VI Bur Internal v. Chase Manhattan Bank

Opinions of the United
2002 Decisions States Court of Appeals
for the Third Circuit
12-5-2002
VI Bur Internal v. Chase Manhattan Bank
Precedential or Non-Precedential: Precedential
Docket No. 01-3467
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PRECEDENTIAL
Filed December 5, 2002
UNITED STATES COURT OF APPEALS
FOR THE THIRD CIRCUIT
Nos. 01-3467/3468/4325/4326/4464
VIRGIN ISLANDS BUREAU OF INTERNAL REVENUE
Appellant (01-3468/4464)
v.
CHASE MANHATTAN BANK,
Defendant/Third-party Plaintiff
Appellant (01-3467/4325)
v.
WILLIAM LANSDALE,
Third-Party Defendant
Appellant (01-4326)
Appeal from the District Court of the Virgin Islands
Division of St. Thomas
(D.C. Civil Action No. 93-cv-00093)
District Judge: Honorable Raymond L. Finch
District Judge: Honorable Thomas K. Moore
Argued May 13, 2002
Before: AMBRO, FUENTES and GARTH, Circuit Judg es
(Opinion filed: December 5, 2002)
Lawrence M. Hill, Esquire (Argued)
Michael I. Saltzman, Esquire
Richard A. Nessler, Esquire
White & Case LLP
1155 Avenue of the Americas
New York, NY 10036
Attorney for Appellant
Chase Manhattan Bank
Iver A. Stridiron
Attorney General
Elliott McIver Davis
Solicitor General
Joanne E. Bozzuto (Argued)
Special Assistant Attorney General
Richard M. Prendergast
Assistant Attorney General
Office of Attorney General of
Virgin Islands
Department of Justice
48B-50C Kronprindsens Gade,
GERS Building, 2nd Floor
Charlotte Amalie, St. Thomas
USVI, 00802
John A. Sopuch, III, Esquire
Sopuch Nouhan Higgins Arnett &
Gaubert
311 South Wacker Drive, Suite 5600
Chicago, IL 60606
John A. Zebedee, Esquire
Hymes & Zebedee
10 Norre Gade, 3rd Floor
P.O. Box 990
Charlotte Amalie, St. Thomas
USVI, 00804
Attorneys for Appellee
Virgin Islands Bureau of
Internal Revenue
2
Henry C. Smock, Esquire (Argued)
Smock Law Offices
Palm Passage, Suite B18-23
P.O. Box 1498
Charlotte Amalie, St. Thomas
USVI, 00804
Richard Smith, Esquire
Cynthia Morales, Esquire
Shook, Hardy & Bacon LLP
Miami Center, Suite 2400
201 South Biscayne Boulevard
Miami, FL 33191-4332
Attorney for Appellee
William Lansdale
OPINION OF THE COURT
AMBRO, Circuit Judge:
This case poses two questions. First, does senior bank
officers’ knowledge that the company named in a notice of
levy previously had merged into another company neither
named nor identified in the levy notice require the bank to
enforce the levy against the company not named in the
notice? Under the circumstances of this case, we hold that
it does not. Second, must a bank honor a notice of levy on
property in which it holds an unexercised right of setoff,
but has limited the property owner’s access? We hold that
because an account holder retains a property interest in
the account until the right of setoff has been exercised,
dishonoring the levy is not justified.
I. Background
William Lansdale established La Isla Virgen, Inc. ("La Isla
Virgen" or "LIV"), a Delaware corporation, in 1981. He was
its president and a director, and he and his wife were its
sole shareholders. LIV bought an $800,000 certificate of
deposit ("CD") from Chase Manhattan Bank ("Chase") on
August 20, 1985, and later increased the amount to $1.2
million. On March 18, 1986, Lansdale personally borrowed
3
$1.2 million from Chase, granting (through LIV) to Chase a
security interest and right of setoff against LIV’s CD.
In late 1988 LIV merged into Marina Pacifica Oil
Company ("Marina Pacifica"), a California corporation
wholly owned by the Lansdales. In early 1989 Marina
Pacifica bought a renewal CD from Chase for
$1,487,371.95, by converting the LIV CD. Marina Pacifica
granted Chase a security interest in the renewal CD.
Four months later, senior Chase officers recommended
the reapproval of the collateralized line of credit to
Lansdale. An internal memorandum noted that Lansdale,
besides being the majority shareholder and president of
Marina Pacifica,
was also the 100% owner of our former customer, La
Isla Virgen, Inc., which during 1988 ceased to be,
merging into [Marina Pacifica] which survived the
merger. Marina Pacifica Oil resultantly possesses all
the debts and obligations of the former LIV.
Additionally, the merger agreement provided for the
preservation of all the rights of creditors relative to all
liens upon any property of LIV, and provided for the
attachment of such liens to the surviving corporation.
At the same time, LIV was embroiled in litigation with the
Virgin Islands Bureau of Internal Revenue ("VIBIR")
stemming from alleged income tax liabilities for past tax
years. The District Court of the Virgin Islands ultimately
resolved that issue in favor of the VIBIR, and we affirmed.
See La Isla Virgen, Inc. v. Olive, Nos. 1986-263, 1988-012,
and 1988-270 (D.V.I. Feb. 28, 1991), aff ’d , 952 F.2d 1393
(3d Cir. 1991).
On April 22, 1991, the VIBIR, in its attempt to execute
against assets of LIV to collect on its judgment, issued to
Chase’s St. Thomas branch a notice of levy against LIV for
$22,514,390.14 in unpaid taxes, interest, and penalties.
The notice identified the taxpayer as "La Isla Virgen," and
listed its taxpayer identification number. On the date of the
notice, $1,304,138.17 remained in Marina Pacifica’s CD
pledged to Chase, and Lansdale owed a $600,000 balance
on his personal loan from Chase secured by the CD.
4
Chase’s customer support services department in St.
Thomas performed a computer search of Chase’s account
database. The database maintained files only on open
accounts. Chase searched its database both by taxpayer
name and tax identification number. It then sent a notice
to the holders of any matching accounts, giving an account
holder twenty-one days "to settle the dispute with the
taxing authority." If there was no such resolution, Chase
would remit the funds to that authority. Using this
procedure, Chase discovered an open account under La Isla
Virgen’s name, labeled "LIV Building Account." It remitted
the balance, $5,058.53, to the VIBIR. It did not perform a
search under Marina Pacifica’s name or identification
number.
On May 12, 1991, Lansdale requested that Chase
transfer $724,696.02 from the CD to a Marina Pacifica
account in California. Chase refused because the transfer
would have reduced the balance below the $600,000
required to secure fully Lansdale’s personal loan. In this
context, Chase transferred $703,338.17 to the Marina
Pacifica account, leaving a balance of $600,800 in the CD.
On March 17, 1992, Marina Pacifica merged into
Lonesome Dove Petroleum Corporation ("Lonesome Dove"),
a Texas corporation wholly owned by the Lansdales. Marina
Pacifica assigned its interest in the CD to Lonesome Dove.
On May 20, 1992, the VIBIR served Chase with a notice of
levy, identifying the taxpayer as La Isla Virgen, naming
Marina Pacifica and Lonesome Dove as successor
corporations, and providing the taxpayer identification
numbers of all three corporations. The balance on the CD
was $606,167.51, but Chase wired the accumulated
interest of $6,167.51 to Lonesome Dove, leaving a $600,000
balance, which it did not remit to the VIBIR.
One week after the VIBIR served the second notice of
levy, Chase sent a letter to John deJongh, its local counsel
in the Virgin Islands, asking for his opinion on offsetting
the balance of the CD against Lansdale’s loan. DeJongh
replied that he was "unable to vouch for the seniority of
Chase’s lien as against the V.I. Government’s tax lien," but
agreed with the decision to set off. Chase sent a letter to
5
Lansdale demanding payment and on June 5 set off the
balance of the CD against Lansdale’s loan.
On June 16, 1993, the VIBIR sued Chase for failure to
comply with the 1992 levy, seeking the value of LIV’s
property Chase held at the time of the levy, plus a 50%
penalty. The VIBIR agreed to a dismissal with prejudice as
to the 50% penalty in exchange for Chase adding Lansdale
as a third-party defendant, which it did. In May 1998 the
District Court granted the VIBIR’s motion to amend its
complaint to add a count for failure to comply with the
1991 levy, and seeking a 50% penalty for that failure. Both
parties moved for summary judgment.
On July 30, 2001, the District Court granted the VIBIR’s
motion for summary judgment on the two levies, and
granted Chase’s cross-motion to dismiss the 50% penalty.
Although the order resolved all claims between the two
parties, Chase retained a third-party claim for contribution
from Lansdale. In light of the outstanding claim, Chase and
the VIBIR were uncertain whether this order constituted a
final order, and both filed motions for entry of a final
judgment under Federal Rule of Civil Procedure 54(b).1 The
Court granted the motion and entered judgment on October
26, 2001.
Because we find that the District Court did not abuse its
discretion in entering its 54(b) judgment, its order is
appealable. Berckeley Investment Group Ltd. v. Colkitt, 259
F.3d 135, 140 (3d Cir. 2001).2 Our appellate jurisdiction is
pursuant to 28 U.S.C. S 1291, and we exercise plenary
review over the District Court’s grant of summary
_________________________________________________________________
1. Rule 54(b) provides: "When more than one claim for relief is presented
in an action, whether as a claim, counterclaim, cross-claim, or third-
party claim . . . the court may direct the entry of a final judgment as to
one or more but fewer than all of the claims or parties only upon an
express determination that there is no just reason for delay and upon an
express direction for the entry of judgment."
2. Because Lansdale is not a party to VIBIR’s lawsuit against Chase, it
is beyond peradventure that Lansdale cannot appeal the District Court’s
judgment as to that suit. Lansdale’s attempt to join in this appeal is
therefore dismissed for lack of standing. We further deny Lansdale’s
motion to serve as amicus curiae.
6
judgment. Tse v. Ventana Medical Systems, Inc. , 297 F.3d
210, 217 (3d Cir. 2002).
II. Discussion
A. The 1991 levy
The 1991 notice of levy, sent to Chase’s St. Thomas
branch, named only LIV. At the time of the notice, LIV had
merged, more than two years earlier, into its successor
company, Marina Pacifica. The District Court used a
general agency standard to impute to Chase knowledge of
Marina Pacifica’s status as LIV’s successor. V. I. Bureau of
Internal Revenue v. Chase Manhattan Bank, 168 F. Supp.
2d 480, 489 n.13 (D.V.I. 2001) (citing F.D.I.C. v. Ernst &
Young, 967 F.2d 166, 170 (5th Cir. 1992), and In re Carter,
511 F.2d 1203, 1204 (9th Cir. 1975)). It reasoned that
because senior Chase officers knew Marina Pacifica was
LIV’s successor in interest, their knowledge was imputed to
Chase as a whole. Chase did have property belonging to
Marina Pacifica at the time it received notice of the 1991
levy naming LIV, and the Court concluded it should have
surrendered that property to the IRS.
What the VIBIR is attempting is to shift the burden to
Chase to research whether assets held once by one of its
customers are now held by a successor entity. For an
immense and extensive operation like that of Chase, the
consequences of such a ruling slide none too slowly down
the slope from irritating to impossible. While we reject per
se pronouncements absolving entities like Chase in every
instance,3 in this case it makes more sense, and better
policy, simply to place on the VIBIR the burden of including
each taxpayer Chase should search for assets, particularly
when the VIBIR knows that Marina Pacifica was LIV’s
successor and indeed in the VIBIR’s 1992 levy mentioned,
in addition to LIV, not only Marina Pacifica but Lonesome
Dove as well.
_________________________________________________________________
3. For example, Chase is not absolved where evidence shows it to be in
conspiracy with Lansdale to hide assets or it engages in fraud. No
evidence of either is presented on the record before us.
7
The VIBIR and the District Court cited United States v.
Donahue Industries, Inc., 905 F.2d 1325 (9th Cir. 1990), to
bolster their claim of imputed knowledge, but that case
differs greatly from this one. In Donahue, the levy notice
referred to "Donahue Printing" instead of"Donahue
Industries, Inc." Id. at 1332. However, because the bank
had responded in the past to the IRS summons with a
letter indicating that it acknowledged that both names
referred to the same entity, the "deficiencies" in the levy
notice did not excuse the bank’s refusal to honor the levy.
Id.
The facts of this case part company with those of
Donahue. If there had been a Donahue-like miswording (for
example, if the levy listed "Marine Pacifica" instead of
"Marina Pacifica"), Chase would presumably have found the
correct account, if not by its name search, then certainly by
its taxpayer identification number search. Therefore, while
it may be true that, as the Ninth Circuit observed in
Donahue, "deficiencies" in levy notices necessarily do not
constitute "reasonable cause" under S 6332 for dishonoring
a levy, id. at 1332, the complete absence of the name
"Marina Pacifica" or its taxpayer identification number is
not simply a deficiency. Rather, it is an omission of any
marker by which Chase could identify Marina Pacifica as
the taxpayer subject to levy. This omission resulted in the
levy being ineffective as to accounts under that name.
B. The 1992 levy
The District Court erred in applying Virgin Islands law
regarding levies. Instead, it should have followed the
pertinent Internal Revenue Code ("IRC") provisions. Virgin
Islands income tax law "mirrors" the IRC:
The income-tax laws in force in the United States of
America and those which may hereafter be enacted
shall be held to be likewise in force in the Virgin
Islands of the United States, except that the proceeds
of such taxes shall be paid into the treasuries of said
islands.
48 U.S.C. S 1397. The District Court mistakenly reasoned
that, because the provisions at issue in this case are
"administrative and procedural in nature," Virgin Islands
8
income tax law should apply. Chase Manhattan Bank, 168
F. Supp. 2d at 486. On the contrary, the IRC does not
distinguish between "substantive" and "nonsubstantive"
income tax provisions, and neither do we. Chase Manhattan
Bank v. Gov’t of V.I., Bureau of Internal Revenue , 300 F.3d
320 (3d Cir. 2002). Therefore, we apply federal law
governing liens and levies.
We begin with a general review of the subject. Section
6321 of the IRC authorizes the Government to obtain a lien
against a delinquent taxpayer:
If any person liable to pay any tax neglects or refuses
to pay the same after demand, the amount (including
any interest, additional amount, addition to tax, or
assessable penalty, together with any costs that may
accrue in addition thereto) shall be a lien in favor of
the United States upon all property and rights to
property, whether real or personal, belonging to such
person.
26 U.S.C. S 6321.
The Government’s lien is not self-executing, however.
United States v. Nat’l Bank of Commerce, 472 U.S. 713, 720
(1985). The Government must select between two
alternative options when enforcing its lien. In the first, a 26
U.S.C. S 7403(a) lien foreclosure suit, the Government files
an action in District Court to enforce the lien. This is an
involved proceeding that actually determines the priorities
of the various claimants. Id.
The second, and more common, lien enforcement
mechanism is 26 U.S.C. S 6331’s administrative levy. This
is a "provisional remedy, which does not determine the
rights of third parties until after the levy is made, in
postseizure administrative or judicial hearings." Nat’l Bank
of Commerce, 472 U.S. at 731 (emphases omitted). 26
U.S.C. S 6332 requires that the party holding the levied
property relinquish it. Unlike S 7403(a)’s lien foreclosure
suit, S 6331’s administrative levy does not determine the
relative priority of creditors’ claims, either amongst
themselves or in relation to the Government’s lien. Instead,
it simply "protect[s] the Government against diversion or
loss while such claims are being resolved." Nat’l Bank of
9
Commerce, 472 U.S. at 721. In essence, it takes a snapshot
of the property at the time of levy, freezing it until the court
can sort out the rights of competing claimants.
Sometimes someone other than the taxpayer holds
property that is subject to an administrative levy. These
third parties understandably are apprehensive about
turning over property they hold to the Government,
especially if it is later proved that another creditor, or the
taxpayer, had a superior claim. Section 6332(e) accordingly
provides that those who honor an administrative levy"shall
be discharged from any obligation or liability to the
delinquent taxpayer and any other person with respect to
such property or rights to property arising from such
surrender or payment." 26 U.S.C. S 6332(e). Dishonoring
the levy, on the other hand, exposes a third party to
substantial liability: "failure to surrender the property upon
service of a tax levy will render the third party personally
liable to the government for the value of the property and
for additional penalties if the noncompliance was not
reasonable." Congress Talcott Corp. v. Gruber , 993 F.2d
315, 318 (3d Cir. 1993). Besides "a sum equal to the value
of the property or rights not . . . surrendered . . . together
with costs and interest," the statute imposes an additional
50% penalty upon "[a]ny person who fails or refuses to
surrender any property or rights to property, subject to
levy, upon demand," if the refusal to surrender property
was "without reasonable cause." 26 U.S.C.S 6332(d).
There are only two exceptions to the rule that a third-
party holder of levied property must turn it over to the
Government. The first is where the taxpayer’s property is
"subject to a prior judicial attachment or execution." Nat’l
Bank of Commerce, 472 U.S. at 722 (citation omitted). The
second is where the taxpayer no longer has a property
interest in the levied property, so that the third party is
"neither in possession of nor obligated with respect to
property or rights to property belonging to the delinquent
taxpayer." Id.
Both exceptions are logical. In the first case, the property
has already been judicially determined to be the subject of
another attachment or execution proceeding, so to
relinquish it to the Government makes little sense, as it
10
would be both inefficient and confusing. In the second, the
levy does not apply because the taxpayer has no
proprietary interest in the property in question. The
Government’s right to levy property extends only to the
taxpayer’s property: the IRS "steps in the taxpayer’s shoes
. . . [and] acquires whatever rights the taxpayer himself
possesses." Id. at 725 (citation omitted). If the taxpayer has
no interest in the property, the Government’s lien cannot
attach. Because the first exception is not in play here, we
need not discuss it. Therefore, we turn to the second: did
LIV and/or its successors -- Marina Pacifica and Lonesome
Dove4 -- retain any property rights in the CD at the time of
the 1992 levy.
Section 6331’s language is extremely broad, covering"all
property and rights to property" owned by the taxpayer.
Congress Talcott, 993 F.2d at 319 (quoting Nat’l Bank of
Commerce, 472 U.S. at 719-20). Courts look to both state
and federal law to answer whether a taxpayer owns
"property or rights to property" held by another. State law
determines the nature of the legal interest the taxpayer has
in the property. Nat’l Bank of Commerce, 472 U.S. at 722.
However, federal law assigns consequences to the state law
rights. Id. "Thus, because the United States Congress
meant to attach a broad meaning to the statutory language
‘all property and rights to property,’ courts must liberally
identify property rights created under state law." Congress
Talcott, 993 F.2d at 319 (citation omitted).
In this context, for a levy to attach requires only a small
property interest. "[E]ven if others claim an interest in the
property and the taxpayer’s interest may be quantified as
but a modicum, the property remains subject to
attachment by levy and must be surrendered until ultimate
ownership can be resolved." Id. at 319 (citing Nat’l Bank of
Commerce, 472 U.S. at 721-22). National Bank of Commerce
held that joint accounts were subject to administrative levy.
Although the co-owner had a right to the accounts, the
taxpayer’s "unqualified right to withdraw the full amounts
on deposit in the joint accounts without notice to his
_________________________________________________________________
4. For convenience, unless the context requires otherwise, LIV and its
successors are hereinafter jointly and severally referred to as "LIV."
11
codepositors" was a sufficient property interest to subject
the entire amount to administrative levy. 472 U.S. at 723-
24. In Congress Talcott, we concluded that even if the third-
party possessor of the property had a right of setoff against
the property, the taxpayer retained a property interest until
the setoff was exercised. 993 F.2d at 320.
A secured creditor who obtains a perfected security
interest before the Government’s lien attaches has priority
over the Government, and its security interest will prevail
in a wrongful levy suit. The administrative levy"settles no
rights in the property subject to seizure." Nat’l Bank of
Commerce, 472 U.S. at 728 (citation omitted). However, if
the property is levied upon, the secured creditor must turn
the property over to the Government, or risk incurring the
penalties described above. Congress Talcott, 993 F.2d at
318.
The proper recourse for secured creditors with a priority
interest in levied property is to relinquish the property and
then file a wrongful levy action under 26 U.S.C.S 7426(a):
If a levy has been made on property or property has
been sold pursuant to a levy, 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.
Such a creditor has nine months from the date of the levy
to file suit for wrongful levy. 26 U.S.C. S 6532(c)(1). The
creditor may then prove the priority of its interest in court
and recover the property or its value. 26 U.S.C.
S 7426(b)(2).
This mechanism may seem overly burdensome to the
priority creditor, who must surrender property when it
knows it will ultimately prevail over the Government
(provided it follows the procedural prerequisites, e.g., filing
a S 7426 wrongful levy suit within nine months). However,
public policy supports this result: just as a sheriff in
executing a judgment would levy (or seize) a debtor’s
property and then let the court sort out the rights of
12
competing claimants, so here the administrative levy merely
freezes the various assets until rights can be established.
The alternative is much less appealing. To allow every
party who claimed priority to hold on to, and dispose of,
property on which the Government levies would result in
chaos. All creditors in possession of levied taxpayer
property would claim that their interest was prior, and the
Government would find it difficult to collect on liens. The
administrative levy is a "quick [and] relatively inexpensive"
way to serve the "[n]eed for our government promptly to
secure its revenues." Nat’l Bank of Commerce , 472 U.S. at
721 (citation omitted).
In this case, Chase Manhattan’s decision not to turn over
the $606,167.51 was unreasonable. The VIBIR properly
obtained a lien, and on May 20, 1992, served Chase with a
notice of levy. Section 6332 instructs us that, as a
nontaxpayer holding property that had been levied, Chase
was obligated to turn over the money, unless one of two
exceptions applied. As already noted, the first exception--
that the money was subject to prior judicial attachment or
execution--does not apply. But as to the second exception,
Chase argues that it exercised its right of setoff, and thus
the CD was not LIV’s property at all.
The parties agree that New York law governs, so we apply
that law to determine LIV’s property interest in the CD. To
review, events occurred in the following sequence: at the
time of the 1992 levy, the CD’s remaining balance was
$606,167.51. On the day of the levy, May 20, 1992, Chase
wired $6,167.51 to Lonesome Dove’s account, leaving
$600,000. Chase later sent a letter to John deJongh, its
local counsel in the Virgin Islands, requesting an opinion
on the advisability of setting off $600,000. DeJongh did not
vouch for the priority of Chase’s lien, but agreed that the
setoff should occur. Chase then authorized the setoff,
which was completed June 5, 1992, sixteen days after the
levy.5
_________________________________________________________________
5. Because we perform de novo review of the summary judgment, and so
have determined for ourselves what facts are undisputed and what
reasonable inferences can be drawn in Chase’s favor (as the non-moving
party) from those undisputed facts, we will not respond separately to
Chase’s contentions concerning inappropriate fact-finding by the District
Court.
13
Chase first argues that its right of setoff, acquired in
1986 when it loaned Lansdale $1.2 million secured by the
initial CD, extinguished all of LIV’s property rights.
Appellant’s Br. at 45. Chase had a perfected security
interest in the CD, with priority over the tax lien, and
therefore, it contends, LIV had no property right in the CD.6
Appellant’s Br. at 46-47. This argument fails because it
amounts to a claim of priority, and that (perhaps
counterintuitively to a secured creditor) is not a proper
ground for resisting an administrative levy. Chase could
have properly raised a claim of priority only by turning over
the levied property and then bringing a wrongful levy suit
under S 7426 within the prescribed nine-month time period.
If Chase were to exercise its right of setoff before an IRS
levy, it would gain complete ownership of the property, and
LIV would lose any property interest in it. See generally
Barkley Clark & Barbara Clark, 2 The Law of Bank
Deposits, Collections and Credit Cards P 18.01 (rev. ed.
2002). There would then be no need for Chase to comply
with the levy, because this would trigger the second
permissible reason for dishonoring it, the defense that the
taxpayer has no proprietary interest in the property levied
against.
But what happens when a right of setoff is possible but
not exercised before an IRS levy? Congress Talcott answers
this question, for it rejects the idea that a mere right of
setoff extinguishes a taxpayer’s interest in property. In
Congress Talcott, the IRS served a notice of levy on
Congress Talcott, which, pursuant to a factoring agreement,
held cash collateral in an account to which the taxpayer,
Gruber, lacked access. 993 F.2d at 317. Congress Talcott
refused to turn over the account balance, arguing that it
had a superior interest in the account by virtue of the
agreement containing the cash collateral provisions. We
held that because Gruber’s debt had not matured, and
_________________________________________________________________
6. As a preliminary matter, we note that even if we were to accept this
argument, it does not justify Chase’s decision to wire the $6,167.51 to
Lonesome Dove’s account, rather than forwarding the funds to the
VIBIR. The balance due on the loan was $600,000.00. Even by its own
logic, Chase should have turned over the excess funds to the VIBIR.
14
"although Congress had absolute control and discretion
over the use of the funds, Congress was to return to Gruber
any amount not applied to Seegull’s debt once the debt was
satisfied." Id. at 320. As Gruber possessed a property
interest in the account, Congress Talcott was unjustified in
refusing to turn over the balance. Id. at 321.
Other circuit courts have also rejected the idea that an
unexercised right of setoff excuses a bank from honoring a
levy. In United States v. Cache Valley Bank, 866 F.2d 1242
(10th Cir. 1989), the bank argued that because it could
have offset the taxpayer’s funds against outstanding loans,
it had an interest superior to the Government’s. The Tenth
Circuit rejected this argument, observing that "the lien
attached to the deposits in the taxpayer’s account before
the bank exercised its right of setoff." Id. at 1245 (emphasis
in original). Similarly, in United States v. Sterling Nat’l Bank
& Trust, 494 F.2d 919, 922 (2d Cir. 1974), the Second
Circuit found that until a bank exercised its right of setoff,
the taxpayer retained a property interest in his account. In
contrast, because Pennsylvania gives banks an automatic
right of setoff, Pittsburgh National Bank v. United States,
657 F.2d 36 (3d Cir. 1981), held that a taxpayer default
alone was enough to constitute the "exercis[ing]" of the
right of setoff. Id. at 39. But no such automatic right of
setoff exists under New York law, Marine Midland Bank v.
Graybar Electric Co., 41 N.Y.2d 703, 708 (N.Y. 1977), and
Lansdale was not in default in any event. Thus, Chase’s
right of setoff upon a default does not constitute an
exercise of the right.
Chase next argues that it "effectively" exercised its setoff
prior to the 1992 levy because it had restricted LIV’s access
to the $600,000, refusing to allow it withdrawals that would
drop the balance below that threshold, and thereby
exercising the functional equivalent of a setoff before the
notice of the levy. Appellant’s Br. at 46-7.
Restriction of LIV’s right to withdraw did not extinguish
its property interest in the CD. The documents indicate that
Chase had to demand payment prior to exercising its right
of setoff. No demand was made until after the 1992 levy.
Moreover, the fact that Chase inquired of local counsel
about the advisability of exercising its right of setoff a week
15
after receiving the notice of levy indicates that it did not
believe that it had already exercised the right simply by
restricting LIV’s access.
The Eleventh Circuit has found that "[u]nder New York
law setoff is complete when three steps have been taken: a
decision to exercise the right, some action that
accomplishes the setoff, and some record evidencing that
the right of setoff has been exercised." Gregg v. U.S.
Industries, 715 F.2d 1522, 1539 (11th Cir. 1983) (citing
Clarkson Co. v. Shaheen, 533 F. Supp. 905, 925 (S.D.N.Y.
1982), and Aspen Industries, Inc. v. Marine Midland Bank,
74 A.D.2d 59, 62 (N.Y. App. Div. 1980), rev’d on other
grounds, 52 N.Y.S.2d 316 (N.Y. 1980)). Chase did not take
these steps until after the 1992 levy, when it consulted
local counsel as to the advisability of setting off, had the
setoff authorized, and finally completed it over a week later.
Similarly, the bank in Congress Talcott did not withdraw
funds from the taxpayer’s account until four months after
the notice of levy. 993 F.2d at 321. We held that only at the
time of this withdrawal was the right of setoff exercised. Id.
These decisions underscore the obvious. A setoff-- a
nonjudicial remedy -- is a taking transferring the debtor’s
or pledging party’s asset to the creditor bank. James J.
White & Robert S. Summers, Uniform Commercial Code
S 21-7, at 401 (4th ed. 1995). Prior to the taking, the
property still belongs to the debtor or pledging party. See
Sterling Nat’l Bank, 494 F.2d at 922.
Chase’s emphasis that Lansdale and LIV had no
"unfettered right to claim funds," and no"unilateral right to
withdraw the $600,000," Appellant’s Br. at 48, reveals that
it misses the point regarding the nature of our inquiry. The
taxpayer in Congress Talcott similarly lacked an
"unfettered" right of withdrawal; indeed, he was completely
denied access to the account. Nevertheless, we held that he
retained a property interest in the account. The same is
true here.
To recapitulate, the second exception to an
administrative levy is not available here. Because Chase did
not exercise its setoff right until after it received the notice
of levy, LIV retained a property interest in the CD. Chase
16
should have turned over the CD proceeds to the VIBIR, and
then filed a S 7426 wrongful levy suit within nine months of
the levy. Because it did not take these measures, it is liable
for "a sum equal to the value of the property or rights not
surrendered," 26 U.S.C. S 6332(d) -- $606,167.51, plus
costs and interest.7
* * * * *
Under the circumstances presented, we conclude that
Chase did not dishonor the 1991 levy. However, we hold
that Chase’s dishonoring of the 1992 levy was
impermissible because LIV retained a property interest in
the CD at the time of levy. We therefore affirm in part and
reverse in part.8
A True Copy:
Teste:
Clerk of the United States Court of Appeals
for the Third Circuit
_________________________________________________________________
7. Although Chase’s refusal to honor the levy was unreasonable, the 50%
penalty does not apply because on June 30, 1994, the parties stipulated
for dismissal with prejudice as to a penalty, in exchange for Chase
naming Lansdale as a third-party defendant. Chase Manhattan Bank,
168 F. Supp. 2d at 485.
8. As already noted, supra n.2, we dismiss Lansdale’s appeal for lack of
standing.
17