finding § 6323(b) applied to attorneys' efforts in procuring the interpled fund where "[w]ithout the interpled fund, the government would have no asset against which to attach its lien"Summary of this case from Morgan Stanley Smith Barney, LLC v. Weiner
No. C-00-1510 VRW
September 19, 2001
The present matter is an interpleader action involving money paid into a court-operated account by interpleader plaintiff Blimpie International in the amount of an arbitration award owed to one of the interpleader defendants, Peacox Ventures. See In the matter of the arbitration between Peacox Ventures, LLC v. Blimpie International, Inc. (hereinafter, Peacox v. Blimpie), C-00-0746-VRW. Blimpie filed the interpleader action under 28 U.S.C. § 1335 seeking a determination by the court regarding the right of interpleader defendants Patrick J. Carter, Scot D. Bernstein, Peacox Ventures and the United States to receive payment from the interpled fund.
Currently before the court is Carter and Bernstein's claim for payment from the interpled fund for additional attorney fees incurred on behalf of their client, Peacox, after they obtained the arbitration award against Blimpie. The United States has an interest in this fund as well; accordingly, the government opposes Carter and Bernstein's request. For the reasons set forth below, Carter's and Bernstein's request for the additional attorney fees is GRANTED.
Blimpie is a franchisor of deli-style sandwich shops. See 12/15/00 Letter (Doc. #23) at 1. Between July 1995 and June 1996, Peacox acquired franchise rights for Blimpie restaurants in the Sacramento area. See id. A dispute arose between Peacox and Blimpie regarding the franchises, which prompted Peacox to sue Blimpie for violations of California's Franchise Investment Law, fraud and misrepresentations in connection with the offer and sale of the franchises. See Compl. (Doc. #1), ¶ 8; 12/15/00 Letter (Doc. #23) at 1. The matter was submitted to arbitration, during which Carter and Bernstein represented Peacox. See Compl. (Doc. #1), ¶ 8; 12/15/00 Letter (Doc. #23) at 1. In return for that representation, Peacox granted Carter and Bernstein an express contractual attorney fee lien against any recovery obtained. See 12/15/00 Letter (Doc. #23) at 1.
While the arbitration was pending, the Internal Revenue Service served a notice of levy on Blimpie in the amount of $167,434 for several federal tax liabilities owed to the government by Peacox. See Compl (Doc. #1), ¶ 10 and Exh. B. The levy was based on federal tax lien notices recorded against Peacox between July 23, 1998, and January 12, 1999. Id., Exh. B.
On September 22, 1999, the arbitrator awarded Peacox $200,000 in damages in its action against Blimpie, as well as an additional $14,834 in fees and expenses. See Compl. (Doc. #1), ¶ 8 and Exh. A. Blimpie refused to pay the award, and thus Carter and Bernstein engaged in extensive settlement negotiations with Blimpie on behalf of Peacox and were eventually forced to file a petition in this court to obtain confirmation of the arbitration award and entry of judgment against Blimpie. The court entered judgment against Blimpie on April 27, 2000. See Minutes (Doc. #12), Peacox v. Blimpie, C-00-0746-VRW. Because Carter and Bernstein procured the arbitration award, the court awarded them $155,810 from the interpled fund under the Internal Revenue Code's superpriority provision governing attorney liens, 26 U.S.C. § 6323(b)(8). See 9/8/00 Order (Doc. #18). The government concedes that Carter and Bernstein were entitled to this amount. Govt. B.R. (Doc. #24) at 4.
Carter and Bernstein now request an additional $35,887 from the interpled fund to cover the additional fees incurred in obtaining confirmation of the arbitration award and payment of the award by Blimpie. As noted, the government opposes the request.
When an individual fails to pay taxes owed to the federal government, the United States obtains a lien in the amount of the liability on "all property and rights to property, whether real or personal, belonging to such person." 26 U.S.C. § 6321. The lien arises at the time the tax assessment is made and continues until the tax is paid or becomes uncollectible by reason of lapse of time. 26 U.S.C. § 6322. The lien takes priority over all subsequently perfected liens, unless one of a number of exceptions enumerated in 26 U.S.C. § 6323(b) applies. The crux of the present dispute between the government and Carter and Bernstein hinges on the exception governing attorney liens.
Under section 6323(b) the government's lien under section 6321 "shall not be valid"
With respect to a judgment or other amount in settlement of a claim or of a cause of action, as against an attorney who, under local law, holds a lien upon or a contract enforceable against such judgment or amount, to the extent of his reasonable compensation for obtaining such judgment or procuring such settlement * * *.26 U.S.C. § 6323(b)(8). This provision "excerpts from IRS priority attorneys' liens on property acquired as a judgment or in satisfaction of a legal settlement, either of which the attorney dedicated legal services to obtain." B H Opticks, Inc. v. Internal Revenue Serv., 633 F. Supp. 1356, 1358 n. 1 (E.D. Mo. 1986). The exception is limited by its terms "to the extent of [the attorney's] reasonable compensation for obtaining such judgment or procuring such settlement." 26 U.S.C. § 6323(b)(8). As Carter and Bernstein correctly point out, the rationale for this exception is presumably to provide incentive for attorneys: "[A]n attorney who helps to generate a fund benefitting a delinquent taxpayer is entitled to priority as against the government because such an attorney has helped to create an asset from which the government can recover delinquent taxes." Park City Leasing, Inc. v. VIP Mobile Phone Centers, Inc., 763 F. Supp. 140, 142 (E.D. Pa. 1991).
The government argues that Carter and Bernstein are not entitled to the $35,887 in additional fees because the government's tax lien on the interpled fund takes priority over Carter and Bernstein's claim. Specifically, the government contends that once the arbitration award against Blimpie was granted on September 22, 1999, or, at the latest, once the present interpleader action was filed on April 28, 2000, any efforts by Carter and Bernstein could not have been an attempt to obtain a judgment or procure a settlement. The court disagrees.
In order to benefit from the superpriority protection of section 6323(b)(8), the attorney seeking such protection must establish (1) that the fund was created out of a judgment or settlement of a claim, (2) that local law would recognize the existence of a lien, and (3) that the amount of the lien reflects the extent to which the attorney's efforts reasonably contributed to the award. See Reed Steven d/b/a Storm Partners v. HIP Health, 81 F. Supp.2d 1335, 1338 (S.D. Fl. 1999) (citing Oakland Raiders v. Brown, 1976 WL 953, 77-1 USTC (CCH) ¶ 9440 (N.D. Cal. 1976)) (internal punctuation and citations omitted). The government does not dispute the first two elements. Indeed, these elements are easily satisfied here. See Haupt v. Charlie's Kosher Market, 17 Cal.2d 843, 844-45, 112 P.2d 627 (1941) (finding an attorney's lien on the proceeds of a judgment, which was created by a contingent fee contract with his client, provided the attorney with priority status over a subsequent claim to the judgment).
Rather, as noted above, the government focuses on the third element, contending that the element cannot be satisfied with respect to Carter and Bernstein's efforts subsequent to the date the arbitration award was granted. But what the government ignores is that the granting of the award did not finish "obtaining [the] judgment or procuring [the] settlement" for which the government now has a lien. The efforts of Carter and Bernstein, namely, filing a petition with this court to confirm the award, negotiating with Blimpie, responding to the interpleader action and obtaining an order directing Blimpie to deposit the amount due under the award with the court, "reasonably contributed" to procuring the interpled fund on behalf of Peacox. See 22 U.S.C. § 6323(b)(8); see also Chicago Title Ins. Co. v. Kern, 1981 WL 1873 at *1, 81-2 USTC (CCH) ¶ 9696 (D. D.C. 1981) (noting that attorneys are entitled "to compensation [under section 6323(b)(8)] for settling an interpleader action when faced with the demand of an adverse claimant."). Arguably, the money in the interpled fund would not have existed in the absence of these efforts by Carter and Bernstein. Without the interpled fund, the government would have no asset against which to attach its lien.
The government's reliance on Abex Corp. v. Ski's Enterprises, Inc., 748 F.2d 513 (9th Cir. 1984), is unavailing. In Abex, the Ninth Circuit held that attorney fee claims against an interpled fund under the Equal Access to Justice Act do not take priority over claims by the IRS. Id. at 517. Abex, unlike the case at bar, did not involve a superpriority claim under section 6323.
In sum, the court finds that Carter and Bernstein have demonstrated that their efforts on behalf of Peacox after the arbitration award was granted "reasonably contributed" to the eventual interpled fund paid by Blimpie. Under section 6323(b)(8), therefore, Carter and Bernstein are entitled to the attorney fees incurred for these efforts. Accordingly, the court GRANTS Carter and Bernstein's request that the $35,887 in additional attorney fees be paid to them from the interpled fund.
The clerk is directed to file the letter dated December 15, 2000, close the file and terminate all pending motions.
IT IS SO ORDERED.