Garrity, Levin and Muir llp v. Internal Revenue Service et al

Filing 47

Judge Richard G. Stearns: ORDER entered granting 35 Motion to Dismiss for Lack of Jurisdiction. (RGS, law2)

UNITED STATES DISTRICT COURT
DISTRICT OF MASSACHUSETTS
CIVIL ACTION NO. 15-11405-RGS
GARRITY, LEVIN AND MUIR, LLP
v.
UNITED STATES OF AMERICA,
PAUL DILLON, and SHARON DILLON
MEMORANDUM AND ORDER
ON THE MOTION OF THE UNITED STATES TO DISMISS
FOR WANT OF JURISDICTION
March 1, 2016
Plaintiff and counterclaim defendant Garrity, Levin and Muir, LLP
(GLM), a Needham-based law firm, represented the interests of defendants
Paul Dillon and Sharon Dillon in a third-party bankruptcy proceeding
involving tax debtors John McBride, and his wife, Nancy McBride. At stake
is Nancy McBride’s interest in the $75,000 in excess proceeds resulting from
the foreclosure sale of the McBrides’ former home in Marblehead,
Massachusetts. The money is being held in escrow by GLM. Both the Dillons
and the Internal Revenue Service lay claim to the escrowed funds.1 The IRS

In May of 2009, the Dillons loaned the McBrides $38,052 secured by
a promissory note and later a mortgage on the Marblehead home. At the
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now moves to dismiss for want of subject matter jurisdiction pursuant to Fed.
R. Civ. P. 12(b)(1).
How GLM came into possession of the escrowed funds is as follows.
On July 17, 2012, Gary Cruickshank, the Trustee of the McBride estate,
petitioned the Bankruptcy Court for an order permitting him to disburse the
excess funds. The Bankruptcy Court, having previously held that it lacked
jurisdiction over Nancy McBride (and therefore the Dillons’ derivative claim
to the excess funds), adopted a proposal (endorsed by the IRS attorney) that
the funds be transferred from the Trustee to an escrow account held by
GLM.2 Immediately following the transfer, the IRS served GLM with a
Notice of Levy. The Notice explained to GLM that the Dillons’ only recourse
was to bring an action for wrongful levy pursuant to 26 U.S.C. § 7426 within
the applicable nine-month statute of limitations. For reasons unknown, the
Dillons, or more precisely, GLM acting on their behalf, did not file an
objection to the levy. Instead, on March 27, 2015, after receiving a Final

time they gave the loan, the Dillons were unaware that the McBrides had filed
for bankruptcy in 2008. The IRS claim arises from liens placed on the home
in 2007 for taxes owing for the years 2003 through 2005. Additional facts
are set out in the court’s Memorandum and Order of October 16, 2015,
denying GLM’s motion to dismiss the IRS’s counterclaims.
The parties had earlier entered into a stipulation to follow this course
if they could not agree on the appropriate forum in which to resolve the
competing claims of the Dillons and the IRS.
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Demand for Payment from the IRS, GLM filed this interpleader action under
Fed. R. Civ. P. 22, naming the Dillons and the IRS as defendants.3 GLM
maintains that it cannot comply with the IRS’s levy, or distribute the funds
to the Dillons, without facing potential liability to the unrequited party.
The IRS responded by counterclaiming against GLM, demanding
payment of the levy with interest (Count I), and for the assessment of an
additional 50 percent penalty against GLM for failing to honor the original
levy without reasonable cause (Count II). On January 14, 2016, claiming
sovereign immunity, the United States filed the instant motion to dismiss for
lack of subject matter jurisdiction.
It is black letter law that the United States is not required to interplead
when it has not waived its sovereign immunity. 7 Wright, Miller & Kane,
Federal Practice & Procedure: Civil 3d § 1721, at 699 (2001). In 1996, 28
U.S.C. § 2410(a)(5), which in its then existing form waived the immunity of
the United States in quiet title or foreclosure actions where it “ha[d] or
claim[ed] a mortgage or other lien,” was amended to clarify that the waiver
extended to interpleader actions as well. There is a limitation: the section

GLM also pled under 28 U.S.C. § 1335 (statutory interpleader).
Statutory interpleader, however, requires complete diversity between the
parties. As the United States is not a citizen for diversity purposes, by
definition diversity jurisdiction does not exist. See Commercial Union Ins.
Co. v. United States, 999 F.2d 581, 584 (D.C. Cir. 1993).
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2410(a) waiver applies only to a “true” interpleader. See Wright, Miller &
Kane § 1721, at 701 (“Section 2410(a) will not apply unless ‘a viable
interpleader action is filed naming the United States as a party defendant.’
In the absence of a bona fide interpleader, the court lacks subject-matter
jurisdiction.”) (internal footnote omitted).
A true interpleader arises when a stakeholder is subject to a legal
dilemma because two or more parties have colorable claims to the stake in
its possession and the satisfaction of one will likely lead to a lawsuit by the
other(s). Here there is no true interpleader, as GLM can incur liability to
only one party – the United States, by failing to honor the levy. This is
because 26 U.S.C. § 6332(e) holds a party complying with an IRS levy
absolutely immune from liability to any other competing claimant.4 Instead
of seeking relief from the levied party, the frustrated other is channeled by
26 U.S.C. § 7426 to an action for wrongful levy against the IRS itself. To the
extent that GLM now faces the potential of liability to the Dillons, it is
because of an omission of the firm’s own making – its failure to advise the

There are only two defenses to a failure to honor an IRS levy, either
the party served is not in possession of the taxpayer’s property, or the
property is subject to judicial attachment or execution. United States v. Nat’l
Bank of Commerce, 472 U.S. 713, 721-722 (1985). Neither applies to the
stake in GLM’s possession.
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Dillons to bring an action contesting the IRS levy within the nine months
allowed.5
ORDER
For the foregoing reasons, the motion of the United States to dismiss
for lack of subject matter jurisdiction is ALLOWED. The Clerk will now close
the case.6
SO ORDERED.
/s/ Richard G. Stearns
UNITED STATES DISTRICT JUDGE

GLM complains (not without reason) that it was misled into believing
that interpleader was a proper legal recourse by the fact that an IRS attorney
(Nina Ching) appeared to endorse an interpleader action in the hearing
before the Bankruptcy Court. The circumstances, however, are not pellucid.
While Ms. Ching used the word interpleader in describing her prior dealings
with the Dillons and GLM, she also noted that the Dillons were not amenable
to an interpleader, and that she was “happy if the check is issued to [GLM]
because then the IRS can just pursue collection there. . . . And then they can
file a wrongful levy suit . . . .” Bankr. Hr’g Tr., July 17, 2012, at 5-6 (Dkt #
30-1). There also is no dispute that the Notice of Levy served by the IRS on
GLM stated that an action of wrongful levy was the only available recourse
open to GLM and the Dillons. Even absent that notice, GLM’s suggestion of
an equitable estoppel against the United States fails. See Office of Pers.
Mgmt. v. Richmond, 496 U.S. 414, 426 (1990) (“Judicial use of the equitable
doctrine of estoppel cannot grant respondent a . . . remedy that Congress has
not authorized.”). The government-abetted confusion might, however,
prompt the IRS to reconsider the imposition of a 50% penalty on GLM.
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The Government agreed at the hearing held February 26, 2016, that
a dismissal on Fed. R. Civ. P. 12(b)(1) grounds would terminate its
counterclaims as well.
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