Congress Talcott Corporation v. Gabriel Gruber Lawrence Herman United States of America

(2d 1983). рolicies, ed. As stated in its AE- coverage triggered only

GIS’S after the

primary coverage is exhausted. primary

We do not know whether the cov-

erage has been or even exhausted “practical

there is a likelihood” that it will be

exhausted. See Corp. Associated Indem. v. Indus., Inc., (2d

Fairchild 961 F.2d

Cir.1992). We make cannot this determina-

tion placed until LILCO the cards on

the table for tous see. court,

We vacate the order of the district

including portion dealing requested

arbitration, without prejudice to a renewed

application therefor complete more concerning

disclosure of the facts available

insurance, agreed upon settlements with both carriers,

plaintiffs payments promised thereunder. fourth-party defendant-appellant

Costs

AEGIS. CORPORATION,

CONGRESS TALCOTT

Appellant, GRUBER; Herman;

Gabriel Lawrence America,

United States of

Appellees.

No. 92-1586. Appeals,

United States Court of

Third Circuit.

Argued Jan. May

Decided COURT THE OF

OPINION LEWIS, Judge. Circuit 6331(a) authorizes Title 26 U.S.C. aon a lien to enforce initiating rights to Here, are asked we an administrative retains to determine by a factor- monies held interest in holdWe for loans. ing agent as collateral funds are does, such and that that he section to attachment the district affirm Accordingly, we will mo- granting court’s order judgment. summary tion for I.

A. Herman and Lawrence Gabriel Seegull Man- in the controlling officers were (“Seegull”), a maker Company ufacturing 1987, Seegull January boys apparel.1 petition bankruptcy Chapter filed a Court for Bankruptcy States Later, the Pennsylvania. District Eastern enter Seegull to bankruptcy court authorized with factoring agreement into a factoring (“Congress”), a Corporation Talcott agree- of this the terms comрany. Under Seegull up to ment, loan Congress would $250,000.2 Congress, from loans for the In return receivable accounts assigned its Seegull security inter- Congress a granted Congress, Block, Wolf, & Sol- Schorr Krasny, Marvin other various inventory and entered in its est PA, P. McCa- John is-Cohen, Philadelphia, factoring rider In a agreements. Hahn & (argued), D. Gettler hey, Thomas agreed that Gruber parties agreement, Con- City, appellant, Hessen, for New York $100,- pledge the sum and Herman Corp. Talcott gress Seegull’s guarantee additional 000 as an Allen, Bruton, S. Gary obligations. ‍‌‌​​‌‌‌​​​​​​​​​‌‌‌​​​​‌‌‌‌‌​​‌‌‌‌‌​​‌​​‌‌​‌‌​​​‍Gilbert R. A. James Bradley (argued), U.S. A. Rothenberg, Janet and Herman On March DC, Justice, Div., Washington, Tax Dept, of agreements signed cash identical appellee, U.S. for Congress to secure deposit funds agree- factoring

loans extended Gru- agreements, these Pursuant GREENBERG, ment. ROTH and Before: deposited $89,510 Herman ber LEWIS, Judges. Circuit gar- traditionally with the associated been Seegull Herman president of 1. Gruber typically is one of industry. secretary. company's as the served accommodation, may provide loans factor as the such as factoring agreement enables firm A2. sales, ap- example. That anticipation of receivable its accounts transfer to sell or here. agreement at issue type of pears They Congress. company, factoring to a $10,000 Congress.- Herman fur- belonging, to [Gruber as the delinquent tax- $125,000, deposits, totaling ther between payer].” (Congress yet had not been served March and December of 1987. account.) with a notice of on Herman’s amount of taxes owed Gruber totaled aspects Several of the cash collateral $120,320.74. Congress When received the agreements important are to the resolution of,levy, notice Gruber’s account balance was First, factoring agreement of this case. $53,920.99. Herman’s account balance was incorporated by reference into the cash $145,593.59. Congress responded Second, to the no- agreements. collateral the cash col- by informing tice the IRS that it agreements had a provided Congress lateral with , superior security in depos- “appropriate discretion to any all or its because of the cash collateral part of deposited the balance” of the monies comply and would levy only with the Gruber and Herman after for Con- Seegull’s Congress debt to gress’ obligations factoring agree- repaid. under the had been any agreement. ment or agree- related The later, Four months Congress withdrew Congress ments vested with discretion to $126,361.37from deposited funds in full appropriate the cash for the satis- satisfaction of Seegull’s debts and obli- faction of claims “at prior time” without gations. Congress debited Gruber’s internal notification to Gruber or Herman. by $55,652.65, balance, account leaving a zero significant aspect Another of the cash col- and $70,708.72, debited Herman’s аccount agreements lateral was that interest which leaving $69,378.49. a balance of accrued on the collateral was added to the Fearing that an additional notice of on Last, perhaps fund. and significant, most portion Herman’s imminent, of the funds was agreements provided upon satisfac- Congress filed an interpleader in action obligation tion of its agreements, under the against district court defendants-appel- Congress any portion would return of the lees, Gruber, Herman and the United States deposit collateral fund still on to Gruber and America, claiming subject that it was Herman. multiple liability $69,378.49 for the remaining deposited The sums Gruber and Herman in seeking fund and a determi- Congress placed general oper- were ownership nation of of the funds. ating account at Chemical Bank in New answer, In government its denied that York. Neither Gruber nor Herman had ac- Congress exposed multiple liabil- Congress cess to this account. establishеd ity complied if it levy. with the govern- accounting system an internal to monitor all ment also filed a counterclaim and a cross- deposits debits and made on behalf of Gruber counterclaim, claim. In I Count Herman; up and it set two internal accounts government asserted that was lia- monthly their names and issued state- ble to the United States for all and debits, reflecting ments deposits and interest rights which, possession in its on accrued. levy, belonged date of the to Gruber. II, government Count

B. sought to foreclose duly perfected on all prop- “tax liens several tax assessments erty of Gabriel Gruber against Gruber and Herman connection and Lawrence R. including Herman the in- employment taxes withheld from the terpleader [Congress’] fund in posses- employees Inc., Apparel, of Giles another Eighteen later, sion-” gov- months company for which Herman and Gruber act- granted ernment was leave to assert an addi- controlling ed as officers. It filеd notices of wrongful tional count for the conversion of against tax liens Gruber and Herman in Oc- liens, funds to the tax based on the 1988, January tober 1989 and March 1989. claim that continued to debit the On December the IRS served a interpled pay attorneys’ funds to fees. levy Congress notice of on property, for “[a]ll credits, property, money, granted and bank The district govern- deposits [Congress’] possession now and ment’s judgment against motion for default analysis re- Our tax against attachment December statutory princi- January application quires an On March Herman with a federal summary concerning compliance ples moved government §§ grounds 6331-2. pursuant on the to 26 U.S.C. against issued judgment refused review improperly with a brief begin had our discussion We government was levy, that an IRS honor statutes. tax liens its federal foreclose entitled pay delinquent taxpayer is fund, When interpled against the Reve taxes, the Internal tax liens that 6321 of ing section tortiously converted posi when it interpled places debit- fund nue Code attached attorneys’ empowers fees. it to pay creditor fund to ed the tion of secured rights to property and on “all impose a lien Congress ultimately held court The district taxpayer. 26 belonging to the property” represented $53,920.99, which the liable for lien, gov the § To enforce U.S.C. deposited funds. portion levy may an initiate administrative ernment notice, levy the court a tax with served Once 6331(a). taxpayer’s aWhen section under of redress only reasoned, Congress’ means party, section by a third is held property to the funds the to surrender either was a 6332(a) government to serve the authorizes claim file an administrative government party.3 levy the Section third levy notice' IRS, wrongful suit file a or 6332(a) provides: held that court The district the IRS. against legislative bypass the could not property ... possession any person in superior it had a grounds scheme levy upon subject to property rights to Thus, posses- aas property. interest shall, upon levy has been a which subject it was when property sor of Gruber’s property or ... surrender demand lien, to the liable to federal except such [government], to rights plus withheld sums it for the government is, at the rights as property or part of the levy was issued. the date from interest demand, subject an to attach- of such time judicial pro- district court’s under from the appeals or execution for motion government’s cess. granting order had The district summary judgment. levy and party who honors A third pursu case jurisdiction this subject matter liability to no property has surrenders 1331, 1340and 2410. We §§ 28 U.S.C. ant to however, failure taxpayer; delinquent 28 U.S.C. jurisdiction under appellate a tax service of property upon surrender a motion granting § An order personally party the third levy render will plenary re subject to summary judgment for the value government to the liable Gill, Corp. v. 960 Trust Resolution

view. if penalties additional property and for Cir.1992). (3d 336, 340 F.2d 26 See reasonable. noncompliance was 6332(c)(2). served Individuals § U.S.C. II. by sur- may respond either levy a notice A. instituting a rendering property and 7426, 26 under U.S.C. wrongful action retained key whether Gruber issue is claim with filing an administrative byor in the de- property interest any cognizable § 6843. under subject them funds which posited custody temporary government merely gives the sec- authorized administrative 3. An against until protect diversion "provisional property a described has been tion 6332 remedy.” Commerce, Id. property are resolved. against v. National Bank States United 472 claims — 2919, 721, U.S. -, McDermott, 105 S.Ct. U.S. United States Unlike (1985). (1993), to a by In contrast L.Ed.2d 565 cited L.Ed.2d suit, another which is enforce- dissent, question of lien foreclosure case confronts available ment mechanism con levy. We are not imposition a tax 7403(a), an administrative section priority to lien problem of tax with the cerned whether the not determine does was addressed. McDermott others'; it superior to property are rights Supreme recognized Court has property,” National Bank Com- party merce, two defenses for who fails to 719-20, U.S. 105 S.Ct. at comply levy. with a tax United States v. liberally courts identify must property rights Commerce, National Bank created under state law. 721-22, 2919, 2924-25, 86 L.Ed.2d (1985). First, it is a defense that the B. property already subject “judicial at tachment or execution” as set out section Congress’ principal argument is that it had 6332(a). Second, person holding prop Id. right to set-off the debts Seegull owed erty may by arguing defend that the levied supplied by with collateral Gruber under the taxpayer’s “property is not the agreement. cash claims property.” Id. Under the second matured, that the debt had and that defense, even if claim an others interest already right, obtained full may and the interest title the funds the date of modicum, quantified be as but a levy. If longer Gruber no had an inter- by levy remains to attachment property, est in the the funds were not sub- must until be surrendered ultimate owner ject to attachment federal ship can resolved. Id. Because federal consequences law defines the which attach to In agreement the absence of an to the law, rights created under state it is common contrary, New York requires depos law that ly in a proceeding, understood that “the special its made to a account are to be re steps into the shoes.” Id. at depositor they turned to the if are not used (citations omitted). 105 S.Ct. at 2927 purpose for the special which underlies the Thus, acquires rights “the IRS whatever Accessories, account.4 Noah’s Ark Auto Inc. taxpayer possesses.” himself Id. Rochester, v. First Nat’l Bank 64 Misc.2d ease, Congress In this refused to surren- 944, 316 (Sup.Ct.1970). N.Y.S.2d 663 A fed instead, deposited; der the funds Gruber had levy may eral tax contingent attach such a satisfy it Seegull debited those funds to interest. United States v. Marine Midland parties debt. The concede that the levied Bank, (W.D.N.Y.1987). F.Supp. 675 780 prior judicial funds were not to at- Thus, question here is whether Gruber Therefore, tachment. defense avail- ‍‌‌​​‌‌‌​​​​​​​​​‌‌‌​​​​‌‌‌‌‌​​‌‌‌‌‌​​‌​​‌‌​‌‌​​​‍intended to transfer his interest in the funds Congress able to for failure to honor the outright merely or whether he intended to is that the “proper- funds were not pledge the funds as collateral. ty property” belonging to to Gruber at the time the notice of was served. Id. law, pledge Under common a per at 105 at 2925. security ceived as “a a chattel or intangible in an represented by indispens an apply must state law to deter Courts instrument, able being the interest interest, created any, mine what if purpose a bailment securing for the property. Aquilino levied v. United 509, 513, of a debt....” 1277, 1280, See Duncan Box & 80 S.Ct. (1960). Applied Energies, Lumber Co. v. 165 Although L.Ed.2d 1365 W.Va. state law (1980) issue, governs noted, {citing 270 S.E.2d as have Re we federal 1). § Security, By pledge, statement of assigns consequences law created Bess, pledgor himself, “the general local law. retains the United States v. title U.S. 1054, 1057, parts possession special pur and for a L.Ed.2d 1135 (1958). Thus, pose pledge mortgage .... A because the United States differs from a meaning personal property being meant to attach a broad a lien statutory language property, legal to the “all Applied and and not a title to it.” Although surrounding 4. the transactions at issue in this case transactions the cash collateral agreements, have connections both New York and Penn- we will New law York sylvania, appellant question any proper- did not raise the choice of whether Gruber maintained ty law issue before the district court. Because New interest in the levied funds. See Restatement (Second) significant § York has the most contacts with the Conflicts of Laws Supreme Court Jones, required language (citing Energies, S.E.2d Commerce, the Marine Bank National 1). Pledges, although the that court concluded Midland be collateral cash right to unqualified an have taxpayer did not that clear makes Gruber Congress and tween in the reserve the full amounts withdraw control had absolute although it did accounts, property interest funds, Con the use over discretion to attach- subject the funds sufficient was any amount Gruber towas return gress Id. by tax debt debt Seegull’s once applied Marine Midland argues that factoring agree Under satisfied. was debt that the claims inapposite. It ac Seegull’s assigned ment, was result, had and; had matured event In the receivable. counts inter- of his already been divested was due it to collect able was support To levy was filed. when est to return accounts, Congress those evidence Congress offers argument, Her to Gruber balance Seegull’s account monthly statements Con Thus, arrangement between man. factoring claims, which, indicate that it pledge. constituted gress Congress had because relationship ended had Midland, addressed In Marine ar- Congress also money. advancing ceased York New issue identical almost an increasing bal- debit steadily gues that case, purchased the bank law. indicates Seegull account ance on delinquent tax- from a contracts installment repay debt. Seegull had failed Midland, F.Supp. at Marine payer. produced evidence Congress had If ap- the bank agreed that parties its outstand Seegull was default charges of the credit service percentage aply equal greater than were ing special debts contracts the installment funds, we deposited of the portion Gruber’s the bank’s established on accounts reserve Gru interest any beneficial agree that taxpayer would name. the in books funds would in the retained might have special ber the payment from to entitled not was action, is no levy if there In a be immaterial. bal- the accounts’ unless accounts reserve satisfy a to fund remaining in used a unpaid balance the percent exceedеd ances claims, the outstanding creditor’s pur- contracts installment of the balances “property a to have be considered that will not argued bank by the bank. chased Midland, 675 funds. Marine in the interest” amounts “represented accounts reserve the Fashions, 328 780; also Fine see at F.Supp. [taxpayer] and to the payable then not 422.5 F.2d at in might not receive might or [taxpayer] the experi- the bank’s depending Seegull future is by the of a default The evidence at Id. purchased.” it contracts the Congress did best, ence That however. scant at contingent that these claimed The bank the 780. before accounts the to debit choose not subject “property” not were interests position future levy belies its notice was to and that Gruber default Seegull was in funds in levied the interest of his divested court ob- argument, rejecting this In York Although under New that time. before right payment to although the served retain right to may lose party a law a interest, tаxpayer had contingent awas for failure accounts in holdback amounts right un- interest” “beneficial default, Comm. Equimark upon Midland, promptly act law. Marine York New der F.2d Corp., 812 Fin. Serv. Fashions, v. C.I.T. Fin. Co. Inc. 780; Fine see also F.Supp. In- Cir.1987) Emigrant (3d (citing Cir.1964). 141, (2d 419, 421-22 U.S., F.2d v. Builders, v. Willow Savings Bank statutory dustrial reading of the the broad Applying made, by for, levy is after the provided is nation district requires the approach The dissent's 5. action, levy wrongful filing of a priority of the extent determine court to Worth, prelimi- Bank-Fort See Texas-Commerce levied fund in the taxpayer's interest Cir.1990). (5th U.S., levy. Under 156-57 F.2d of the step attachment N.A. nary to the however, scheme, a determi- statutory (1943)), 290 N.Y. 48 N.E.2d Our conclusion supported is further by the payment concern, existed, deposit appar- the extent it ever scheme of the cash agreements. collateral agree- Under those ently failed motivate to debit the ments, parties gave Congress discretion entirety receipt Gruber’s account “apрropriate apply any part all or of the Indeed, notice. action tak- deposited balance” of the monies by Congress en at that time was to communi- Herman as Seegull’s loans superior cate to the had a under the factoring agreement. Thus, Con- security deposit. interest in gress acquire could not Gruber’s steps took no to withdraw the balance deposited fund until it debited monies to Gruber’s account until four months after the discharge SeegulPs obligations. Although imposed.6 was monthly statements indicate that Con- gress had advancing money ceased and that Although undisputed it Seegull debt, paying been Con- agreement gave cash un gress has failed establish that Seegull had limited deposited discretion to Thus, defaulted on its debt. when the debt, Seegull funds satisfaction of the filed, Seegull satisfy could still its obli- important question parties is whether gations had not extinguished right, to divest Gruber of intended title his to the debiting fund and interest in the funds at the time he Gruber, therefore, his account. retained an signed the cash collateral and de attachable property interest the return of posited Congress. the funds with The last funds under New York law. paragraph agreement, which reserves sum, In we conclude that under New York right recoup Gruber the monies not law, Gruber had a beneficial interest debt, used in satisfaction of the resolves that return of deposit the monies on contingent question con favor. We upon the full satisfaction debt. clude that it parties’ was the intent that We hold that this beneficial interest, small, retain some however right to attachment fed- in the funds. levy.7 eral default, focusing possible erty rights on evidence of a in his or her account when obli- argues gation dissent that material issues of fact Pittsburgh bank matures. Nat’l regarding ownership Congress’ (3d Cir.1981). Gruber's and se- Bank v. United 657 F.2d 36 curity dispute preclude parties interests remain in provide, Unless the obligation otherwise a demand view, summary judgment. In our the dissent mature at is the time a is served if inquiry hyper-scrutiny elevates the to a level of the debts exceed the funds then on contemplated that neither deposit. consistent with nor States v. First Nat. Bank Co., by clearly legislative (W.D.Pa.1988) (a a defined F.Supp. scheme focused Trust 695 195 primarily prohibiting obligation the removal or conver- pay- demand is one which is due and taxpayer's property. holder; sion of a immediately option are con- able We at the of the it is adopt application strained to a broad following of that a mature at debt all times execution by any delivery National payment may scheme event, Bank In Commerce. since be due thereaf- of significant demand). we find it any that record is the ter without case, any persuasive of agreements devoid evidence In this the cash collateral do demand; instead, Gruber’s interest in the payment upon assumed Seegull fund because not make due they permit defaulted on Congress, its debt. time and in its discretion, satisfy to debit Gruber’s account to factoring agreement by 7. The the view, authorized Seegull’s obligations. provision In our this Bankruptcy Court for the Eastern District of postponed Congress' right of set-off it had until Pennsylvania. expresses The dissent concern actually debited Gruber’s account. See General district the court's failure to the Tarr, determine Corp. F.Supp. Electric v. Credit 935 governed appropriate agree- state law the (W.D.Pa.1978) (parties to a demand altered note concern, however, ment. This is of no moment. contract; thus, obligation by terms of demand The conclusion that Gruber had retained an in- specifically provided where demand note it terest in the funds would have resulted "immediately payable” become due and law, Pennsylvania even we had found that if events, happening the of certain it was not law, governed parties' instead of New York agreements. the occurred). mature until such events Con- Since gress did not debit Gruber’s account four until law, Pennsylvania government a Under right bank's automatic months the served the after notice of extinguishes prop- levy, Congress right the taxpayer’s of set-off had no of set-off under due of taxes IRS’s assessment gins with III. Upon § 6201. 26 U.S.C. unpaid, under but. disposition law control Questions for and a demand such assessment The case. district judgment summary law, by operation taxes, lien arises a as key issue identified properly court prop “upon § to U.S.C. pursuant in the interest had sufficient Gruber whether real or property, rights to whether erty and funds those deposited funds delinquent tax belonging [the personal, levy. uncontested The by tax attachment However, validity of that payer].” these Under he did. demonstrate facts specified credi other lien, certain vis-a-vis that the district circumstances, conclude we provisions notice tors, governed judgment in summary properly entered subordinates § That section favor. government’s “аny purchas interests lien to the tax interest, mechanic’s security er, aof holder dissenting. GREENBERG, Judge, Circuit no unless lienor, creditor” lien judgment court’s the district majority affirms filed, pursuant to lien been the tax has tice of govern summary judgment grant of pro state 6323(f), in accordance Section an that Gabriel the basis ment on personal filing real cedures paid he had fund ownership interest recently in has Supreme Court liens. However, ma Congress Taleott. over provision of Section the notice terpreted court, an not made has jority, district like tax lien a valid non of qua as sine fact into inquiry adequate competing lien: there is instances where appli interest ownership an had such ... lien bene competing state “[where] of this argument Since law. cable state 6323(a) § ... we provision from the fits cast on been case, doubt has further lien to States’ the United must deem effect assertions broad of no filing than the no sooner commencеd analysis of Supreme Court’s itsof — McDermott, U.S. United States v. tice.” Unit priority in tax lien problem a related addition, even at -, at 1528. — U.S. -, McDermott, ed States filed, a been lien the tax has if a notice (1993). Because L.Ed.2d may be accorded nonetheless special priority de must interest I believe Gruber's transactions later-arising “commercial law, present by state fined to 26 U.S.C. pursuant agreement,” financing conflicting relative facts reveals record 6323(c)(l)(A)(i).1 § interest, the district vacate I would upheld upon prop- as that court lien insofar court’s order Once may enforce validity it taxpayer, delinquent erty aof autho- action a foreclosure its I. an ac- Such 26 U.S.C. rized under possible for other protection provides tion concerning general background Some 7403(b) re- § interests, 26 U.S.C. in that necessary an is enforcement of tax scheme upon, liens persons joinder of all quires of the effects possible understanding of in,” prоperty. any “claiming interest A or fund. levy the Gruber and IRS’s liens finally may determine then The court principal means levy one of two tax priority of all property rights to taxpayers against recalcitrant used collection adjudged to interests; government if the of a foreclosure IRS, being other by the its interest, to execute proceed it can have an process be- The tax enforcement lien. tax denied, 410 priority), cert. claim of limit defeated extinguished Gruber's Pennsylvania which law (1973). 591 35 L.Ed.2d 93 S.Ct. the time U.S. deposited funds at rights to the case, invoked our exception not been levy has served. notice of may instructive nonetheless but the statute apparently fall within agreements Factoring given com position indicating preferred See, Corp. v. Gas e.g., Texas Oil & exception. loans, against liens tax financing even as mercial (con- Cir.1972) (5th States, F.2d 466 1040 United any nearly other priority over would have to be receivable sidering acсounts fuel-service claim. statute, finding that failure but within statutory time security within "acquire” Thus, judgment. proce- 6331(a). the lien enforcement § such tax.” 26 U.S.C. Certain orderly adjudication any prop- dure entails property, items of e.g., personal limited ef erty may compete interests that with the fects, benefits, pension certain and a mini lien, tax and affords substantial mum amount wages salary, exempt are due-process protections to holders of such levy pursuant from a tax § to 26 U.S.C. 6334. interests, judicial requiring determination of Further, statutory authorization for chal affording their full opportu- them lenge by a party third wrongful served with a nity to be may heard before the IRS take levy, § U.S.C. permits its terms possession any disputed property. levy recipient possession to retain of the disputed property until a may Internal deter provides Revenue Code also government mine if the emergent for circumstances which the col- there Worth, in. lection of Texas-Cоmmerce revenues could be frustrated Bank — Fort removal N.A. v. or conversion of 896 F.2d 156-157 (5th Cir.1990). government rightly permitted should be to look for the obligations. satisfaction of tax case, In our chronology of tax enforce- Thus, the statute creates an alternate means proceedings culminating levy assessments, enforcing levy the tax the Gruber implications, fund has crucial de- permitted § under 26 U.S.C. 6831. The tax pending upon the extent of Gruber’s owner- levy “provi- often has been characterized aas ship interest in the points fund at various remedy;” adjudicate sional it does not com- procedure. the enforcement The cash collat- peting rights property, but does allow the agreement, 16, 1987, eral dated March ac- government to seize and sell of the knowledged deposit by $89,- Gruber of delinquent taxpayer prior adjudi- to such an 510.00. The district court found that be- cation. See United States v. National Bank 30, 1987, January 31,1987, tween and March Commerce, 713, 721, 472 U.S. Gruber had Talcott (1985). 2919, 2924, 86 L.Ed.2d 565 Because $133,326.62. a total of Congress Talcott de- levy permits pos- to take posited all of the provided funds Gruber into ultimately session of to which it general operating account. Nevertheless entitled, may not be Section contains provided Talcott Gruber with safeguards. levy usually several A cannot be monthly reflecting “account statements” delinquent taxpayer made until the has had total provided, collateral he ‍‌‌​​‌‌‌​​​​​​​​​‌‌‌​​​​‌‌‌‌‌​​‌‌‌‌‌​​‌​​‌‌​‌‌​​​‍had set-offs for days pay at least ten an assessment. Lev- debts, paid and interest on the bal- upon salary normally only ies can be made ance. As reflected on the account state- days’ after taxpayer. notice to the While ments, Congress Talcott had debited the proceeds a lien property, follows Gruber fund for substantial amounts to cover Bess, 51, 57, see United States v. Seegull’s By levy, debts. the time of the (1958) 2 L.Ed.2d 1135 Gruber account statement reflected a balance (“[t]he property subsequent transfer of $53,920.99, only far less than the total of attachment of the lien does not affect the deposits. lien”), contrast, only “a shall extend year over a Well after the commencement property possessed obligations existing 6331(b). Seegull factoring arrangement, § at the time thereof.” 26 U.S.C. separate against tax assessments example, For on a bank account Herman, pursuant Gruber and reaches the amount in Lawrence the account at the § levy; time of U.S.C. does not extend to subsequent deposits by unpaid payroll taxpayer. Apparel, the taxes of Giles Inc.2 § C.F.R. generally 301.6331-1. A IRS made one assessment in the amount $81,939.62 18, 1988, “upon property rights July effective of and to on a and second $14,961.25 property belonging 19, ... in taxpayer] September to the amount of on [the on which ... there is a lien for the 1988. The IRS filed a notice of its lien 6672, §§ 2. Under 26 U.S.C. unpaid withholding 6671 and Gruber for the full amount of Giles’ controlling "рersons" and Herman were of Giles taxes. thus, Apparel; personally either would be liable $14,961.25 on of 1988, the in amount and first assess arising from the Gruber against exception 19, The crucial 1988. September $81,939.62in his coun of the in amount ment 6323, recently § of 26 be that U.S.C. would County, residence, New Jer Camden ty of McDevmott, preventing supra, as in the defined Subsequently, 27, 1988.3 sey, October on against having lien any from government $14,961.25 the lien its notice of a filed IRS security in- already subject to the property as the second from arising against Gruber section, until the enumerated terests January 1989. on sessment of lien. files notice properly government the levy against Gruber of its notice served might have filing, the tax liens after be Even interim in the Talcott on fund arising certain claims to subordinate been on December filings, lien the two tween financing transactions commercial from Congress Tal- never served The IRS U.S.C. agreements, fund. the Herman levy against awith cott 6323(c)(l)(A)(i). § levy on the Although the total аmount and, $102,000. as we was over fund Gruber have attached Further, lien could no $130,- deposited over seen, had Gruber have conveyed in satis- had Gruber property that Talcott, government the the time of to the just debt prior of a faction depos any the amounts of claimed has never Trust Co. Union St. Louis tax assessments. $53,920.99shown beyond the by Gruber ited (8th 617 F.2d v. United at the time account statements on Gruber’s Cir.1980) belong not does (“[property that the appears It therefore lien and not thus is and concede would government tax before transferred if it has been at of least owner had become Talcott assessment”). Therefore, question of due to deposits, the Gruber of some relative Gruber’s Congress Talcott’s factoring account. deficiencies of the time in the fund at ownership interests may well be determina- the first assessment above, on levy served explained As Gruber, or paid over monies If the tive. turnover require the would Congress Talcоtt them, already had become Con- part of ... some property “all of the assess- property before gress Talcott’s there or which taxpayer] on belonging [the 18, 1988, then no July deficiency on of such tax.” of ... for the payment lien is a funds that to such attached 6331(b). lien would have Thus, if Gruber § even 26 U.S.C. Gruber’s, subsequent no longer no of were fund on date ownership in the no had addition, if funds. levy could reach levy would levy, December security interest Congress Talcott property of against be valid prior to the Gruber fund to the prior attached lien had a tax liens, govern- if the of filing of its notices exceptions, Subject to certain levy.4 of time prop- as to effective were not ment’s notices arisen, to 26 pursuant have a lien Jersey, then New outside located per- erty real § U.S.C. reasoning in Supreme Court’s the assess- date sonal lien McDermott, no government had delinquencies, Apparel the Giles ments levy.5 as the basis served July cоuld $81,939.62 on i.e., amount property that sub- property, or law, applicable means Jersey New 3. Under 6323(f), prior tax lien. ject § a no- to a of 26 scheme the notice county resi- in the debtor’s of lien filed tice personal against all is effective dence challenged appeal, Talcott 5.On Jersey. N.J.Stat.Ann. See New within located summary judgment to grant of court's district Thus, (West 12A:9-401(l)(a) Supp.1992). counterclaim, II of its Count County may not have filing Camden IRS's against Howev- Gruber. foreclosing tax liens belonging to funds any priority given it er, not affect II does of Count the resolution New York. located in that were because, validity of the question of the above, never have liens would these explained (supra 320 n. majority why the not clear It is any part the fund attached requires 5) determina- my approach thinks that prior time of already owned Talcott step” "preliminary as a property interests tion assessments, security inter- it had a or in which levy. abovе makes validity As the text of a to liens. filing notices prior of the to against est automatically clear, effective levy is that, chronology agreements permitted demonstrates Congress The above Talcott to majority’s approach, simple it is no pace up any deficiency make in Seegull loan to determine whether the IRS’s liens matter deposited by transactions from funds Gruber to, levy against, or its was effective attached Herman, any time. It appar- seems all, some, moneys none of the or fund daily vagaries ent that the factoring often deposited Congress Gruber Talcott. Seegull would cause in posture, to be a deficit Certainly that determination cannot be made therefore, by application strict of Con- closely examining any without whether of the set-off, gress Congress Talcott’s “property” fund was Gruber’s on the dates of may Talcott have become owner of the entire many or liens. There are inconsis- long Gruber fund before the attachment of tent facts in the record relative to whether personalty first tax lien to Gruber’s or part in Gruber owned fund the latter the service of Congress Talcott. Congress clearly Talcott Congress throughout Talcott has claimed this time, it all that or whether owned each ease in the Gruber fund part of the amount at issue.6 For owned Congress became Talcott’s either as soon as mentions, example, majority gives but by Gruber, paid it had been over or as soon to, pay- short shrift the fact that Gruber’s Seegull sufficient deficits arose in the placed [Congress Talcott’s] ments “were account to offset the amounts Gruber had operating general account at Chemical Bank Admittedly from time time. York.... [and] [did New not have] Congress fact that Talcott sent Gruber “ac- (At 317.) access to this account.” The ma- despite having deposited count statements” jority principally upon instead the con- relies account, payments his into its own bank jecture might have been due a Congress fact that agreed Talcott had Congress if refund Talcott had been able to funds, pay Gruber interest on the are incon- Seegull collect accounts receivable Congress ownership sistent with Talcott’s Seegull exceeding amounts all loans to possible and would be evidence of a continu- interest and fees due Talcott ing interest of Gruber. It is also true that pursuant factoring arrangement. to the response levy by the immediate contingencies Con- Those never were fulfilled. Talcott, counsel, gress through its awas deposit payments of Gruber’s to Con- alia, stating, “Congress letter inter [Tal- account, mind, gress my Talcott’s bank interest in the cash collateral account cott’s] strong so an indicium of Talcott’s superior may interest the IRS that, itself, ownership it creates a material account;” response in that initial but precluding summаry judgment. issue of fact surely does not foreclose Talcott’s But it is not the fact of record that position throughout litigation consistent of, supports Congress ownership Talcott’s that it had become the owner of the total in, superior interest all or at least a substan- deposited by tax fund Gruber before deficien- part tial the time of service of fund conflicting cies were assessed. filing While of the notices of liens. The may factoring agreement and the cash collateral evidence mean that Talcott’s circumstances, 726-27, ownership (possible Under 105 S.Ct. at 2927-28 certain interests parts segregated of an amount of cash can be co-depositors of bank account's cannot defeat purposes E.g., of a tax if Talcott levy). Ownership of distinct amounts federal right already ownership had a matured of 50% distinguishable a cash fund is also from a of the amount reflected on a certain Gruber involving interests in real situation less-than-fee statement, yet account but had not made a book- estate, any levy where would attach to the entire changed keeping entry reflecting ownership, interest, though underlying fee even the lesser which, say, may then a situation have arisen in might right have a out $25,000 $50,000 of a statement balance was Rodgers, proceeds States v. of sale. See United Gruber, $25,000 "owned” "owned” but 76 L.Ed.2d 236 words, by Congress Talcott. In other (1983) (federal court could order tax sale of real factoring arrangement and the Gruber cash col- property despite homestead interest of state-law analogous joint are to a lateral delinquent taxpayer’s spouse, spouse but depositor bank account as to which each has a proceeds compensation from be entitled to full right to withdraw all United States v. funds. Cf. interest). Commerce, supra, for loss of homestead National Bank 472 U.S. at sale 326 to whether questions as all be not itself ownership could assertion of govern- is valid and tax lien it cer- judgment, summary by determined one superseded can be interest ment’s fact issue a material means that

tainly also that are interests of other group the select owned concerning who raised been has However, tax liens. priority over granted liens and tax the time fund at lien the tax under both requirement the basic has federal termining whether mines of Gruber’s analysis is an a federal statutory law cases have payer’s tional proper quences of 105 S.Ct. the federal the nature nue but v. United rights federally Neither been determined (1958). matter left state S.Ct. 56-57 isfy sufficient law is quences thenceforth (1960).... al law. citations delinquent analyzed ‘ Rodgers, priority of ‍‌‌​​‌‌‌​​​​​​​​​‌‌‌​​​​‌‌‌‌‌​​‌‌‌‌‌​​‌​​‌‌​‌‌​​​‍“[I]n Bank act, applicable tax application of state law.’ United States property. § 6321. Several [78 [78 1277, at tax requirements inoperative,’ And those state law levy can “property” omitted.] interests defined, S.Ct. 2925, sufficiently the property intеrest merely attaches 76 L.Ed.2d 461 U.S. to federal law.’ lien inescapable This majority nor taxpayer or statute then determines application of a interest, e.g., the attachment in the Commerce, liens on state law. clear that States v. the Court already follows from only reach legal interest II. that state controls 363 1057-58]. property.” ^[677] United are ‘creates interest, and federal consequences are [4 236]. prerequisite U.S. [the has property to which dictated Bess, [taxpayer] the district 472 U.S. Supreme Court v. at 683 nature or extent state summarized L.Ed.2d the tax conse delinquent tax- I believe Bess, 357 U.S. created States L.Ed.2d consequences, United statute], state attached. “property” ‘[O]neeit federal reve 509, 513, in the fund no the fact federal law: determining law creates ’ Aquilino the conse- [Additional law [103 valid. at v. States to de- deter- feder 1135] 1365] S.Ct. 722, Na- sat 26 80 at A ‘a States “property [or] 2132, linquent view de taches under Texas mination taxpayer’s аnd law, States preme Court under Texas possessory each and tax tax sale ence to the issue as to what quent exempts homestead follows because mine the federal der Court ditions. sale. dance (6th a tax lien sell, question of of state L.Ed.2d disputed, and because 6331, This attach, demonstrated Rodgers, it Cir.1983) spouse taxpayer, and that Id. 76 determined with federal not be v. to a homestead v. nonetheless is court, law as levy provisions, U.S.C. encumbered novo of the homestead taxpayer the facts respectively, This is Bank of whether under state law). Rodgers, at L.Ed.2d 236 can be law. U.S. correct choice may constitutes proper state interest rights are 700-01, how far (1991) law, the Court a district has a homestead where notes that it is clear that appropriate explicated in Bess (“Although Salve attach spouse’s But such so in order for determined Celina, concerning most 461 U.S. (appellate law, separate and undivided property even property.”). appropriate, 103 S.Ct. reserving law. Regina nature of the choice of determined court’s an attached “property” 26 homestead property” (1983). There, a court law. This law. Even that a tax clearly in United property under certain though Texas state of state in this See, e.g., United a determination there found, in accor- “consequences” the lien or 677, 103 S.Ct. Collegev. Rus- exists to which determinations court must from a ownership are when first F.2d at 2146. Un- law controls may governs may § 6321 and delinquent by federal case, of the de- for deter- the delin- questions must state law instance, interests property principle law 163, lien at- order a though forced deter- refer- both con- lien law Su- re- deserving endeavor complex layered and is a law, priority lien e.g., the federal Thus parties and the by analysis of additional 6323, certainly governs 26of U.S.C. scheme Bank, Seegull factoring agree- United district court. States Mаrine Midland (W.D.N.Y.1987). ment, incorporated F.Supp. which is reference agreement, contained a cash point, simply At this we do not know if of law of the where contractual choice state principles governing ownership of bank ac- accepted by Congress very specialized counts are relevant to the supplementary In briefs to this Taleott. Further, factoring. majori- business of court, parties’ discussions have centered ty’s application of Marne Midland is not Pennsylvania place was the on whether case, accurate. delinquent tax- acceptance apply whose law therefore should payer contingent had a por- interest in ownership of the to determine fund. tion of a might reserve bank account that However, determination of the correct repay be needed to installment contracts simple, choice of law would not be that be purchased by taxpayеr. the bank from the present quite cause the record is unclear The IRS served a notice on the bank accepted about where Taleott early October 1974. In almost ten factoring agreement. In this situa unusual later, years the bank had made sufficient tion, parties have made a valid contractu collections on the repay contracts to over law, simply al choice but than nam rather $50,000 taxpayer. The court held that ing applies, parties the state whose law funds, it was these realized designated instead the then-unknown state fulfilled, contingencies after the had been particular which was to be the location of a contrast, to which the was effective. In event the formation the contract. Congress Taleott maintains that the debts Therefore, a court first must use standard owing to it were never covered collections analysis choice-of-law to determine the loca obligation accounts and that no event, ie., significant tion of the contractual repay any funds to Gruber ever arose. acceptance factoring agreement by majority possible applica- treats the Congress Taleott. A court then would have Pennsylvania tion summarily law more apply acceptance, law the state of law, dismissing than New York in a footnote parties’ accord -withthe contractual choice of Pennsylvania several cases under decided law, ownership security to determine strongly support Congress law that Talcott’s interests in the Gruber fund at the relevant See, position. e.g., Pittsburgh Nat’l Bank v. times of lien attachment and service of (3d Cir.1981) (IRS 657 F.2d 36 situation, In this under the rule of Klaxon levy against wrongful bank account was be- Co., Mfg. Co. v. Stentor Elec. cause, law, Pennsylvania right bank’s (1941), 85 L.Ed. a court first automatically extinguished deposi- of set-off apply would the choice-of-law rules of the depositor’s tor’s in account as soon as state, Pennsylvania, forum to determine what matured); debt to bank United States v. state’s law would define the act of Co., F.Supp. First Nat’l Bank & Trust “acceptance” factoring agree Talcott’s (W.D.Pa.1988) (IRS levy ineffective ment. The court probably need addi against taxpayer’s deposit; certificate of un- tional facts determine where the act of law, Pennsylvania taxpayer’s property der acceptance Only occurred. then could the acquired auto- ceased when bank finally question answer the of what right maturity matic of set-off of 'tax- applies by parties’ state’s law virtue of the bank). payer’s obligation Al- demand contractual choice of law. though majority property in- considers Although proper determination terests bank accounts to be relevant ana- very complicated, choice of law is it cannot be law, logs under New York it then strains to concludes, majority incorrectly avoided. The distinguish foregoing cases decided under analysis, simple signifi- without that a “most Pennsylvania law. adequate cant contacts” test is to determine potentially One or two cases from each applies. assuming that New York law Even jurisdiction pertinent of which deals York law would if a correct New —none made, analysis majori- factoring agreements simply are not a choice-of-law were — case, ty places determining pos- emphasis single undue on a sufficient basis for law. state ownership interest sible is too in this case question

The choice-of-law great without to be determined complex is a task analysis, which

deal of further arguments of court, assisted

the district first instance. parties,

III. obligated to are courts

Although in- law to determine

state support attach- sufficient

terests are levy, the district court federal in this case. problem

never confronted con- obvious addition, presents ‍‌‌​​‌‌‌​​​​​​​​​‌‌‌​​​​‌‌‌‌‌​​‌‌‌‌‌​​‌​​‌‌​‌‌​​​‍the record ownership concerning Gruber’s fact

flicts of security in- possible Talcott’s the facts needed

terest, an absence choice of contractual parties’

determine the district vacate I therefore would

law. summary judgment on Count grant of

court’s counterclaim, and I for determination the case

would remand application law and of state

the choice conflicting facts apparently law to the interests. priority of

ownership CAPRARO, Jr., Appellant, A.

Charles CO. PARCEL SERVICE

UNITED

No. 92-5454. Appeals, Court States

Third Circuit. 18, 1993. March

Argued May

Decided

Case Details

Case Name: Congress Talcott Corporation v. Gabriel Gruber Lawrence Herman United States of America

Court Name: Court of Appeals for the Third Circuit

Date Published: May 10, 1993

Citation: 993 F.2d 315

Docket Number: 92-1586

Court Abbreviation: 3rd Cir.