W.T. Mechanical, Inc. v. Heatmasters, Inc. et al

Filing 35

MEMORANDUM OPINION signed by the Honorable Charles P. Kocoras on 9/15/2011.Mailed notice(sct, )

UNITED STATES DISTRICT COURT
NORTHERN DISTRICT OF ILLINOIS
EASTERN DIVISION
W.T. MECHANICAL, INC.,

)
)
Plaintiff,
)
)
vs.
)
)
HEATMASTERS, INC., and
)
INTERNAL REVENUE SERVICE,
)
)
Defendants.
)
___________________________________ )
)
UNITED STATES OF AMERICA,
)
)
Counterclaim-Plaintiff,
)
)
HEATMASTERS, INC.,
)
W.T. MECHANICAL, INC., and
)
BRUCE M. ROSE,
)
)
Counterclaim-Defendants.
)

11 C 2482

MEMORANDUM OPINION
CHARLES P. KOCORAS, District Judge:
This case comes before the Court on cross-motions for summary judgment filed
pursuant to Federal Rule of Civil Procedure 56 by defendant and counterclaim-plaintiff,
the United States of America (the “United States”), and counterclaim-defendant Bruce
Rose (“Attorney Rose”). Attorney Rose also filed a motion to strike. For the reasons

stated below, the United States’ motion is granted and Attorney Rose’s motions are
denied.
BACKGROUND 1
Between October 7, 2002, and September 13, 2004, several federal employment
tax assessments were made against W.T. Mechanical, Inc. (“WT Mechanical”). Notices
of the assessments, and demands for payment, were sent to WT Mechanical on the dates
of the assessments. Despite such notices and demands, WT Mechanical failed to pay the
taxes. On January 19, 2005, the Internal Revenue Service (the “IRS”) filed a tax lien
against WT Mechanical with the Illinois Secretary of State. WT Mechanical is liable to
the United States for unpaid federal taxes in the amount of $259,444.32, plus interest and
other statutory additions accruing from and after April 15, 2011.2
Around May 2003, WT Mechanical asked Attorney Rose to file a lawsuit on its
behalf against Heatmasters, Inc. (“Heatmasters”) in the Circuit Court of Cook County.
Before filing the lawsuit, on June 4, 2003, Attorney Rose agreed to represent WT
Mechanical in the litigation against Heatmasters for $150 per hour plus a twenty percent

1

Unless otherwise noted, the following facts are undisputed for purposes of summary
judgment. The Court denies Attorney Rose’s motion to strike and considers any material facts
derived from the Declaration of Sam Randazzo.
2

WT Mechanical did not file a response to the United States’ Motion for Summary
Judgment. Accordingly, the Court holds that WT Mechanical is liable to the United States for
unpaid federal taxes in the amount of $259,444.32, plus interest and other statutory additions
accruing from and after April 15, 2011.

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contingency fee. On September 5, 2003, Attorney Rose, on behalf of WT Mechanical,
filed the lawsuit against Heatmasters. Approximately eight months after filing the
lawsuit, on April 30, 2004, Attorney Rose and WT Mechanical amended their fee
agreement, so that Attorney Rose would earn a contingency fee equaling one-third of any
recovery against Heatmasters.
From March 2003 to May 2004, Attorney Rose represented WT Mechanical in
other matters and wanted to secure payment of his fees from any amount recovered in
the case against Heatmasters. For this reason, in May 2004, Attorney Rose and WT
Mechanical orally agreed that Attorney Rose would continue to represent WT
Mechanical on all other matters for $275 per hour and that WT Mechanical’s payment
would be deferred until Attorney Rose resolved the case against Heatmasters. WT
Mechanical agreed that all of Attorney Rose’s fees would “come off the top” of any
recovery from Heatmasters. Attorney Rose eventually capped his fees for all hourly
matters at $63,000.
On September 12, 2006, Attorney Rose and WT Mechanical again amended their
fee agreement. According to Attorney Rose, the amendment memorialized the May
2004 oral agreement, even though it does not expressly refer to the date of the prior oral
agreement.

Pursuant to the amendment, WT Mechanical would use any money

recovered from Heatmasters to first pay Attorney Rose the one-third contingency fee for

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work done in that case and then pay Attorney Rose $63,000 for work done in other
matters.3
In March 2007, WT Mechanical voluntarily dismissed its lawsuit against
Heatmasters. The dismissal caused Attorney Rose and WT Mechanical to once more
amend the fee agreement on July 26, 2007, to ensure that their previous fee agreement
applied to any recovery from Heatmasters at any time, whether through litigation,
arbitration, mediation, or otherwise. On February 29, 2008, WT Mechanical filed
another lawsuit against Heatmasters in the Circuit Court of Cook County.

This

subsequent complaint was based on events occurring in 2002 and 2003 and contained
allegations similar to those alleged in the original complaint against Heatmasters. On
December 15, 2010, WT Mechanical and Heatmasters settled the pending claims for
$122,500.
On February 22, 2011, Heatmasters paid the one-third contingency fee directly to
Attorney Rose. In March 2011, the IRS was impleaded as a third-party defendant in the
3

The September Amendment also refers to a tax levy served by the IRS on Heatmasters in
the amount of $126,000. According to the September Amendment, the IRS, WT Mechanical, and
Attorney Rose agreed that the IRS and Attorney Rose would equally share any recovery from
Heatmasters up to a gross recovery of $180,000. For amounts recovered in excess of $180,000,
Attorney Rose would receive 55% and the IRS would receive 45% of the recovery. The September
Amendment elaborated that WT Mechanical assigned to Attorney Rose the right to, and granted
Attorney Rose a security interest in, 50% of any recovery not exceeding $180,000 from Heatmasters,
plus 55% of any recovery exceeding $180,000, plus 100% of any recovery after the IRS’s levy is
satisfied until the amount paid to Attorney Rose equals one-third of the gross amount recovered from
Heatmasters plus $63,000.

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case against Heatmasters, so the court could decide the proper disposition of the
remaining $81,670.75 in settlement proceeds. The IRS removed the case to this Court
and the IRS and Attorney Rose filed cross-motions for summary judgment. The IRS
asserts that it is entitled to all of the remaining settlement proceeds and Attorney Rose
contends that he is entitled to $63,000 of the remaining settlement proceeds.
LEGAL STANDARD
Summary judgment is appropriate when the pleadings, discovery materials,
disclosures, and affidavits demonstrate no genuine issue of material fact, such that the
movant is entitled to judgment as a matter of law. Fed. R. Civ. P. 56(a); Protective Life
Ins. Co. v. Hansen, 632 F.3d 388, 391-92 (7th Cir. 2011). A genuine issue of material
fact exists when, based on the evidence, a reasonable jury could find in favor of the nonmoving party. Van Antwerp v. City of Peoria, Ill., 627 F.3d 295, 297 (7th Cir. 2010).
When faced with cross-motions for summary judgment, the court “construe[s] all
inferences in favor of the party against whom the motion under consideration is made.”
Edwards v. Briggs & Stratton Ret. Plan, 639 F.3d 355, 359 (7th Cir. 2011).
DISCUSSION
If a person who is liable to pay a tax neglects or refuses to pay the tax after a
demand is made, the amount of the tax is a lien in favor of the United States on all
property and rights to property belonging to such person. 26 U.S.C. § 6321. The federal

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tax lien arises at the time the assessment is made and continues until the liability is
satisfied. 26 U.S.C. § 6322. The federal tax lien is not valid against any purchaser,
holder of a security interest, mechanic’s lienor, or judgment lien creditor, until notice of
the lien has been properly filed. 26 U.S.C. § 6323(a).
Even if notice has been filed, the federal tax lien is not valid with respect to
certain categories of liens which receive a super-priority status, including certain
attorneys’ liens. 26 U.S.C. § 6323(b)(8). Under Section 6323(b)(8), the federal tax lien
is not valid as to settlement proceeds against an attorney who, under local law, holds a
lien or contract enforceable against the proceeds, to the extent of his reasonable
compensation for procuring the settlement.
The parties dispute the scope of Section 6323(b)(8). Section 6323(b)(8) states
that the attorney “holds a lien upon or a contract enforceable against the [settlement]
amount, to the extent of his reasonable compensation for . . . procuring such settlement.”
According to the IRS, the super-priority lien only encompasses the amount owed in
connection with procuring the settlement; in this case, the one-third contingency fee.
According to Attorney Rose, the super-priority lien encompasses the entire amount
secured by the fee agreement, as long as that total amount does not exceed reasonable
compensation for procuring the settlement. Attorney Rose contends that, based on his
usual hourly rate and the number of hours spent on the case, he devoted over $230,000

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in time to procuring the settlement. Under Attorney Rose’s interpretation of the statute,
the one-third contingency fee plus $63,000 is not unreasonable compensation for
procuring the settlement because it is much less than the amount he could have charged
on an hourly basis.
The resolution of this issue is a matter of statutory construction and a plain
reading of the statute yields support for both interpretations. Because the statute is
ambiguous, the Court refers to the legislative intent to aid its interpretation. See United
States v. Hudspeth, 42 F.3d 1015, 1022 (7th Cir. 1994). The Section 6323(b)(8)
attorney’s lien encourages attorneys to file lawsuits and obtain judgments that enable
their clients to pay their tax liabilities and, in exchange, protects the attorney’s right to
recover his or her reasonable fees resulting from those efforts. Federal Tax Lien Act of
1966, Pub. L. No. 89-719, 1966 U.S.C.C.A.N. 3722, 3727. By enacting Section
6323(b)(8), Congress intended to grant super-priority status to the fees incurred by an
attorney to obtain a judgment or settlement which enhanced the IRS’s ability to collect
taxes. Accordingly, Attorney Rose’s Section 6323(b)(8) lien is limited to the one-third
contingency fee, which represents the fees attributed, and amount paid, to Attorney Rose
for obtaining the settlement. Affording the $63,000 super-priority status under Section
6323(b)(8) would be unreasonable because such fees were not attributable to procuring

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the settlement. Section 6323(b)(8) does not permit an attorney to tack on fees incurred
for other matters.
Even though Attorney Rose’s interest in the $63,000 is not entitled to superpriority status, Attorney Rose suggests that he holds a security interest or maintains an
equitable lien, which benefits from Section 6323(a)4 and has priority based on the
general rule of “the first in time is the first in right.”5 The priority of a federal tax lien
is governed by the common law principle that “the first in time is the first in right.”
United States v. McDermott, 507 U.S. 447, 449 (1993). For purposes of “first in
time” priority against a competing state interest benefitting from Section 6323(a), the
federal tax lien is dated from the time of its filing. Id. at 454. The competing state
interest comes into existence for “first in time” purposes once it is perfected, meaning
that the identity of the lienor, the property subject to the lien, and the amount of the
lien must be established.

Id. at 449.

Moreover, when dealing with property

subsequently acquired by the debtor, the state lien attaches to the property when the
debtor acquires rights in the property. Id. at 452-53.
4

Under Section 6323(a), the federal tax lien is not valid against any purchaser, holder of a
security interest, mechanic’s lienor, or judgment lien creditor, until notice of the federal lien has been
filed.
5

The Court does not decide whether Attorney Rose had either a security interest or equitable
lien on the settlement proceeds or whether any such interest benefits from Section 6323(a). Even
assuming Attorney Rose had a security interest or equitable lien which benefits from Section
6323(a), Attorney Rose failed to perfect the security interest or equitable lien before the United
States filed notice of the federal tax lien.

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Here, notice of the federal tax lien was filed on January 19, 2005. While
Attorney Rose argues that his interest came into existence upon the May 2004 oral
agreement, any such interest was not yet perfected since the amount of the lien was
uncertain6 and no evidence suggests that the amount became certain prior to the date
that the United States filed notice of the federal tax lien. Further, any secured interest
could not attach to the recovery from Heatmasters until WT Mechanical acquired
rights in the settlement proceeds when Heatmasters and WT Mechanical agreed to
settle the case on December 15, 2010. Finally, Attorney Rose’s purported interest is
inferior to the federal tax lien for an additional reason. Attorney Rose roots his
interest in the May 2004 oral agreement and represents that the agreement entitled
him to a unified fee composed of the one-third contingency fee and the hourly fees.
Illinois Rule of Professional Conduct 1.5(c) requires a contingent fee agreement to
be in writing. Since Attorney Rose amended the former contingent fee agreement,
he was required to document the May 2004 oral agreement in writing. See Ill. Rules
of Prof’l Conduct R. 1.5(c). As such, no security interest or equitable lien could arise

6

For matters other than the case against Heatmasters, Attorney Rose agreed to represent WT
Mechanical for $275 per hour. At the time of this agreement, Attorney Rose continued to work on
other matters at the hourly rate. At a later date, Attorney Rose capped his fees for these other matters
at $63,000. The undisputed facts demonstrate that Attorney Rose had capped his fees by September
12, 2006, the date Attorney Rose and WT Mechanical memoralized the May 2004 oral agreement.
By the time Attorney Rose capped his fees at $63,000, the United States had already filed notice of
the federal tax lien.

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until the agreement was memoralized on September 12, 2006. See, e.g., McKeeBerger-Mansueto, Inc. v. Bd. of Educ. of Chi., 691 F.2d 828, 837 (7th Cir. 1982)
(finding that equitable lien arose on the date the contingent fee contract was
executed). Thus, any interest, perfected or not, arose after the United States filed
notice of the federal tax lien. See McDermott, 507 U.S. at 449; see also Capuano v.
United States, 955 F.2d 1427, 1432 (11th Cir. 1992) (explaining that a federal tax lien
is superior to any interest not perfected at the time notice of the federal lien is filed).
Since the federal tax lien’s priority date precedes the state lien’s priority date, the
federal tax lien has priority.
CONCLUSION
For the foregoing reasons, this Court denies Attorney Rose’s motion for
summary judgment and motion to strike and grants the United States’ motion for
summary judgment.

Charles P. Kocoras
United States District Judge
Dated: September 15, 2011

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