Opinion
Case No. 5:03 CV 1818, Resolving Docket Nos. 7.
September 10, 2004
REPORT AND RECOMMENDATION OF MAGISTRATE JUDGE
Plaintiff, Massillon Industrial Credit Union, filed its complaint for interpleader in state court claiming conflicting claims with respect to two notices of levy from the Department of the Treasury, Internal Revenue Service (IRS) notifying plaintiff of liens in excess of the amount of Derrell Lee Ehmer's deposits of $1,631.50.
Around June 27, 2003 plaintiff received a "Notice of Levy" from the IRS notifying plaintiff of a lien in the amount of $16,015.00 on Derrell L. Ehmer's credit union accounts with plaintiff. On June 30, 2003 plaintiff placed holds on Mr. Ehmer's accounts. That same day "Derrell Lee Ehmer, Sovereign" sent a letter to plaintiff threatening civil and criminal action if plaintiff honored the levy because:
1. Derrell L. Ehmer is a fictitious person, and
2. The levy is a nonconsensual unconstitutional taking of property.
Around July 8, 2003 plaintiff received a second "Notice of Levy" from the IRS in the amount of $16,029.00.
Plaintiff in its complaint sought discharge from any further liability on the claim against Mr. Ehmer's deposits, resolution of the dispute, and injunction against either the IRS or Mr. Ehmer from instigating any action against plaintiff in relation to the recovery of the deposit. Upon notice from the United States, the matter was removed to federal court and the undersigned did authorize payment to the Clerk of Court with deposit of $1,631.50 (Docket No. 10).
A technical amendment was made to the complaint substituting the United States for the Internal Revenue Service.
Around the time the undersigned authorized payment to the Clerk of Court, the United States moved to dismiss the complaint (Docket No. 7). The United States relied upon two unpublished decisions, which the undersigned considered questionable, Rosenheck Co., Inc. v. U.S., ex rel. I.R.S., 1997 WL 460259 (N.D. Okla., Apr. 9, 1997) and Queen City Savings Loan Assoc. v. Sanders, 1980 WL 1642, 46 A.F.T.R.2d 80-5715, 80-2 USTCP 9657 (W.D. Wash. Aug. 7, 1980). The undersigned notes that the IRS has taken its official position from these two unpublished decisions. See IRM 5, 17.5, 18.5 — Interpleader Suits (10-31-2000). As a precautionary measure, the undersigned permitted plaintiff to make payment of the amount in Mr Ehmer's accounts to the Clerk of Court. Plaintiff shortly thereafter countered the government's motion with cases that are the progeny of St. Louis Union Trust Co. v. Stone, 570 F.2d 833 (8th Cir. 1978), such as CPS Electric Ltd. v. U.S., 166 F.Supp.2d 727 (N.D.N.Y. 2001). The U.S. is correct that all plaintiff's case law is distinguishable.
Plaintiff and the United States agree that the matter is now governed by FED. R. CIV. P. 22. There is no dispute that Rule 22 and 28 U.S.C. § 2410(a)(5) permit the United States to be joined as a party to an interpleader action or suit in nature of interpleader. The United States, however, argues that plaintiff cannot bring this interpleader because plaintiff as a stakeholder is not subject to inconsistent or double liability, a proposition which is supported in Rosenheck and Queen City Savings, supra.
The preliminary question, though, is whether sovereign immunity bars this action. "The United States may not be required to interplead when it has not waived its sovereign immunity." Commonwealth of Kentucky for the Benefit of United Pacific Ins. Co. v. Laurel County, 805 F.2d 628, 636 (6th Cir. 1986), cert. denied, 484 U.S. 817 (1987). 28 U.S.C. § 2410(a)(5) allows the United States to be named in a civil suit in a district court having subject matter jurisdiction over an action for interpleader or in the nature of interpleader with respect to, real or personal property on which the United States "has or claims a mortgage or other lien (emphasis added)." Accordingly, a court must discern whether the dispute before it concerns interpleader over a mortgage or lien, as opposed to levy. "A federal tax lien . . . is not self-executing. Affirmative action by the IRS is required to enforce collection of unpaid taxes." U.S. v. Nat. Bank of Commerce, 472 U.S. 717, 720, 105 S.Ct. 2919, 86 L.Ed.2d 565 (1985). [T]he lien generally arises when an assessment is made, and it continues until the taxpayer's liability `is satisfied or becomes unenforceable by reason of lapse of time.'" U.S. v. Nat. Bank of Commerce, 472 U.S. at 719, quoting 26 U.S.C. § 6322. Resolution depends on whether the dispute centers upon an outstanding lien, or if the matter concerns a proceeding which had extinguished the lien. Here the lien has not been extinguished by prior payment of funds to the IRS and the U.S. continues to assert an interest in the funds held by the Clerk of Court. See Laurel County, 805 F.2d at 630. To answer the preliminary question, the United States has waived sovereign immunity under the circumstances.
Focusing on a distinction between lien and levy in Laurel County, the court reasoned:
Nor is a Rule 22 interpleader proceeding against the United States an available remedy to Laurel County in this case. An interpleader proceeding does not establish jurisdiction: ` The United States may not be required to interplead when it has not waived its sovereign immunity.' 7 C. Wright, A. Miller, M. Kane, Federal Practice and Procedure § 1721, at 654 (2d ed. 1986) (citing, inter alia, United States v. Dry Dock Savings Institution, 149 F.2d 917 (2d Cir. 1945)). There had been here no waiver of sovereign immunity with respect to the Laurel County claim. Section 2410(a)(5), moreover, by its express language applies only to controversies over property `on which the United States has or claims a mortgage or other lien.' This is simply not such a dispute. There is no claim for mortgage or other lien; rather, a tax levy [FN12] is involved.
FN12. `Levy' and `lien' are not synonymous. See Black's Law Dictionary at 816, 832 (5th ed. 1979). `Levy' is a form of `seizure.' See 53 C.J.S. `Levy' at 2 (1948); see also 84 C.J. A. Taxation § 349 (1954).Id. at 636.
However, federal question jurisdiction cannot be presumed. While Rule 22 authorizes interpleader actions, it does not confer subject matter jurisdiction. Bell Beckwith v. U.S., I.R.S. 766 F.2d 910, 915-16 (1985); Laurel County, 805 F.2d at 636. Because this tax lieninterpleader is brought in the Sixth Circuit, it is subject to a more restrictive interpretation of subject matter jurisdiction, because the Sixth Circuit in Bell Beckwith v. U.S., disagreed with the prevailing expansive view expressed in Stone. And see 17 No. 3 Federal Litigator 58 (March 2002) This variance was noted in plaintiff's cited decision CPS Electric Ltd. See Id., 166 F. Supp.2d at 730. If the dispute over the "stake" involves ownership interests governed by state law, Bell Beckwith indicates that a federal question is lacking. The matter at hand, though, is not factually complex and does not involve competing claims to the funds beyond the claims of Mr. Ehmer and the IRS. In this situation the Sixth Circuit would not depart from Stone. See Bell Beckwith, 766 F.2d at 917 n. 1. Accordingly, the general rule applies that "matters directly affecting the nature or operation of such liens are federal questions, regardless of whether the federal statutory scheme deals with them or not." Stone, 570 F.2d at 835, quoting U.S. v. Brosnen, 363 U.S. 237, 240, 80 S.Ct. 1108, 4 L.Ed.2d 1192 (1960). Federal question jurisdiction over this matter exists under 28 U.S.C. § 1331 for an interpleader under Rule 22.
The government contends that nonetheless the Rule 22 interpleader must be dismissed because the fundamental requirement of plaintiff's exposure to multiple liability has not been met. The government citing 26 U.S.C. § 6332(e) argues that there is no potential for double or multiple liability because that provision provides: "[a]ny person in possession of . . . property or rights to property subject to levy . . . shall be discharged from any obligation or liability to the delinquent taxpayer and any other person with respect to such property or rights of property arising from such surrender or payment." The two unpublished decisions cited by the government espouse that view. Other decisions have found, contrary to the government's position, that this statutory immunity has no relevance to the issue whether an interpleader action may be brought. Although Rule 22 itself refers to "liability, . . . most [courts] stress that the vexation and expense of multiple litigation warrants the use of interpleader even absent a substantial danger of multiple liability." 7 Wright, Miller Kane, Federal Practice Procedure: Civil 3d § 1704 p. 542 (2001). Further, ". . . it is immaterial whether the stakeholder believes that all claims against the fund are meritorious." Id. at 544. Under general interpleader governance, other courts have found an interpleader can serve to enjoin mere vexatious nonmeritorious litigation because immunity alone does not prevent claimants to the "stake" from filing suit. See First Interstate Bank of Oregon N.A. v. U.S., 891 F.Supp. 543, 547 (D. Ore. 1995); Kurland v. U.S., 919 F.Supp. 419, 422 (M.D. Fla. 1996). Under this reasoning, a federal injunction under Rule 22 is necessary to relieve the plaintiff from the threat of litigation, "leaving the disinterested party the ability to bow out, leaving the actual parties with real interests at stake to litigate their claims." Kurland, 919 F.Supp. at 422.
Rule 22 interpleader provides in pertinent part:
(1) Persons having claims against the plaintiff may be joined as defendants and required to interplead when their claims are such that the plaintiff is or may be exposed to double or multiple liability.
The undersigned distinguishes this matter from State Farm Mutual Automobile Ins. Co. v. IRS, 2003 WL 22429275 (N.D. Ohio) wherein the Court applied the immunity provision of 26 U.S.C. § 6332(e) in concluding that there was no liability. The undersigned notes that in that case the Court expressly noted that the plaintiff had not controverted the IRS' contention.
A third line of reasoning, which in application is an alternate rationale, operates under the facile fiction that there are no adverse interests because the "IRS `steps into the taxpayer's shoes.'" Rosenheck, 1997 WL 460259 quoting Nat. Bank of Commerce, 472 U.S. at 725. And see Queen City ("Thus, the IRS is making a claim through the taxpayer, not against him"); Toledo Plumbers and Pipefitters Plan and Trust v. U.S., 1991 WL 172934 at *4 (N.D. Ohio 1991). This rationale is based, at best, on a misreading of National Bank of Commerce's holding that the lien is coextensive of the taxpayer's property interest. This rationale would terminate due process since there would never be a cognizable dispute if the interests of payer and collector are deemed never to be adverse.
The lines of judicial decisions applying 26 U.S.C. § 6332(e) to Rule 22's requirement of multiple exposure, cannot be reconciled. The undersigned accordingly recommends an alternative basis for dismissal. The undersigned finds that plaintiff's effort to have a Rule 22 interpleader is defeated by 26 U.S.C. § 6332 subparts (a), (c) and (d). "The courts uniformly have held that a bank served with an IRS notice of levy `has only two defenses for failure to comply with the demand.' . . . One defense is that the bank in the words of § 6332(a) is neither `in possession of' nor `obligated with respect to' property or rights to property belonging to the delinquent taxpayer. The other defense, again with reference to § 6332(a) is that the taxpayer's property is `subject to prior judicial attachment or execution." U.S. v. Nat. Bank of Commerce, 472 U.S. at 721-22 and see U.S. v. General Motors Corp., 929 F.2d 249, 251 (6th Cir. 1991). Failure to comply creates a liability governed under 26 U.S.C. § 6332(d). Plaintiff is in an especially precarious situation because as a "bank" as defined under 26 U.S.C. § 408(n) and 26 § 581 it was required by 26 U.S.C. § 6332(c) to surrender any deposit "only after 21 days after service of levy."
Interpleader under present circumstance would serve to evade the provisions of § 6332 which require plaintiff to remit the funds in its possession to the IRS within 21 days of presentation of levy. Interpleader thwarts the statute. An interpleader "cannot be employed to accomplish purposes that exceed the needs of orderly contest with respect to the fund." State Farm Fire Cas. Co. v. Tashire, 386 U.S. 523, 534, 87 S.Ct. 1199, 18 L.Ed.2d 270 (1967). A violation of law is committed that places the United States in the position of counter claiming against plaintiff to assert the claim for liability under § 6332(d). The court cannot give the requested relief in the complaint to enjoin actions against it from the United States, because this would place plaintiff in direct conflict with § 6332(a), (c) and (d). In the bank deposit attachment situation, the interpleader overrides federal law. There is no question that in so doing it exceeds the need of orderly contest with respect to the fund. The federal statutory scheme provides procedures to address competing claims. See 26 U.S.C. § 6343 (competing claims against levied property). Also a taxpayer may seek review of an assessment and obtain injunctive relief under 26 U.S.C. § 6429, following exhaustion of administrative procedures. Third-party interests are also protected under 26 U.S.C. § 7426. See Nat. Bank of Commerce, 105 S.Ct. at 2928-29. Interpleader consequently is an unnecessary and excessive alternative to statutory resolution procedures. Plaintiff's interpleader enables a new set of liabilities to accrue against it that would not otherwise. Rather than relieving plaintiff from the fear of being exposed to the vexation of multiple claims this interpleader creates an additional claim that would not have existed without the interpleader action.
RECOMMENDATION
Accordingly, on this basis the undersigned recommends that the government's motion to dismiss be granted (Docket No. 7) and that the Clerk of Court be ordered to divest the funds held in relation to this case and return them to plaintiff.
ANY OBJECTIONS to this Report and Recommendation must be filed with the Clerk of Court within ten (10) days of mailing of this notice. Failure to file objections within the specified time WAIVES the right to appeal the Magistrate Judge's recommendation. See, United States v. Walters, 638 F.2d 947 (6th Cir. 1981); Thomas v. Arn, 474 U.S. 140 (1985).