Pioneer Trust Bank, N.A. v. Hart et al

Motion to Dismiss for Lack of Jurisdiction .

D. Or.January 10, 2017

US Mot. to Dismiss (Case No. 6:16-cv-01934) 1 CAROLINE D. CIRAOLO Principal Deputy Assistant Attorney General YAEL BORTNICK Trial Attorney, Tax Division U.S. Department of Justice P.O. Box 683 Washington, D.C. 20044 202-514-6632 (v) 202-307-0054 (f) Yael.Bortnick@usdoj.gov Of Counsel: BILLY J. WILLIAMS United States Attorney Attorneys for the United States of America UNITED STATES DISTRICT COURT DISTRICT OF OREGON EUGENE DIVISION PIONEER TRUST BANK, N.A., Plaintiff, v. PATRICK L. HART, an individual; and the INTERNAL REVENUE SERVICE, UNITED STATES GOVERNMENT DEPARTMENT OF THE TREASURY, a federal government department, Defendants. Case No. 6:16-cv-01934 UNITED STATES OF AMERICA'S MOTION TO DISMISS Case 6:16-cv-01934-AA Document 12 Filed 01/10/17 Page 1 of 13 US Mot. to Dismiss (Case No. 6:16-cv-01934) 2 CERTIFICATION UNDER LR 7-1 Counsel for the United States certifies that she has conferred with counsel for Pioneer Trust Bank, N.A. Counsel has not attempted to confer with Patrick L. Hart as he has not yet appeared in this action. MOTION Defendant-in-Interpleader, the United States of America (“United States”), on behalf of the Internal Revenue Service (“IRS”),1 by and through undersigned counsel, hereby moves the Court, pursuant to Federal Rule of Civil Procedure 12(b)(1), to dismiss the Complaint for lack of subject matter jurisdiction. In support of its motion, the United States Submits as follows: MEMORANDUM IN SUPPORT Although the United States has consented to be sued in certain interpleader actions, this case is not a true interpleader. There are two central prerequisites for maintaining an interpleader action: (1) there must be two or more potential adverse claimants to a stake and (2) the stakeholder must face the threat of multiple liability. Neither prerequisite is met here. The IRS and Patrick L. Hart (“Mr. Hart”) are not adverse claimants, and if Pioneer Trust Bank, N.A. (“Pioneer Trust”) honors the levy, as it must, it has absolute statutory immunity from all claims that anyone, including Mr. Hart, may assert against it. This case is not a valid interpleader and the United States has not waived its sovereign immunity from suit. Therefore, this suit must be dismissed. 1 The Internal Revenue Service may not be sued eo nomine in this case. Shelton v. United States Customs Service, 565 F.2d 1140, 1141 (9th Cir.1977) (“It is well established that federal agencies are not subject to suit eo nomine unless so authorized by Congress in explicit language.”); Murphy v. Internal Revenue Service, 493 F.3d 170, 174 (D.C. Cir. 2007). Therefore, in the event that the Court does not dismiss this matter in its entirety, the Internal Revenue Service should be dismissed as a party and the United States substituted in its place. Case 6:16-cv-01934-AA Document 12 Filed 01/10/17 Page 2 of 13 US Mot. to Dismiss (Case No. 6:16-cv-01934) 3 Factual Background For purposes of this motion to dismiss, the facts alleged in the Complaint in Interpleader are deemed correct. In relevant part, the Complaint alleged on or about December 29, 2015, Mr. Hart purchased a cashier’s check from Pioneer Trust in the amount of $249,242.11 (the “Check”).2 Complaint, ¶ 6. The funds supporting the Check are in Pioneer Trust’s control and total $249,242.11 (the “Proceeds”). Complaint, ¶ 7. On September 28, 2016, the IRS served on Pioneer Trust a Notice of Levy, seeking possession of a portion of the Proceeds underlying the Check. Complaint, ¶ 9. However, Pioneer Trust alleges, in contradiction to the Notice of Levy, that if Pioneer Trust pays the Proceeds to the IRS based upon the Notice of Levy, Pioneer Trust would be liable to Mr. Hart. Complaint, ¶ 11. Pioneer Trust states, “Mr. Hart and the IRS’ adverse claims to the Proceeds subject [Pioneer Trust] to potential multiple claims and liability.” Complaint, ¶ 14. Argument The Complaint in Interpleader filed by Pioneer Trust in the instant case against the United States should be dismissed because it is not a proper interpleader and this Court lacks jurisdiction over a claim seeking to determine the correct payee for property properly levied by the IRS where the IRS does not release the levy. I. The levy gave the United States the immediate right to possess the Cashier’s Check. Section 6331 of the Internal Revenue Code authorizes collection of tax by levy, which “includes the power of distraint and seizure by any means.” 26 U.S.C. § 6331(b). Where, as here, 2 Mr. Hart first purchased a cashier’s check in December 2014 in the same approximate amount, which he held until replacing it with the check at issue in the Complaint. It is the IRS’s belief that Mr. Hart is using cashier’s checks to avoid levy against a bank account. Case 6:16-cv-01934-AA Document 12 Filed 01/10/17 Page 3 of 13 US Mot. to Dismiss (Case No. 6:16-cv-01934) 4 a taxpayer's property or rights to property are held by another, a notice of levy served upon the custodian of that property gives the United States the right to all property levied upon, and creates a custodial relationship between the property holder and the United States so that the property comes into the United States’ constructive possession. Phelps v. United States, 421 U.S. 330, 334 (1975); United States v. General Motors Corp., 929 F.2d 249, 251 (6th Cir. 1991). Thus, the service of the Notice of Levy upon Pioneer Trust gave the United States the immediate right to possession of the Proceeds identified on the Notice. II. Pioneer Trust must honor the levy or face liability for failure to honor. The service of the Notice of Levy imposed a duty on Pioneer Trust to comply with the levy and surrender all property or rights to property held for the taxpayer. 26 U.S.C. § 6332(a). “[A] person served with a notice of levy has only two possible defenses for failure to comply with the demand: (1) that he is not in possession of the taxpayer's property or property in which the taxpayer has any interest, and (2) that the property is subject to a prior judicial attachment or execution.” Kentucky for benefit of United Pacific Ins. Co. v. Laurel County, 805 F.2d 628, 635 (6th Cir. 1986) (emphasis added; citations omitted). See also United States v. National Bank of Commerce, 472 U.S. 713, 722-23 (1985). Any failure or refusal to honor the levy—including, potentially, the prosecution of an interpleader action—renders Pioneer Trust liable to the United States under 26 U.S.C. § 6332(d)(l). National Bank of Commerce, 472 U.S. at 721. The Internal Revenue Code provides that any person who fails or refuses to surrender any property subject to levy upon demand by the United States shall be individually liable for the property not surrendered, up to the value of the tax liability for which the levy was made. 26 U.S.C. § 6332(d)(l). Moreover, in addition to the liability imposed by section 6332(d)(1), any person who fails or refuses to surrender levied Case 6:16-cv-01934-AA Document 12 Filed 01/10/17 Page 4 of 13 US Mot. to Dismiss (Case No. 6:16-cv-01934) 5 property without reasonable cause shall be liable for a penalty equal to 50 percent of the amount recoverable under section 6332(d)(1). 26 U.S.C. § 6332(d)(2). Thus, in order to avoid liability under Section 6332(d)(1), Pioneer Trust must honor the levy, and leave it to other claimants to pursue their administrative remedies, as provided by the Internal Revenue Code. National Bank of Commerce, 472 U.S. at 728; see also United States v. Badger, 930 F.2d 754, 756 (9th Cir. 1991); United States v. Weintraub, 613 F.2d 612, 622 (6th Cir. 1979). “Congress thus balanced the interest of the Government in the speedy collection of taxes against the interests of any claimants to the property, and reconciled those interests by permitting the IRS to levy on the assets at once, leaving ownership disputes to be resolved in a post-seizure administrative or judicial proceeding.” National Bank of Commerce, 472 U.S. at 729 (emphasis added). III. Compliance with the levy affords Pioneer Trust absolute immunity. The Internal Revenue Code provides that any person who honors a levy “shall be discharged from any obligation or liability to the delinquent taxpayer and any other person” with respect to the property surrendered. 26 U.S.C. § 6332(e). Given this absolute statutory defense, Pioneer Trust is hardly “subject[ed] … to potential multiple claims and liability,” as the complaint alleges. Complaint, ¶ 14. Rather, it is under a statutory obligation to surrender the Proceeds to the IRS, irrespective of any dispute they may have with the levy. And once the funds have been surrendered, Pioneer Trust is insulated under the same statutory scheme from any claims by any third party, including Mr. Hart. 26 U.S.C. § 6332(e).3 3 The United States notes that the legal position of a party already in possession of immunity to any action challenging compliance with a levy is really not improved by a judgment obtained in an interpleader action. See Pub. Sch. Ret. Sys. of Missouri v. United States, 227 F.R.D. 502, 504 (W.D. Mo. 2005) (noting that “[w]hile it is true that any Case 6:16-cv-01934-AA Document 12 Filed 01/10/17 Page 5 of 13 US Mot. to Dismiss (Case No. 6:16-cv-01934) 6 IV. This action is not a proper interpleader. As plaintiff, Pioneer Trust bears the burden of proving that interpleader is proper. Dunbar v. United States, 502 F.2d 506, 511 (5th Cir. 1974) (the burden is on the party seeking interpleader to demonstrated that he is entitled to it). The purpose of an interpleader action is to avoid multiple lawsuits and resolve multiple claims to the same funds. See, e.g., Lee v. W. Coast Life Ins. Co., 688 F .3d 1004, 1009 (9th Cir. 2012). Toward that end, “[t)he central prerequisite for a ‘true’ interpleader action . . . is that the plaintiff-stakeholder runs the risk—but for determination in interpleader—of multiple liability when several claimants assert rights to a single stake.” Airborne Freight Corp. v. United States, 195 F.3d 238, 240 (5th Cir. 1999); see also Ohio Nat’l Life Assur. Corp. v. Langkau, 353 Fed. Appx. 244, 248 (11th Cir. 2009) (“Interpleader is appropriate where the stakeholder may be subject to adverse claims that could expose it to multiple liability on the same fund.”). Indeed, Federal Rule of Civil Procedure 22 codifies this requirement: “Persons with claims that may expose a plaintiff to double or multiple liability may be joined as defendants and required to interplead.” Fed. R. Civ. P. 22(a)(l ). Thus, to be a proper interpleader, there must be (1) two or more potential adverse claimants to a stake and (2) the stakeholder must face the threat of multiple liability. Pioneer Trust fails to state a cause of action for interpleader because neither prerequisite is met here. A. No Adverse Claimants Exist. First, no adverse claimants exist because any claim that the IRS has to the Proceeds is through the taxpayer, Mr. Hart, not against him. See Rosenheck & Co. v. U.S. Ex rel. I.R.S., 1997 future suits concerning the interpleaded property will be dismissed because of the prior judgment, a judgment does not preclude vexatious litigation.”). Case 6:16-cv-01934-AA Document 12 Filed 01/10/17 Page 6 of 13 US Mot. to Dismiss (Case No. 6:16-cv-01934) 7 WL 460259, at *2 (N.D. Okla. Apr. 9, 1997); Queen City Savings & Loan Assoc. v. Sanders, 1980 WL 1642, *1 (W.D. Wash. Aug. 7, 1980). The Internal Revenue Code allows the IRS to “step[] into the taxpayer’s shoes” and “acquire[] whatever rights the taxpayer himself possesses.” Pub. Sch. Ret. Sys. of Missouri v. United States, 227 F.R.D. 502, 504-05 (W.D. Mo. 2005) (quoting United States v. National Bank of Commerce, 472 U.S. 713, 725 (1985)). Thus, the only claimant is Mr. Hart. Mr. Hart receives the same economic benefit whether Pioneer Trust pays the Proceeds to him or to the United States: the Proceeds either go directly into his pocket, or they reduce his debt to the United States. The fundamental requirement of adverse claims to the Proceeds is absent in the instant matter and the interpleader cannot be maintained. Additionally, any claim to the Proceeds by Mr. Hart would be clearly devoid of substance, and therefore could not fulfill the prerequisite that there be adverse claimants. See § 1705 When Interpleader Is Appropriate—Adverse Claimants Required, 7 Fed. Prac. & Proc. Civ. § 1705 (3d ed.). See also New York Life Ins. Co. v. Lee, 232 F.2d 811, 813 (9th Cir. 1956) (“There is no doubt but that an asserted adverse claim may be so wanting in substance that interpleader under the statute may not be justified.”). Pioneer Trust cannot reasonably fear that any claim challenging compliance with the levy is colorable. See Bank of Am. Nat'l Trust & Sav. Ass'n v. Mamakos, 57 F.R.D. 198, 200-01 (N.D. Cal. 1972) (concluding that a levied-upon bank had no valid basis for instituting an interpleader action because it “could not reasonably have been in doubt” about whether it was obliged to comply with the IRS's levy or would be liable to the taxpayer for doing so). B. Pioneer Trust Does not Face Double or Multiple Liability. Second, Pioneer Trust is not subject to the threat of multiple liability. Federal law provides persons complying with IRS levies with immunity from liability to the delinquent Case 6:16-cv-01934-AA Document 12 Filed 01/10/17 Page 7 of 13 US Mot. to Dismiss (Case No. 6:16-cv-01934) 8 taxpayers, or to any other person. See 26 U.S.C. § 6332(e). Those persons accordingly “do not face the prospect of double liability,” and so “cannot meet this basic requirement for interpleader.” Johnson v. United States, 566 F. Supp. 1012, 1014 (M.D. Fla. 1983). For example, in Pub. Sch. Ret. Sys. of Missouri, 227 F.R.D. at 503, the stakeholder was served with an IRS Notice of Levy upon the wages, salary, and other income of the delinquent taxpayer. In turn, the delinquent taxpayer threatened to sue the stakeholder if it complied with the levy. See id. The stakeholder, fearing double liability, filed an interpleader action, interpleading the delinquent taxpayer and the United States. Id. The court dismissed the interpleader upon the United States' motion, and found that it was not a proper interpleader action. Id. at 504. The court reasoned that because the United States claimed the delinquent taxpayer's property through the taxpayer, that the United States did not bring a separate claim for the property. Id. Additionally the Court noted that because it would not have authority to litigate the claim between the IRS and the taxpayer in an interpleader action further suggests that it is not proper for a creditor to initiate an interpleader in response to an IRS levy. Id. See also AmeriPride Servs., Inc. v. Leidel, 2004 WL 2011457, at *1 (D. Kan. Aug. 30, 2004) (holding that because “[p]ersons complying with an IRS levy are immune from liability” plaintiff’s “concern about double or multiple liability [based on such compliance] is unfounded”); Allegheny Child Care Acad. v. Klein, 2003 WL 23112776 (W.D. Pa. Nov. 17, 2003) (similar); State Farm Mut. Auto. Ins. Co. v. IRS, 2003 WL 22429275 (N.D. Ohio Sept. 18, 2003) (similar); Rosenheck & Co., 1997 WL 460259 (N.D. Okla. Apr. 9, 1997) (similar); Queen City Savings & Loan, 1980 WL 1642 (W.D. Wash. Aug. 7, 1980) (similar). As discussed above, Pioneer Trust must honor the levy, and it will be absolutely immune from any liability from any person for doing so. It does not run the risk of multiple liabilities, and Case 6:16-cv-01934-AA Document 12 Filed 01/10/17 Page 8 of 13 US Mot. to Dismiss (Case No. 6:16-cv-01934) 9 there are also no adverse claims. Pioneer Trust therefore cannot meet its burden to prove that this is a proper interpleader wherein it is exposed to multiple liabilities, and as a result, as discussed more fully in section V, below, it cannot establish a waiver of sovereign immunity. See, e.g., Lewis Cty. v. United States, 2016 WL 3405773, at *2 (W.D. Wash. June 21, 2016) (holding that the stakeholder failed to state a cause of action for interpleader because “any claim the IRS has to the excess proceeds is through [the taxpayer], not against him” and because “there is no threat of multiple liability” given the statutory defense provided by 26 U.S.C. § 6632(e)); Garrity, Levin & Muir, LLP v. United States, 2016 WL 829898, at *2 (D. Mass. Mar. 1, 2016) (granting the United States’ motion to dismiss because the case was not a true interpleader as required for a waiver of sovereign immunity as 26 U.S.C. § 6332(e) provides immunity from liability to any other competing claimant); First Fed. Sav. Bank v. Triple CT Trust, 2013 WL 7019296, at *1 (D. Wyo. Sept. 20, 2013) (holding that given the statutory defense contained in 26 U.S.C. § 6332(e), “Plaintiff runs no risk of multiple liability, and this action is not in the nature of an interpleader, as required for a waiver of the United States’ sovereign immunity under 28 U.S.C. § 2410.”). V. The United States has not waived its sovereign immunity. In order to establish subject matter jurisdiction in an action against the United States, there must be: (1) “statutory authority vesting a district court with subject matter jurisdiction”; and (2) “a waiver of sovereign immunity.” Alvarado v. Table Mountain Rancheria, 509 F.3d 1008, 1016 (9th Cir. 2007). Even where statutory authority vests the district courts with subject matter jurisdiction, the United States cannot be sued without its consent. United States v. Dalm, 494 U.S. 596, 608 (1990). More specifically, the United States “is immune from suit, save as it consents to be sued … and the terms of its consent to be sued in any court define that court’s jurisdiction to entertain suit.” Id. (internal citations and quotation marks omitted). A suit against Case 6:16-cv-01934-AA Document 12 Filed 01/10/17 Page 9 of 13 US Mot. to Dismiss (Case No. 6:16-cv-01934) 10 the United States may therefore only be brought under a specific statutory waiver of immunity that is strictly construed against a finding of subject matter jurisdiction. Soriano v. United States, 352 U.S. 270, 276 (1957); United States v. Sherwood, 312 U.S. 584, 590 (1941). The party asserting jurisdiction has the burden of establishing that the district court actually does have jurisdiction. See Kokkonen v. Guardian Life Ins. Co., 511 U.S. 375 (1994). Pioneer Trust alleges that the Court has jurisdiction over this matter pursuant to 28 U.S.C. § 1335, which provides district courts with original jurisdiction of any civil action of interpleader, subject to certain limitations that are not met in this case. See Complaint, ¶ 4; 28 U.S.C. § 1335(a)(1) (limiting jurisdiction to situations where there are “[t]wo or more adverse claimants, of diverse citizenship”). Moreover, even if jurisdiction could be grounded on a federal statute, to oblige the United States to respond to an interpleader action would require a waiver of sovereign immunity. The United States may not be required to interplead when it has not waived sovereign immunity. United States v. Dry Dock Savings Inst., 149 F.2d 917 (2d Cir. 1945). Without such a waiver, subject matter jurisdiction is absent in an action against the United States Though not plead, Pioneer Trust may attempt to rely upon the waiver of sovereign immunity contained in 28 U.S.C. § 2410(a)(5). But, section 2410(a)(5) requires that there be a proper interpleader action. As discussed above, there are no adverse claimants because the IRS’s claims to the Proceeds is through Mr. Hart, not against him. And the absolute statutory defense available under 26 U.S.C. § 6332(e) insulates Pioneer Trust from the exposure to the “double or multiple liability” that is a prerequisite for this action to be in the nature of an interpleader. Therefore, because Pioneer Trust does not meet these prerequisites, the United States’ waiver of sovereign immunity under 28 U.S.C. § 2410 does not apply and this action must be dismissed for Case 6:16-cv-01934-AA Document 12 Filed 01/10/17 Page 10 of 13 US Mot. to Dismiss (Case No. 6:16-cv-01934) 11 a lack of jurisdiction. See, e.g., Lewis Cty. v, 2016 WL 3405773, at *2; Garrity, Levin & Muir, LLP, 2016 WL 829898, at *2; First Fed. Sav. Bank, 2013 WL 7019296, at *1. Moreover, section 2410(a)(5) only waives sovereign immunity for interpleaders with respect to “real or personal property on which the United States has or claims a mortgage or lien.” See Com. of Ky. for Benefit of United Pac. Ins. Co. v. Laurel Cty., 805 F.2d 628, 635 (6th Cir. 1986) (no waiver of sovereign immunity for interpleader against United States when levy, not lien, was at issue). Courts have found that interpleader within the meaning of 28 U.S.C. § 2410(a)(5) cannot be used where a levy is concerned, because a tax levy and a tax lien are distinct vehicles for the collection of taxes, and § 2410(a)(5) only concerns tax liens. Even if we had found the existence of a federal question in a defendant's cross-claim based on the Internal Revenue Code in this case, we would find it remarkably anomalous to permit the bank to bring this action through the interpleader procedural device where Congress has specifically barred a similar action based on the declaratory judgment procedural device. Commercial National Bank of Chicago v. Demos, 18 F.3d 485, 490 (7th Cir. 1994). In other words, the Seventh Circuit opined that a plaintiff could not use an interpleader to force the United States to litigate a levy-based claim to the funds, since the plaintiff could not have maintained a declaratory judgment action to determine the government's right to levy the fund. Simply put, while Pioneer Trust invokes the interpleader remedy, a party may not use this remedy when it seeks to avoid a federal tax levy. Additionally, as discussed in depth in the previous section, this action is not a proper interpleader because Mr. Hart and the IRS are not adverse claimants and because Pioneer Trust does not face the threat of multiple liability. Because this is not a proper interpleader action, sovereign immunity has not been waived and the Court lacks jurisdiction over the United States in this action. Case 6:16-cv-01934-AA Document 12 Filed 01/10/17 Page 11 of 13 US Mot. to Dismiss (Case No. 6:16-cv-01934) 12 Conclusion Based on the foregoing, the United States requests the Court dismiss this action with prejudice for lack of subject matter jurisdiction as it fails to invoke a waiver of sovereign immunity. After the case is dismissed, the subject funds should be returned to Pioneer Trust or otherwise made available for levy by the IRS. Patrick L. Hart can then, if he so decides, file a refund claim on the ground that those taxes were wrongfully or illegally assessed and collected. Respectfully submitted this 10th day of January, 2017. CAROLINE D. CIRAOLO Principal Deputy Assistant Attorney General /s/ Yael Bortnick YAEL BORTNICK Trial Attorney, Tax Division U.S. Department of Justice P.O. Box 683 Washington, D.C. 20044 202-514-6632 (v) 202-307-0054 (f) Yael.Bortnick@usdoj.gov Of Counsel: BILLY J. WILLIAMS United States Attorney Case 6:16-cv-01934-AA Document 12 Filed 01/10/17 Page 12 of 13 US Mot. to Dismiss (Case No. 6:16-cv-01934) 13 CERTIFICATE OF SERVICE I hereby certify that on this 10th day of January, 2017, I electronically filed the foregoing document with the Clerk of Court using the CM/ECF system, which will send notification of such filing to the following: /s/ Yael Bortnick YAEL BORTNICK Trial Attorney United States Department of Justice, Tax Division Case 6:16-cv-01934-AA Document 12 Filed 01/10/17 Page 13 of 13