Goodrich v. United States ( 2021 )

Case: 20-30422 Document: 00515926578 Page: 1 Date Filed: 07/06/2021
United States Court of Appeals
for the Fifth Circuit
United States Court of Appeals
Fifth Circuit
FILED
July 6, 2021
No. 20-30422 Lyle W. Cayce
Clerk
Walter G. Goodrich, in his capacity as the Independent
Executor on behalf of Henry Goodrich Succession; Walter
G. Goodrich; Henry Goodrich, Jr.; Laura Goodrich
Watts,
Plaintiffs—Appellants,
versus
United States of America,
Defendant—Appellee.
Appeal from the United States District Court
for the Western District of Louisiana
USDC No. 5:17-CV-610
Before Higginbotham, Stewart, and Wilson, Circuit Judges.
Carl E. Stewart, Circuit Judge:
Plaintiffs-Appellants Walter G. “Gil” Goodrich (individually and in
his capacity as the executor of his father—Henry Goodrich, Sr.’s—
succession), Henry Goodrich, Jr., and Laura Goodrich Watts brought suit
against Defendant-Appellee United States of America. Henry Jr. and Laura
are also Henry Sr.’s children. Plaintiffs claimed that, in an effort to discharge
Henry Sr.’s tax liability, the Internal Revenue Service (“IRS”) has
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wrongfully levied their property, which they had inherited from their
deceased mother, Tonia Goodrich, subject to Henry Sr.’s usufruct. Among
other holdings not relevant to the disposition of this appeal, the magistrate
judge1 determined that Plaintiffs were not the owners of money seized by the
IRS and that represented the value of certain liquidated securities. This
appeal followed.
Whether Plaintiffs are in fact owners of the disputed funds is an issue
governed by Louisiana law. For the reasons that follow, we conclude that the
Louisiana Supreme Court should have the chance to resolve this issue in the
first instance.
I. FACTS & PROCEDURAL HISTORY
Henry Sr. and Tonia, Louisiana residents, owned community
property during their marriage, including personal property, oil-and-gas
rights, and shares of stock and stock options in Goodrich Petroleum
Corporation (the “Goodrich securities”). Tonia died in 2006. Her
succession, which was completed in 2015, left her interest in some of the
community property, including the Goodrich securities, to her children
subject to Henry Sr.’s usufruct. During his life, Henry Sr. sold $857,914
worth of the Goodrich securities. One half of that amount—$428,957—
belonged to Henry Sr. given his community interest in the property, while
the other half was attributable to Plaintiffs’ naked ownership subject to
Henry Sr.’s usufruct. At issue on appeal is Plaintiffs’ claim to their share of
those proceeds.
Henry Sr. died in March 2014 having failed to pay $38,029 in assessed
income tax for that year, in addition to $312,078 for 2013 and $214,806 for
1
Pursuant to 28 U.S.C. § 636 and Federal Rule of Civil Procedure 73, the
magistrate judge presided over this case by consent of the parties.
2
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2012. A month after Henry Sr. passed away, his executor, Gil, opened a
succession checking account.2 Notwithstanding the money placed in the
savings account, “[a]ll estate funds and expenses have passed through [the
checking] account.” In April 2017, the IRS placed a levy on the checking
account in order to collect Henry Sr.’s unpaid taxes. In May 2017, the bank
remitted all of the remaining funds within the checking account—
$239,927—to the IRS. The IRS applied that amount to Henry Sr.’s 2012 tax
liability, which also included penalties and interest and totaled $238,922 as
of the date Henry Sr. passed away. There remains a combined outstanding
balance of $471,818 on Henry Sr.’s 2013 and 2014 tax liability.
The same month that the bank remitted the $239,927 payment to the
IRS, Plaintiffs filed this lawsuit claiming under I.R.C. § 7426(a)(1) 3 that the
agency had wrongfully levied those funds. Relevant to this appeal, the
operative complaint alleged that the IRS had taken money that in actuality
belonged to Plaintiffs as owners of nearly half-a-million dollars’ worth of
liquidated Goodrich securities. The parties filed cross-motions for summary
judgment. As part of their motion, Plaintiffs attached a final accounting of
Henry Sr.’s succession, which indicated that all of the cash remaining in the
succession was needed to satisfy Plaintiffs’ property claims against it.
Without considering whether he had subject-matter jurisdiction to
entertain Plaintiffs’ claim, the magistrate judge partly granted and denied the
Government’s and Plaintiffs’ motions and issued a final judgment. More
2
He also opened a succession savings account, but that account is not relevant to
the disposition of this appeal.
3
This provision states: “If a levy has been made on property . . ., any person (other
than the person against whom is assessed the tax out of which such levy arose) who claims
an interest in or lien on such property and that such property was wrongfully levied upon
may bring a civil action against the United States in a district court of the United States.”
§ 7426(a)(1).
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specifically, the magistrate judge ordered the IRS to return $86,774, which
represented Plaintiffs’ share of proceeds from the sale of personal property
and oil-and-gas revenues that had been deposited into the succession
checking account. The magistrate judge, however, held that Plaintiffs were
not entitled to any funds attributable to their portion of the liquidated
Goodrich securities. Relying on a Louisiana appellate court decision and the
Louisiana Civil Law Treatise, he reasoned that the IRS’s claim to that money
took priority over that of Plaintiffs since they were “unsecured creditors” of
Henry Sr.’s succession.
Plaintiffs timely appealed, contending that they are owed the
remaining amount levied from the succession checking account, i.e.,
$153,153, since it reflects (at least some of) their share of the liquidated
Goodrich securities.
II. STANDARD OF REVIEW
“Jurisdiction cannot be waived, and it is the duty of a federal court
first to decide, sua sponte if necessary, whether it has jurisdiction before the
merits of the case can be addressed.” Filer v. Donley, 690 F.3d 643, 646 (5th
Cir. 2012). “When courts lack subject matter jurisdiction over a case, they
lack the power to adjudicate the case” and must dismiss it. Nat’l Football
League Players Ass’n v. Nat’l Football League, 874 F.3d 222, 225 (5th Cir.
2017). “Questions of subject-matter jurisdiction are reviewed de novo.”
Zimmerman v. City of Austin, 969 F.3d 564, 567 (5th Cir. 2020).
III. DISCUSSION
A. Overview of § 7426(a)(1)
When an individual neglects or refuses to pay his or her taxes, a lien
arises on “all property and rights to property” belonging to that person once
the IRS assesses the tax liability. I.R.C. §§ 6321–22. The IRS may then
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collect the unpaid taxes through placing an administrative levy on the
property. I.R.C. § 6331(a). Congress, however, has afforded third parties
such as Plaintiffs the right to challenge the IRS’s levy when they have an
“interest” in the property. See § 7426(a)(1). In a suit for wrongful levy, the
plaintiff cannot challenge the tax assessment itself, but rather the IRS’s
ability to collect the tax. Myers v. United States, 647 F.2d 591, 603 (5th Cir.
Unit A 1981). “[T]o establish a wrongful levy claim a plaintiff must show (1)
that the IRS filed a levy with respect to a taxpayer’s liability against property
held by the non-taxpayer plaintiff, (2) the plaintiff had an interest in that
property superior to that of the IRS and (3) the levy was wrongful.” Oxford
Cap. Corp. v. United States, 211 F.3d 280, 283 (5th Cir. 2000). The last
element requires the plaintiff to demonstrate “some interest in the property
to establish standing.” Id.The Fifth Circuit has yet to clarify whether the standing requirement
is jurisdictional or what satisfies this standard. As to the former, the parties’
appellate briefing does not provide the court any guidance, having assumed
(like the magistrate judge) that the standing requirement is a merits issue.4
The question here is whether Plaintiffs have an interest in the levied funds
sufficient for a court to conclude that their claim falls within the scope of
§ 7426(a)(1). See § 7426(a)(1). Since that inquiry requires interpretation of a
statute, it would seem to go to the merits of Plaintiffs’ claim. But § 7426(a)(1)
operates as a waiver of the United States’s sovereign immunity from suit,
Oxford, 211 F.3d at 283, and “[s]overeign immunity is jurisdictional,” Cozzo
v. Tangipahoa Par. Council--President Gov’t, 279 F.3d 273, 280 (5th Cir.
2002). Thus, if Plaintiffs lack standing for their wrongful levy claim, then
sovereign immunity applies, see McGinness v. U.S., I.R.S., 90 F.3d 143, 145
4
The Government did argue in its summary judgment briefing that the standing
requirement is jurisdictional.
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(6th Cir. 1996) (noting that standing is a “prerequisite[] for establishing a §
7426 waiver of sovereign immunity”); Arford v. United States, 934 F.2d 229,
232 (9th Cir. 1991) (same), and the magistrate judge lacked subject-matter
jurisdiction over the claim, see Bodin v. Vagshenian, 462 F.3d 481, 484 (5th
Cir. 2006) (holding that federal courts are “deprive[d]” of subject-matter
jurisdiction when there is no waiver of sovereign immunity). 5
With respect to what qualifies as an “interest” in property for the
purposes of § 7426(a)(1), other circuits have held that “the right of a third
party to challenge a wrongful levy is confined to persons who have a fee
simple or equivalent interest, a possessory interest, or a security interest in
the property levied upon.” Austin & Laurato, P.A. v. United States, 539 F.
App’x 957, 960 (11th Cir. 2013) (per curiam) (quoting Frierdich v. United
States, 985 F.2d 379, 383 (7th Cir. 1993) and citing additional cases from other
circuits); Allied/Royal Parking L.P. v. United States, 166 F.3d 1000, 1005 (9th
Cir. 1999) (same). The Frierdich court explained that its standard is grounded
in a contextual reading of § 7426(a)(1); for, “[w]hen [the terms] interest and
lien are conjoined, the inference arises that the legislature was referring to
ownership or its near equivalents[.]” 985 F.2d at 381. It added that unsecured
creditors cannot sue for wrongful levy. Id. at 383. “To hold otherwise,” as
another decision upon which Frierdich relied observed, “would invite
litigation from numerous parties only remotely aggrieved by IRS levies, with
consequent disruptive effects on federal tax enforcement.” Valley Fin., Inc.
5
The operative complaint averred jurisdiction under both § 7426 and 28 U.S.C.
§ 1346(e). Section 1346(e) provides district courts with original jurisdiction over specific
civil actions against the United States, such as those for wrongful levy. It does not
independently permit a plaintiff to sue the government when the United States has not
otherwise waived its sovereign immunity.
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v. United States, 629 F.2d 162, 168 (D.C. Cir. 1980); see Frierdich, 985 F.2d at
381–83. We adopt Frierdich’s definition of “interest” as used in § 7426(a)(1).
B. Intersection of Federal Tax Law with Louisiana Law
The dispositive question here is whether Plaintiffs have demonstrated
the requisite interest in the disputed funds. Indeed, Plaintiffs acknowledge
that, the Government prevails if they are creditors rather than owners of the
money. “[I]n the application of a federal revenue act,” including the Internal
Revenue Code, “state law controls in determining the nature of the legal
interest which the taxpayer had in the property sought to be reached by the
statute.” Aquilino v. United States, 363 U.S. 509, 513 (1960) (citation and
footnote omitted). Hence, to answer the question posed above, we must
apply relevant state law, which in this case is the law of Louisiana.
“To determine Louisiana law, we look to the final decisions of the
Louisiana Supreme Court.” Chevron Oronite Co., L.L.C. v. Jacobs Field Servs.
N. Am., Inc., 951 F.3d 219, 225 (5th Cir. 2020) (citation omitted). However,
as Plaintiffs observe, “No Louisiana court[,]” let alone that state’s highest
court, “has decided the precise issue of whether the naked owner of [money]
occupies the status of owner or creditor.” Given this, we could make a guess
as to how the Louisiana Supreme Court would address the issue per Erie R.R.
Co. v. Tompkins, 304 U.S. 64, (1938). But we can avoid making such a guess
by invoking Rule XII, § 1 of Louisiana’s high court, which states:
When it appears to . . . any circuit court of appeal of the United
States, that there are involved in any proceedings before it
questions or propositions of law of this state which are
determinative of said cause independently of any other
questions involved in said case and that there are no clear
controlling precedents in the decisions of the supreme court of
this state, such federal court before rendering a decision may
certify such questions or propositions of law of this state to the
Supreme Court of Louisiana for rendition of a judgment or
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opinion concerning such questions or propositions of Louisiana
law.
La. Sup. Ct. R. XII, § 1; accord La. Stat. Ann. § 13:72.1.A. While
neither Plaintiffs nor the Government have “moved this court to certify [a]
question to the Louisiana Supreme Court, . . . the Rule further provides that
certification ‘may be invoked by . . . any circuit court of appeal of the United
States upon its own motion[.]’” See Coleman v. OFS, Inc., 554 F. App’x 251,
255 (5th Cir. 2013) (per curiam) (quoting La. Sup. Ct. R. XII, § 2).
We consider several factors to assist us in deciding whether to certify
a question since “[w]e are acutely aware that certification is not a panacea for
resolution of those complex or difficult state law questions which have not
been answered by the highest court of the state.” In re Katrina Canal Breaches
Litig., 613 F.3d 504, 509 (5th Cir. 2010) (citation and internal quotation
marks omitted). Those factors are:
(1) the closeness of the question and the existence of sufficient
sources of state law; (2) the degree to which considerations of
comity are relevant in light of the particular issue and case to
be decided; and (3) practical limitations of the certification
process: significant delay and possible inability to frame the
issue so as to produce a helpful response on the part of the state
court.
McMillan v. Amazon.com, Inc., 983 F.3d 194, 202 (5th Cir. 2020) (citation
omitted). We conclude that each factor weighs in favor of certification here.
Regarding the first factor, “[i]t is axiomatic that in Louisiana, courts
must begin every legal analysis by examining primary sources of law: the
State’s Constitution, codes, and statutes.” Shaw Constructors v. ICF Kaiser
Eng’rs, Inc., 395 F.3d 533, 546 (5th Cir. 2004) (citations omitted). Relevant
here is the Louisiana Civil Code, though it does not overtly answer the
question posed by this case. The parties agree that Henry Sr. held a usufruct
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of consumables over the money at issue. According to the Code, “[i]f the
things subject to the usufruct are consumables, the usufructuary becomes
owner of them. He may consume, alienate, or encumber them as he sees fit.
At the termination of the usufruct he is bound to pay to the naked owner
either the value that the things had at the commencement of the usufruct or
deliver to him things of the same quantity and quality.” La. Civ. Code
Ann. art. 538. Likewise, Article 629 states, “At the termination of a usufruct
of consumables, the usufructuary is bound to deliver to the owner things of
the same quantity and quality or the value they had at the commencement of
the usufruct.” La. Civ. Code Ann. art. 629. Notably, the Code does not
clarify the naked owner’s relationship to consumables at the conclusion of a
usufruct.
Nevertheless, several courts have attempted to discern the nature of
that relationship. In Succession of Catching, upon which the magistrate judge
relied in determining that the IRS need not return to Plaintiffs the funds at
issue, an individual became the naked owner of $476,758 worth of
consumables when his mother died, subject to his father’s usufruct. 35 So. 3d
449, 450 (La. App. 2 Cir. 2010). During his lifetime, the father made a
bequest to a church of $100,000. Id. When he passed away, his total assets
were worth $330,307. Id. The church sought the $100,000 legacy gift from
the father’s succession. Id. at 450–51. The appeal court, having applied
Articles 5366 and 538 of the Code, denied the church’s request because the
consumables held by a usufructuary “became a debt owed by the succession
to the naked owner” at the termination of the usufruct and the succession
6
Article 536 defines consumables as “those that cannot be used without being
expended or consumed, or without their substance being changed, such as money,
harvested agricultural products, stocks of merchandise, foodstuffs, and beverages.” La.
Civ. Code Ann. art. 536.
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was worth less than the debt owed. Id. The son’s priority over the church was
a function of his father’s will, which stated that “all administration debts be
paid before any legacies were distributed.” Id. at 450. Consequently, even if
the son did not own the funds in dispute, his claim to them still took priority
over that of the church. Catching is therefore only so helpful to the resolution
of the instant dispute.
The same could be said for another decision cited by the parties,
Stewart v. Usry, 399 F.2d 50 (5th Cir. 1968). In that case, this court observed
that an “imperfect” usufructuary, i.e., one of consumables, becomes a
“debtor” of the naked owner when the usufruct ends. Id. at 55 (quoting
Burdin v. Burdin, 129 So. 651, 654 (La. 1930)). However, it clarified that the
connection between the usufructuary and naked owner is more one of “quasi
debtor-creditor.” Id. Quoting a French commentator’s—Marcel Planiol’s—
treatise of civil law, the court clarified “that something more than an ordinary
debtor-creditor association is contemplated: ‘the relations between the
usufructuary and the naked owner are not those of an ordinary debtor and
creditor. What is involved here is not so much the return of a sum of money,
as a restitution of the capital subject to usufruct, whose enjoyment cannot be
extended beyond the duration of the usufruct[.]’” Id. at 55 n.10 (citation
omitted). But the court left for another day what that “something more” may
be.
Even if Henry Sr. as a usufructuary of consumables was in debt to his
children as naked owners, that does not necessarily mean Plaintiffs were
unsecured creditors. Whatever the exact nature of his debt may be, we
determine that “the only court that can adjudicate [the question] with
finality”—the Louisiana Supreme Court—should have an opportunity to
provide an answer. See McMillan, 983 F.3d at 196.
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With respect to the second factor, this court has observed that
“certification may be advisable where important state interests are at stake
and the state courts have not provided clear guidance on how to proceed.”
Katrina Canal Breaches, 613 F.3d at 509 (citation omitted). Such interests are
involved here since a determination of the naked owner’s relationship to
consumables will affect the rights of all individuals and entities, including the
naked owners themselves, who have competing claims to a usufructuary’s
assets.
Finally, the third factor also weighs in favor of certification because
we “perceive no hardship in certifying the question[s]” stated below. See
Silguero v. CSL Plasma, Inc., 907 F.3d 323, 333 (5th Cir. 2018). The court
“can formulate [a] discrete issue[] for consideration” and there is no
indication that the Louisiana Supreme Court will be unable to respond
promptly. See id. Additionally, there is no risk of the IRS losing the ability to
refund the remaining portion levied from Henry Sr.’s succession checking
account if certification will delay resolution of this appeal.
* * *
We certify the following questions to the Louisiana Supreme Court:
1. Does a usufructuary’s testamentary usufruct of consumables
render naked owners unsecured creditors of the usufructuary’s
succession?
2. If not, what is the naked owner’s relationship to those
consumables?
Should the Louisiana Supreme Court accept our request for answers
to these questions, we disclaim any intention or desire that it confine its reply
to the precise form or scope of the questions certified. Along with our
certification, we transfer this case’s record and the briefs submitted by the
parties. We will resolve this case in accordance with any opinion provided on
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these questions by the Louisiana Supreme Court. Accordingly, the Clerk of
this court is directed to transmit this certification and request to the
Louisiana Supreme Court in conformity with the usual practice of this court.
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