APPEAL FROM THE UNITED STATES DISTRICT COURT FOR THE EASTERN DISTRICT OF PENNSYLVANIA. (D.C. Civil No. 89-04172).
Before: Greenberg, Roth and Lewis, Circuit Judges.
Title 26 U.S.C. § 6331(a) authorizes the government to enforce a lien on a taxpayer's property or rights to property by initiating an administrative levy. Here, we are asked to determine whether a taxpayer retains a property interest in monies held by a factoring agent as collateral for loans. We hold that he does, and that such funds are subject to attachment by tax levy under section 6331. Accordingly, we will affirm the district court's order granting the government's motion for summary judgment.
Gabriel Gruber and Lawrence Herman were controlling officers in the Seegull Manufacturing Company ("Seegull"), a maker of boys apparel.*fn1 In January 1987, Seegull filed a Chapter 11 bankruptcy petition in the United States Bankruptcy Court for the Eastern District of Pennsylvania. Later, the bankruptcy court authorized Seegull to enter into a factoring agreement with Congress Talcott Corporation ("Congress"), a factoring company. Under the terms of this agreement, Congress would loan Seegull up to $250,000.*fn2
In return for the loans from Congress, Seegull assigned its accounts receivable to Congress, granted Congress a security interest in its inventory and entered various other agreements. In a rider to the factoring agreement, the parties agreed that Gruber and Herman would pledge the sum of $100,000 as an additional guarantee of Seegull's obligations.
On March 16, 1987, Gruber and Herman signed identical cash collateral agreements to deposit funds with Congress to secure the loans extended under the factoring agreement. Pursuant to these agreements, Gruber deposited $89,510 and Herman deposited $10,000 with Congress. Herman made further deposits, totaling $125,000, between March and December of 1987.
Several aspects of the cash collateral agreements are important to the resolution of this case. First, the factoring agreement is incorporated by reference into the cash collateral agreements. Second, the cash collateral agreements provided Congress with discretion to "appropriate or apply all or any part of the balance" of the monies deposited by Gruber and Herman as payment for Congress' obligations under the factoring agreement or any related agreement. The agreements vested Congress with discretion to appropriate the cash collateral for the satisfaction of claims "at any time" without prior notification to Gruber or Herman.
Another significant aspect of the cash collateral agreements was that interest which accrued on the collateral was added to the fund. Last, and perhaps most significant, the agreements provided that upon satisfaction of its obligation under the agreements, Congress would return any portion of the collateral fund still on deposit to Gruber and Herman.
The sums Gruber and Herman deposited with Congress were placed in a general operating account at Chemical Bank in New York. Neither Gruber nor Herman had access to this account. Congress established an internal accounting system to monitor all debits and deposits made on behalf of Gruber and Herman; it set up two internal accounts in their names and issued monthly statements reflecting debits, deposits and interest accrued.
The IRS made several tax assessments against Gruber and Herman in connection with employment taxes withheld from the employees of Giles Apparel, Inc., another company for which Herman and Gruber acted as controlling officers. It filed notices of tax liens against Gruber and Herman in October 1988, January 1989 and March 1989.
On December 27, 1988, the IRS served a notice of levy on Congress for "all property, rights to property, money, credits, and bank deposits now in [Congress'] possession and belonging to [Gruber as the delinquent taxpayer]." (Congress had not yet been served with a notice of levy on Herman's account.) The amount of taxes owed by Gruber totaled $120,320.74. When Congress received the notice of levy, Gruber's account balance was $53,920.99. Herman's account balance was $145,593.59. Congress responded to the notice by informing the IRS that it had a superior security interest in Gruber's deposits because of the cash collateral agreement and would comply with the levy only after Seegull's debt to Congress had been repaid.
Four months later, Congress withdrew $126,361.37 from the deposited funds in full satisfaction of Seegull's debts and obligations. Congress debited Gruber's internal account by $55,652.65, leaving a zero balance, and debited Herman's account by $70,708.72, leaving a balance of $69,378.49.
Fearing that an additional notice of levy on Herman's portion of the funds was imminent, Congress filed an interpleader action in the district court against the defendants-appellees, Gruber, Herman and the United States of America, claiming that it was subject to multiple liability for the $69,378.49 remaining in the deposited fund and seeking a determination of ownership of the funds.
In its answer, the government denied that Congress would be exposed to multiple liability if it complied with the levy. The government also filed a counterclaim and a crossclaim. In Count I of the counterclaim, the government asserted that Congress was liable to the United States for all property and rights to property in its possession which, on the date of the levy, belonged to Gruber. In Count II, the government sought to foreclose on all duly perfected "tax liens upon all property and rights to property of Gabriel Gruber and Lawrence R. Herman including the interpleader fund in [Congress'] possession . . . ." Eighteen months later, the government was granted leave to assert an additional count for the wrongful conversion of funds subject to the tax liens, based on the claim that Congress continued to debit the interpled funds to pay its attorneys' fees.
The district court granted the government's motion for default judgment against Gruber on December 13, 1990, and against Herman on March 19, 1992. On January 13, 1992, the government moved for summary judgment against Congress on the grounds that Congress had improperly refused to honor an IRS levy, that the government was entitled to foreclose its federal tax liens against the interpled fund, and that Congress had tortiously converted the tax liens that attached to the interpled fund when it debited the fund to pay attorneys' fees.
The district court ultimately held Congress liable for the $53,920.99, which represented Gruber's portion of the deposited funds. Once served with a tax levy notice, the court reasoned, Congress' only means of redress was either to surrender the funds to the government and file an administrative claim with the IRS, or file a wrongful levy suit against the IRS. The district court held that Congress could not bypass the legislative scheme on grounds that it had a superior interest in the property. Thus, as a possessor of Gruber's property when it was ...