid after the claims of the IRS and other judgment creditors.
Thomas F.
Johnson,
525 South Main Street
,
Ukiah
,
Calif.
95482
, for plaintiff. Michael D. Howard, Assistant
United States
Attorney,
San Francisco
,
Calif.
94102
, for
United States
. William T. Murphy, Schaeger, Walerk & Murphy,
155 North Redwood Drive
,
San Rafael
,
Calif.
94903
, for Wesco.
Rob
ert J. Stumpf, Bronson, Bronson & McKinnon, P. O. Box 7358, San
Francisco, Calif. 94120, for Andrew Quick and John Paro. Thomas
Sperling, 950 Brooklyn,
Roseburg
,
Ore.
97470
. Anthony Young, 1640 Fifth Street, Santa Monica, Calif. 90401, for
Meteorology Research, Inc. J. D. Calhoun, Tarkington & Carey, 505
Sansome Street, San Francisco, Calif. 94111, for Matheson Gas Products
and J. Goldman.
Findings
of Fact and Conclusions of Law
LANGFORD,
Magistrate:
This action
was tried before this Court on October 22 and 23, 1984. These Findings
of Fact and Conclusions of Law are filed pursuant to Rule 52(a), Federal
Rules of Civil Procedure.
Findings
of Fact
1. M. & T.
Sperling, Inc. (hereinafter the "Company") is a non-operating
California
corporation which was formed in 1975 by Thomas Sperling (hereinafter
"Sperling") and four associates. In 1976 Sperling purchased
all the Company stock and thereafter was the Company's sole shareholder.
2. From 1976
through
October 1, 1981
, the Company's primary business activity was in the field of
environmental quality analysis, and the Company conducted business under
the fictitious name-style of "Environmental Systems and
Services" (hereinafter "ES&S").
3. The
Company's gross revenues from 1979 to October 1981 were as follows:
1979 .... $340,000
1980 .... 680,000
1981 .... 390,000
4. In October
1981, all the Company's operating assets were sold to Ronald Schock
(hereinafter "Schock"). Schock purchased the Company's assets
for $30,000 cash and three notes. Two of the notes were secured; one was
for $150,000, and one was computed on gross income. The remaining note
was unsecured in the amount of $18,000.
5. It is the
$150,000 note given from Schock to the Company (hereinafter the
"note") which is the subject of this lawsuit. The note was
secured by equipment, a lease, and an option to purchase a building, all
of which belonged to the Company.
6. Prior to
Schock's purchase of the Company's operating assets, the Company owned
approximately 300 gold mining claims. Because the Company failed to file
claim renewals, pay the renewal fees, or expend requisite additional
development costs, the claims lapsed in September 1981, and the Company
failed to renew the claims during the 90-day grace period which expired
in December 1981. The Company never listed its gold mining claims as
assets on its balance sheets. At best, the claims were without value in
the latter half of 1981, and the Company no longer owned the claims
following December 1981.
7. From
January 1982 through April 1982, the Company had no other income than
that received on the notes given by Schock in exchange for the Company's
operating assets. Moreover, as of
April 23, 1982
, Sperling had no assets of any significant value which were available
to pay his or the Company's creditors. In December 1982, Sperling sold
his remaining interest in an airport at Lakeport and sustained a net
loss on the property as a result of the sale.
8. From
January 1982 through April 1982, numerous irate creditors of the Company
attempted to collect on overdue bills. During this period of time,
Andrew Quick (hereinafter "Quick") leased business space from
Sperling in the Company building. Quick's secretary was also the
secretary for the Company. In their attempts to collect the overdue
bills, some of the creditors telephoned Schock, and Schock referred such
calls to a telephone number which was answered either by Quick's
secretary or by Quick when Sperling was not available. Also during this
time, Quick personally assisted in having Sperling's power reinstated
following a cut-off of the power for non-payment of the bill. On
April 1, 1982
, the sheriff served the Company with at least three lawsuits. Service
of the lawsuits was made at the building occupied by Quick and the
Company. Sperling discussed the receipt of the lawsuits with Quick
sometime prior to
April 23, 1982
. Also on
April 1, 1982
, Sperling had a telephone conversation with Internal Revenue Service
Officer
Rob
ert Yakerson concerning the Company's unpaid employment and unemployment
taxes. That telephone conversation was followed up by a meeting between
Messrs. Sperling and Yakerson in the Company's building on
April 7, 1982
. Quick was aware of the April 7 meeting, and asked Sperling if the
Internal Revenue Service was going to "throw him in jail."
During the same month, Sperling told Quick that the airport in which
Sperling owned a personal interest was in foreclosure.
9. On or about
April 23, 1982
, the Company transferred to Quick and John A. Paro (hereinafter
"Paro") its sole remaining asset of value, i. e., the
note. The then remaining principal owed on the note was $147,826, with
an interest rate on the balance of ten and one-half percent. The minimum
monthly payment on the note was $1,300; the maximum monthly payment on
the note was $2,024.02. Regardless of whether the minimum or the maximum
was paid, the total yearly payment on the note was $24,288.24.
10. In
exchange for the note, Quick and Paro paid $40,000 ($20,000 each).
Although the note was held in the name of the Company, the entire
$40,000 purchase price was paid to Sperling individually. From the
April 23, 1982
transfer of the note until the present date, the Company has received no
further income from any source and has had no assets of value. At the
time of the transfer of the note, the Company owed 55 creditors a total
of approximately $120,000 in overdue bills. Of the $40,000 payment
received from Quick and Paro, less than $5,000 was used to pay off the
Company's creditors, and the remainder of the payment was used for
Sperling's personal benefit.
11. Sperling
testified that he believed at the time of the transfer of the note that
the transfer would delay the Company's creditors from collecting on
their respective accounts. Although Quick testified that he had no
knowledge of creditors' claims against the Company on the date of the
transfer, the Court finds that he was aware of the fact that Sperling
had serious financial difficulties before the note was transferred.
Prior to the transfer, neither Quick nor Paro made any meaningful
inquiry into the financial status of the Company or of Sperling.
Considering Quick's proximity to Sperling's office, and the repeated
instances upon which Quick was advised of Sperling's financial straits,
the Court finds that Quick would have had intentionally to look the
other way to avoid being aware of Sperling's creditor problems.
12. As stated
before, neither Quick nor Paro paid the Company anything for the
transfer of the note held in the name of the Company. Quick and Paro
have alleged that Sperling was the alter ego of the Company, but even if
that were true, the Court finds that fair consideration was not given
for the note. In addition to Schock's promise to repay the $150,000 note
in full, Sperling gave his own personal guarantee for payment of the
note. Furthermore, the note was secured by equipment, a lease and an
option to buy the Company building, and Schock had timely made all
payments from the time of the origination of the note until its transfer
to Quick and Paro. Regardless of the value of these various items of
security, it is clear that together with Schock's and Sperling's
guaranties, the note was worth considerably more than the $10,000 to
$15,000 alleged by Quick and Paro to be the value of the note at the
time it was transferred. The Court is likewise unpersuaded by Quick and
Paro's expert, who testified that the note was worth approximately
$10,000 on the date of transfer.
13. Prior to
the initiation of the instant interpleader action by Schock, Quick and
Paro received approximately $22,000 of their $40,000 purchase price for
the note. Since the date of filing this action, Schock's monthly
payments have been made directly into the Court.
14. On
April 7, 1982
, Sperling gave the Internal Revenue Service a $10,000 check as partial
payment for the Company's delinquent employment and unemployment taxes,
and requested that the Internal Revenue Service refrain from filing any
liens against the Company until the end of the month. The check was
dishonored by the bank, but the Internal Revenue Service records do not
reflect notification of the check's return until
June 7, 1982
. On
April 30, 1982
, federal tax liens with respect to the Company's delinquent employment
taxes were prepared, and the liens were filed with the Lake County
Recorder's Office during the first week of May, 1982. The Internal
Revenue Service has never collected any funds with respect to the
subject federal tax liens. Those tax liens are as follows:
(a)
August 10, 1981
: Federal employment taxes against the Company for the first quarter of
1981 in the amount of $20,241, exclusive of interest and penalties;
(b)
December 7, 1981
: Federal employment taxes against the Company for the second quarter of
1981 in the amount $15,850, exclusive of interest and penalties;
(c)
February 8, 1982
: Federal employment taxes against the Company for the third quarter of
1981 in the amount of $17,982, exclusive of interest and penalties; and
(d)
March 8, 1982
: Federal unemployment taxes against the Company for 1980 in the amount
of $816.36, exclusive of interest and penalties.
15. On
March 21, 1983
, Meteorology Research, Inc. (hereinafter "MRI") obtained a
judgment against the Company in the amount of $17,456.33, plus interest
at seven percent that date. On
March 15, 1983
, J. Goldman/Matheson Gas Products (hereinafter "Goldman")
obtained a judgment against the Company in the amount of $3,253.52, plus
interest in the amount of $567.36. Neither of these judgments have been
satisfied.
16. Sperling
testified that the claims made by the IRS, MRI and Goldman were due and
owing by the Company on the date of the transfer of the note to Quick
and Paro.
Conclusions
of Law
1. Federal tax
liens come into existence with respect to all property and rights to
property belonging to taxpayers such as the Company on the date the
taxes are assessed. Where a taxpayer transfers property after taxes are
due but prior to the filing of a tax lien, the
United States
may seek relief under the fraudulent conveyance laws of the state in
which the property is located. Accordingly,
California
law governs the substantive issues in this interpleader action.
2. Under
California
law, a conveyance without adequate consideration, made by a person who
is insolvent or who as a result of the conveyance becomes insolvent, is
void. Likewise, California law provides that a conveyance made without
fair consideration, when the grantor believes that he will incur debts
beyond his ability to pay as such debts occur, is fraudulent both as to
present and future creditors. Moreover, a conveyance the grantor makes
to hinder, delay or defraud creditors is similarly void. The Court
concludes, based on grantor Sperling's testimony, that the transfer of
the note was made with his actual intent to hinder or delay the present
or future creditors of the Company.
3. So long as
there is insufficient consideration and the transferor is rendered
thereby insolvent, and the creditor has a claim at the time of the
conveyance, it is not necessary under
California
law to show actual fraudulent intent to set aside a conveyance. When a
transferor has existing indebtedness, a voluntary conveyance is
presumptively fraudulent when it is made without fair consideration. The
question then becomes whether the grantee gave fair consideration for
the note; that is, whether the values exchanged were equivalent and
whether the grantee acted in good faith. The Court has concluded that
Quick and Paro did not give fair consideration for the note, and that
Quick did not act in good faith. Because Quick acted as the agent for
Paro with respect to the acquisition of the note, Paro is chargeable
with Quick's lack of good faith. The transfer of the note, therefore,
must be set aside.
4. In this
action, it is clear that the IRS liens were filed before the judgments
of MRI and Goldman were entered. The Court concludes that the creditors
are entitled to the proceeds on a first in time, first in right basis,
as follows: first, the IRS; second, MRI; and third, Goldman.
5. The Court
also concludes that pursuant to its discretion to award attorneys' fees
in interpleader actions, Schock is entitled to payment for his
attorney's fees in this action. Those fees are to be paid after the
principal claims of the IRS, MRI and Goldman, respectively, are paid.
6. Next, the
Court concludes that the IRS, MRI, and Goldman, respectively, should be
paid interest and/or penalties in accordance with the judgment filed
contemporaneously herewith.
7. Finally,
the Court concludes that any remaining proceeds from the note should be
divided equally between Quick and Paro.
IT IS SO
ORDERED.
Order
Based on Findings of Fact and Conclusions of Law
On
October 1, 1981
, Ronald H. Schock and Lorna Schock (hereinafter "Schock")
signed a promissory note in the amount of $150,000.00 and made payable
to M & T Sperling, Inc. (hereinafter "the note"). On
April 23, 1982
, the note was assigned to Andrew M. Quick and John A. Paro
(hereinafter, respectively, "Quick" and "Paro").
Based on the Findings of Fact and Conclusions of Law filed
contemporaneously herewith.
IT IS HEREBY
ORDERED that the transfer of the note to Messrs. Quick and Paro is set
aside.
IT IS FURTHER
ORDERED that the Clerk of the Court, so long as it has proceeds from the
note, and therefore Schock, shall disburse the proceeds from the note to
the entities and in the amounts designated below:
First,
the Internal Revenuw Service shall receive the principal amount of its
claim, i. e., $54,889; then
Second,
Meteorology Research, Inc. shall receive the principal amount of its
claim, i. e., $17,456.33; then
Third,
J. Goldman/Matheson Gas Products shall receive the principal amount of
its claim, i. e., $3,235.52; then
Fourth,
Schock shall receive attorney's fees incurred in connection with this
interpleader action, i. e., $2,775.00; then
Fifth,
Messrs. Quick and Paro shall receive the amount necessary to recoup
their full $40,000 purchase price of the note, i. e.,
approximately $18,000, subject to proof; then
Sixth,
the Internal Revenue Service shall receive interest according to law on
the principal amount of its claim; then
Seventh,
Meteorology Research, Inc. shall receive interest at the rate of seven
percent (7%) on the unpaid balance of the principal amount from
March 21, 1983
; then
Eighth,
J. Goldman/Matheson Gas Products shall receive interest in the amount of
$567.36 plus seven percent (7%) on the unpaid balance of the principal
amount from
March 15, 1984
; then, and finally
Ninth,
the balance of the note proceeds shall be paid equally to Messrs. Quick
and Paro.
IT IS FURTHER
ORDERED that Schock shall maintain a descending balance statement which
indicates the disbursement of the proceeds from the note, and shall
forward copies of the statement to the entities above listed on or
before June 30th and January 1st of each year until the note has been
paid in full.
IT IS SO
ORDERED.
Judgment
On
October 1, 1981
, Ronald H. Schock and Lorna Schock (hereinafter "Schock")
signed a promissory note in the amount of $150,000.00 an made payable to
M & T Sperling, Inc. (hereinafter "the note"). On
April 23, 1982
, the note was assigned to Andrew M. Quick and John A. Paro
(hereinafter, respectively, "Quick" and "Paro"). The
transfer of the note to Messrs. Quick and Paro is hereby set aside
pursuant to the California Uniform Fraudulent Conveyance Act, California
Civil Code Section 3439, et seq., and the liens of the Internal
Revenue Service, Meteorology Research, Inc., J. Goldman/Matheson Gas
Products (hereinafter the "creditors") and the attorney's fees
of Schock shall attach to the proceeds of the note. The funds held by
the Clerk of the Court and future payments made by Schock shall be
distributed pursuant to the Court's Order entered contemporaneously
herewith, with the creditors' liens being paid in the order of their
creation and Schock's attorney's fees paid thereafter.
[62-2 USTC
¶9836]Jack Surasky, Plaintiff v.
United States of America
, Defendant
U.
S. District Court, Middle Dist. Fla., Jacksonville Div., 4676-Civ.-J,
11/8/62
[1954 Code Secs. 212 and 1016]
Deductions: Proxy fight expense: Adjusted basis of stock.--The
taxpayer could not deduct contributions made to a stockholder's
committee in connection with a proxy fight as ordinary and necessary
expenses for the production of income or for the management,
conservation or maintenance of income-producing property. Also rejected
was the taxpayer's alternative contention that he should be permitted to
add the amount of the contributions to the basis of his stock in
determining gain on its sale.
Mark Hulsey,
Jr., Glickstein, Crenshaw, Glickstein & Hulsey, 512 Barnett National
Bank Bldg.,
Jacksonville
2,
Fla.
, for plaintiff. Edward F. Boardman, United States Attorney, P. O. Box
59, Jacksonville 1, Fla., John F. Murray, Department of Justice,
Washington 25, D. C., for defendant.
Findings
of Fact and Conclusions of Law
MCRAE,
District Judge:
1. The
plaintiff is a citizen of the
United States
and a resident of
Jacksonville
,
Florida
.
2. During 1954
and 1955, the plaintiff purchased a total of 4,000 shares of the 61/2
million shares of outstanding common stock of Montgomery Ward & Co.,
Inc., (hereinafter referred to as "Ward") a corporation
engaged in nation-wide retail and catalog merchandising. The Ward stock
was listed on the New York Stock Exchange.
3. In the
latter part of 1954, the plaintiff, together with other Ward
stockholders, formed a committee known as the Wolfson-Montgomery Ward
Stockholder's Committee (hereinafter referred to as the "Wolfson
Committee").
4. The object
of the Wolfson Committee was to displace a majority of the Board of
Directors and the existing management of Ward and replace them with its
own nine candidates for the Board and new management. The Wolfson
Committee commenced a stock proxy soliciting campaign in late 1954,
during which substantial sums of money were expended in soliciting
proxies by mail, by telephone, and by advertising.
5. The Wolfson
Committee was financed by voluntary contributions from its members,
among whom were the plaintiff and other stockholders of Ward. During
1955, the plaintiff contributed to the Wolfson Committee the total sum
of $17,000 which was expended in soliciting proxies.
6. At the
Ward's stockholders meeting of
April 22, 1955
, at which nine directors were elected, three of the Wolfson Committee's
nine candidates were elected to the Board of Directors. The remaining
six Wolfson Committee candidates were defeated. The plaintiff was not
one of the Wolfson Committee's nominees.
7. The
plaintiff, on his 1955 income tax return deducted (in arriving at
taxable income) the amount of $17,000 contributed to the Wolfson
Committee. Upon audit by agents of the District Director of Internal
Revenue, the claimed deduction of $17,000 was disallowed.
8. The
plaintiff paid the additional tax occasioned by the aforementioned
disallowance (together with that occasioned by another adjustment not
here material) and filed a timely claim for refund. The District
Director advised the plaintiff by registered mail of the disallowance of
the claim.
9. During the
year 1956, the plaintiff sold all the Ward stock which he had purchased
in 1954 and 1955, and reported on his 1956 individual income tax return
long-term capital gains on the sales in the total amount of $50,929.55.
In determining the cost basis of the stock for tax purposes, the
plaintiff did not include as a part thereof the $17,000 paid to the
Wolfson Committee.
10. On
April 14, 1960
, the plaintiff filed a claim for refund of 1956 in the amount of
$4,250. The aforementioned claim was based upon the plaintiff's
contention that, if the $17,000 payment to the Wolfson Committee was not
deductible in 1955, then the plaintiff was entitled to add the $17,000
to his cost basis of the Ward stock for capital gains purposes. The
District Director of Internal Revenue notified the plaintiff of the
disallowance of this claim by registered mail.
11. The Court
has jurisdiction of the parties and subject matter of this action. 28 U.
S. C. §1346(a)(1).
12. The sole
question presented in this action is whether the sum of $17,000
contributed by the plaintiff to the Wolfson Committee is (a) allowable
as a deduction under Section 212 of the Internal Revenue Code of 1954 in
computing the plaintiff's 1955 income tax liability or (b) allowable as
an addition to the cost of the Ward stock which was sold by the
plaintiff in 1956 or (c) neither allowable as a deductible expense nor
as an addition to basis.
13. Section
212 of the Internal Revenue Code of 1954 insofar as is here material
allows as a deduction all the ordinary and necessary expenses paid
during the taxable year for the production or collection of income, or
for the management, conservation, or maintenance of income producing
property. The Treasury Regulations, which have received judicial
approval, require that the expense bear a reasonable and proximate
relation to the production or collection of income or to the management,
conservation, or maintenance of income producing property. Forbes v.
Commissioner, [53-1 USTC ¶9420] 204 F. 2d 777 (C. A. 2).
14. To
summarize the facts, the plaintiff herein contributed $17,000 to a
committee which was to use the money to solicit proxies from other
shareholders of a large, publicly-held corporation, in the hope that the
committee would be able to seat a sufficient number of its candidates on
the board of directors so that new management policies could be carried
out which might result in larger profits and larger dividends to the
shareholders.
15. The
plaintiff had clear title to his Ward stock and was receiving dividend
income therefrom. It was certainly most speculative whether his
contribution to the Wolfson Committee would touch off a series of events
culminating in the production of increased income to the plaintiff.
Furthermore, the plaintiff was not a candidate for the board of
directors nor does the record reflect that he anticipated obtaining a
position in Ward's management.
16. Since
deductions are a matter of legislative grace, the plaintiff in a tax
refund suit must show that he is entitled to the claimed deduction. Deputy
v. du Pont [40-1 USTC ¶9161], 308
U. S.
488. The Court concludes that the plaintiff has failed to show that his
claim is clearly within the statutory provision allowing the
deductibility of non-business expenses. The question presented herein is
essentially factual (Commissioner v. Heininger [44-1 USTC ¶9109],
320 U. S. 467, 475), and the Court finds as a fact that the plaintiff
has failed to discharge his burden of proving that the $17,000
contribution to the Wolfson Committee is ordinary or necessary; that is,
the contribution does not bear a proximate relationship to the
production of taxable income.
17. The Court
specifically finds lacking the necessary proximate relationship between
the expenditure and the production of income or the management of income
producing property. At the time the plaintiff contributed his funds to
the committee, it was pure speculation whether he would derive any
monetary reward therefrom. At the time the expenditure was made, the
Court could certainly not find that it was necessary, nor was it even
ordinary, within the common meaning of that word.
18. The Court
is not unmindful of the fact that the plaintiff, at the time he
contributed the $17,000 to the committee, did so with hopes of realizing
a profit and that, as a matter of fact, the dividends on his stock
increased following the election of three of the Wolfson Committee's
candidates. However, it is necessary to view the instant transaction as
of the time it occurred, without the benefit of hindsight. The record is
completely devoid of any evidence of a direct proximate relationship
between the plaintiff's expenditure and the increased dividends; the
latter could have been caused by any one of a myriad of factors. As for
the plaintiff's desire to make a profit, there are any number of
transactions entered into by the parties with a profit motive which are
not accorded preferential tax treatment. The Treasury cannot be expected
to underwrite all profit seeking speculations.
19. The Court
has carefully reviewed the numerous cases cited by the plaintiff in an
effort to support his claim and has found them inapposite. Suffice it to
say that in the main they concern situations where taxpayers are
threatened with a loss of property or position and are required to
expend funds to preserve the threatened property or position. The
plaintiff here is not threatened with the loss of his Ward stock or a
diminution of its value. His expenditure is not proximately related to
the production of income or the management of income producing property
but is rather made with only a possible expectation of increasing the
value of his property through a chain of indirectly connected
circumstances. Thus, the cases he relies upon do not lend support to his
contention. Indeed, neither party has directed the Court's attention to
any authority which could be considered dispositive of the issue
presented.
20. The
plaintiff's claim does not come within the framework of deductibility
established by Section 212 of the 1954 Code. The District Director
properly disallowed the claimed deduction. The plaintiff is entitled to
no tax refund for the year 1955.
21. As to the
plaintiff's alternative contention that the $17,000 contribution to the
Wolfson Committee should be added to the cost basis of his Ward stock
for purpose of computing capital gain upon the sales in 1956, the Court
concludes that the plaintiff is not entitled to capitalize the
contribution. The Court is aware that money expended in acquiring stock,
and gaining or protecting title to stock, is properly a a capital
expenditure. Lawrence v. O'Connell [56-2 USTC ¶10,070], 238 F.
2d 476 (C. A. 1). But here the plaintiff had clear title to and
ownership of his Ward stock. It was not necessary for the plaintiff to
expend these funds; it was immaterial whether or not he joined the
Wolfson Committee. Therefore, his contribution was not directed toward
the protection of the plaintiff's property, and cannot be capitalized to
reduce the gain realized upon the stock sale in 1956. The plaintiff is
entitled to no tax refund for the year 1956.
23. The
defendant is entitled to a judgment in its favor dismissing the
plaintiff's cause of action.
[56-2 USTC
¶9789]C. Rallo Contracting Company, Inc., a corporation, Plaintiff v.
Thomas J. Blong, and Thomas J. Blong, Jr., d/b/a T. J. Blong Painting
Company, et al., Defendants
Circuit
Court, City of St. Louis, State of Mo., Cause No. 78890-D, Div. 3,
6/28/56
[1939 Code Secs. 3672(a) and (1)--similar to 1954 Code Secs. 6323(a) and
(1), respectively]
Collection: Lien for taxes: Valid against garnishment lien:
Attorneys' fees of interpleading contractor allowed.--A
sub-contractor contracted with a contractor to furnish the materials and
equipment and perform the paint work under the latter's general contract
to construct a high school. The government assessed withholding taxes
due against the sub-contractor who later became a judgment debtor of a
paint company. The latter instituted garnishment proceedings against the
contractor holding funds due to the subcontractor. The paint company did
not have a lien upon the funds since the service of summons in
garnishment was invalid, having been made upon a clerk and not an
authorized officer of the contractor. Even though the service had been
valid, the federal lien would be superior to the garnishment lien
despite the fact that the government filed its notice of tax lien with
the city and county after the service of summons. Therefore, the
government was entitled to receive the funds deposited in court by the
contractor, less an allowance for the latter's attorneys' fees.
Blumenfeld
& Abrams,
418 Olive St.
,
St. Louis
2,
Mo.
, filed the petition for plaintiff. Answer was filed for the Gidden Co.
by Rogers H. Burgess, Union Commerce Bldg.,
Cleveland
,
Ohio
. John K. Lord, Jr., 960 Paul Brown Bldg., 818 Olive, St. Louis 1, Mo.,
for defendant Waggner Paint Co. Harry Richards, United States Attorney
(by
Rob
ert E. Brauer, Assistant United States Attorney) for United States.
Before REAGAN,
District Judge.
Findings
of Fact and Conclusions of Law
This cause
having come on for hearing on January 25, 1956, plaintiff being
represented by counsel, and the defendant, Waggener Paint Company, a
corporation, and the United States of America, Intervenor, being
represented by counsel, and the defendants, Thomas J. Blong and Thomas
J. Blong, Jr., d/b/a T. J. Blong Painting Company, being in default and
not appearing either in person or by counsel, and the defendant, Glidden
Company, a corporation, having filed its answer waiving and renouncing
any and all claim to the funds described in the Bill of Interpleader,
and on June 1, 1955, plaintiff, by leave of Court, dismissed its
petition as to the defendant, Glidden Company, a corporation, without
prejudice; and this Court having sustained the Bill of Interpleader of
the plaintiff and having ordered said plaintiff to pay the sum of
$3,726.23 into the registry of this Court, and having allowed the
attorneys for the plaintiff the sum of $500.00 as and for their
attorneys' fee, and having ordered the Clerk of this Court to pay said
sum of $500.00 to Blumenfeld and Abrams, attorneys for plaintiff, out of
the fund deposited by the plaintiff into the registry of this Court; and
the evidence adduced by the plaintiff and defendant Waggener Paint
Company, a corporation, and the United States of America, Intervenor,
having been duly heard and considered, and this Court, being fully
advised in the premises, hereby makes and enters its findings of fact
and conclusions of law:
Findings
of Fact
1. Plaintiff
corporation is a general building contractor in the metropolitan area of
St. Louis, Missouri, and, in connection with the construction of the
Bishop DuBourg High School in St. Louis, Missouri, plaintiff, as general
contractor, contracted with the defendants, Thomas J. Blong and Thomas
J. Blong, Jr., d/b/a T. J. Blong Painting Company, that they furnish the
materials and equipment and perform the paint work under plaintiff's
general contract to construct said high school;
2. That
plaintiff, under said contract with said defendants, Thomas J. Blong and
Thomas J. Blong, Jr., d/b/a T. J. Blong Painting Company, owes said
defendants the sum of $3,726.23; that said sum of money has been
deposited into the registry of this court by the plaintiff, out of which
the sum of $500.00 has been allowed by this court, to be paid out of
said sum, as attorneys' fee to the attorneys for the plaintiff;
3. On
September 15, 1954, defendant Waggener Paint Company, a corporation,
recovered a judgment in the sum of $4,800.00, plus interest in the sum
of $300.00, against the defendants, Thomas J. Blong and Thomas J. Blong,
Jr., d/b/a T. J. Blong Painting Company, 2610 Locust Street, St. Louis,
Missouri, in Proceedings No. 75086-D in the Circuit Court of the City of
St. Louis, Missouri, wherein defendant, Waggener Paint Company, a
corporation, was plaintiff, and the defendants, Thomas J. Blong and
Thomas J. Blong, Jr., d/b/a T. J. Blong Painting Company, were
defendants;
4. On
September 17, 1954, defendant, Waggener Paint Company, a corporation,
caused a writ of execution to be issued out of said Circuit Court of the
City of St. Louis, to enforce the payment and satisfaction of said
judgment recovered by it against the defendants, Thomas J. Blong and
Thomas J. Blong, Jr., d/b/a T. J. Blong Painting Company, on September
15, 1954;
[Garnishment
Proceedings Against Primary Contractor]
5. In aid of
execution, defendant, Waggener Paint Company, a corporation, instituted
garnishment proceedings against the plaintiff, as garnishee, in the
Circuit Court of the City of St. Louis, being Proceedings No. 27391-G in
said court; in said garnishment proceedings, said defendant Waggener
Paint Company, a corporation, caused a summons in garnishment to be
issued out of said Circuit Court of the City of St. Louis, directed to
the plaintiff, as garnishee, and caused said summons in garnishment to
be delivered to the sheriff of the City of St. Louis for service;
6. Said
summons in garnishment was left, on
September 21, 1954
, by Fred J. Mueller, Deputy Sheriff of the City of St. Louis, Missouri,
with Ann Dattilo, a clerk of the plaintiff corporation; the return of
said Deputy Sheriff Fred J. Mueller reads as follows:
"No
goods, chattels, or real estate found in the City of St. Louis,
Missouri, belonging to the within named defendants, Thomas J. Blong and
Thomas J. Blong, Jr., d/b/a T. J. Blong Painting Company whereon to levy
the writ hereto attached and make the debt and costs, or any part
thereof; thereupon by order of the attorney for plaintiff, I executed
said writ in said City of St. Louis at the hour of 9:00 o'clock and 20
minutes a. m. on the 21st day of September, 1954 by declaring in writing
to C. Rallo Contracting Co., a corporation, by delivering said written
declaration, directed to said corporation to Ann Dattilo, Chief Clerk of
said corporation, she being in the business office of said corporation
and having charge thereof, that I attached in its hands all debts due
from it to said defendant as above, and by summoning it in writing as
garnishee, and I, at the same time, by said declaration, further
executed said writ by summoning said corporation, as garnishee, by
declaring to it in writing, by delivering a summons of garnishment in
writing directed to said corporation to said Ann Dattilo, C. C. thereof,
that I summoned it to appear . . ."
7. Ann
Dattilo, on
September 21, 1954
, and thereafter, was a bookkeeper and clerk employed by the plaintiff
corporation, and left in charge of plaintiff's business office when
Joseph Rallo, the Assistant Secretary of the plaintiff corporation, was
away from the business office. Ann Dattilo was not, on that date and
thereafter, an officer of the corporation, nor was she a cashier of the
plaintiff corporation. Joseph Rallo was away from the business office of
the plaintiff corporation when the said garnishment summons was brought
to its business office by Deputy Sheriff Fred J. Mueller, who handed the
summons in garnishment to Ann Dattilo;
[Assessment
of Withholding Taxes Against Sub-Contractor]
8. On August
12, 1954, the United States of America assessed against Thomas J. Blong
Painting Company, 2610 Locust Street, St. Louis, Missouri, withholding
taxes due for the second quarter of the year 1954 in the sum of
$3,328.78, plus interest due thereupon in the sum of $6.56; the
assessment was made upon that date in the office of the District
Director of Internal Revenue, St. Louis, Missouri, and appears on an
assessment list kept and maintained in the office of said District
Director of Internal Revenue, St. Louis, Missouri;
9. Notice of
the assessment, and demand for the payment of said assessed taxes, plus
interest, were given and made by the United States of America upon and
to the Thomas J. Blong Painting Company on August 20, 1954; no payment
has been made upon said assessed withholding taxes, plus interest, and
the full amount of said assessed withholding taxes, plus said assessed
interest, plus interest thereon as provided by law, is due and owing the
United States of America;
10. Notice of
Federal Tax Lien A-763, giving notice that said withholding taxes, plus
interest, were assessed against Thomas J. Blong Painting Company on
August 12, 1954, and giving notice that a lien for such taxes, plus
interest, existed in favor of the United States of America, was filed by
and on behalf of the United States of America in the office of the
Recorder of Deeds for the City of St. Louis and in the office of the
Recorder of Deeds for St. Louis County on September 24, 1954;
11. A Notice
of Levy, together with a Warrant for Distraint and a copy of said Notice
of Federal Tax Lien A-763, demanding the surrender and payment of all
property and rights to property belonging to the Thomas J. Blong
Painting Company, was served upon plaintiff corporation by and on behalf
of the United States of America on September 24, 1954; this Notice of
Levy gave notice that withholding taxes in the sum of $3,328.78, plus
interest thereupon in the sum of $6.56, were assessed against the Thomas
J. Blong Painting Company for the second quarter of the year 1954;
12. On
August 12, 1954
and on
September 24, 1954
, and in the period between said dates, Thomas J. Blong Painting Company
had its place of business at
2610 Locust Street
,
St. Louis
,
Missouri
, and Thomas J. Blong and Thomas J. Blong, Jr., both lived in the County
of St. Louis, Missouri.
Conclusions
of Law
1. This Court
has jurisdiction of the subject matter of the Bill of Interpleader and
of the claims of defendant, Waggener Paint Company, a corporation, and
of the United States of America, Intervenor; defendants Thomas J. Blong
and Thomas J. Blong, Jr., d/b/a T. J. Blong Painting Company are in
default; and the defendant, Glidden Company, a corporation, has been
dissmissed as a party defendant, on June 1, 1955, without prejudice, by
the plaintiff with leave of Court.
2. Under
Section 525.050, V. A. M. S., 1949, the service of the summons in
garnishment dismissed as a party defendant, on June 1, garnishee, in
Proceedings No. 27391-G, in the Circuit Court of the City of St. Louis,
Missouri, wherein defendant, Waggener Paint Company, a corporation, was
garnisher, upon Ann Dattilo, by Deputy Sheriff Fred J. Mueller, on
September 21, 1954, was invalid and of no force and effect, said Ann
Dattilo not then being either the President, Secretary, Treasurer,
Cashier, or Chief or Managing Officer of the plaintiff corporation,
garnishee, in those said proceedings;
3. That the
defendant, Waggener Paint Company, a corporation, does not have a lien
upon the sum of money deposited by the plaintiff corporation into the
registry of this Court, by reason of such invalid service of the summons
in garnishment;
[Federal
Tax Lien Prior to Garnishment]
4. That the
defendant, Waggener Paint Company, a corporation, garnisher in said
garnishment proceedings, No. 27391-G, in the Circuit Court of the City
of St. Louis, would not have had, even were the summons in garnishment
validly served on plaintiff corporation, as garnishee, a lien upon the
sum of money deposited by the plaintiff into the registry of this Court,
good as against the lien of the United States of America for unpaid
withholding taxes, plus interest, assessed against Thomas J. Blong
Painting Company by the United States of America for the second quarter
of the year 1954;
5. That a
lien, to secure the payment of the assessed withholding taxes, in the
sum of $3,328.78, plus assessed interest in the sum of $6.56, assessed
against Thomas J. Blong Painting Company for the second quarter of the
year 1954, arose and exists in favor of the United States of America
against and upon all property and rights to property, real or personal,
belonging to said Thomas J. Blong Painting Company; that said lien for
such assessed withholding taxes, plus assessed interest, became and was
valid against all the world on September 24, 1954, after the Notice of
Federal Tax Lien A-763 was filed in the office of the Recorder of Deeds
of the City of St. Louis and in the office of the Recorder of Deeds for
St. Louis County, Missouri;
6. That the
Notice of Federal Tax Lien A-763 was filed in the proper counties under
Section 14.010 V. A. M. S.;
7. That the
indebtedness due from the plaintiff corporation to the defendants,
Thomas J. Blong and Thomas J. Blong, Jr., d/b/a T. J. Blong Painting
Company, is property as to which the lien of the United States of
America, for and on account of said assessed withholding taxes, plus
assessed interest, for the second quarter of the year 1954, assessed
against Thomas J. Blong Painting Company, attached on September 24,
1954, valid as against the whole world;
8. That the
United States of America is entitled to receive and recover the sum of
money, $3,726.23, deposited by plaintiff corporation into the registry
of this Court, less the sum of $500.00 allowed by this Court to
Blumenfeld and Abrams, attorneys for plaintiff corporation, as and for
attorneys' fees ordered to be paid out of said sum so deposited.
[55-1 USTC
¶9405]
United States of America
, Plaintiff v. Grant Thorn, Hazel Thorn, Genevieve Thorn, Eastern Tar
Products Corporation, Harrisburg Trust Company, Eastern Road Material
Corporation,
Rob
ert J. Baabe, Edwin C. Higgins, Defendants
In
the United States District Court for the Middle District of
Pennsylvania, Civil No. 4856, October 29, 1954
[1939 Code Sec. 3670--similar to 1954 Code Sec. 6321]
Lien for taxes: Deposit pending determination of liability.--A
trust company was allowed to deposit into court the proceeds from the
sale of property subject to lien for tax assessments against the
taxpayer. Against the Government's motions to the contrary, the court
also allowed costs and attorney's fees to the trust company out of the
money paid into the court.
J. Julius
Levy, United States Attorney, Scranton, Pa., Edmund C. Grainger, Jr.,
Tax Division, United States Department of Justice, Washington, D. C.,
for plaintiff. McNees, Wallace and Nurick, Commerce Building,
Harrisburg, Pa., for defendant Harrisburg Trust Co. Harry Shapiro, 111
North Charles Street, Baltimore, Md., for other defendants.
Memorandum
and Order
Memorandum
FOLLMER,
District Judge:
This action
was instituted by the United States of America to enforce certain liens
for tax assessments filed against defendants Grant Thorn and Hazel
Thorn, pursuant to authority granted by Title 26 U. S. C. §3678. The
Amended Complaint joins as defendants all parties known to have any
claim against a fund of $26,371.65, held by Harrisburg Trust Company.
The latter is joined as a defendant solely because it "has property
in its possession or under its control which belongs to the defendant,
Grant Thorn, and which consists of proceeds from the sale of property in
the amount of $26,371.65."
Defendant,
Harrisburg Trust Company, disclaiming any ownership or interest in the
said fund has moved the Court.
(a) For leave
to pay the said sum of $26,371.65 into the court.
(b) That the
above stated action be dismissed in so far as the same relates to
Harrisburg Trust Company.
(c) For
reasonable counsel fees and payment of costs advanced in the sum of
$60.52.
The
United States of America
, by its counsel, at the argument on the motion, agreed that the fund
should be transferred to the registry of the Court and that thereafter
the action should be dismissed as to defendant Harrisburg Trust Company.
It did, however, take the position that the Court is without power to
make any allowance for costs and attorney's fees on the legal principal
that in so doing the Court would in effect be allowing them against the
United States
. This precise question was fully and ably discussed by Judge Clary in
U. S.
v. Ullman, et al. (D. C. E. D. Pa.) 115 Fed. Supp. 211 [53-2
USTC ¶9648]. I am in complete accord with the views expressed and
conclusions reached therein.
An appropriate
order will be entered granting the motions of defendant Harrisburg Trust
Company.
Order
AND NOW,
October 29, 1954
, upon motion of Harrisburg Trust Company for the reasons set forth in
Memorandum this day filed, it is
Ordered, (1)
That defendant Harrisburg Trust Company pay into the registry of the
Court the sum of $26,371.65, less costs advanced in the sum of $60.52
and counsel fees in the sum of $750.00. (2) That on said payment, the
said action shall be dismissed as to defendant Harrisburg Trust Company.
[53-2 USTC
¶9648]
United States of America
v. Herman Ullman, Julia Ullman and United Benefit Life Insurance Company
United States of America
v. Theodore Ullman, Lillian Ullman, United Benefit Life Insurance
Company and Fidelity-Philadelphia Trust Company of
Philadelphia
,
Pennsylvania
In
the United States District Court for the Eastern District of
Pennsylvania, Civil Action Nos. 14963, 14964, 115 FSupp 211, October 22,
1953
Property subject to tax lien: Costs and attorneys' fees allowed to
insurance company depositing cash surrender value in court.--In 1947
taxpayers each purchased an endowment life insurance policy. In 1951
deficiencies were assessed against each of them for the years 1945, 1946
and 1948 and tax liens were filed. In the two actions against taxpayers
and the insurance company for recovery of taxes due and foreclosure of
the liens, the interpleader of the insurance company to pay the cash
surrender value of the policies into the Court was allowed. The Court
also allowed costs and attorneys' fees to the insurance company out of
the money paid into the Court. The Government on motions sought to set
aside that portion of the decree of interpleader which allowed such
costs and attorneys' fees, contending that in making such an allowance
the Court would in effect be allowing costs and attorneys' fees against
the United States contrary to Title 28, U. S. C., Sec. 2412, because the
funds in the Court might be declared to be the property of the United
States. It was held that the allowance of the costs and attorneys' fees
to the insurance company could not be construed as costs and attorneys'
fees taxed to the
United States
under that statute. Motions denied.
H. Brian
Holland, Assistant Attorney General, Andrew D. Sharpe, F. A. Michels,
Special Assistants to the Attorney General, W. Wilson White, United
States Attorney, William C. Thompson, Assistant United States Attorney,
for plaintiff. Walter B. Gibbons, 1242 Fidelity-Philadelphia Trust
Building, 123 South Broad Street, Philadelphia 9, Pa., for defendant,
United Benefit Life Insurance Company.
Opinion
CLARY,
District Judge:
The above two
cases are before the Court on motions by the United States to set aside
and vacate that portion of the decree of interpleader entered in each
case which allowed costs and attorneys' fees to the United Benefit Life
Insurance Company, defendant. No question has been raised as to the
propriety of the decree of interpleader, and any question as to the
reasonableness of the amounts of counsel fees awarded in each case was
expressly waived by the Government at the argument of the motions. Only
one legal question is in issue and to put that question in its proper
setting a review of the facts is necessary.
The
Commissioner of Internal Revenue reviewed the income tax returns of
Herman Ullman, defendant in Civil Action No. 14963, for the years 1945,
1946 and 1948. Contending that false and fraudulent returns had been
made, the Commissioner early in September of 1951 assessed deficiency
taxes against him in the amount of $87,810.41 for the years in question.
On
September 12, 1951
, liens for said taxes were filed in this Court and in the Court of
Common Pleas of Berks County, the residence of the said Herman Ullman.
Attempting to foreclose the liens, the Government instituted the present
action against Herman Ullman, his wife Julia Ullman, and the United
Benefit Life Insurance Company. The complaint alleges that on
August 23, 1947
, Herman Ullman purchased from the said insurance company a twenty year
endowment, single premium, life insurance policy, face value of which
was $50,000. The cost of the policy to defendant was $32,527.00 and the
beneficiary of the policy was his wife, Julia Ullman, the third
defendant. The Government in this action claims the surrender value of
said policy, which has since been determined to be $33,732.77.
Civil Action
No. 14964 is a suit by the
United States
to foreclose similar liens against Theodore Ullman and to recover income
taxes allegedly due from him in the sum of $89,141.49 for the years 1945
to 1948 inclusive. The complaint in that case avers that defendant
Theodore Ullman on
August 31, 1947
purchased from the United Benefit Life Insurance Company a $50,000.
twenty year endowment policy for the sum of $33,284.50, his wife Lillian
being beneficiary. The Commissioner of Internal Revenue, after review of
his returns for the years in question, made his assessment of the
deficiency allegedly due early in September of 1951 and likewise filed
income tax liens in this Court and in the Court of Common Pleas of Berks
County on
September 12, 1951
. In the second action, the Government has also made the
Fidelity-Philadelphia Trust Company of
Philadelphia
,
Pennsylvania
, a defendant for the reason that the policy in question was assigned to
it on
February 9, 1951
as security for a loan of some $23,000. The two Ullmans and their wives
have filed answers denying that any fraudulent returns were made,
denying that any taxes are owed by them to the United States for the
years in question, and further averring that there have been filed and
are presently pending in the United States Tax Court petitions for
redetermination of income taxes due for the years in question. The
Fidelity-Philadelphia Trust Company has also answered averring that the
assignment of the policy to it was for money loaned and that its claim
on the proceeds antedated the claim of the Government and is superior to
it. On the other hand, the United Benefit Life Insurance Company
answered in each case stating that the cash surrender value was claimed
from it not only by the Government but by the other defendants, that it
had no interest in the proceeds and therefore filed its counterclaims in
interpleader relinquishing any claim to the proceeds of the policies and
asking permission of the Court to pay the money into the registry of the
Court and to interplead the several claimants.
[Costs
and Attorneys' Fee Allowed to Insurance Company]
After a
hearing, upon due notice to all parties, the prayers of the two
petitions for interpleader were allowed. The money was paid into the
registry of the Court and the United Benefit Life Insurance Company was
discharged from any further liability in the case. As part of the order
of interpleader in each case, the Court allowed costs and an attorney's
fee to the United Benefit Life Insurance Company out of the fund paid
into Court. The only part of those orders which the United States now
contests is the allowance of costs and attorneys' fees to the Insurance
Company, the United States taking the position that the Court is without
power to make any such allowance on the legal principle that in so doing
the Court would in effect be allowing costs and attorneys' fees
against the United States.
The argument
of the Government in this respect is principally based on Title 28 U. S.
C. Section 2412 which provides:
"(a)
The United States shall be liable for fees and costs only when such
liability is expressly provided for by Act of Congress.
"(b)
In an action under subsection (a) of section 1346 or section 1491 of
this title, if the United States puts in issue plaintiff's right to
recover, the district court or Court of Claims may allow costs to the
prevailing party from the time of joining such issue. Such costs shall
include only those actually incurred for witnesses and fees paid to the
clerk.
"(c)
In an action under subsection (b) of section 1346 of this title, costs
shall be allowed in all courts to the successful claimant, but such
costs shall not include attorneys' fees."
Section 2412
must be viewed and analyzed in the light of the Act of which it is a
part. Chapter 161 of the United States Code is a comprehensive act which
sets out in detail the terms and conditions under which claims by or
against the
United States
are to be litigated. Among its provisions are the time for commencing
action against the United States, the prohibition against requiring
security by the United States. It also governs actions affecting
property on which the
United States
has a lien, garnishment, interest, costs, execution in favor of the
United States
, and payment of judgments against the
United States
. Section 2412, therefore, is only one of the many provisions relating
to the
United States
as a party to an action in a Federal Court. The only applicable
provision upon which the Government can rely in Section 2412 is
subsection (a) which provides that the
United States
shall be liable for fees and costs only when such liability is expressly
provided for by Act of Congress. Section 1346 of Title 28, referred to
in Section 2412 in subsection (a)(1), provides for suits against the
United States, for the recovery of claims for taxes; subsection (a)(2),
any civil claim not sounding in tort against the United States not
exceeding $10,000. Subsection (b) of Section 1346 is the Federal Tort
Claims Act providing for suits against the United States for the
negligence or wrongful act or omission of any employee of the Government
acting within the scope of his employment under circumstances where the
United States, if a private person, would be liable. Section 1491 of
Title 28, also referred to, merely establishes the jurisdiction of the
Court of Claims. It will be noted that subsection (c) of Section 2412
merely provides that the
United States
shall pay costs if held liable in a Tort claim but prohibits the
allowance of attorneys' fees in addition to the recovery which practice,
except in a few States, is the ordinary common law or statutory
practice.
[Section
2405 Does Not Prefer the U. S.]
On the other
hand, in Section 2405 covering garnishment of the funds of a corporation
in the hands of a debtor, it is provided that no judgment shall be
entered against any garnishee until after judgment has been rendered
against the corporation, nor until the sum in which the garnishee is
indebted is actually due. Section 2410 covering actions affecting
property on which the
United States
has a lien does not attempt to give the
United States
a priority over any other valid prior lien. However, it does give the
Government the right, in a sale made to satisfy a lien prior to that of
the
United States
, to redeem the real estate within one year from the date of sale. If
further provides that the Comptroller General may release either real or
personal property from a lien of the
United States
where it is made clear that a sale of such property under a prior lien
will not bring sufficient funds to either wholly or partly satisfy the
lien of the
United States
. There is nothing, therefore, in this section which indicates an intent
on the part of Congress to prefer the
United States
and assert rights in a judicial action superior to those of a private
litigant.
Since this is
an action by the
United States
, the provisions of the Federal Interpleader Act, Title 28 United States
Code, Section 1335, and Rule 22 of the Federal Rules of Civil Procedure
are applicable. There is also present here in each case diversity of
citizenship between the insurance company and the other claimants to the
fund. The amount in controversy likewise exceeds $500.00. In the
interpretation of this Act it was held in the case of Mutual Life
Ins. Co. of New York v. Bondurant, et al., (1928 C. C. A. 6) 27 Fed.
(2d) 464, cert. den. 278
U. S.
630, 73 L. Ed. 548, that whatever costs and fees would be allowable to
an insurer in an interpleader brought irrespective of the statute would
also be allowable in actions brought thereunder. The Court said at pages
465, 466:
"It
is well settled that a stakeholder, who brings the nonstatutory equity
interpleader bill, is entitled to reasonable attorney's fees, as well as
other costs.McNamara v. Provident, Sav. Life Assur. Soc. of
New York
(C. C. A.) 114 Fed. 910;
Louisiana
State Lottery
Co.
v. Clark (C. C.) 16 Fed. 20. The Interpleader Act effects no
important change in the substantive rights of parties to an
interpleader suit; it merely enlarges the jurisdiction of federal courts
over the necessary parties to certain interpleader suits. Nothing in the
language or in the history of this essentially jurisdictional act
evidences an intent that the rules as to costs and attorney's fees in a
statutory interpleader should be different from those that prevail in
the ordinary equity interpleader whether it be in the federal or state
courts."
Since the
decision in the Bondurant case,supra, the propriety of
allowance of costs and attorney's fees out of a fund deposited with the
court has apparently never been questioned. See Treinies v. Sunshine
Mining Co., 99 Fed. (2d), 651, 308 U. S. 66, 84 L. Ed. 85; Mutual
Life Ins. Co. v. Bondurant, supra; Hunter v. Federal Life Ins. Co.,
111 Fed. (2d), 551; New York Life Insurance Co. v. Miller, 139
Fed. (2d), 657; Globe Indemnity Co. v. Puget Sound Co., 154 Fed.
(2d), 249.
[The
Question to Be Determined]
The simple
legal question to be determined in these two actions is, therefore,
whether an award of counsel fees and costs may be granted in an
interpleader action to a disinterested third party stakeholder who
interpleads the
United States
and other claimants to a fund. The United States Attorney frankly
concedes that insofar as his research and that of the Department of
Justice indicates this is a matter of first impression. The argument of
the Government, however, is that since the funds in question may,
after the present litigation is concluded, be declared to be the
property of the United States, the net result of any present allowance
would in effect be an imposition of costs and attorneys' fees against
the United States which in the absence of specific Congressional
authority provided for in Section 2412(a) this Court is without
authority to make. In other words, it argues that the Court is bound to treat
the funds as if presently owned by the
United States
. The Government, however, frankly concedes that legal title to the
funds presently in the registry of this Court is in the other claimants
and not in the
United States
. It asks the Court to draw from the language of Section 2412(a) a
preference in favor of the
United States
in interpleader actions although frankly conceding that as between
private litigants the award made would be without question proper under
equitable principles. In support of its contention the Government relies
in its supporting memorandum on only three cases, Stanley v.
Schwalby, 162
U. S.
255;The Antelope, 12 Wheat. 546, 548; Leary v.
United States
, 253
U. S.
94. The first two cases afford no assistance in the determination of
this issue. The principle there enunciated is that costs are not taxable
to the
United States
, which principle of law is not here in dispute. The case of Leary v.
United States, is likewise inapposite. The facts of the Leary
case, see United States v. Carter, 217 U. S. 286, 54 L. Ed. 769,
clearly disclose that the fund, out of which costs and attorney's fee
were requested, was actually at the time the requests were made the
property of the United States. This, of course, completely distinquishes
the Leary case from the instant actions, since the Government
frankly admits that the funds in question here are not now its property.
Clearly, under present statutes, if in Civil Action No. 14963 Herman
Ullman should prevail against the claim of the Government, no attorney's
fee could be charged to the Government. The Government, however, by its
motion attempts to place the innocent stakeholder in the same category
as an adversary claimant and contends that the Court is without
equitable power, where the Government is a claimant to a fund, to make
proper allowances in accordance with accepted equitable principles.
I read no such
meaning or draw no such inference from the plain language of Section
2412(a). The Congress, in its wisdom, has waived sovereign immunity
against suits, but wisely chose to limit the extent to which the public
treasury should be charged, in suits to which the United States is a
party, for costs and attorneys' fees of litigation, reserving to itself
the right to determine when and under what circumstances such payments
should be made. There is nothing in the language of the statute which
would warrant the Court in penalizing an innocent stakeholder simply
because the
United States
happens to be a party to the litigation. A holding as contended for by
the Government would engraft by decisional law a preference in favor of
the
United States
not specifically provided for by Congress and unwarranted on equitable
principles. That the sum ultimately recovered by the
United States
might be slightly diminished is of no moment. It is still the property
of the defendant. It would be an extremely strained construction of
words to describe that slight diminution as costs and attorneys' fees
taxed against the
United States
. I cannot and will not so construe the plain language of the statute.
Rather do I believe that this case merits the application of the
equitable principles underlying all interpleader actions.
An appropriate
order will be entered in each case denying the motions of the
Government.
[81-2 USTC
¶9696]Chicago Title Insurance Company, Plaintiff v. Teddy R. Kern, et
al., Defendants
U.
S. District Court, D. C., Civil Action 80-3174, 10/1/81
[Code Sec. 6323]
Attorneys' fees: Interpleader action: Satisfaction of IRS tax lien.--Attorneys
involved in an interpleader action that was settled out of court were
entitled to attorneys' fees out of the amount due their clients, despite
the fact that the IRS had a tax lien against their clients. The efforts
of the attorneys come within the scope of Code Sec. 6323(b)(8) which
refers to compensation for procuring a settlement.
Steven M.
Roth, 2033 M St. N. W., Washington, D. C. 20036, for plaintiff. Gary E.
Milne, 416 Hungerford Drive, Rockville, Maryland 20850, Stuart H.
Grozbean, Pickett, Houlon and Berman, 7515 Annapolis Road, Hyattsville,
Md. 20734, for defendants.
Order
ROBINSON, JR.,
District Judge:
Defendants in
this interpleader action have each moved to release and distribute the
interpled fund. A settlement has been reached between the parties and
the only remaining issue is whether or not attorneys for Defendant F. D.
R. Johnson and F. D. R. Johnson Excavating Co., Inc., (hereinafter
Johnson) are entitled to attorneys fees out of the amount due their
clients. The Internal Revenue Service has a tax lien on whatever is due
Johnson and it protests the attorneys' claim to a fee out of the Johnson
share of the settlement.
The Federal
tax lien priority statute controls this dispute. It provides:
(8) Attorneys'
liens. 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 enforcible against such judgment or
amount, to the extent of his reasonable compensation for obtaining
such judgment or procuring such settlement, except that this
paragraph shall not apply to any judgment or amount in settlement of a
claim or of a cause of action against the United States to the extent
that the United States offsets such judgment or amount against any
liability or the taxpayer to the United States.
26
U. S.
C. §6323(b)(8) (1976) (emphasis added).
Attorneys for
Johnson argue that but for their representation, Johnson (and by lien,
the IRS) would not be receiving a portion of the interpled fund. The IRS
argues that the attorney fee exception to tax lien priority only applies
where the attorneys have contributed to the creation of a fund, not
where attorneys have merely defended the right of a taxpayer to a fund
already in existence, as in this interpleader action.
The IRS is
mistaken in asserting that attorneys are not entitled to compensation
for settling an interpleader action when faced with the demand of an
adverse claimant. Such efforts are within the purview of Section
6323(b)(8), which refers to "compensation for procuring a
settlement" and the authority relied on by the IRS is not to the
contrary. The IRS does not dispute Johnson attorneys' efforts to procure
the settlement in this action. Though the Johnson attorneys'
characterization of themselves as the
United States
"own private collection agency" is extreme, those attorneys
did work to garner taxpayer funds which were the subject of a government
lien. They are entitled to reasonable compensation for their efforts.
Therefore, it
is by the Court this 1st day of October, 1981,
ORDERED, that
the Clerk of the Court shall distribute one-half of the fund of money
interpled in the above captioned case to the defendant J & T
Construction Company; and it is
FURTHER
ORDERED, that counsel for Defendants Johnson are entitled to attorneys
fees in this action which shall take priority over the lien filed by the
Internal Revenue Service; and it is
FURTHER
ORDERED, that the Johnson Attorneys shall file with the Court on or
before
October 15, 1981
, a demand for fees to which they claim entitlement, specifying the
number of hours worked by subject matter and by attorney and specifying
the hourly rate claimed by each attorney, as follows:
Number
Type of Hourly of Fee
Attorney Work Rate Hours Demand
Example:
Jones Discovery ...... $50 3 $150
Court
Jones Appearances .... 65 2 130
Smith Discovery ...... 50 3 150
Drafting
Smith Pleadings ...... 45 1 45
Total .......... $475
[93-2 USTC
¶50,619] Blue Cross of Western Pennsylvania and Pennsylvania Blue
Shield, Plaintiffs v. United States of America, Internal Revenue
Service; Commonwealth of Pennsylvania, Department of Revenue;
Commonwealth of Pennsylvania, Department of Labor and Industry; and
Fairman Drilling Company, Defendants
U.S.
District Court, West.
Dist.
Pa.
, Civ. 92-2236,
8/9/93
[Code Sec. 6323 ]
Bankruptcy: Tax lien: Accounts receivable: Priority: Attorneys'
fees.--A federal tax lien had priority over a creditor's security
interest in accounts receivable and other assets. The creditor failed to
demonstrate that it acquired the receivables within the 45-day extension
period from the date of the filing of the tax lien. Further, no
attorneys' fees were awarded because the tax lien was far in excess of
the interpleaded funds and the IRS lien had priority.
MEMORANDUM OPINION
BLOCH,
District Judge:
Plaintiffs,
Blue Cross of Western Pennsylvania and Pennsylvania Blue Shield, have
brought this interpleader action. At the time of filing, plaintiffs owed
the Business and Educational Benefit Association, Inc. (BEBA) the sum of
$63,655.30 representing insurance commission proceeds. At the time that
plaintiffs attempted to make these payments to BEBA, BEBA was in the
midst of Chapter 7 bankruptcy proceedings. The court-appointed trustee
informed plaintiffs that he would not
admin
ister these funds to BEBA's creditors, and the funds were returned to
plaintiffs. Plaintiffs concede that this amount is owed and, as
stakeholder of those funds, have filed the instant action.
The only
parties alleging claims for these funds are Fairman Drilling Company
(Fairman) and the
United States of America
, Internal Revenue Service (IRS). Fairman is a creditor of BEBA, whose
loan notes are secured by an interest in "accounts receivable,
cash, contracts, choses in action, and generally other assets."
Fairman asserts that it is entitled to the funds and that its interest
was perfected prior to the tax liens recorded by the IRS. Fairman has
filed a motion for summary judgment on this claim.
Also before
the Court is plaintiffs' motion for attorney's fees, which has been
opposed by the IRS.
I.
Summary Judgment
Summary
judgment may only be granted if "the pleadings, depositions,
answers to interrogatories, and admissions on file, together with the
affidavits, if any, show that there is no genuine issue as to any
material fact and that the moving party is entitled to judgment as a
matter of law." Fed. R. Civ. P. 56(c). "Rule 56 mandates the
entry of summary judgment, after adequate time for discovery and upon
motion, against the 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 (1966). In considering a motion for summary judgment, this
Court must examine the facts in a light most favorable to the party
opposing the motion. International Raw Materials, Ltd. v. Stauffer
Chemical Corp., 898 F.2d 946, 949 (3d Cir. 1990).
The burden is
on the moving party to demonstrate that the evidence creates no genuine
issue of material fact. Chippollini v. Spencer Gifts, Inc., 814
F.2d 893, 896 (3d Cir.) (en banc), cert. dismissed, 483
U.S.
1052 (1987). Where the non-moving party will bear the burden of proof at
trial, the party moving for summary judgment may meet its burden by
showing that the "evidentiary materials of record, if reduced to
admissible evidence, would be insufficient to carry the non-movant's
burden of proof at trial."
Id.
See also Celotex, 477
U.S.
at 322.
In that there
are no genuine issues of material fact, summary judgment is appropriate
in the instant case.
A federal tax
lien is a perfected, choate lien on the date the lien arises. United
States v. Fidelity-Philadelphia Trust Co. [72-1
USTC ¶9394 ], 459 F.2d 771, 773 (3d Cir. 1972) (citing United
States v. Security Trust and Savings Bank [50-2
USTC ¶9492 ], 340 U.S. 47, 71 (1950)). The lien arises at the time
of assessment and continues until the liability is satisfied or becomes
unenforceable. 26 U.S.C. §6322
. However, when competing against a purchaser, holder of a security
interest, mechanics lienor, or judgment lien creditor, the IRS's
interest does not attach until notice of the tax lien is filed. 26
U.S.C. §6323(a) .
Further, 26 U.S.C. §6323(c)
provides that a federal tax lien is not valid against a security
interest in accounts receivable where the accounts receivable are
actually acquired by the taxpayer within 45 days after a tax lien
filing. 26 U.S.C. §6323(c)(2)(B)
. See United States v. McDermott [93-1
USTC ¶50,164 ], 61 USLW 4282, 4283 (1993); Congress Talcott
Corp. v. Gruber [93-1
USTC ¶50,283 ], 993 F.2d 315, 322-25 (3d Cir. 1993) (Greenberg, J.,
dissenting); Shawnee State Bank v. United States [84-1
USTC ¶9513 ], 735 F.2d 308, 310-311 (8th Cir. 1984). In the instant
case, it is uncontroverted that the IRS filed its notice of federal tax
lien on
October 13, 1991
. Therefore, assuming that Fairman is entitled to the 45-day extension
provided in §6323(c) ,
Fairman must demonstrate that it actually acquired the accounts
receivable prior to
November 28, 1991
. 1
In the instant
case, there is no question that plaintiffs did not begin issuing the
commission checks until February 19, 1992, well after the 45-day
safe-harbor provided by 26 U.S.C. §6323(c)
. Therefore, the lien of the IRS has priority under §6323(a)
, and judgment will be entered in favor of the IRS and against
Fairman and the remaining defendants.
II.
Attorney's fees
Generally,
courts have discretion to award attorney's fees to a disinterested
stakeholder in an interpleader action. Abex Corp. v. Ski's
Enterprises, Inc. [85-1
USTC ¶9144 ], 748 F.2d 513, 516 (9th Cir. 1984). However, the
existence of superior federal tax liens gives the government a statutory
priority over the interpleader plaintiffs' ability to diminish the fund
by an award of attorney's fees. United States v. Wilson [64-1
USTC ¶9396 ], 333 F.2d 147, 149 (3d Cir. 1964). See also Cable
Atlantic, Inc. v. Project, Inc., 749 F.2d 626, 627 (11th Cir. 1984);
Abex [85-1
USTC ¶9144 ], 748 F.2d at 516.
Because the
government's tax lien is far in excess of the interpleaded funds, and
because the IRS prevailed in the interpleader action, plaintiffs are not
entitled to an award of attorney's fees.
1
Fairman's interest in the accounts receivable was not perfected prior to
the issuance of the commission checks since "the amount of the
lien" was not established until that time. McDermott [93-1
USTC ¶50,164 ], 61 USLW at 4282 (citing
United States
v. City of
New Britain
[54-1
USTC ¶9191 ], 347 U.S. 81, 84 (1954)).
[80-2 USTC
¶9725]Campagna-Turano Bakery, Inc., Plaintiff-Appellee v.
United States of America
, Defendant-Appellant
(CA-7),
U. S. Court of Appeals, 7th Circuit, No. 79-2355, 10/3/80, Affirming an
unreported District Court decision
[Code Sec. 6323]
Attorneys' fees and court costs: Interpleader action: Tax liens not
satisfied.--A debtor bakery, which brought an interpleader action
after the amount it owed to its creditor had been completely impressed
with perfected federal tax liens, was not entitled to recover its costs
and attorneys' fees because the amount the debtor owed was insufficient
to satisfy the federal tax liens. Code Sec. 6323, the exclusive source
of exceptions to the priority of federal tax liens, does not create an
exception to the superiority of the tax liens for the claims of
interpleading plaintiffs who incur expenses for court costs and
attorneys' fees. The District Court's decision to award costs and
attorneys' fees while valid tax liens remained outstanding was reversed.
Louis W.
Levit, Levit & Miller,
105 W. Adams St.
,
Chicago
,
Illinois
60603
, for plaintiff-appellee. Stephen Gray, Department of Justice,
Washington
, D. C. 20530, for defendant-appellant.
Before SWYGERT
and SPRECHER, Circuit Judges, and DUMBAULD, Senior District Judge. *
SPRECHER,
Circuit Judge.
This case
presents the question of whether a debtor is entitled to costs and
attorneys' fees when it brings an interpleader action in which the
amount the debtor owes is insufficient to satisfy federal tax liens when
the federal tax liens attached after the contract creating the debt but
before the filing of the interpleader. We hold that the interpleading
debtor may not recover its costs and attorneys' fees at the expense of
the tax liens.
I. In
November, 1974, the Campagna-Turano Bakery, Inc. ("Campagna")
entered into a contract to purchase office furniture, bakery equipment,
and store contents from the Yamo Baking Company ("Yamo"). The
purchase price was $60,000; $30,000 was paid in cash to Yamo upon
execution of the contract and the remaining $30,000 was payable in 30
monthly installments of $1,000. After having made four payments of
$1,000, Campagna ceased paying Yamo, leaving a balance due of $26,000.
In December, 1975, Campagna filed a complaint interpleading several
defendants, including the
United States
, who might have claims superior to Yamo's to the $26,000 still owed by
Campagna. The
United States
had duly recorded two series of tax liens against Yamo: $22,997.23 in
liens (Lien 1) recorded prior to the November, 1974, contract, and
$8,842.58 in liens (Lien 2), recorded after the November, 1974, contract
but prior to Campagna's December, 1975, interpleader action.
In the
Interpleader action, the District Court awarded $22,997.23, the amount
of Lien 1, to the
United States
. The court awarded $3,002.77 to Campagna as costs and attorney's fees. 1
These awards equalled the $26,000 still owed by Campagna. 2 The government argues that the District Court could not
award an amount for costs and attorneys' fees while valid tax liens
remained outstanding. We agree, and reverse.
II.
If any taxpayer fails to pay a tax after notice and demand, 26
U. S.
C. §6321 (1954) creates a lien on all property belonging to that
taxpayer. This tax lien becomes effective immediately and, upon notice,
has priority over all other claims to the lien-encumbered property,
except those claims enumerated in §6323.
There
is no dispute that the first tax lien, securing $22,977.23, is superior
to Campagna's claim for costs and attorneys' fees. Notice of the lien
was given prior to the November, 1974, contract. But Campagna argues
that the second lien, filed after the contract, is not superior to its
claim for costs and attorneys' fees.
The
Campagna argument is as follows. Lien 2 could only attach to such
property as Yamo then owned. But Yamo did not "own" the
$26,000 owed to it from Campagna: it merely owned a "non-negotiable
chose in action" for the balance due on the purchase contract.
Thus, the argument continues, the government, by virtue of its lien,
acquired a status similar to that of a garnishee and could assert only
those rights which Yamo could have asserted. Yamo certified in the
November, 1974, contract that all of its property had been free and
clear and that all taxes were paid or would be paid within thirty days.
Since Yamo violated that contractual certification, Campagna argues that
it would have the right to offset the expense of the interpleader
against the debt otherwise due to Yamo. Thus, the argument concludes, if
the government must stand in the shoes of Yamo, Campagna should have the
right to offset the expense of the interpleader against the government's
Lien 2.
Campagna's
argument is creative, but it is not the law. The law is that a court may
not diminish the amount available for satisfaction of a federal tax lien
by awarding costs and attorneys' fees to an interpleading plaintiff.
Section 6323 of the Federal Tax Lien Act of 1966 is the exclusive source
of exceptions to the priority of federal tax liens. Unfortunately for
Campagna, §6323 creates no exception to the superiority of federal tax
liens for the claims of interpleading plaintiffs who incur expenses for
court costs and attorneys' fees.
Not
only does §6323 not provide a relevant exception, but the claim raised
by Campagna is similar to that raised by interpleading plaintiffs but
rejected in a plethora of cases. In United States v. Liverpool &
London Ins. Co. [55-1 USTC ¶9136], 348
U. S.
215 (1955), the issue before the Supreme Court required a determination
of priority between federal tax liens and a garnishment lien. The
garnishee had filed suit to have priority established and then requested
costs and attorneys' fees. The Supreme Court first found that the
federal tax lien was superior. It then held that costs and attorneys'
fees could not be awarded prior to satisfaction of the tax liens.
The
Supreme Court reached a similar result in United States v. R. F. Ball
Construction Co. [58-1 USTC ¶9327], 355
U. S.
587 (1958). There, the Court summarily reversed a decision awarding
costs and attorneys' fees to an interpleading plaintiff. The Court held
that the Liverpool & London decision controlled claims by
interpleaders for costs.
This
court, in Bjork v. United States [73-2 USTC ¶9689], 486 F. 2d
934 (7th Cir. 1973), reached a result compatible with the Supreme
Court's decisions in Liverpool & London and in Ball.
Finding that a federal tax lien was valid and had attached, this court
held that the tax lien necessarily precluded an award of costs and
attorneys' fees to an interpleading plaintiff unless there was some
amount remaining after satisfaction of the tax lien.
These
and other decisions in the Tax Court and in every circuit which has
considered the issue have consistently held that an interpleading
plaintiff cannot be awarded costs and attorneys' fees when such an award
would diminish the amount available to satisfy a federal tax lien. 2
Campagna does not even address these cases or attempt to distinguish the
facts in its situation from this clear line of authority. But ignoring
precedent will not make the cases go away.
III.
Campagna's primary argument 4
is that the government's tax lien attached only to a chose in
action--not to the amount of $26,000 still due to Yamo and that costs
and attorneys' fees can be an offset against the government's lien. But
allowance of such an offset was specifically rejected by the Supreme
Court in United States v. Pioneer American Ins. Co. [63-2 USTC ¶9532],
374 U. S. 84 (1963). In Pioneer, a mortgage contract between a
defaulting taxpayer and his mortgage company provided that the mortgagee
would be entitled to its costs and attorneys' fees if the
taxpayer-mortgagor defaulted on his payments. After such a default did
occur, the
United States
secured a §6323 tax lien against the mortgaged property. The
United States
conceded that its tax lien was subordinate to the prior mortgage but
contended, however, that its tax lien was superior to the mortgagee's
claim for costs and attorneys' fees out of the remaining proceeds from
the sale of the mortgaged property. The
United States
argued that the mortgagee's claim for its costs and attorneys' fees
could not become choate until after they had been incurred and this per
se did not occur until after the tax lien attached. The Supreme
Court agreed, holding that the claim for attorneys' fees was necessarily
inchoate at least until the tax liens attached and that the tax liens
must have priority. 5
Campagna's
situation is similar to the situation in Pioneer. Campagna filed
its interpleader complaint in December, 1975. By that time, federal tax
liens in excess of the $26,000 due to Yamo had attached and had been
duly recorded. Thus, well before Campagna incurred any expenses in
prosecuting the interpleader suit, the amount due to Yamo had been
completely impressed with perfected federal tax liens. Any amount for
costs and attorneys' fees could only become choate after the
interpleader action had been heard and after the court specified an
allowable amount. Pioneer, 374
U. S.
at 91. Thus, Campagna's "offset" theory fails because there
never was any choate amount to be offset before the federal tax liens
had attached and had been recorded.
Campagna
argues that Pioneer is inapposite because it does not deal with a
situation where the claim for attorneys' fees is a "direct
offset" against the chose in action to which the government has
succeeded. But Campagna's argument begs the question. None of the
attorneys' fees cases involves a "direct offset" because all
courts have determined that no "direct offset" is allowed.
Indeed, Pioneer emphasizes that, until the court award, there is
not even a choate claim, let alone a "direct offset."
Campagna
suggests that the fact that Yamo misrepresented its tax status implies a
right to an offset for attorneys' fees. Its argument is that since Yamo
misrepresented itself as having no tax liability, and since the
interpleader was necessary because Yamo did have a tax liability, then
Yamo should be liable for costs and attorneys' fees relating to the
interpleader. We do not decide that question. But even if an offset were
allowed in a case between Campagna and Yamo, it could not be allowed in
the present case. Pioneer clearly teaches that costs and
attorneys' fees cannot be offset against a tax lien while they remain
inchoate, and that costs and attorneys' fees necessarily remain inchoate
until the actual award by the court.
Indeed, the
circumstances in Pioneer were even more favorable to the
interpleading plaintiff than they are here. There, the contract giving
rise to the interpleaded fund specifically stated that attorneys' fees
and costs would be granted to an interpleading plaintiff. The Pioneer
court found that such language made no difference; the claim remained
inchoate. In the Campagna-Yamo contract, there is not even such specific
language relating to attorney's fees. The relevant language is merely
Yamo's certification that it had no tax liabilities. That certification
cannot change the Pioneer result.
Campagna
relies on United States v. Winnett [48-1 USTC ¶9115], 165 F. 2d
149 (9th Cir. 1947), where the court found that the rights of the
government do not extend beyond those of the taxpayer whose right to
property is levied upon. But Campagna's reliance is misplaced. Winnett
did not deal with attorneys' fees but involved a written notice of
limitation of interest established prior to the attachment or recording
of federal tax liens. Winnett had borrowed money from Summers and later
endorsed a note from Summers to a bank. The written contract between the
parties stated that if Summers defaulted and Winnett was called on to
make payment, the amounts so paid could be offset against the amounts
due on Winnett's note to Summers. Summers did default and Winnett paid
the bank accordingly. Shortly before the default, the government filed a
tax lien against Summers and subsequently levied on Winnett for the
entire debt. The court found that the government was only entitled to
the amount of Winnett's debt to Summers remaining after the offset
because the limitation of interest and right of offset had been reduced
to writing before any tax liens had attached. In effect, the court found
that the claim had been choate. 6
But attorneys' fees claims, of course, are not choate until established
and awarded by a court. Thus, the Winnett decision offers no
reason for departing from the Pioneer result. Similarly, the
cases cited by Campagna as following Winnett do not deal
with attorneys' fees and are equally unavailing. 7
IV. Campagna
argues persuasively that the result we reach is inequitable. Although
not legally required to bring an interpleader action, it was forced to
do so in order to avoid liability exceeding the amount of the debt owed
to Yamo. Now, it is unable to recover costs and attorneys' fees
resulting from the initiation of that action. Perhaps §6323 should
contain an exception for plaintiffs in Campagna's situation. But it is
for Congress, not this court, to write that exception.
Finally,
Campagna argues that the government's position in this case is
unconscionable. First, the government allowed Yamo to incur serious
delinquencies but made no serious effort to collect the taxes due. Then,
Campagna providently provided the government with a convenient forum for
the collection of the tax liens, yet the government responded with
numerous technical and procedural objections. But Campagna cites no law,
and we know of none, requiring the government to move rapidly on all tax
delinquencies. As to the government's technical and procedural
objections, 8
we cannot compel good sportsmanship.
REVERSED.
*
Senior District Judge Edward Dumbauld of the Western District of
Pennsylvania is sitting by designation.
1
All of the defendants named in the interpleader complaint, except the
United States
, failed to answer; default judgments were entered against them.
2
The District Court ordered that the $34,000 worth of assets already
purchased by Campagna be discharged from any and all tax liens against
Yamo. These funds are not at issue in this appeal.
3
See Hinkley & Donovan v. Paine [77-1 USTC ¶9373], 424 F.
Supp. 1013, 1021 (N. H. 1977) (disinterested bank-stakeholder who had
filed an interpleader not entitled to costs and attorneys' fees when
amount available was insufficient to satisfy prior federal tax liens); United
States v. State National Bank of Connecticut [70-1 USTC ¶9209], 421
F. 2d 519 (2d Cir. 1970) (no claim for attorneys' fees is enforceable
when the available funds are insufficient to satisfy a judgment based on
prior federal tax liens). Accord, MDC Leasing Corp. v. New York
Property Ins. Underwriting Ass'n [79-1 USTC ¶9122], 450 F. Supp.
179 (S. D. N. Y. 1978), aff'd, 603 F. 2d 213 (3d Cir. 1979); Corwin
Consultants, Inc. v. Interpublic Group of Companies, Inc. [74-1 USTC
¶9401], 375 F. Supp. 186, 193 (S. D. N. Y. 1974), rev'd on other
grounds [75-1 USTC ¶9299], 512 F. 2d 605 (2d Cir. 1975); Pennsylvania
Insurance Co. v. Long Island Marine Supply Corp. [64-2 USTC ¶9505],
229 F. Supp. 186, 188 (S. D. N. Y. 1964); United States v. Henry's
Bay View Inn, Inc. [61-1 USTC ¶9157], 191 F. Supp. 632, 634 (S. D.
N. Y. 1960); United States v. Wilson [64-1 USTC ¶9396], 333 F.
2d 147, 149 (3d Cir. 1964); United States v. Administrator of Estate
of McCall [70-1 USTC ¶9183], 313 F. Supp. 1399, 1402-03 (M. D. Pa.
1969); Spinks v. Jones, 499 F. 2d 339 (5th Cir. 1974); Short
v. United States [75-1 USTC ¶9232], 395 F. Supp. 1151, 1155 (E. D.
Tex 1975); Texas Oil & Gas Corp. v. United States [72-2 USTC
¶9653], 340 F. Supp. 409, 411 (W. D. Tex. 1971), aff'd, 466 F.
2d 1040 (5th Cir. 1972), cert. denied, 410 U. S. 1040 (1973); Unlhorn
v. Owens [63-1 USTC ¶9149], 211 F. Supp, 798, 802-03 (S. D. Tex.
1962); Bank of America Nat. Trust & Sav. Ass'n v. Mamaos
[75-1 USTC ¶9211], 509 F. 2d 1217, 1219-20 (9th Cir. 1975); C.
I.
T. Corp. v. United States [72-2 USTC ¶9544], 344 F. Supp. 1272,
1277 (N. D. Cal. 1972); United States v. Chapman [60-2 USTC ¶9667],
281 F. 2d 862, 870-71 (10th Cir. 1960).
4
In the proceedings below, Campagna argued that it was a
"purchaser" within the meaning of §6323 and therefore
entitled to the priority accorded by that section to purchasers. The
District Court's order was based on this argument. On appeal, however,
Campagna has abandoned this argument, both in the brief and at oral
argument. Therefore, that argument is not considered in this opinion.
Campagna also
claimed on appeal that some undelineated new argument was raised by the
United States
on appeal with regard to "post-purchase levies". But
Campagna's argument is groundless. The
United States
has consistently claimed the entire fund on the theories relied on in
this appeal.
5
The Court stated:
[I]t is
equally apparent that the amount of the lien for attorney's fees was
undetermined and indefinite when the federal tax liens in question were
filed. The mortgage held by respondents secured a promissory note which
obligated the mortgagor maker to pay a "reasonable attorney's
fee" "in the event of default" and" of the placing
of this note in the hands of an attorney for collection." By the
time the federal liens subordinated by the Arkansas courts were placed
of public record, default had occurred, the mortgagee had elected to
declare the note due and payable, an attorney had been engaged and a
suit to foreclose the mortgage had been filed. But the "reasonable
attorney's fee"--reasonable in relation to the service to be
performed by the attorney--had not been reduced to a liquidated amount.
The final amount was to be established by court decree that the Chancery
Court set the fee considerably below the sum requested. Moreover, there
is no showing in this record that the mortgagee had become obligated to
pay and had paid any sum of money for services performed prior to the
filing of the federal tax lien.
374
U. S.
84, at 90-91 (footnote omitted).
6
The court stated:
These writings
served as a notice of litigation of Summers' interest in the note to all
who might subsequently take the note, either as purchaser for value or
for a pre-existing debt. One choosing to reach this chose-in-action
belonging to Summers by attachment or garnishment could acquire no
greater right against Winnett than that possessed by Summers. This would
hold true even though the sovereign initiated the proceeding.
165
F. 2d 149, at 151 (footnote omitted).
7
Campagna cites two other cases in support of its argument that the tax
lien attached to Yamo's claim against Campagna was subject to a set-off
for costs and attorneys' fees. Neither case, however, dealt with costs
and attorneys' fees, and both cases involved choate claims prior to tax
liens. In Stuart v. Willis [57-1 USTC ¶9330], 244 F. 2d 925 (9th
Cir. 1957), the court held that the government's levy upon the property
of joint ventures, to liquidate the tax liability of one venturer alone,
was void. In Karno-Smith Co. v. Maloney [40-2 USTC ¶9533], 112
F. 2d 690 (3rd Cir. 1940), the court held that an insolvent
subcontractor had no enforceable right to monies held by a general
contractor, but subject to a valid supplier's claim. Consequently, tax
liens against the subcontractor could not reach the same monies. Neither
case directly supports Campagna's argument and neither is inconsistent
with the Pioneer opinion.
8
Campagna complains that the government first sought to dismiss this
action in District Court for lack of jurisdiction but then made it clear
that, once the plaintiff refiled in state court, it would remove the
case back into federal court. We confess we cannot understand this
strategy. But we make no opinion as to the propriety of these actions
and find they have no relevance to the issue on appeal.
[75-2 USTC
¶9627]National Bank of Joliet, Plaintiff v. W. H. Barber Oil Co., Beach
Coal & Oil Co., Carson Petroleum Co., Illinois Bell Telephone
Company, E. F. McDonald Stamp Company, Sprague, Relyea, Hicks, Trico
Transport, C. Bud Werner, Great Lakes Solvent, Starr Johnson and Ruth
Carnaghi and the United States of America, Defendants
U.
S. District Court, No. Dist.
Ill.
, East. Div., No. 74 C 2725,
7/11/75
[Code Sec. 6323]
Lien for taxes: Attorney's fees: Bank-stakeholder.--Attorney's
fees of interpleading bank-stakeholder were not allowed against a fund
which was insufficient to satisfy prior federal tax liens.
Rob
ert Quinn, Schenk, Andreano, Duffy & Quinn, 505 Morris Bldg.,
Joliet
,
Ill.
, for plaintiff. Jeffery D. Snow, Department of Justice,
Washington
, D. C. 20530, for defendants.
Memorandum
Opinion
Motion for Summary Judgment
MAROVITZ,
District Judge:
According to
the amended complaint, plaintiff National Bank of Joliet made various
loans of money to Carnaghi Oil Co., including a loan of $100,000.00 as
evidenced by a note dated March 24, 1969, and secured by written and
perfected assignment of accounts receivable, inventory, furniture,
fixtures and equipment of Carnaghi Oil Co., and a loan in the amount of
$50,500.00 as evidenced by a note dated May 28, 1970, and secured by
written and perfected assignment of inventory, accounts receivable,
equipment, cars and trucks of Carnaghi Oil.
In the early
part of 1970 the principals of Carnaghi Oil, along with its creditors
and plaintiff, concluded that future operations of Carnaghi Oil were
financially impossible, and the parties agreed to a discontinuance of
business operations on or about
July 20, 1970
, to be followed by a liquidation of assets.
Pursuant to
said agreement liquidation monies were received and held by plaintiff as
escrow agent and various disbursements were made therefrom to defray
necessary costs and expenses of
admin
istration and as payment of secured loans.
[Interpleader
Action]
Plaintiff
brings this interpleader action as a disinterested stakeholder, seeking
court resolution as to the proper distribution of the remaining
liquidation monies of over $77,000 to the creditors of Carnaghi Oil Co.
Plaintiff states that "it has no interest whatsoever in the balance
of the funds so held by it except as to the usual bank charges for the
transmission of such funds or other reasonable and necessary expenses
incurred by it."
Answer to
plaintiff's interpleader complaint have been filed by the United States,
E. F. McDonald Stamp Company, Starr Johnson, First National Bank of
Joliet as Trustee under the Last Will and Testament of Frank J.
Carnaghi, Deceased, Beach Coal & Oil Co., and United Fire &
Casualty Co. The
United States
has issued interrogatories to all of the defendants, and responses have
been received from Beach Coal & Oil Co., W. H. Barber Oil Co., C.
Bud Werner, United Fire & Casualty Co., and the plaintiff.
[Tax
Liens]
The government
has lodged a claim in the amount of $147,373.77 based on tax liens
against Carnaghi Oil; the government contends that said liens have
priority over all remaining claims of other creditors. The liens arise
from assessments made for unpaid Federal withholding and FICA taxes,
excise taxes, and employment taxes for various periods beginning in the
third quarter of 1969 and extending through the end of the calendar year
1970.
The government
bases its priority on 26
U. S.
C. §§ 6321, 6322, and 6323, which state in part:
SEC. 6321.
LIEN FOR TAXES.
If
any person liable to pay any tax neglects or refuses to pay the same * *
* 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.
SEC. 6322.
PERIOD OF LIEN.
Unless
another date is specifically fixed by law, the lien imposed by Section
6321 shall arise at the time the assessment is made and shall continue
until the liability for the amount so assessed * * * is satisfied * * *.
SEC. 6323.
VALIDITY AND PRIORITY AGAINST CERTAIN PERSONS.
(a)
Purchases [Purchasers], Holders of Security Interests, Mechanic's
Lienors, and Judgment Lien Creditors.--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 * * * has been filed by the Secretary or his delegate.
The
government further notes that some of the parties to this suit have not
appeared, and of those that have none have set forth a claimed security
interest or mechanic's lien or judgment lien. Based on the above, the
government moves for summary judgment.
[Attorney's Fees Requested]
The only
opposition to the government's motion comes from plaintiff, which seeks
to withdraw the sum of $4,012.50 for payment of attorneys' fees.
Plaintiff relies on 26
U. S.
C. §6323(b)(1) and (h)(4) for support. Those sections state:
(b)
Protection for certain interests even though notice filed.-- Even though
notice of a lien imposed by section 6321 has been filed, such lien shall
not be valid--
(1)
Securities.--With respect to a security (as defined in sub-section
(h)(4))--
(A)
as against a purchaser of such security who at the time of purchase did
not have actual notice or knowledge of the existence of such lien; and
(B)
as against a holder of a security interest in such security who, at the
time such interest came into existence, did not have actual notice or
knowledge of the existence of such lien.
26 U. S. C. §6323(b)(1)
*
* *
Security.--The
term "security" means any bond, debenture, note, or
certificate or other evidence of indebtedness, issued by a corporation
or a government or political subdivision thereof, with interest coupons
or in registered form, share of stock, voting trust certificate, or any
certificate of interest or participation in, certificate of deposit or
receipt for, temporary or interim certificate for, or warrant or right
to subscribe to or purchase, any of the foregoing; negotiable
instrument; or money.
26 U. S. C. §6323(h)(4)
[Notes
Provided Fees]
Plaintiff argues that the notes and security agreements held by it
provided that the Bank's security included all reasonable attorneys'
fees incurred by the Bank by reason of said loan, collections and
related transaction.
[Prior Dispositive Decision]
In United
States v. State National Bank of Connecticut, [70-1 USTC ¶9209] 421
F. 2d 519 (2d Cir. 1970), the government commenced suit to reduce tax
liens to judgment and foreclose the liens on certain bank accounts held
by defendant bank. The defendant bank in effect interpleaded, although
in the form of what amounted to a disclaimer and tender of the balance
in the account into court. The district court granted attorneys' fees to
the bank out of the funds deposited. The Court of Appeals reversed with
language clearly dispositive herein:
We
hold that a disinterested bankstakeholder 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. United States v. R. F. Ball
Construction Co. [58-1 USTC ¶9327], 355 U. S. 587, 78 S. Ct. 442, 2
L. Ed. 2d 510 (1958); United States v. Liverpool & London &
Globe Ins. Co. [55-1 USTC ¶9136], 348 U. S. 215, 75 S. Ct. 247, 99
L. Ed. 268 (1955); United States v. Wilson [64-1 USTC ¶9396],
333 F. 2d 147 (3d Cir. 1964); Seaboard Surety Company v. United
States [62-2 USTC ¶9653], 306 F. 2d 855 (9th Cir. 1962); United
States v. Henry's Bay View Inn, Inc. [61-1 USTC ¶9157], 191 F.
Supp. 632 (S. D. N. Y. 1960).
Thus,
in
United States
tax cases, at least, the attorneys' fees and costs are tied to the fund.
If the government gets the whole fund, the fundholder takes nothing from
it for attorney's fees and costs. Bank of America National Trust
& Savings Association v. Mamakos [73-1 USTC ¶9290], 57 F. R. D.
198 (N. D. Cal. 1972).
Nor do we
believe plaintiff is entitled to attorneys' fees under 26 U. S. C. §6323(e)(3),
which provides that a lien or security interest deemed to be prior to a
federal tax lien shall extend to reasonable expenses, including
attorneys' fees incurred in collecting or enforcing the secured
obligation. The fees petitioned for here arise from the attorneys'
services relating to this lawsuit and to the
admin
istration of the escrow account and not for services relating to the
enforcement of plaintiff's secured obligation. It is exactly these
former legal services for which the Bank is precluded from claiming fees
from an inadequate fund.
The
government's motion for summary judgment is granted; the plaintiff is
not entitled to attorneys' fees for its role as disinterested
stakeholder. Plaintiff's motion for summary judgment is accordingly
denied.
[73-2 USTC
¶9613]Beaufort Transfer Company, Plaintiff v. Fischer Trucking Company;
Harry Morris; United States of America: Division of Employment Security,
State of Missouri; Driscoll Insurance Agency, Inc.; Purcell-Ellis Tire
Company; Yellow Freight Systems, Inc.; Ryder Trucklines; Norwalk Truck
Lines; Navajo Freight Lines, Inc.; Wilson Freight Company; Acme Fast
Freight, Inc.; Fischer Transfer Company; Philipp Transit Lines, Inc.,
Defendants
U.
S. District Court, East. Dist.
Mo.
, East. Div., No. 71 C38(2), 2/21/73
[Code Sec. 6323]
Tax liens: Chattel mortgage: Garnishments: Legal expenses and fees:
Cross-claim.--An amount deposited with the court in payment for the
transfer of interstate and intrastate common carrier operating rights
was disposed of as follows: (a) a chattel mortgage, earlier in time, had
priority over the U. S. tax liens; (b) claims by garnishors were denied
since the right to receive payment by the seller for the transfer of the
operating rights was conditional between the time of service of the
garnishments and the filing of the garnishees' answers; (c) attorney
fees of the buyer that were related to the transfer of the rights were
allowed since the sale contract called for a division of such expenses
between buyer and seller; (d) legal expenses of the buyer related to a
suit for specific performance to thwart a second sale agreement entered
into by the seller were denied since these were not contemplated in the
initial sale contract; (e) cross-claim by the trucking company that
attempted to purchase the rights under the second agreement for loans
made to the seller during pendency of the suit for specific performance
were denied; (f) the buyer's request for attorney fees related to
bringing this interpleader suit was denied since it was a claimant to
the fund and not just a disinterested stockholder.
Fred M.
Reichman, William J. Tate, Husch, Eppenberger, Donohue, Elson &
Cornfeld, 7 N. 7th St., St. Louis, Mo., for plaintiff. J. H. Langworthy,
103 E. St. Louis St., Pacific Mo., Rufus D. Shannon, 200 N. Meramec,
Clayton, Mo., Richard O. Funsch, 506 Olive St., St. Louis, Mo., Flynn
& Parker, 319 N. 4th St., St. Louis, Mo., Thompson, Mitchell,
Douglas & Neill, Hall, Reaban, Seigel & & Hyatt, 705 Olive
St., St. Louis, Mo., for defendants.
Memorandum
Opinion and Order
REGAN,
District Judge:
This action of
interpleader filed in the Circuit Court of the City of
St. Louis
was removed by the
United States of America
. The sum of $32,750 was deposited in the Registry of the Court pursuant
to our order of
December 9, 1971
. Numerous claims against the funds have been asserted, including a
claim by plaintiff.
Briefly, the
facts giving rise to this action are as follows: On September 8, 1966,
Fischer Trucking Company (Fischer) contracted to sell to Beaufort
Transfer Company (Beaufort) Fischer's interstate and intrastate common
carrier operating rights for the lump sum figure of $33,000.00, of which
$250 was paid on the date of the contract, the balance to be paid within
30 days after the Interstate Commerce Commission (ICC) and the Missouri
Public Service Commission approved the transfer of the rights. On the
same date a "Letter of Disbursement," to be adverted to later,
was executed by Fischer.
On
September 20, 1966
, another contract was entered into by Fischer, this one with Philipp
Transit Lines, Inc. (Philipp), whereby Fischer purported to sell to
Philipp the identical operating rights for the sum of $40,000. As the
result of Fischer's refusal to abide by its September 8 contract,
Beaufort sought and obtained a decree of specific performance. On
February 9, 1970
, the Supreme Court of Missouri affirmed the trial court's decree. Beaufort
Transfer Co. v. Fischer Trucking Co.,
Mo.
, 451 S. W. 2d 40.
After the
mandate of the Missouri Supreme Court was filed in the court below,
applications for the transfer of the operating rights were prosecuted
before the respective commissions. The ICC approved the transfer of the
interstate rights by an order served on
November 16, 1970
, the order to become effective
December 21, 1970
(35 days after the service date). This suit was filed
December 11, 1970
, although Beaufort had not yet succeeded in obtaining the necessary
approval of the Missouri Public Service Commission for the transfer of
the intrastate rights. Even as late as the date this case was tried,
such rights had not been obtained.
We first
consider whether any of the claimants obtained a lien on the purchase
price indebtedness or a right against Beaufort by virtue of garnishment.
In ruling this issue we reject the contention of the
United States
that the service of a writ of garnishment in aid of execution would not
suffice to create a lien upon an indebtedness owing to a judgment
debtor. Vittert Const. & Inv. Co. v. Wall Covering Contr., Inc.,
Mo. App., 473 S. W. 2d 799; Dugan v. Missouri Neon & Plastic
Advertising Company, 8 Cir., decided February 6, 1973.
Claims
purporting to be based on execution and garnishment in aid thereof are
asserted by the following claimants: The Division of Employment Security
for the State of
Missouri
, Driscoll Insurance Agency Company, Inc., Purcell-Ellis Tire Company,
Acme Fast Freight, Inc., Yellow Freight Systems, Inc., Ryder Trucklines,
Inc., Norwalk Truck Lines, Navajo Freight Lines, Inc., and Wilson
Freight Company.
Under Missouri
law (Missouri Supreme Court Rule 90.02; Section 525.040 R. S. Mo.),
notice of garnishment has the effect of attaching all money, rights,
credits, or other choses in action of the judgment defendant in the
garnishee's possession or charge or under his control at any time
between the service of the garnishment and the time of filing the
garnishee's answer. The
Missouri
authorities make it abundantly clear, however, that a debt which is
conditional or dependent for its existence upon some contingency is not
a subject of garnishment. Raithel v. Hamilton-Schmidt Surgical Co.,
Mo. App., 48 S. W. 2d 79, 81, 82; Beckham v. Tootle, Hanna & Co.,
19 Mo. App. 596, 604; Zeltman v. Commercial Bank, 67 Mo. App.
672, 677; State ex rel. Government Employees Insurance Co., Mo.
App., 454 S. W. 2d 943, 950.
In view of the
foregoing, it is necessary to ascertain the precise date Beaufort became
unconditionally obligated to pay the purchase price for the operating
rights. The contract of
September 8, 1966
, expressly provides that the purchase is conditioned upon the
rights being transferred by the ICC and the Missouri Public Service
Commission to Beaufort without restriction and that the $32,750 balance
of the purchase price shall be paid 30 days after the operating rights
have been "finally transferred." The decree of specific
performance directs Fischer to perform the contract by accepting the
purchase price, conditioned upon the motor carrier operating
rights being transferred by the ICC and the Missouri Public Service
Commission. Obviously, unless the regulatory bodies authorized the
transfer of the rights, Beaufort was in no event obligated to pay the
purchase price. Prior to the approval of the transfers, the indebtedness
was conditional and contingent.
The ICC
approved the transfer of the interstate rights by an order served
November 16, 1970
, to be effective
December 21, 1970
. It is, however, unnecessary to definitively decide whether the
condition or contingency as to the interstate rights was removed as of
November 16, the service date, or December 21, the effective date of the
order, for the reason that the "purchase" and the payment of
the purchase price were conditioned upon the transfer to Beaufort of both
the intrastate and the interstate rights. Beaufort was not required to
accept the transfer of one of the rights unless the other was also
transferred, so that until both rights were transferred the indebtedness
remained conditional and contingent. 1
By filing this
interpleader suit on December 11, 1970, Beaufort waived the condition as
to the approval of the transfer by the Missouri Public Service
Commission, accepted the approved transfer of the interstate right as
full compliance by Fischer, and thereby at that time conceded its
liability for the full purchase price. In these circumstances we hold
that as of December 11, 1970, Beaufort's contractual and court-ordered
indebtedness to Fischer was for the first time no longer conditional or
contingent, and was then owing, but not yet due (because the 30 day
period had not elapsed.) In light of the foregoing determination, we
consider the claims based on execution and garnishment.
The Division
of Employment Security filed Certificates of Assessment against Fischer
on
November 17, 1966
,
July 27, 1966
and
December 23, 1966
. The filing of such certificates has the effect of a judgment of the
Circuit Court where filed. Section 288.170, R. S. Mo. Executions and
garnishments in aid thereof were issued on each judgment naming Beaufort
as garnishee. Answers to interrogatories were duly filed by Beaufort in
each proceeding, the last such answer being filed
April 30, 1970
. Inasmuch as the indebtedness of Beaufort to Fischer was not in
existence as an unconditional obligation on April 30, it follows that
the Division of Employment Security obtained no lien on the debt and
that its status was simply that of a judgment creditor.
Driscoll
Insurance Agency, Inc. obtained a judgment against Fischer on
October 4, 1966
. On
March 10, 1970
execution thereon was issued returnable
May 12, 1970
, Beaufort being summoned as garnishee. Interrogatories were filed on
April 20, 1970
and answered by Beaufort on
May 5, 1970
. No unconditional debt being owed by Beaufort on
May 7, 1970
, Driscoll obtained no lien on the debt and occupied the status of a
simple judgment creditor.
Purcell-Ellis
Tire Company obtained a judgment against Beaufort on
July 5, 1966
. An execution was issued on
March 9, 1970
, returnable
April 10, 1970
. The sheriff's return on the execution indicates service was had by
handing a copy of the "Summons to the Garnishee" to the agent
in charge of Beaufort. No showing is made that garnishment proceedings
were in fact instituted or prosecuted. We cannot speculate with respect
to this fact. Inasmuch as the return date was
April 10, 1970
, it was the duty of the garnishor (assuming that a garnishment had in
fact been issued) to file interrogatories not later than six days after
the return date. (
Missouri
Supreme Court Rule 90.12; Section 525.130, R. S. Mo.) There is no
contention that any such interrogatories were filed then or thereafter.
The failure to timely file interrogatories had the effect of abandoning
the garnishment (assuming there was a garnishment proceeding).
Durham
v. Jerome, 226 Mo. App. 1214, 49 S. W. 2d 637. Purcell-Ellis has
no lien on the indebtedness.
Acme Fast
Freight, Inc. obtained a magistrate court judgment against Fischer. A
transcript of this judgment was filed in the
Circuit
Court
of
St. Louis
County
. On
August 28, 1970
, execution and garnishment in aid thereof, naming Beaufort as
garnishee, were issued, returnable
November 27, 1970
. Interrogatories were filed
November 27, 1970
and were answered by Beaufort on
December 8, 1970
. Acme's claim is based on the premise that Beaufort's indebtedness
arose on
November 16, 1970
, the date the Interstate Commerce Commission order was served. We have
held to the contrary, not because the debt was not then due, but for the
reason that Beaufort's obligation was then, and until at least
December 11, 1970
, contingent and conditional. Since the indebtedness was not subject to
garnishment on
December 8, 1970
, when the interrogatories were answered, the claim of Acme Fast Freight
Inc. must also fail.
Yellow Freight
Systems, Inc., after obtaining judgment, instituted garnishment
proceeding in the
Magistrate
Court
of
St. Louis
County
. The transcript of the proceedings discloses that the answer of
garnishee to the interrogatories was filed
June 2, 1970
, long before an unconditional indebtedness became owing to Fisher.
Yellow's claim necessarily must fail.
Ryder
Trucklines, Inc., Norwalk Truck Lines, Inc., Navajo Freight Lines, Inc.,
and Wilson Freight Company each obtained magistrate court judgments,
transcripts of which were subsequently filed in the Circuit Court. We
glean from the transcripts of the court proceedings that several
garnishment proceedings were instituted by each judgment creditor, with
the last such being returnable
October 28, 1970
. The transcripts are silent as to whether or when interrogatories were
filed in those garnishments and whether or when, if so, the garnishee
filed answers thereto. 2
Claimant failed to sustain its burden of making a prima facie showing
that the garnishments were still effective when Beaufort's indebtedness
became unconditional. 3
The liens
claimed by the United States of America and Philipp Transit Lines, Inc
respectively, involve other considerations. The claim of the
United States of America
is based on assessments against Fischer for unpaid withholding,
employment and highway use taxes. Notices of the tax liens were duly
filed in
Franklin
County
(Fischer's principal place of business) on various dates beginning
September 8, 1966
and ending
February 5, 1969
. Other notices of tax liens were filed in
St. Louis County
,
Missouri
, on
July 1, 1971
. Notices of levy were served on Beaufort on
April 16, 1968
and
April 16, 1970
. The parties have stipulated that the aggregate of the taxes owing by
Fischer is $13,707.48 plus accrued interest at 6% per annum.
Section 6321,
26
U. S.
C. provides for a lien for unpaid taxes on all property and rights to
property belonging to the person liable for the tax. That motor carrier
operating rights, particularly interstate rights, are property is well
settled. See Friederich v. Dockery, 8 Cir., 209 F. 2d 677 and In
re Rainbow Express, Inc., 7 Cir., 179 F. 2d 1. Hence, the lien of
the
United States
attached to the operating rights, subject to any valid prior security
interest therein.
Claimant
Philipp Transit Line, Inc. is the transferee of a note executed by
Fischer under date of
January 4, 1966
, secured by a chattel mortgage of the same date on Fischer's operating
rights as well as other property. The payee of the note, Fischer
Transfer Company, duly recorded the chattel mortgage under the then
applicable
Missouri
law. Philipp purchased the note and mortgage on
November 19, 1969
. Still due on the note is $6,848.56 and interest at 4% per annum from
December 1, 1968
. 4
The chattel mortgage operated to confer a lien on the operating rights
in favor of the holder thereof. In re Rainbow Express, Inc., 7
Cir., 179 F. 2d 1. By virtue of Section 6323(a) and (h)(1), 26
U. S.
C., the lien of the chattel mortgage is prior to the later created tax
lien of the
United States of America
.
Under the
totality of the circumstances here involved, the liens of both Philipp
and the
United States of America
attached to the proceeds of the sale of the rights. 5
Were this not so, the ICC right which Beaufort acquired would be
encumbered with both the security interest of Philipp and the tax liens
of the Government. It was in recognition of this fact that the contract
of
September 8, 1966
provided that should there be any tax liens or mortgages on the
operating rights all such encumbrances "shall be removed prior
to the consummation of this purchase as herein provided."
It is clearly
to be inferred from the Letter of Disbursement that the parties
contemplated that Fischer, whose obligation it was to remove the liens,
would be financially unable to do so, so that Beaufort was thereby
authorized to discharge these liens out of the purchase price. Whether
the Letter of Disbursement constituted a contract obligating
Beaufort to pay the amount of the liens in partial satisfaction of the
sale price is not the real issue. What is important is that Fischer not
only authorized such payments by Beaufort but even now urges that out of
the monies due it from the deposit there be paid the amount of Philipp's
security lien and the Government's tax liens. And the decree of specific
performance, taking note thereof, directed Fischer to accept the sum of
$32,750, "less any and all sums paid by Beaufort Transfer
Company pursuant to the disbursement letter." In this situation,
neither Philipp nor the
United States
is an adverse claimant insofar as Fischer's interest in the final
disposition of the fund is concerned.
In view of the
fact that the aggregate of the lien claims of Philipp and the
United States
are substantially less than the amount of the purchase price which
Beaufort deposited, there would be no present problem resulting from the
multiplicity of the other claims (which we have disallowed) but for the
claim of Beaufort itself to substantial attorneys' fees. The contract of
September 8, 1966 provides that the "Buyer and Seller hereby assume
and agree to pay equally half-and-half all fees and expenses in
connection with the transfer of the motor carry (sic) operating rights
of Seller to Buyer, and under the Certificate of Public Convenience and
Necessity, to be transferred between the Buyer and Seller, under the
terms of this contract." Relying on this provision, Beaufort claims
entitlement to one-half of $9,779.60 (the aggregate legal fees and
expenses incurred by it in connection with the transfer of the ICC
permit and the so far unsuccessful effort to obtain the Missouri
rights), as well as one-half of $14,813.24 (the expenses which were
incurred in connection with the suit for specific performance).
We have no
doubt that the parties, knowledgeable as they were of the procedures of
the regulatory bodies and the legal intracacies involved in obtaining
transfers of operating rights, were aware that expert services would be
essential for the purpose of seeking (and hopefully obtaining) the
approval of the agencies for the transfers and that the provision of the
contract relating to the division of the cost of such services was
entered into with that fact in mind. We agree that Beaufort is entitled
to one-half of the fees and expenses it incurred in prosecuting the
application for the transfer of the ICC operating rights, and also
(although the matter is not entirely free from doubt) to the fees and
expenses incurred in unsuccessfully attempting to obtain the Missouri
rights. Hence, the purchase price was subject to a set-off of $4,889.80.
However,
neither party anticipated on
September 8, 1966
, that Fischer would attempt to avoid its obligation under the contract.
In our judgment, the expenses incurred in connection with the suit for
specific performance were not within the contemplation of the parties,
and we do not believe that the contract can reasonably be construed to
justify the payment to Beaufort of one-half of those expenses as
distinguished from the expenses directly incurred in the efforts to
obtain the approval of the transfers of the operating rights. Beaufort
is not entitled to recover any portion of its specific performance
expenses.
Philipp has
filed a cross-claim seeking a personal judgment against Fischer based on
moneys loaned in the aggregate sum of $8000. The loans were made to
Fischer during the pendency of the suit for specific performance in
order to enable Fischer to make the monthly payments due Fischer
Transfer Company, the then holder of the note secured by the chattel
mortgage. Philipp was a party to the suit and no doubt intended to apply
the loan indebtedness on the purchase price of the rights if Fischer and
Philipp prevailed.
In general,
interpleader jurisdiction is limited to the fund in controversy. Cf.
Northern Natural Gas Co. v. Grounds, 10 Cir., 441 F. 2d 705, 715. To
the extent that a cross-claim is permissible under federal or
Missouri
law, it must arise out of the transaction that is the subject matter of
the action or relate to the property that is the subject matter of the
action. Philipp's asserted cross-claim fits neither category. 6
True, Fischer does not object to the cross-claim, but since we have no
independent (e.g., diversity) jurisdiction as to the cross-claim,
we decline to exercise questionable pendent jurisdiction over it.
Finally,
Beaufort requests attorney's fees and expenses for bringing this
interpleader. Faced with a multiplicity of claims to portions of the
fund and vexed with a number of garnishment proceedings, some pending
and others threatened, Beaufort was, of course, justified in bringing
the claimants into one forum. Nevertheless, it was not a mere
disinterested stakholder, in that in its petition for an order of
interpleader it claimed entitlement to $10,127.09 out of the fund.
Beaufort's claim as filed in this proceeding was increased to
$12,796.42, some 39 per cent of the fund deposited.
"Costs
and attorney's fees frequently are denied when the stakeholder claims an
interest in the disputed fund . . .". Wright and Miller, Federal
Practice and Procedure, §1719, page 483. Cf. Standard Surety &
Casualty Co. v. Baker, 8 Cir., 105 F. 2d 578, 580; Continental
Casualty Co. v. Associated Pipe & Supply Co., D. C. La., 310 F.
Supp. 1207, 1214.
The attorneys'
fees sought by Beaufort are in the sum of $4,057.50 for 121 hours of
legal service in the preparation and prosecution of this action. In
addition, its seeks reimbursement for cash outlays by its attorneys in
the amount of $277.75. We have not been apprised of any reason why such
substantial legal expenses should have been incurred in this relatively
simple, uncomplicated, and essentially uncontested interpleader. That
the legal services may have been performed in the period prior to our
order sustaining the petition for interpleader does not mean that the
services were performed for that purpose. It would appear that much time
was spent in the preparation of the stipulation of facts, but these
facts basically relate to the merits of the respective claims, as
distinguished from the mere existence of conflicting claims, a fact
which was not in controversy. The delay in obtaining the order of
interpleader could not reasonably be said to have been due to resistence
to such an order nor to have resulted in Beaufort's incurring any
appreciable additional legal expenses.
In our view,
Beaufort obtained a large benefit from the order of interpleader, in
that it has been enabled to have its own contractual claim adjudicated
as well as being discharged from all liability for the numerous judgment
creditor garnishment claims which it had therefore been compelled to
defend. And, comparably to Continental Casualty Co. v. Associated
Pipe & Supply Co., supra, Beaufort has had the use and benefit
of the $32,750 fund for the year from
December 11, 1970
, when the action was filed, to
December 16, 1971
, when the fund was paid into the registry of the court. In these
circumstances, and bearing in mind that Beaufort is not a disinterested
stakeholder, we have determined in the exercise of our discretion that
an award of attorney's fees and expenses would not be appropriate.
The foregoing
memorandum constitutes our findings of fact and conclusions of law.
The Clerk is
directed to enter judgment in accordance herewith, awarding claimant
Philipp Transit Lines, Inc., out of the fund deposited, the sum of
$6,848.56 plus interest thereon at 4% per annum from December 1, 1968 in
the present amount of $1,158.54, awarding claimant United States of
America, out of the fund deposited, the sum of $13,707.48 plus interest
at 6% per annum accrued on the assessments in the present amount of
$5,262.45, awarding claimant Beaufort Transfer Company, out of the fund
deposited, the sum of $4,889.80, awarding the balance of the fund
deposited to Fischer Trucking Company, disallowing all other claims to
the fund, and dismissing the cross-claim of Philipp Transit Lines, Inc.,
without prejudice.
1
We are aware that under
Missouri
law, a debt may be attached although it is not yet due.
Missouri
Supreme Court Rule 90.25; Section 525.250 R. S. Mo. The question here,
however, is not whether the indebtedness was due (e.g., 30 days
after the transfer of both rights) but whether the liability was contingent
(e.g., upon the approval of regulatory bodies) "In this State the
statute authorizes an attachment in some instances, where the debt is
not yet due, yet the provision plainly contemplates that to warrant the
proceeding, there must be an actual subsisting debt which will
become due by the efflux of time." State ex rel. Government
Employees Insurance Co., Mo. App., 454 S. W. 2d 950, quoting from Hearne
v. Keatt, 63 Mo. 84, 89.
2
Claimants allege that interrogatories were filed, but presented no proof
thereof. Of importance, there is no allegation whatever respecting
garnishee's answers, if any, and the date thereof.
3
A claim has also been lodged on behalf of a proposed intervenor,
Trailmobile, Inc. This claim is based solely on a judgment. A judgment
creates no lien on the personal property of the debtor "until an
execution has been issued and levied. [
Missouri
] Supreme Court Rule 76.17." United States v. Plez Lewis &
Son, Inc., D. C. Mo., [67-2 USTC ¶9611] 272 F. Supp. 221, 223-224.
It follows that the claim is lacking in merit, and intervention will be
denied.
4
Philipp also asks for attorneys' fees. The note provides that if it is
not paid when due, Fischer "agrees to pay all costs of collection
including attorney's fees." However, we find nothing in the papers
filed which gives Philipp a lien for such "costs of
collection," nor is there any evidence with respect to any such
"costs" or the amount thereof.
