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UNITED STATES v. STERLING NATL. BANK & TRUST CO.

June 5, 1973

United States of America, Plaintiff,
v.
Sterling National Bank & Trust Company Of New York, Defendant and Third-Party Plaintiff, v. Charles S. Smith, Third-Party Defendant


Palmieri, District Judge.


The opinion of the court was delivered by: PALMIERI

PALMIERI, District Judge:

This is a motion by the Government for summary judgment. Fed. R. Civ. P. 56. The material facts in the case are not in dispute.

 The case involves a dispute relating to the obligations of the defendant Bank as the result of a tax levy affecting one of its depositors.

 The United States brought this action against Sterling National Bank and Trust Company of New York (Bank) after the defendant failed to honor a tax levy made by the Internal Revenue Service (I.R.S.) upon the checking account of one of the Bank's depositors.

 Since the chronology of events is of crucial importance it is set forth below.

 On February 13, 1970, the I.R.S. made an income tax assessment and demand for payment against Charles S. Smith (taxpayer) and his wife, jointly and severally, for the taxable period ending December 31, 1968, in the amount of $8,211.38.

 On June 23, 1970, the taxpayer borrowed $6,097.32 from the Bank as evidenced by his promissory note. Under the terms of the note the taxpayer gave the Bank a continuing lien and right of setoff upon any and all cash balances the taxpayer maintained with the Bank to be applied against any and all indebtedness, whether matured or unmatured.

 On August 14, 1970, the I.R.S. made a second assessment and demand against the Smiths. This claim involved unpaid income taxes for the taxable period ending December 31, 1969, and amounted to $6,475.20.

 The I.R.S. filed notices of lien with respect to the two assessments referred to above on November 5, 1970, and March 2, 1971, respectively.

 On June 9, 1971, the I.R.S. served the Bank with a notice of levy. The levy indicated that the taxpayer was indebted to the Government in the amount of $15,531.26 ($14,686.58 in assessed taxes, plus statutory additions). The levy directed the Bank to remit to the I.R.S. all of the taxpayer's property then in the Bank's possession. The taxpayer maintained a checking account with the Bank which on the day the levy was served had a balance of $5,132.36. Prior to service of the levy the Bank had not acted to restrict the taxpayer's right to withdraw funds from the account.

 Because the Bank did not remit the funds in the taxpayer's account as the notice of levy had instructed, the I.R.S. served the Bank with a final demand on June 18, 1971. This instrument directed the Bank to honor the levy and set forth the provisions of law which govern dishonor.

 On July 2, 1971, the Bank exercised its alleged right of setoff and applied $3,779.64 to satisfy the indebtedness of the taxpayer, remitting what was left in the taxpayer's account, the sum of $1,352.72, to the I.R.S.

 On August 5, 1971, the I.R.S. advised the Bank by letter that the I.R.S. had a prior right to the entire $5,132.36 balance of the taxpayer's account and demanded payment of the remaining $3,779.64 within two weeks. The Bank did not comply with this demand.

 On April 14, 1972, this action was brought by the Government to recover $3,779.64 (the amount collected by the Bank by way of setoff), $1,889.82 (half of the first amount as a 50 percent penalty pursuant to 26 U.S.C. §§ 6332(c) (1) and 6332(c) (2)), plus interest and costs of the action.

 On September 26, 1972, the taxpayer died.

 On December 5, 1972, his estate paid his tax indebtedness plus ...


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