United States District Court, M.D. Pennsylvania
January 12, 2004.
ASBESTOS WORKERS LOCAL NO. 23 PENSION FUND, by and through Robert T. Norcross and Les J. Zane, as Trustees, Plaintiff
UNITED STATES OF AMERICA, INTERNAL REVENUE SERVICE and PATRICK KELLEY, Defendants
The opinion of the court was delivered by: CHRISTOPHER CONNER, District Judge
Presently before the court in this interpleader action are
cross-motions for summary judgment by defendants, Patrick Kelley and the
Internal Revenue Service ("IRS"), seeking disbursement of payments owed
under a pension benefit plan administered by plaintiff, Asbestos Workers
Local No. 23 Pension Fund ("Fund"), and governed by the Employee
Retirement Income Security Act ("ERISA"), 29 U.S.C. § 1001-1401.
Patrick Kelley, named as designated beneficiary under the plan, became
entitled to a guaranteed amount of benefits following the death of his
father, Richard Kelley, the participant in the plan. The IRS contends
that tax liens against Richard Kelley's property attached to the term
benefits payable to Patrick Kelley. The Fund filed this interpleader
action to resolve the rights of the IRS and Patrick Kelley to the benefit
The question presented is whether guaranteed minimum benefits payable
to a designated beneficiary under a pension plan constitute "property" of
the participant to which a tax lien may attach.*fn1 For the reasons that
follow, the court finds that such benefits do not constitute property of
the participant and will grant Patrick Kelley's motion for summary
I. Statement of Facts*fn2
For a number of years, plaintiff's father, Richard Kelley, was employed
under a collective bargaining agreement that included a pension benefit
plan. (Doc. 27 ¶ 6; Doc. 29, Exs. 7-8). The plan offered several
payment options, one of which granted monthly benefits to the participant
throughout the participant's life and, if the participant died before
receiving 120 payments, "the remainder of said  payments" to a
designated beneficiary. (Doc. 29, Ex. 7 at 17a). Under this option,
deemed the "ten-year-guarantee pension," either the participant or the
beneficiary was guaranteed to receive at least 120 monthly benefit
payments from the Fund.
On May 20, 1996, Richard Kelley applied for benefits under the plan and
selected the ten-year-guarantee pension option. (Doc. 27 ¶ 7; Doc.
29, Ex. 8). He named his son, Patrick Kelley, as his designated
beneficiary. His retirement became effective on June 1, 1996, and on that
date he began receiving pension benefits of approximately $1100 per
month. (Doc. 27 ¶¶ 9-10; Doc. 29, Ex. 8).
In 1997, after Richard Kelley failed to satisfy IRS demands for
satisfaction of tax obligations from previous years, a lien in favor of
the United States attached by operation of law to all of his property,
including his interest in pension benefits under the plan. (Doc. 27 ¶
12; Doc. 29, Exs. 1-6). The IRS served notices of levy on the Fund,
demanding disbursement of a portion of the monthly pension benefits as
they became due. Consequently, starting in November 1997 the Fund reduced
Richard Kelley's benefit payments by approximately $500, remitting this
sum to the IRS each month. (Doc. 27 ¶¶ 13-15; Doc. 29, Exs. 9-10).
The payments continued until June 5, 2001, when Richard Kelley died. At
the time of his death, Richard Kelley had received sixty-one payments
under the plan. (Doc. 27 ¶ 18; Doc. 29, Ex. 11). Soon thereafter, the
IRS advised the Fund that the lien against Richard Kelley remained
attached to the minimum benefits payable to his designated beneficiary
and that the Fund should continue to honor the agency's levy. The Fund
notified Patrick Kelley that he was eligible under the plan to receive
fifty-nine benefit payments as designated beneficiary but that the
IRS had asserted a levy against the benefits. (Doc. 27 ¶¶ 19-21). The
Fund reduced Patrick Kelley's monthly benefits by the amount allegedly
subject to the IRS levy and placed that portion in a separate escrow
account pending resolution of the conflicting claims. (Doc. 29, Ex. 11).
On November 27, 2001, the Fund filed a complaint for interpleader,
naming the IRS and Patrick Kelley as defendants. The complaint sought
resolution of the competing claims of the two parties and a release from
liability in connection with the withheld pension payments. (Doc. 1). The
IRS filed a counterclaim against the Fund for immediate distribution of
the amounts withheld and a cross claim against Patrick Kelley for
foreclosure of the tax liens. (Doc. 8). Patrick Kelley filed a
counterclaim against the Fund for immediate disbursement of the amounts
withheld. (Doc. 10). The court ordered the amount held in escrow by the
Fund and all future payments owed under the plan to be deposited into the
registry of the court pending disposition of the controversy. (Doc. 14).
The claimants subsequently filed cross-motions for summary judgment.
II. Subject Matter Jurisdiction
Federal courts have an independent obligation to ensure the existence
of subject matter jurisdiction over claims before them, even when the
parties do not raise the issue. See Nesbit v. Gears Unlimited. Inc.,
347 F.3d 72, 76-77 (3d Cir. 2003); see also FED. R. Civ. P. 12(h)(3)
("Whenever it appears . . . that the court lacks jurisdiction of the
subject matter, the court shall dismiss the action."). In this case,
plaintiff's complaint premises jurisdiction on 28 U.S.C. § 1335, which
courts original jurisdiction over all actions "in the nature of
interpleader" involving "[t]wo or more adverse claimants, of diverse
citizenship as defined in section 1332 of this title."
28 U.S.C. § 1335. Under § 1332, however, diversity exists only
among citizens of different states and "foreign state[s]," not between a
citizen of a state and the federal government or an agency thereof. See
id. § 1332; Commercial Union Ins. Co. v. United States, 999 F.2d 581,
584 (D.C. Cir. 1993). Because the IRS is an agency of the federal
government, no diversity of citizenship exists between the claimants, and
the court cannot exercise jurisdiction over the action under § 1335.
See Texas v. ICC, 258 U.S. 158, 160 (1922): Commercial Union Ins., 999
F.2d at 584.
This conclusion, however, does not mandate dismissal. In addition to
§ 1335, interpleader actions may be brought under Federal Rule of
Civil Procedure 22, which, unlike its statutory counterpart, permits
actions to be premised on a jurisdictional basis other than diversity of
citizenship. See FED. R. CIV. P. 22; 7 CHARLES ALAN WRIGHTETAL., FEDERAL
PRACTICE AND PROCEDURE § 1710, at 590 (3d ed. 2001). Jurisdiction
exists over a Rule 22 interpleader action if the claimants' potential
causes of action against the stakeholder would be subject to the court's
jurisdiction under federal law. Bell & Beckwith v. United States.
766 F.2d 910, 912-13 (6th Cir. 1985) ("In interpleader actions as in
declaratory judgment actions, federal question jurisdiction exists if
such jurisdiction would have existed in a coercive action by the
defendant."); accord Commercial Nat'l Bank of Chi. v. Demos, 18 F.3d 485,
488-89 (7th Cir. 1994): Commercial Union. 999 F.2d at 585;
Morongo Band of Mission Indians v. Cal. State Bd., 858 F.2d 1376, 1384
(9th Cir. 1988); Home Corp. v. deLone. No. Civ. A. 96-7672, 1997 WL
214849, at *4 n.11 (E.D. Pa. Apr. 23, 1997). In this case, defendants'
potential causes of action against plaintiff actually asserted as
counterclaims arise under the Internal Revenue Code and ERISA.
See 26 U.S.C. § 7403; 29 U.S.C. § 1132(a)(1)(B). These claims are
subject to the district court's jurisdiction under 26 U.S.C. § 7402,
which grants jurisdiction over claims by the United States to enforce the
Internal Revenue Code, and 28 U.S.C. § 1331, which permits
jurisdiction over claims by beneficiaries to recover benefits under
ERISA. See 26 U.S.C. § 7402; 28 U.S.C. § 1331. Thus, the court
will construe this action as one arising under Federal Rule of Civil
Procedure 22 and exercise jurisdiction over plaintiff's claims. See St.
Louis Union Trust Co. v. Stone, 570 F.2d 833, 835-36 (8th Cir. 1978)
(holding that district court could exercise jurisdiction over Rule 22
interpleader action brought by trust company to resolve claims by
beneficiary of entitlement to benefits on which the IRS asserted a tax
lien); see also 28 U.S.C. § 2410 (" [T]he United States may be named
a party in any civil action or suit in any district court . . . of
interpleader or in the nature of interpleader with respect to . . .
property on which the United States has or claims a . . . lien.").
III. Summary Judgment
A. Standard of Review
Federal Rule of Civil Procedure 56 permits the entry of summary
judgment against a party on an issue or a claim when "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 a judgment as a matter of law." FED. R.
CIV. P. 56(c); see also Saldana v. Kmart Corp., 260 F.3d 228, 231-32 (3d
Cir. 2001). In resolving a motion for summary judgment, courts should not
weigh conflicting evidence or make factual findings but, rather, should
"consider all evidence in the light most favorable to the non-moving
party" to determine whether "the evidence is such that a reasonable jury
could return a verdict for the nonmoving party." Schnall v. Amboy Nat'l
Bank, 279 F.3d 205, 209 (3d Cir. 2002). Summary judgment is appropriate
when a party "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, 322-23 (1986).
B. Validity of the Tax Lien
To ensure the collection of owed taxes, the Internal Revenue Code
creates a lien in favor of the United States on "all property and rights
to property, whether real or personal," belonging to a person who
neglects or refuses to satisfy a tax obligation after demand from the
government. 26 U.S.C. § 6321: see also United States v. Nat'l Bank of
Commerce, 472 U.S. 713, 719-20 (1985). Following attachment of this
lien, the Secretary of the Treasury may impose an administrative levy on
the property to the extent necessary to secure full repayment.
26 U.S.C. § 6331. Such levies may be served not only on the taxpayer
but also on third parties, such as employers and pension fund
compel disbursement of compensation or benefits as they become due to the
taxpayer. Id. § 6331(b), (d): see also Nat'l Bank of Commerce. 472
U.S. at 719-20; In re Connor, 27 F.3d 365, 366-67 (9th Cir. 1994).
Because the Internal Revenue Code clearly grants to the IRS the power
to attach and levy all "property and rights to property," the validity of
a tax lien often hinges on whether the asset to be attached qualifies as
"property." The Code, however, neither defines "property" nor provides
guidance on whether the existence of property is a matter of state or
federal law. See 26 U.S.C. § 6321. Courts struggled to find the
appropriate source for the meaning of the term*fn3 until Drye v. United
States, 528 U.S. 49 (1999), in which the Supreme Court held that federal
law governs whether an asset constitutes "property" for purposes of
§ 6321, but that state law creates the "interests" by which this
standard is judged. Id. at 57-58.
Applying this standard requires distinctions among three related
concepts: "assets," "interests," and "property." An "asset" is any "item
that . . . has value," including cash, chattels, land, rights to
contractual performance, and choses in action. BLACK'S LAW DICTIONARY 112
(7th ed. 1999); see United States v. Craft.
535 U.S. 274, 278-79 (2002): United States v. Bess, 357 U.S. 51, 59-60
(1958); Congress Talcott Corp. v. Gruber, 993 F.2d 315, 319-20 (3d Cir.
1993). Assets may be tangible or intangible, vested or contingent, real
or personal. See Craft. 535 U.S. at 278-79; Congress Talcott, 993 F.2d at
319-20; Connor. 27 F.3d at 366-67. Simply, an asset is anything that has
a legal existence and can be owned.
"Interests" in an asset are those legally cognizable means by which an
individual may exert control over the asset. See Craft. 535 U.S. at
278-79. Such interests may include the power to profit from or use the
asset, to exclude others or inhibit its sale, or to devise or designate
beneficiaries of the asset. See id.: Bess. 357 U.S. at 59-60. Because an
individual's interests depend on the extent to which they may be enforced
in courts in that person's jurisdiction, state law generally controls
this issue. Drye, 528 U.S. at 57-58.
"Property," for purposes of the Internal Revenue Code, is a label
applied under federal law to an asset when a person has a sufficiently
"beneficial interest" in it. See id. at 58. When an individual may gain
personally from the exercise of his or her interest, federal law will
recognize the asset as property of the individual. See Craft. 535 U.S. at
278-79. To use a familiar metaphor, a person's interests in an asset
under state law are sticks in the person's bundle, and federal law
decides whether the bundle is heavy enough to be called "property." Id.
Thus, the validity of a lien against a delinquent taxpayer under the
Internal Revenue Code requires resolution of three related issues: (1)
what "asset" the government seeks to attach, (2) what "interests" the
taxpayer has in the asset under
state law, and (3) whether the taxpayer derives sufficient benefits
from the interests for the asset to constitute "property" of the taxpayer
under federal law.
1. Nature of the Asset To Be Attached
A prerequisite to determining an individual's "interests" in an asset,
or deciding whether the asset qualifies as "property," is identifying the
precise nature of the asset that the government seeks to attach. See
id. at 278-81. Whether the asset arises from a contract, statute, or
common law heavily influences the analysis of rights available under
state law, and initial classification demands close attention. See
id.; Bess. 357 U.S. at 59-60.
In this case, the asset claimed by the IRS is Richard Kelley's
contractual right to the minimum benefit payments under the pension
plan. According to the agency, the lien that arose during Richard Kelley's
life attached to those benefits and remained effective following his
death, when the right to the payments was transferred to Patrick Kelley.
See id. at 57 ("The transfer of property subsequent to the attachment of
the lien does not affect the lien, for `it is of the very nature and
essence of a lien, that no matter into whose hands the property goes, it
passes cum onere[*fn4]. . . .'"). Having identified the asset as a
contractual right, the court must consult state contract law to determine
Richard Kelley's "interests" in the benefit at the time of attachment.
2. Interests in the Asset
When the asset at issue is a right to contractual performance, the
plain language of the contract forms the centerpiece of the discussion of
the individual's interests. See, e.g., id at 55; see Willison v.
Consolidation Coal Co., 637 A.2d 979, 982 ( Pa. 1994). Both federal and
state law dictate strict fidelity to the unambiguous meaning of the terms
of an agreement, and a party's interests must be measured by those
provisions.*fn5 See Int'l Union. United Auto. Workers of Am., Local No.
1697. 188 F.3d 130, 138 (3d Cir. 1999): Willison. 637 A.2d at 982.
The contract in this case, the pension plan, entitled Richard Kelley to
collect lifetime benefits from the Fund, but offered no method by which
he could obtain or alienate the funds during his life. The plan did not
permit participants to redeem benefits early or to surrender the value of
the annuity for an immediate lump-sum payment. Essentially, Richard
Kelley's rights under the plan were limited to suing for monthly payments
as they became due, if not made promptly by the Fund.
Indeed, the only individual with authority to compel payment of the
minimum benefits is the designated beneficiary. The plan accords the
beneficiary, not the participant, a right to receive these payments and
grants him or her the option, with Fund approval, to obtain them as a
lump sum.*fn6 The power to enforce payment of the minimum benefits lies
exclusively with Patrick Kelley.
The only power Richard Kelley had over the minimum payments during his
life was the ability to designate a beneficiary of those funds after his
death. The plan clearly provided him with discretionary authority to
choose a beneficiary and change that designation at any time. (Doc. 29,
Ex. 7 at 37a). Because this authority offered Richard Kelley limited
control over the minimum payments, it constitutes a cognizable interest
in those payments. See Drye, 528 U.S. at 58; Bess, 357 U.S. at 59-60.
Whether this interest is sufficiently beneficial to qualify the asset as
"property" is a matter of federal law. Drye, 528 U.S. at 58.
3. Qualification of the Asset as "Property"
Satisfaction of the federal standard for "property" requires only that
the interests give the taxpayer, at the time of attachment, a minimal
level of control of
the disposition of the asset for his or her personal benefit.*fn7 See
id. Subsequent changes in the taxpayer's legal status or adverse
consequences of the exercise of the interest "are of no concern to the
operation of the federal tax law." Nat'l Bank of Commerce. 472 U.S. at
723; see Drye. 528 U.S. at 52, 58-59. Thus, even if the individual loses
or renounces his or her interest in the asset, federal law will still
recognize the asset as "property" of the individual so long as exercise
of the interest offered the taxpayer a potential benefit at the time of
attachment. See, e.g. Bess. 357 U.S. at 56: cf. Lane v. UNUM Life Ins.
Co. of Am., No. 1:02-CV-1573. 2003 WL 22838754, at *3 (M.D. Pa. Nov. 25,
2003) ("The law recognizes many situations in which a person may
irrevocably renounce the right to receive a benefit but still be
considered `eligible' for it").
The mere right to designate a beneficiary, however, is not a
sufficiently "beneficial interest" to satisfy the federal definition of
property. Bess, 357 U.S. at 59-60; see Drye, 528 U.S. at 52, 59 n.6. As
the Supreme Court stated nearly fifty years ago in the context of life
insurance policies, the power of designation offers the owner no ability
to use the funds for his or her personal benefit. Bess, 357 U.S.
at 59-60. Because disposition of the funds occurs after the death of the
owner, that party cannot enjoy the asset or otherwise use it to his or
her advantage. Id. Only the beneficiary stands to gain. Whatever
incidental benefits the owner may obtain from the authority to designate
is simply insufficient to meet the federal definition of "property." Id.
Because Richard Kelley's interest in the minimum payments was limited
to the power of designation, those benefits did not constitute his
"property" under the Internal Revenue Code. See id. No lien attached to
those funds and the IRS lacked authority to issue a levy against them.
See 26 U.S.C. § 6321, 6331. Patrick Kelley is entitled to receive the
pension benefit payments free of any lien or levy asserted by the IRS.
For the foregoing reasons, the court finds that the guaranteed minimum
benefits payable to Patrick Kelley as designated beneficiary under the
pension benefit plan did not constitute "property" of Richard Kelley to
which the tax lien attached. Therefore, the court will grant Patrick
Kelley's motion for summary judgment and deny the motion of the IRS.
However, because plaintiff's complaint includes claims for injunctive
relief and costs that have not yet been addressed by the parties, entry
of judgment will be deferred pending submission of briefs in support of
and in opposition to these claims. See WRIGHT ET AL., supra, §§ 1717,
1719 (discussing claims for injunctive relief and costs in interpleader
cases pursuant to Federal Rule of Civil Procedure 22).
An appropriate order will issue.