APPEAL FROM THE UNITED STATES DISTRICT COURT FOR THE WESTERN DISTRICT OF PENNSYLVANIA (D.C. Civil No. 78-1409)
Before Seitz, Chief Judge, and Van Dusen and Higginbotham, Circuit Judges.
The Government appeals from an order of the district court, 498 F. Supp. 101 (D.C.) granting summary judgment for Pittsburgh National Bank (PNB) in a wrongful-levy action brought pursuant to 26 U.S.C. § 7426(a)(1) (1976).
Paul McArdle (the taxpayer) borrowed $10,400 from PNB on March 17, 1975. At that time he executed a ninety-day note, which provided that in the event of default PNB could set off its claim against the balance of any account of the taxpayer's at PNB. The note was renewed at the end of each ninety-day period until it expired on September 12, 1977, when the amount due PNB was $7,400.
Beginning on March 24, 1975, the Internal Revenue Service (the IRS) made a series of tax assessments against the taxpayer and filed tax lien notices in the office of the Allegheny County prothonotary. On September 14, 1977, the IRS served a notice of levy on PNB in the amount of the federal income taxes owed by the taxpayer. On that date the taxpayer had a balance of $2,514.97 in his checking account at PNB, and the bank had not taken any affirmative steps to set off these funds against the amount due on the note. Upon receipt of the notice of levy, PNB placed a "hold" on the taxpayer's checking account. On September 26, 1977, PNB issued a debit advice applying the checking account balance to the amount due on the note.
In accordance with 26 U.S.C. § 6332 (1976), PNB surrendered to the IRS the $2,514.97 balance in the taxpayer's checking account and demanded the return of this amount. After this demand was rejected, PNB brought a wrongful-levy action against the Government pursuant to section 7426(a)(1). The district court found that the taxpayer did not have a property interest in his checking account at the time of the levy because under Pennsylvania law PNB's right of setoff extinguished the taxpayer's property rights by operation of law when the note matured. It therefore granted PNB's motion for summary judgment.
Under 26 U.S.C. § 6321 (1976), the Government can impose a federal tax lien upon "all property and rights to property" belonging to a delinquent taxpayer. Such a lien is created when the IRS makes an assessment against the taxpayer. See 26 U.S.C. § 6322 (1976). If the taxpayer fails to pay the assessment after notice and a demand for payment, the IRS may levy upon "all property and rights to property" that belong to the taxpayer and are subject to a federal tax lien. See 26 U.S.C. § 6331 (1976).
The dispute between PNB and the Government centers around whether the taxpayer's interest in the checking account constituted "property or rights to property" on September 14, 1977, the time of the levy. The parties agree that Pennsylvania law controls this question. If the taxpayer did not have a property interest in the checking account under Pennsylvania law, the district court's determination that the Government's levy was wrongful must be affirmed.
PNB contends that under Pennsylvania law its right of setoff was exercised by operation of law when the note matured because the amount due the bank exceeded the taxpayer's checking account balance. PNB maintains that this setoff terminated the taxpayer's property interest in the checking account as of September 12. The bank relies on a series of cases beginning with Aarons v. Public Service Building & Loan Association, 318 Pa. 113, 178 A. 141 (1935), to support its position.
In Aarons, a judgment creditor attached the depositor's checking account after the depositor's debt to the bank had matured but before the bank had taken any affirmative steps to exercise its right of setoff. The Supreme Court of Pennsylvania held that the bank could set off the checking account balance against the money owed it despite the intervening attachment. The court stated that as soon as a debt owed to a bank by a depositor matures, the bank's right of setoff extinguishes the depositor's rights in the account. The court emphasized that this setoff occurred by operation of law and that the bank "was not required first to make book entries charging one account and crediting the other before asserting its right to priority." 318 Pa. at 116, 178 A. at 142; accord, Duffy v. Fifty-Eighth & Chester Avenue Building & Loan Association, 325 Pa. 127, 189 A. 307 (1937); Adolph Bergman Building & Loan Association v. Blaul, 318 Pa. 126, 178 A. 140 (1935).
The Government does not dispute that Aarons created a doctrine of automatic setoff in Pennsylvania. Instead, it argues that this doctrine was superseded by the adoption in Pennsylvania of 13 Pa.Cons.Stat.Ann. § 4303 (Purdon 1980) (section 4-303 of the Uniform Commercial Code).*fn1 According to the Government, section 4303 demonstrates that a ...