From Casetext: Smarter Legal Research

U.S. v. Bank of Hawaii

United States District Court, D. Hawaii
Apr 2, 2002
Civil No. 01-00460 HG-BMK (D. Haw. Apr. 2, 2002)

Opinion

Civil No. 01-00460 HG-BMK

April 2, 2002


ORDER GRANTING SUMMARY JUDGMENT IN FAVOR OF DEFENDANT BANK OF HAWAII


Plaintiff United States of America brings this action to recover funds held by Defendant Bank of Hawaii. The United States claims the funds are subject to a statutory trust in its favor for unpaid withholding tax liability.

Bank of Hawaii claims a superior interest in the funds, which it asserts were never designated to pay withholding tax liability.

Through the instant motion to dismiss or for summary judgment, Bank of Hawaii claims the United States will be unable to prove its claim at trial.

Because the United States has failed to demonstrate there is a genuine issue of material fact, Bank of Hawaii is entitled to summary judgment.

FACTUAL BACKGROUND

Oahu Construction Company, Inc. ("Oahu Construction") was obligated to Bank of Hawaii under a revolving credit line agreement and a term loan agreement. (Affidavit of Heather Piper ("Piper Affidavit") at par. 5 to 9, attached to Motion filed August 30, 2001.)

The amounts owed under the agreements and related promissory notes were secured by collateral, including contract rights, owned by Oahu Construction. (See security agreement, attached as Exhibit 6 to Piper Affidavit; see also Piper Affidavit at par. 15)

In December 1998, Oahu Construction was experiencing financial difficulties. (See Transcript of November 29, 2001, Deposition of Heather Piper at 9, attached as Exhibit B to Declaration of Keith S. Blair, attached to Opposition filed January 15, 2002.)

In February 1999, Bank of Hawaii sent notices to entities having contracts with Oahu Construction, advising them that Bank of Hawaii had a security interest in the payments owed (Piper Affidavit at par. 16 and 17.)

In the notices, Bank of Hawaii asked that checks payable to Oahu Construction be sent directly to Bank of Hawaii. (Piper Affidavit at par. 17 and 18.)

In response to these letters, Bank of Hawaii received a check in the amount of $64,000 and another in the amount of $126,649.52 on August 30, 1999. (Piper Affidavit at 20.)

Bank of Hawaii deposited these checks into a suspense account, which was not under the control of Oahu Construction. (Id).

Oahu Construction also had a general checking account at Bank of Hawaii. As of September 1, 1999, Oahu Construction held $55,194.34 in the general checking account. (Piper Affidavit at par. 21.)

In September 1999, Bank of Hawaii and Oahu Construction attempted to reach an agreement whereby Oahu Construction's assets would be liquidated by a receiver in an orderly fashion. (Affidavit of Katherine G. Leonard ("Leonard Affidavit dtd. 8/30/01") at par. 3-8, attached to Motion filed August 30, 2001.)

The parties were unable to reach an agreement. (Id.) As a result, Bank of Hawaii, on September 9, 1999, applied the monies that had been in the deposit account and in the suspense account to pay debts owed to it by Oahu Construction. (Piper Affidavit at par. 23.)

Oahu Construction filed for bankruptcy protection later that same day. (See Bankruptcy Petition, attached as Exhibit 17 to Leonard Affidavit dtd. 8/30/01.)

During the bankruptcy, the United States claimed that Oahu Construction owed $243,125.82 for unpaid FICA and withholding taxes. (See Internal Revenue Service Proof of Claim, attached as Exhibit 20 to Leonard Affidavit dtd. 8/30/01.)

PROCEDURAL HISTORY

On December 21, 2000, the Bankruptcy Court issued its Order Granting [the United States'] Motion for Relief from the Automatic Stay to Proceed Against Bank of Hawaii. (See Order, attached as Exhibit 19 to Leonard Affidavit dtd. 8/30/01.)

The United States filed its Complaint against Bank of Hawaii on July 10, 2001.

In response, Bank of Hawaii filed its Motion to Dismiss Complaint or in the Alternative, for Summary Judgment (the "Motion"), and separate Concise Statement on August 30, 2001.

The United States filed its Opposition to the Motion and "Statement of Material Facts In Opposition to Bank of Hawaii's Motion" on January 15, 2002.

The United States failed to comply with Local Rule 56.1, which requires the opposing party to address each statement of undisputed material fact contained in the moving party's Concise Statement. Under Local Rule 56.1(g), material facts set forth in the movant's concise statement are deemed admitted unless controverted by an opposing concise statement. During the hearing, the United States was allowed to clarify its position with respect to the facts.

Bank of Hawaii filed a reply and a Supplemental Concise Statement on January 31, 2002.

LEGAL STANDARD

A. Motion to Dismiss

A motion to dismiss will be granted where the plaintiff fails to state a claim upon which relief may be granted. See Fed.R.Civ.P. 12(b)(6). A complaint should not be dismissed unless it appears to a certainty that plaintiff can prove no set of facts which would entitle the plaintiff to relief. See Neitzke v. Williams, 490 U.S. 319, 326-27 (1989); Fidelity Fin. Corp. v. Federal Home Loan Bank, 792 F.2d 1432, 1435 (9th Cir. 1986), cert. denied, 479 U.S. 1064 (1987).

B. Summary Judgment

Summary judgment is appropriate when there is no genuine issue as to any material fact and the moving party is entitled to judgment as a matter of law. Fed.R.Civ.P. 56(c). The moving party has the initial burden of "identifying for the court the portions of the materials on file [in the case] that it believes demonstrate the absence of any genuine issue of material fact." T.W. Elec. Serv., Inc. v. Pac. Elec. Contractors Ass'n, 809 F.2d 626, 630 (9th Cir. 1987) (citing Celotex Corp. v. Catrett, 477 U.S. 317, 323 (1986)).

If the moving party meets its burden, then the opposing party may not defeat a motion for summary judgment without significant probative evidence tending to support its legal theory. Commodity Futures Trading Comm'n v. Savage, 611 F.2d 270, 282 (9th Cir. 1979). The court must view the facts in the light most favorable to the non-moving party (State Farm Fire Casualty Co. v. Martin, 872 F.2d 319, 320 (9th Cir. 1989)). The opposing party cannot stand on its pleadings, nor can it simply assert that it will be able to discredit the movant's evidence at trial. See T.W. Elec. Serv., 809 F.2d at 630; Fed.R.Civ.P. 56(e).

ANALYSIS

I. THE COURT WILL TREAT THE MOTION AS ONE FOR SUMMARY JUDGMENT.

Bank of Hawaii filed its motion under both Fed.R.Civ.P. 12(b)(6) and Fed.R.Civ.P. 56. "Whenever a district court looks beyond the pleadings in evaluating a Rule 12(b)(6) motion to dismiss, the motion must be treated as one for summary judgment under Rule 56." Grove v. Mead School Dist. No. 354, 753 F.2d 1528, 1532 (9th Cir. 1985).

Because the Court found it necessary to consider the affidavits and exhibits submitted by the parties, the Court treats Bank of Hawaii's Motion as a motion for summary judgment. See Grove, 753 F.2d at 1532.

At the hearing, the parties were informed that the Court would treat Bank of Hawaii's Motion as a motion for summary judgment. There was no objection.

II. BANK OF HAWAII IS ENTITLED TO SUMMARY JUDGMENT

A. Legal principles.

The concept of a "tax trust" being placed on certain funds was discussed in the seminal case of Begier v. I.R.S, 496 U.S. 53 (1990). Begier involved interpretation of 26 U.S.C. § 7501, which creates a "tax trust fund" in favor of the US:

Whenever any person is required to collect or withhold any internal revenue tax from any other person and to pay over such tax to the United States, the amount of tax so collected or withheld shall be held to be a special fund in trust for the United States.
26 U.S.C. § 7501(a). In Begier, a taxpayer paid withholding taxes to the IRS from funds contained in both an account established for withholding taxes and a general account. The taxpayer later filed for bankruptcy protection, and the trustee sought to recover the payments made to the IRS as a preferential payment of "property of the estate." Begier, 496 U.S. at 57.

As property of the estate does not include a trust beneficiary's interest in trust assets, the payment would not be a preferential transfer if it had been made from "trust assets." Although Section 7501 creates a trust when wages are paid, "that section provides no rule by which we can decide whether the assets . . . belong to that trust." Id. at 62. The issue is not whether a tax trust fund was created when an employee was paid, but whether the funds at issue were the "res" of that trust. Id.

The Supreme Court held that the IRS is only required to show "some connection" between the amount held in trust under Section 7501 and the assets at issue. Id. at 65-66 (emphasis in original). In determining the sufficiency of the nexus, the courts should use "reasonable assumptions." Id. at 67.

The Supreme Court held that one such reasonable assumption is that "any voluntary prepetition payment of trust-fund taxes out of the debtor's assets is not a transfer of the debtor's property" (because the assets, at that point, have been sufficiently identified as trust fund assets). Id. at 67. Payment provides a sufficient nexus between the tax trust and the funds.

Payment, however, is merely one method of identifying the trust fund "res." See In re Megafoods Stores, Inc., 163 F.3d 1063, 1069 (9th Cir. 1998) ("voluntary payment was but one method of identifying tax trust funds.") The determinative factor is whether the taxpayer has sufficiently identified particular assets as belonging to the tax trust:

It is clear from the statutory scheme that the taxpayer has the power to identify which portion of its assets constitutes the trust fund; indeed, 26 U.S.C. § 7512 permits the Government to compel such identification where it has not been made.

Begier, 496 U.S. at 71 (Scalia, J., concurring). See also In re Edison Bros., Inc., 268 B.R. 409, 414 (Bankr. D. Del. 2001). ("Unlike the Begier case, the Debtors did not voluntarily pay . . . the funds it had available . . . nor did the Debtors otherwise designate them or identify them in any way as funds subject to [the] constructive trust claim.")

In In re Megafoods Stores, Inc., 210 B.R. 351 (B.A.P. 9th Cir. 1997), aff'd in part, vacated in part, 163 F.3d 1063 (9th Cir. 1998), the Ninth Circuit held that tracing could be used to identify tax trust funds. Although Megafoods involved a state sales tax, the state statute at issue created a "tax trust" in favor of the government for collected but unpaid taxes. Megafoods, 163 F.3d at 1067.

The sales taxes in Megafoods were actually collected at the point of sale and commingled into general accounts. Id. at 1065. The taxpayers failed to pay these funds to the IRS, and later filed for bankruptcy protection. Id.

The State sought to recover the sales taxes from the bankruptcy estate. Id. The Ninth Circuit, relying on Begier, held that the government must show a connection between the tax trust and the particular funds at issue. Id. at 1068. To establish a nexus in a case where actual trust funds were commingled with other funds, the government could trace the trust funds by using the presumptions under the lowest intermediate balance test. Id. at 1067 and 1069; see also RT Roofing Structures Commercial Framing, Inc., v. Daniel, 887 F.2d 981, 987 (9th Cir. 1989) (where wrongdoer commingles funds, beneficiary is entitled to the lowest intermediate balance between the date of commingling and the date of payment).

In Megafoods, there was no dispute that the sales tax proceeds had been placed into the accounts. The lowest intermediate balance test could therefore be used to identify the trust fund assets from the other assets in the account.

B. The United States has not furnished any evidence that the suspense or deposit accounts were identified as the res for a tax trust.

The determinative issue in this case is whether funds in the suspense or deposit accounts were ever identified as the res for a tax trust under 26 U.S.C. § 7501. Because the United States has failed to present evidence with respect to this essential element of its claim, Bank of Hawaii is entitled to summary judgment.

During the hearing, the United States asserted that the funds in the accounts were impressed with a tax trust merely because Oahu Construction had a withholding tax liability when the funds were held by Bank of Hawaii.

This is not the law. Under Begier, the "res" of the tax trust must be identified by the taxpayer. Begier, 496 U.S. at 66-67. Identification may be shown by payment or other reasonable assumption. Id. In cases where tax trust funds have already been identified but commingled with other funds, common law tracing doctrines may be used to isolate the trust funds. Megafoods, 163 F.3d at 1067 and 1069.

The United States has not provided affidavits or other evidence showing that the funds in the accounts were ever designated as tax trust fund assets. When asked when the funds in the suspense accounts were designated as tax trust fund assets, counsel for the United States was unable to identify any evidence in the record.

With respect to the deposit account, the United States similarly failed to present any evidence that a designation was made.

Without proof of a designation, the United States cannot establish the necessary nexus between the tax trust and the accounts. Begier, 496 U.S. at 66-67.

Similarly, the United States cannot use the lowest intermediate balance test to trace the funds. Without proof that withheld payroll taxes were actually placed in the deposit or suspense account, there are no commingled trust funds to trace. Megafoods, 163 F.3d at 1067 and 1069.

C. The alleged agreement by Bank of Hawaii to pay Oahu Construction's withholding taxes does not defeat summary judgment.

Although the United States did not provide evidence that the funds in the suspense or deposit accounts were designated to pay Oahu Construction's withholding tax liability, the United States did offer evidence it claimed supported an agreement by Bank of Hawaii to pay the withholding tax liability.

In its Concise Statement, the United States includes a letter dated September 9, 1999 from Oahu Construction's attorney, Mr. Ted Pettit, to counsel for Bank of Hawaii. (See letter dated September 9, 1999, attached as Exhibit C to Declaration of Keith S. Blair.)

The letter was sent after Oahu Construction was notified of the set-off made by Bank of Hawaii. (See Supplemental Affidavit of Katherine G. Leonard ("Leonard Affidavit dtd. 1/31/02") at par. 5 and 6, attached to Reply dated January 31, 2002.)

In the letter, Mr. Pettit states that Bank of Hawaii confirmed on September 2, 1999, that it was holding $245,000 to pay withholding taxes.

The letter does not create a genuine issue of material fact.

As a threshold matter, Mr. Pettit's statements are hearsay, not subject to any exception. See United States v. Harrison-Philpot, 978 F.2d 1520, 1527 n. 5 (9th Cir. 1992). The United States has not provided sworn testimony from Mr. Pettit or any other witness having personal knowledge of the letter or the alleged agreement.

Even if the letter were competent evidence to oppose a motion for summary judgment, the letter does not create a genuine issue of material fact.

The alleged agreement by Bank of Hawaii to pay withholding taxes was contingent on the parties agreeing to a stipulated receivership over Oahu Construction's assets. (Leonard Affidavit dtd. 8/30/01 at par. 7.)

Bank of Hawaii had proposed to pay the withholding taxes to ensure that the receiver would not face personal liability for the taxes. (Leonard Affidavit dtd. 8/30/01 at par. 7.)

In response to Bank of Hawaii's request, Oahu Construction's treasurer sent Bank of Hawaii a letter dated September 7, 1999, identifying the amount of $245,071.12 in unpaid federal and state withholding taxes. (Leonard Affidavit dtd. 8/30/01 at par. 4; see letter dated September 7, 1999, as Exhibit B to Complaint.)

By letter also dated September 7, 1999, Bank of Hawaii responded by requesting sworn statements from persons responsible for payroll at Oahu Construction. (Leonard Affidavit dtd. 8/30/01 at par. 5; see letter dated September 7, 1999, as Exhibit 14 to Leonard Affidavit dtd. 8/30/01.)

Bank of Hawaii also attached to its letter dated September 7, 1999, a draft stipulation to appoint a receiver. (See draft stipulation, attached as Exhibit 14 to Leonard Affidavit dtd. 8/30/01.)

In the same letter, Bank of Hawaii admonishes that "unless the Bank and Oahu [Construction] can reach a written agreement in principal by 3:00 p.m. [September 8, 1999], the bank reserves the right to proceed with its otherwise available rights and remedies. . . ." (See Exhibit 14 to Leonard Affidavit dtd. 8/30/01.)

The parties were unable to reach an agreement. (Leonard Affidavit dtd. 8/30/01 at par. 8; Piper Affidavit at par. 23).

Because the parties never agreed to a stipulated receivership, Bank of Hawaii never became obligated to pay the withholding taxes. Malani v. Clapp Furuya, 542 P.2d 1265, 1267 (Haw. 1975) (there must be mutual assent as to all essential terms to create a binding agreement.)

The United States has not provided any evidence to dispute the contingent nature of the agreement to pay the withholding taxes. The Pettit letter does not create a genuine issue of material fact.

D. The suspense account was subject to Bank of Hawaii's superior security interest.

Without respect to the suspense account, there is another basis for summary judgment: the suspense account could not have been impressed with a tax trust because it was subject to Bank of Hawaii's security interest.

It is undisputed that Bank of Hawaii had a perfected security interest in Oahu Construction's contract rights, accounts receivable, and proceeds. (Piper Affidavit at par. 16).

As part of its rights as a secured party, Bank of Hawaii reserved the right to have payments owed to Oahu Construction sent directly to Bank of Hawaii. (See security agreement dated October 31, 1991, at 11, attached as Exhibit 6 to Piper Affidavit.)

Bank of Hawaii sent notice to Oahu Construction's obligors, instructing them to send payments directly to Bank of Hawaii. (Piper Affidavit at par. 17.)

The checks received by Bank of Hawaii were deposited in an account controlled only by Bank of Hawaii. (Piper Affidavit at par. 20.)

Funds encumbered by a security interest are not available to pay withholding tax liability if the creditor has prevented the funds from being used for that purpose. Honey v. United States, 963 F.2d 1083, 1090 (8th Cir. 1992); see also Purcell v. United States, 1 F.3d 932, 939 (9th Cir. 1993) (noting that some courts have found funds unavailable for payment of tax trust fund liability even if subject to non-binding restrictions)

In this case, Bank of Hawaii had put the suspense account completely out of Oahu Construction's control. (Piper Affidavit at par. 20) Although check writing restrictions had not been placed on the deposit account, the suspense account was separate from the deposit account. (Id. at par. 20-21.) Oahu Construction had no possession or control over the suspense account. (Id. at par. 20.)

Because Oahu Construction did not have control over the suspense account, the funds could not have been used to create the res for a tax trust fund. See Honey, 963 F.2d at 1090; Purcell, 1 F.3d at 939.

E. Bank of Hawaii is entitled to judgment as a matter of law.

The United States sought relief based on an alleged tax trust under 26 U.S.C. § 7501. The United States did not assert that it had a paramount claim due to a tax lien or levy, or that Bank of Hawaii's actions were improper for reasons other than the impact on the alleged trust funds.

Bank of Hawaii has produced evidence that the United States will be unable to establish a tax trust over the deposit or suspense account. To avoid entry of summary judgment, the United States was required to produce evidence showing a genuine issue of material fact. See Celotex Corp., 477 U.S. at 324 (non-moving party must designate `specific facts showing that there is a genuine issue for trial.') Because the United States has failed to show that there are genuine issues of material fact, Bank of Hawaii is entitled to summary judgment as a matter of law.

The United States did not have a tax lien when Bank of Hawaii set-off the funds in the deposit and suspense accounts. In its proof of claim filed with the bankruptcy court, the United States represented that the withholding tax liability had not yet been assessed. (See Proof of Claim, attached as Exhibit A to Complaint.) Without an assessment, a tax lien cannot arise. 26 U.S.C. § 6322.

A perfected security interest is superior to a later arising tax lien. Slodov v. United States, 436 U.S. 238, 256-57 (1978). Hawaii law also provides banks with a common law right of setoff. See American Sec. Bank v. Kaneshiro, 688 P.2d 254, 255 (Haw. 1984). A bank exercising a right of setoff before a federal tax lien or levy arises is entitled to priority over the United States. See Peoples Nat. Bank of Washington v. United States, 608 F. Supp. 672, 676-77 (W.D. Wash. 1984), aff'd, 777 F.2d 459 (9th Cir. 1985).

Under traditional rules of priority, Bank of Hawaii, as a secured party and bank exercising a right of set-off, has priority over the United States.

CONCLUSION

Based on the foregoing, summary judgment is HEREBY entered in favor of Bank of Hawaii on all claims.

UNITED STATES OF AMERICA v. BANK OF HAWAII, Civil No. 01-00460 HG-BMK, ORDER GRANTING SUMMARY JUDGMENT IN FAVOR OF DEFENDANT BANK OF HAWAII


Summaries of

U.S. v. Bank of Hawaii

United States District Court, D. Hawaii
Apr 2, 2002
Civil No. 01-00460 HG-BMK (D. Haw. Apr. 2, 2002)
Case details for

U.S. v. Bank of Hawaii

Case Details

Full title:UNITED STATES OF AMERICA, Plaintiff, v. BANK OF HAWAII, Defendant

Court:United States District Court, D. Hawaii

Date published: Apr 2, 2002

Citations

Civil No. 01-00460 HG-BMK (D. Haw. Apr. 2, 2002)

Citing Cases

In re Branagan

If a corporation can use its funds to pay legitimate corporate obligations, then such funds are not…