The opinion of the court was delivered by: SAND
The United States has, by order of this Court dated July 8, 1981, obtained a judgment against the Fontanas in the amount of $ 102,404.92. The underlying debt which gives rise to this judgment represents unpaid federal income taxes owed for the years 1974 and 1975, plus statutory additions, interest and penalties.
Prior to obtaining judgment, the United States attempted to levy upon a fund of money held by the Sheriff of Westchester County which money, the Government contends, belongs to the Fontanas. The Sheriff has refused to relinquish the fund because it is subject to a competing claim asserted by Great Lakes Carbon Corporation ("Great Lakes"). Great Lakes is the former employer of Fred Fontana, and it has asserted, in prior litigation in state court and in a currently pending action removed from state court and consolidated with this proceeding, that the fund in question is traceable to wrongful acts by Fontana in breach of his fiduciary obligations as an employee and that such fund should be found to be held in constructive trust for the benefit of Great Lakes. Great Lakes disputes the Government's claim to priority of lien over the fund on the grounds that the taxpayers were not the beneficial owners of the fund but held bare legal title for the benefit of Great Lakes. See Aquilino v. United States, 363 U.S. 509, 80 S. Ct. 1277, 4 L. Ed. 2d 1365 (1960).
The Government now moves for summary judgment, and Great Lakes moves for an order directing that an inquest be held to determine whether such a constructive trust exists.
I. Subject Matter Jurisdiction
Initially, this Court must address the question of subject matter jurisdiction. In its Memorandum of Law at pp. 8-12, the Government argued that the expiration of the time within which Great Lakes could sue the Government for wrongful levy deprives this Court of subject matter jurisdiction over Great Lakes' claim to the Fontana fund. Although the Government has since withdrawn its argument at the request of the Internal Revenue Service, letter of J. D. Pope, Assistant United States Attorney, dated June 11, 1981, the Court is nevertheless compelled to consider the issue because it raises a question of subject matter jurisdiction, not waivable by the parties. See Fed.R.Civ.P. 12(h).
Prior to the enactment of I.R.C. § 7426(a)(1), sovereign immunity, which bars suit against the Government except to the extent that the Government has consented, prevented persons other than the taxpayer from suing the Government to recover their property after the Government had wrongfully levied upon it in satisfaction of the taxpayer's liability. United Sand & Gravel Contractors, Inc. v. United States, 624 F.2d 733, 739 (5th Cir. 1980) (citing S.Rep.No.1708, 89 Cong., 2d Sess., reprinted in (1966) U.S.Code Cong. & Admin.News, pp. 3722, 3750-55). The nine month limitation period governing § 7426, I.R.C. § 6532(c), represents the legislative definition of the extent of the sovereign's consent to suit. Id. Thus, the Court would lack subject matter jurisdiction over an action pursuant to § 7426(a)(1) commenced more than nine months after the cause of action accrued.
The United States and Great Lakes disagree as to whether the cause of action ever accrued. They raise the issue whether a levy actually occurred when the IRS served notice of levy on the Sheriff in November, 1977. The United States argues that service of notice of levy upon the person in possession of the property constitutes a levy. Great Lakes argues that the Government is merely stating the general rule, to which there is an exception when the property is in custodia legis. Great Lakes Memorandum at 18-23. Neither party cites authority directly dealing with this issue. But it is not necessary to determine whether in fact a levy took place, and therefore this Court refrains from deciding this unclear issue.
The jurisdictional issue is simply resolved by the recognition that Great Lakes is not attempting to sue the United States. In one of the two cases presently before the Court, Great Lakes is suing the Fontanas to recover property it alleges they wrongfully hold. The Government has intervened in that proceeding on the ground that its rights to the Fontana fund might be impaired thereby. In the second action, the Government is suing Great Lakes, the Fontanas, and the Sheriff to enforce its claimed levy on the fund. Great Lakes is not availing itself of the wrongful levy remedy provided by § 7426(a) (1), so the nine month's limitation is irrelevant. The Government stated, however, that "the remedy provided by section 7426, which in effect waives the sovereign immunity of the United States in cases where third persons are challenging the propriety of tax levies, is exclusive. United Sand & Gravel Contractors, Inc. v. United States, 624 F.2d 733, 739 (5th Cir. 1980)." Government Memorandum at 9. But more accurately, § 7426 is the third person's "exclusive remedy against the United States." 624 F.2d at 739 (emphasis added). When the property is in the hands of a nongovernmental party, other remedies may be available. Id. For example, in World Marketing, Ltd. v. Hallam, 608 F.2d 392 (9th Cir. 1979), the alleged owner of a sailing vessel levied upon and sold by the Government in satisfaction of a taxpayer's liability had sued the transferee of the vessel to quiet title. Reversing the district court's determination that I.R.C. § 7426 was the exclusive remedy for property wrongfully seized and sold by the United States, the court found that the alleged owner could seek a state law remedy against the transferee. Id. at 394-95. In Crow v. Wyoming Timber Products Co., 424 F.2d 93, 96 (10th Cir. 1970), the court held that the suit for replevin against the purchaser of timber at a tax sale originally brought in state court by the alleged owner of the timber was not merely a concealed § 7426 action, and therefore not removable to federal court. The court noted that although § 7426 was the exclusive remedy against the United States, "nothing in § 7426 purports to cover" a suit against the purchaser in a federal tax sale, and remanded the case to the state court. Id.
The Government presented no theory explaining how a nongovernmental entity could cloak itself in sovereign immunity. The fact that Great Lakes' right to sue the Government may have expired does not mean that its property rights arising under state law have expired and that the Sheriff is now obligated to surrender the property to the Government despite the corporation's competing claim. A statute of limitations governs the times in which a particular remedy may be sought in court, not the underlying rights, which may command other remedies. United States v. Studivant, 529 F.2d 673, 675 (3d Cir. 1976). Section 6532(c) and § 7426(a)(1), taken together, do not reveal any legislative purpose to foreclose other avenues of relief or to extinguish underlying rights.
The vindication of Great Lakes' property rights, which are the subject of its litigation, does not depend upon the availability of a remedy against the Government. The property in question remains in the possession of the Sheriff, in accordance with I.R.C. § 6332(a), which exempts him from the obligation to surrender the property subject to levy while it is "subject to an attachment or execution under any judicial process."
If at the close of this litigation, Great Lakes were adjudged the beneficial owner of the fund, or some portion of it, the Sheriff would release the fund to Great Lakes.
At that point, it would be clear that the Government's lien could not have attached, since the lien can only attach to the taxpayer's property. The Government's only argument that Great Lakes would then be forced to use § 7426(a)(1) would be that even though no lien could have attached, and thus its levy-assuming a levy has occurred-is known to have been wrongful, the Court should nevertheless enforce a wrongful levy and order the disposition of the fund to the Government. Clearly, there is a difference between the Government's inadvertently levying on a third person's property without the aid of any court and a court's enforcing what it knows is a wrongful levy on property it has adjudged to belong to another. The Court is not compelled to do wrong simply because it could no longer remedy the wrong if it had occurred in the past. Therefore, the Court finds that § 7426(c) is not Great Lakes' exclusive means to recover its property and that sovereign immunity does not deprive the Court of jurisdiction over Great Lakes' suit for a state law remedy against the Fontanas.
The only real issue remaining
upon which the appropriateness of summary judgment depends is whether the Fontanas had a sufficient interest in the fund to which the Government's tax lien could have attached.
II. Ownership of the Fontana Fund
The history of the Great Lakes' state court litigation is somewhat complex. For these purposes, however, it suffices to note that the first action was commenced by Great Lakes on May 16, 1975. This action was discontinued by stipulation entered into between Great Lakes and the Fontanas on June 17, 1975. However, on June 20, 1975, Great Lakes commenced a second action against the Fontanas and a corporation they controlled alleging the same basic allegations they had previously asserted in the initial action, plus a claim that the stipulation discontinuing that action had been fraudulently induced. On April 25, 1978, Great Lakes moved for judgment by default on the grounds that the Fontanas had wilfully failed to obey certain disclosure orders of the court and on September 5, 1978, the Supreme Court issued an order which awarded Great Lakes judgment against Mr. Fontana in the sum of $ 31,997.03, plus interest, costs and disbursements, and granted other relief, including a direction that an inquest be held for the purpose of enabling Great Lakes to establish its damages on various causes of action asserted by it. On September 18, 1978, a formal judgment in the amount of $ 38,460.42 on Great Lakes' third cause of action was filed in the County Clerk's Office in New York County. Potter Affidavit, P 19-20. By order entered May 1, 1980, the Supreme Court of New York County ordered that the inquest be held to ascertain the ...