State Auto Property and Casualty Insurance Company v. Burnett et al
OPINION AND ORDER denying 32 Motion for Summary Judgment; granting 34 Motion for Summary Judgment; denying 42 Motion to Strike. Signed by District Judge Debra M. Brown on 9/29/17. (jtm)
IN THE UNITED STATES DISTRICT COURT
FOR THE NORTHERN DISTRICT OF MISSISSIPPI
STATE AUTO PROPERTY AND
CASUALTY INSURANCE COMPANY
EUGENE BURNETT, Individually and
d/b/a JB’s Auto and Diesel; and THE
UNITED STATES OF AMERICA
OPINION AND ORDER
This interpleader action is before the Court on the United States of America’s motion for
summary judgment, Doc. #32; and State Auto Property and Casualty Insurance Company’s
motion for summary judgment and motion to strike. Doc. #34; Doc. #42.
On April 8, 2016, State Auto Property and Casualty Insurance Company filed a
“Complaint for Interpleader and Declaratory Judgment” in this Court, naming as defendants
“Eugene Burnett, Individually and d/b/a JB’s Auto and Diesel,” and The Internal Revenue
Service. Doc. #1. On May 9, 2016, State Auto filed an “Amended Complaint for Interpleader
and Declaratory Judgment” against Burnett, “Individually and d/b/a JB’s Auto and Diesel,” and
the United States of America. Doc. #3. The amended complaint asserts an interpleader action
based on Burnett’s and the United States’ competing claims to building coverage insurance
proceeds, and seeks a declaratory judgment that State Auto has satisfied its obligations under the
building coverage policy.
On June 6, 2016, Burnett, acting pro se, filed an “Answer and Counter-Claim.”1 Doc. #5.
State Auto filed an answer to the counterclaim on June 27, 2016. Doc. #11. On July 5, 2016,
Burnett filed an “Amended Answer and Counter-Claim.”2
counterclaim alleges, among other things, bad faith by State Auto “for failing to timely make
payment” on the policy to Burnett, which permitted the IRS time to make a claim for the policy
proceeds when the IRS originally made no such claim. On July 18, 2016, State Auto answered
Burnett’s amended counterclaim. Doc. #14. The United States filed an answer to the amended
complaint on August 3, 2016.3 Doc. #16.
On August 11, 2016, State Auto filed a motion to deposit the insurance proceeds into the
registry of the Court pursuant to Rules 22 and 67 of the Federal Rules of Civil Procedure. Doc.
#17. United States Magistrate Judge Jane M. Virden granted the motion on August 16, 2016.
This filing was docketed by the Clerk of the Court as an answer and counterclaim to the original complaint.
This filing is dated July 1, 2016; is postmarked as mailed to the Clerk of the Court on July 1, 2016; and was
received and docketed by the Clerk on July 5, 2016—twenty-nine days after Burnett’s original answer and
counterclaim were served on State Auto through the Court’s ECF filing system, and eight days after State Auto filed
an answer to the original counterclaim. Burnett’s amended answer and counterclaim appear to have been filed in
response to State Auto’s amended complaint filed on May 9, 2017, as they were filed within the time period allowed
under the Federal Rules. The summons to Burnett for the amended complaint was issued by the Clerk on June 7,
2016, Doc. #6; and was served on Burnett on June 11, 2016, Doc. #8. The twenty-first day after Burnett was served
was a Saturday, July 2, 2016; making the deadline to respond July 5, 2016, since it was the “the next day that is not
a Saturday, Sunday, or legal holiday.” A summons to Burnett was issued by the Clerk on April 15, 2016, shortly
after the original complaint was filed, Doc. # 2; but, because the docket does not reflect it was served on Burnett, it
is unclear as to how or why Burnett came to file a response to the original complaint.
Federal Rule of Civil Procedure 15(a)(1) provides that “[a] party may amend its pleading once as a matter of course
within … 21 days after service of a responsive pleading ….”). Rule 15(a)(2) provides that “a party may amend its
pleading … with the opposing party’s written consent or the court’s leave.” If Burnett was served with the original
complaint, State Auto could not have amended its complaint without the Court’s leave or Burnett’s written consent
due to Burnett’s filing of his answer and counterclaim to the original complaint. On the other hand, because State
Auto answered Burnett’s original counterclaim, Burnett could not have amended his answer and counterclaim
without the Court’s leave or State Auto’s written consent. Because (1) the record is unclear on these matters, (2)
Burnett has not challenged State Auto’s filing of the amended complaint, and (3) State Auto has not challenged
Burnett’s filing of his amended answer and counterclaim, the Court presumes and proceeds as if the operative
pleadings are State Auto’s amended complaint and Burnett’s amended answer and counterclaim.
The docket reflects the United States was served on June 14, 2016. Doc. #9.
On October 21, 2016, the United States filed a motion seeking summary judgment that
the interpleaded insurance funds are subject to federal liens recorded against Burnett for unpaid
federal income taxes and, as a result, should be distributed to the United States. Doc. #32. On
December 14, 2016, State Auto filed a separate motion for summary judgment. Doc. #34.
On May 19, 2017, Burnett filed “Defendants Response to the United States’ Motion for
Summary Judgment,” to which the defendants filed separate replies on, respectively, May 25 and
May, 26, 2017. Doc. #38; Doc. #40; Doc. #41. Though Burnett’s response is directed to the
United States’ summary judgment motion, State Auto moved to strike Burnett’s response. Doc.
Motion to Strike
State Auto has moved to strike Burnett’s response to the United States’ motion for
summary judgment.4 Doc. #42. State Auto argues that Burnett’s response was (1) grossly
untimely under the local rules, (2) lacks competent summary judgment evidence, and (3) fails to
properly respond to State Auto’s motion for summary judgment and, thus, State Auto’s summary
judgment motion should be granted.
Uniform Local Rule 7(b)(4) provides:
Counsel for respondent must, within fourteen days of service of movant’s motion
and memorandum brief, file a response and memorandum brief in support of the
response. … A party must make a request for an extension of time in writing to
the judge who will decide the motion. Failure to timely submit the required
motion documents may result in denial of the motion.
Because Burnett failed to respond to the United States’ summary judgment motion within
fourteen days and did not seek an extension of the response period, his response is untimely.
State Auto’s motion requests the Court “enter an Order striking Burnett’s Response to the USA’s Motion for
Summary Judgment, holding that the facts set forth in State Auto’s Motion for summary judgment are undisputed
and awarding summary judgment in State Auto’s favor ….”
Dispositive motions, however, cannot be granted because they are unopposed.
Uniform Local Rule 7(b)(3)(E). Summary judgment can only be granted “if the motion and
supporting materials—including the facts considered undisputed—show that the movant is
entitled to it ….” Fed. R. Civ. P. 56(e)(3). “The Supreme Court has recognized that, even in the
absence of a factual dispute, a district court has the power to ‘deny summary judgment in a case
where there is reason to believe that the better course would be to proceed to a full trial.’” Black
v. J.I. Case Co., Inc., 22 F.3d 568, 572 (5th Cir. 1994) (citing Anderson v. Liberty Lobby, Inc.,
477 U.S. 242, 255 (1986)). “Credibility determinations, the weighing of evidence, and the
drawing of legitimate inferences from the facts are jury functions, not those of a judge ….”
Liberty Lobby, Inc., 477 U.S. at 255.
Though Burnett’s response was untimely, in the interest of justice, the Court will
consider Burnett’s response, to which both parties replied without objecting to its untimeliness.
Williams v. Taco Bell Corp., No. 01-21132, 2002 WL 1973807, at *2 n.1 (5th Cir. Aug. 2, 2002)
(“Although Williams’s response was untimely pursuant to a local rule, the district court
considered the response in the interest of justice. For purposes of this appeal, we follow the
district court’s lead and consider Williams’s response to Taco Bell’s motion for summary
judgment.”) (internal quotation marks and alterations omitted).
Accordingly, State Auto’s
motion to strike is denied.
Motions for Summary Judgment
Under Rule 56 of the Federal Rules of Civil Procedure, “[s]ummary judgment is proper
only when the record demonstrates that no genuine issue of material fact exists and the movant is
entitled to judgment as a matter of law.” Luv N’ Care Ltd. v. Groupo Rimar, 844 F.3d 442, 447
(5th Cir. 2016). “A factual issue is genuine if the evidence is sufficient for a reasonable jury to
return a verdict for the non-moving party, and material if its resolution could affect the outcome
of the action.” Burton v. Freescale Semiconductor, Inc., 798 F.3d 222, 226 (5th Cir. 2015)
(internal quotation marks omitted). On a motion for summary judgment, a court must “consider
the evidence in the light most favorable to the nonmoving party and draw all reasonable
inferences in its favor.” Edwards v. Cont’l Cas. Co., 841 F.3d 360, 363 (5th Cir. 2016).
In seeking summary judgment, “[t]he moving party bears the initial responsibility of
informing the district court of the basis for its motion, and identifying those portions of the
record which it believes demonstrate the absence of a genuine issue of material fact.” Nola Spice
Designs, L.L.C. v. Haydel Enters., Inc., 783 F.3d 527, 536 (5th Cir. 2015) (internal quotation
marks and alterations omitted). If the moving party satisfies this burden, “the non-moving party
must go beyond the pleadings and by her own affidavits, or by the depositions, answers to
interrogatories, and admissions on file, designate specific facts showing that there is a genuine
issue for trial.” Id. (internal quotation marks omitted). “Where the nonmoving party bears the
burden of proof at trial, the moving party satisfies this initial burden by demonstrating an
absence of evidence to support the nonmoving party’s case.” Celtic Marine Corp. v. James C.
Justice Cos., Inc., 760 F.3d 477, 481 (5th Cir. 2014).
B. Relevant Facts
1. Insurance policy and payments
Burnett purchased a commercial insurance policy from State Auto to cover his
commercial building and business property. Doc. #34-4. As the named insured, the policy lists
“Eugene Burnett dba JB’s Auto and Diesel.” Id. at 2. The policy term was for one year, from
January 25, 2015, to January 25, 2016. Id. at 12. The policy provided $246,637 of commercial
building coverage, and $29,026 of business personal property coverage. Doc. #34-5 at 1–2.5
On November 14, 2015, Burnett suffered a fire loss to his commercial building. Burnett
filed a claim for the loss with State Auto. At the time of the loss, Covenant Bank held a
mortgage and multiple deeds of trust securing multiple loans on the insured building, and was
named the mortgagee under the policy. Doc. #34-5 at 2.
On November 20, 2015, Burnett was tendered $10,000 as an advance for business
personal property and, on January 27, 2016, an additional $11,911.80. Id. at 2–3 & Exs. 1, 2.
After Burnett submitted receipts verifying replacement of business personal property lost in the
fire, he was tendered an additional $3,465.84. Doc. #34-5 at 3 & Ex. 3. This left $3,648.36
remaining as recoverable depreciation under the policy for business personal property. Doc.
#34-5 at 3.
Sometime before January 5, 2016, State Auto conducted a title search of the insured
property and discovered the property was subject to a federal tax lien filed in the land records of
Panola County, Mississippi, in the sum of $216,925.65 plus interest. Id. at 3; Doc. #1-2. On
January 5, 2016, State Auto spoke with Burnett and obtained contact information from his IRS
representative, Pamela Brown, to discuss the tax lien. Doc. #34-5 at 3. After State Auto left a
voicemail for Brown, on January 14, 2016, IRS representative Jureen Metzler called State Auto.
Id. Metzler left a voicemail advising that the IRS should be included on the check for the
remaining building proceeds and that the IRS’s standard protocol was to sign the check and
return it to the policyholder. Id.
On January 26, 2016, State Auto received the amount of Covenant Bank’s mortgage and
These policy coverage amounts are taken from the affidavit of Mike Myers, a senior claim examiner who worked
for State Auto at the time of the fire. A review of the written policy’s “Commercial Property Coverage Part
Declarations” shows building coverage of $241,845 and business property coverage of $28,120. Doc. #34-4 at 13.
interest totaling $158,144.26. Doc. #34-5 at 3–4 & Ex. 4. The next day, State Auto issued a
check jointly to Eugene Burnett d/b/a JB’s Auto and Diesel and Covenant Bank for $158,144.26.
Doc. #34-5 at 3–4 & Ex. 1. These payments left a balance of building coverage under the policy
in the amount of $88,492.74. Doc. #34-5 at 4.
On January 27, 2016, State Auto requested a check in the amount of $81,736.74 payable
to “Eugene Burnett and Ernestine Burnett and Department of Treasury-IRS” and a check for
$6,756 payable to “Eugene Burnett and Ernestine Burnett and State of Mississippi Department of
Revenue.” Id. These checks were issued on January 28, 2016. Id. & Ex. 5. State Auto notified
Burnett of these payments in a letter dated January 27, 2016. Doc. #34-5 at 4 & Ex. 6. After
learning that the Mississippi Department of Revenue lien had been cancelled, State Auto voided
the $6,756 check. Doc. #34-5 at 4–5. On February 1, 2016, State Auto, through counsel, sent a
letter to the Advisory Group Manager with the Department of Treasury, memorializing State
Auto’s understanding of the voicemail—that the IRS would endorse the check and return it to
Burnett—enclosing the $81,736.74 check. Doc. #34-5 at 5 & Ex. 7.
In response to the February 1, 2016 letter, Metzler called State Auto and left a voicemail
requesting additional documents concerning the policy and stating that if the IRS has an interest
in the remaining building coverage under the policy, the IRS will collect that amount. Doc. #345 at 5–6. On February 3, 2016, State Auto sent a letter to Metzler enclosing a copy of the policy
declarations, photos of the fire damage, and a copy of the title opinion. Id. & Ex. 8. On March
7, 2016, State Auto’s counsel sent a letter to Burnett and State Auto informing them that the IRS
was making a claim for the remaining $88,492.74, stating that the amount “is encumbered by the
Federal Tax Lien (IRC §6321) and should be submitted to the Internal Revenue Service as
payment toward [Burnett’s] current tax liability.” Doc. #34-5 at 6 & Ex. 9.
As of December 12, 2016, Burnett had not provided State Auto with any written report of
debris removal expenses, or any receipts, invoices or estimates for debris removal expenses.
Doc. #34-5 at 6.
2. IRS documents
The IRS produced four documents, each entitled, “Certificate of Assessments, Payments
and Other Specified Matters,” which the IRS states “are certified official transcripts of computer
entries identifying assessments, payments, and credits on the Burnetts’ accounts for given
taxable periods.” Doc. #32-1 at ¶ 4; Doc. #32-2.
The 2007 “Certificate of Assessments, Payments and Other Specified Matters” shows the
following events recorded include:
INTENT TO LEVY COLLECTION
DUE PROCESS NOTICE
INTENT TO LEVY COLLECTION
DUE PROCESS NOTICE
RETURN RECEIPT SIGNED
INTENT TO LEVY COLLECTION
DUE PROCESS NOTICE
RETURN RECEIPT SIGNED
FEDERAL TAX LIEN
MODULE REVERSED OUT OF
FEDERAL PAYMENT LEVY
See Doc. #32-2. Payments of $500.00 were recorded on a monthly basis through May 26, 2016.
This Certificate reflects the account status as of June 22, 2016. Id.
The 2008, 2009, and 2010 Certificates also show entries of “Pending Installment
Agreement” on May 20, 2013; “Federal Tax Lien” on May 24, 2013; and “Installment
Agreement” on July, 24, 2013. Id.
On May 30, 2013, the IRS filed a “Notice of Federal Lien” on the unpaid 2007 through
2010 taxes against the Burnetts with the Chancery Clerk of Panola County, Mississippi. Doc.
#32-4. The IRS claims as of September 30, 2016, Burnetts’ tax liability was $251,320.50,
including tax, penalties, and interest. Doc. #32-1 at ¶ 5–7; Doc. #32-3.
C. State Auto’s motion for summary judgment
An interpleader action is an equitable remedy that has long existed for the purpose of
enabling “a neutral stakeholder, usually an insurance company or a bank, to shield itself from
liability for paying over the stake to the wrong party. This is done by forcing all the claimants to
litigate their claims in a single action brought by the stakeholder.” Underwriters Grp., Inc. v.
Clear Creek Indep. Sch. Dist., No. G-05-334, 2006 WL 1852254, at *3–4 (S.D. Tex. June 30,
2006) (quoting 7 Charles Alan Wright, Arthur Miller & May Kay Kane, FEDERAL PRACTICE AND
PROCEDURE § 1702 (3d ed. 2001)).
A court analyzes an interpleader action in “two distinct steps.” The first step requires the
court to decide “whether the requirements for rule or statutory interpleader action have been
met.” Auto Parts Mfg. Miss., Inc. v. King Const. of Houston, L.L.C., 782 F.3d 186, 193 (5th Cir.
2015). Generally, the first requirement is met “if there is a single fund at issue and [if] there are
adverse claimants to that fund.” Rhoades v. Casey, 196 F.3d 592, 600 (5th Cir. 1999). However,
the party seeking the interpleader bears the burden of establishing that the requirements are
PROCEDURE § 1714.
If the party seeking interpleader,
commonly referred to as the stakeholder, satisfies the interpleader requirements, he may seek
dismissal from the action. Id.
After concluding that the requirements of an interpleader action are satisfied, a court
moves on to the second step of the analysis, which requires the court to determine the
“‘claimants’ respective rights to the fund.” Gen. Elec. Capital Assurance v. Van Norman, 209
F.Supp.2d 668, 670 (S.D. Tex. 2002) (citing FEDERAL PRACTICE AND PROCEDURE § 1714). At
this stage, the interests of the respective claimants are adverse and may be adjudicated by
summary judgment if there are no genuine issues of material fact regarding which claimant is
rightfully entitled to the interpleaded funds.
PROCEDURE § 1714.
However, when genuine issues of material fact exist, each claimant bears the burden of proving
his right to the fund by a preponderance of the evidence at trial by the ultimate finder of fact.
Id.; Gen. Elec. Capital Assurance, 209 F.Supp.2d at 670.
State Auto argues in its summary judgment motion that (1) it has complied with all
interpleader requirements; (2) Burnett’s counterclaim for bad faith fails as a matter of law and
should be dismissed with prejudice; (3) any claim for debris removal under the policy is time
barred; and (4) it is entitled to various forms of relief, including dismissal with prejudice.
Burnett failed to respond to State Auto’s motion.
1. Interpleader requirements
In federal court, “[t]here are two types of interpleader: rule interpleader pursuant to Fed.
R. Civ. P. 22 and statutory interpleader under 28 U.S.C. § 1335.” Auto Parts Mfg. Miss., Inc.,
782 F.3d at 192. State Auto asserts in its amended complaint that this Court has jurisdiction
based on the diversity of citizenship statute, 28 U.S.C. § 1332(a), without mentioning § 1335.
See Doc. #3 at ¶ 4. Thus, State Auto brings a rule interpleader action. See Auto Parts Mfg.
Miss., 782 F.3d at 192.
Section 1332 jurisdiction under Rule 22 requires: “(1) complete diversity of citizenship,
which is met when the stakeholder is diverse from all the claimants, even if citizenship of the
claimants is not diverse; and (2) an amount-in-controversy that exceeds $75,000 exclusive of
interest and costs.” Hussain v. Bos. Old Colony Ins. Co., 311 F.3d 623, 635 n.46 (5th Cir. 2002)
(citing 4 MOORE’S FEDERAL PRACTICE § 22.04[a]). In this case, complete diversity is present.
State Auto is a foreign insurance company existing under the laws of the state of Iowa with its
principal place of business in Iowa. Doc. #3 at ¶ 1. Burnett is a citizen of the state of
Mississippi. Id. at ¶ 2. As “the government is not a citizen of any state, it is not considered in
the complete diversity calculus.”
Hussain, 311 F.3d at 365 n.46.
As for the amount in
controversy, the principal amount at stake of the insurance proceeds is $88,492.74, and thus
exceeds the $75,000 threshold. Thus, diversity jurisdiction is established.
No party disputes that there are adverse claimants to a single fund in this case. Rule
22(a)(1) provides in part that “[p]ersons with claims that may expose a plaintiff to double or
multiple liability may be joined as defendants and required to interplead.” As the Fifth Circuit
has explained, “[t]he central prerequisite for a true interpleader action … is that the plaintiffstake holder runs the risk—but for determination in interpleader—of multiple liability when
several claimants assert rights to a single stake.” Airborne Freight Corp. v. United States, 195
F.3d 238, 240 (5th Cir. 1999) (citing Texas v. Florida, 306 U.S. 398, 406–07 (1939), and White
v. FDIC, 19 F.3d 249, 251 (5th Cir. 1994)) (internal quotation marks and alterations omitted).
Burnett claims an interest in the proceeds of the policy as the named insured under the
policy. Doc. #12 at 4–5. The IRS claims the same proceeds based on a federal tax lien that
attached to all of Burnett’s property and right to property. Doc. #16; Doc. #34. Accordingly,
State Auto faces the risk of liability to multiple claimants asserting claims to the policy proceeds.
See, e.g., Hussain, 311 F.3d at 634 (finding interpleader action when multi-party dispute
originated in state court among insured and his attorneys, United States, insurance company, and
lender over distribution of insurance proceeds); Am. Gen. Life Ins. Co. v. Gibson, No. 13-5069,
2015 WL 280321, at *8 (E.D. La. Jan. 21, 2015) (finding first-stage interpleader appropriate
based on competing claim challenging, among other things, insured’s designation of
beneficiary). Accordingly, the Court finds that the first step of an interpleader action is satisfied.
2. Bad faith counterclaim
Notwithstanding satisfying the requirements of an interpleader action, the Court must
determine whether it would be proper to dismiss State Auto in light of Burnett’s counterclaim of
bad faith against State Auto alleging delay in paying the funds so as to allow the IRS time to
change its mind and make a claim to the proceeds.
“Although a factual dispute may exist as to the rightful ownership of the fund, that
dispute does not preclude the granting of summary judgment in favor of the interpleader. It is in
the very nature of an interpleader action that two or more parties claim rights to certain money or
property.” Commerce Funding Corp. v. S. Fin. Bank, 80 F.Supp.2d 582, 585 (E.D. Va. 1999). A
court may nevertheless delay or deny discharge of the stakeholder if there are “serious charges
that the stakeholder commenced the action in bad faith.” Underwriters Grp., Inc., 2006 WL
1852254, at *5 (citing Mendez v. Teachers Ins. & Annuity Assoc., 982 F.2d 783, 788 (2nd Cir.
Under Mississippi law,6
[w]here an insurance carrier denies or delays payment of a valid claim, [a bad
faith claim] will not lie if the carrier has a reasonable cause for such denial or
delay. Thus, where the parties dispute the existence and legitimacy of the
carrier’s reason for delay or denial, these issues are ones of material fact, and the
plaintiff is entitled to have a jury pass upon this if reasonable minds could differ
as to the legitimacy of the carrier’s reason. Determination of whether reasonable
minds could differ on this issue is a question for the trial judge.
Stamps v. Estate of Watts, 528 So.2d 812, 814 (Miss. 1988) (footnote and citations omitted);
Travelers Indem. Co. v. Wetherbee, 368 So.2d 829, 834–35 (Miss. 1979) (allowing punitive
damages when company withheld funds for eight months without reason).
While Mississippi law allows for an insured to bring a claim for bad faith filing of an
interpleader action,7 courts have regularly held that a party in a properly filed interpleader action
may not assert a counterclaim based on an entitlement to the funds at issue. See, e.g., Metro. Life
Ins. Co. v. Barretto, 178 F.Supp.2d 745, 747–48 (S.D. Tex. 2001). However, a bad faith claim
may be asserted based on an unreasonable delay in filing an interpleader action. United Inv’rs
Life Ins. Co. v. Grant, 387 F. App’x 683, 688 (9th Cir. 2010).
To the extent Burnett’s counterclaim is based on a direct entitlement to the funds, such
claim must be dismissed because, as discussed above, this was a properly filed interpleader
action. Barretto, 178 F.Supp.2d at 747–48. To the extent the counterclaim is based on an
There is no dispute that Mississippi law applies to the state law counterclaim for bad faith but that federal law
governs questions of procedure. See Gasperini v. Ctr. for Humanities, 518 U.S. 415, 427 (1996) (“Under the Erie
doctrine, federal courts sitting in diversity apply state substantive law and federal procedural law.”).
See Vaughn v. Monticello Ins. Co., 838 So.2d 983, 988 (Miss. Ct. App. 2001) (in bad faith action based on “bad
faith filing of an interpleader action” noting Mississippi Supreme Court “held that the interpleader did not insulate
the insurance company from potential bad faith liability”).
unreasonable delay in commencing this interpleader action, the claim must be dismissed because
no reasonable jury could find that State Auto unreasonably delayed payment. After learning of
the IRS lien about two months after the fire, State Auto reached out to Burnett’s contact at the
IRS. In response, the IRS contacted State Auto on January 14, 2016, representing that it would
release the proceeds to Burnett upon receiving the check. Only after the amount of Covenant’s
Bank loan interest was verified could State Auto determine the remaining building coverage
amount under the policy to issue the check. This did not occur until January 26, 2016. No facts
in the record establish that State Auto was at fault for this delay. The day after Covenant Bank’s
loan interest was verified, on January 27, 2016, State Auto requested the check and it was issued
two days later. Only 17 days had lapsed from the time State Auto was first contacted by the IRS
and the check was mailed to the IRS. About a month later, State Auto filed this action. Based
on these facts, the Court finds that any delay was legitimate and no reasonable jury would find
Accordingly, the Court will grant State Auto’s summary judgment motion as to Burnett’s
bad faith counterclaim, with such claim dismissed with prejudice.
3. Debris recovery
According to the policy, a claim for debris removal must be “reported to [State Auto] in
writing within 180 days of the date of the direct physical damage.” Doc. #34-4 at 24. The fire
loss to the insured property occurred on November 14, 2015. Doc. #35-5 at 1. State Auto
presented undisputed evidence that Burnett did not notify State Auto in writing within 180 days
of the damage, and “no receipts, invoices or estimates for debris removal expenses have ever
been submitted by Burnett to State Auto.” Doc. #34-5 at 6. Neither defendant has challenged
State Auto’s failure to interplead proceeds under the debris recovery provisions of the policy.
Because the defendants do not dispute State Auto’s failure to interplead funds for debris
recovery and because the Court finds that any claim for debris removal related to the November
14, 2015, fire would be time barred under the policy, State Auto has no further liability under the
policy with regard to debris recovery in relation to the fire on November 15, 2015.
In its motion, State Auto requests the following relief:
State Auto would respectfully request an order from the Court finding that State
Auto has satisfied all duties currently owed under the building coverage of the
subject policy by tendering all available building coverage under the policy; that
State Auto has satisfied all duties and obligations currently owed under the
business personal property coverage provisions of the policy, but allowing Burnett
to submit additional claims for the remaining recoverable depreciation in the
future, which will then be evaluated under the terms, conditions and exclusions of
the policy; that any claim for debris removal coverage is now time barred under
the terms of the policy; that State Auto has exhausted its applicable limits under
the subject policy (aside from the aforementioned $3,648.36 in remaining
recoverable depreciation) and is relieved and discharged of any further liability or
responsibility to the named insured or any other individual or entity under the
policy arising out of the aforementioned fire loss; and that Burnett’s counterclaim
against State Auto is dismissed with prejudice.
Doc. #34 at 13.
When the stakeholder has no further obligation or liability to the parties under a theory
for failing to pay the disputed proceeds, the stakeholder is entitled to dismissal. Underwriters
Grp., Inc., 2006 WL 1852254, at *6 (citing Barretto, 178 F.Supp.2d at 747–48), and Daniels v.
Equitable Life Assurance Soc. of the United States, 35 F.3d 210, 214–15 (5th Cir. 1994)). State
Auto deposited the remaining $88,492.74 in building coverage proceeds with the Court, and has
no obligation or liability for debris recovery in relation to the fire. There is no evidence of
another obligation pending with regard to the remaining recoverable depreciation of $3,648.36.
Because State Auto has no further obligation or liability to either party, the Court finds that State
Auto is entitled to dismissal.8
D. United States’ motion for summary judgment
The United States argues the lien on Burnett’s property entitles it to the insurance
proceeds. In response, Burnett argues that because he is current on an installment agreement
with the IRS, it is not entitled to claim the proceeds. Doc. #38. In reply, the United States
claims (1) no installment agreement in “good standing” with Burnett has been “established
through competent evidence,” and (2) even if established, the installment agreement is irrelevant.
Doc. #41 at 1–2.
1. Jurisdiction over United States
The Government may not be sued unless it has waived its sovereign immunity. See
United States v. Testan, 424 U.S. 392, 399 (1976). Section 2410(a) “waives the sovereign
immunity of the federal government, enabling private parties to hale the government into court to
determine the priority of outstanding liens on real or personal property,” including in interpleader
actions. Hussain, 311 F.3d at 629 (citing 28 U.S.C. § 2410(a) (2000)).
2. Relevant tax code law
Under 26 U.S.C. §§ 6321 and 6322, if any person liable to pay any tax neglects or refuses
to pay the same after demand, the amount “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” and the lien
imposed “shall arise at the time the assessment is made and shall continue until the liability for
the amount so assessed ... is satisfied or becomes unenforceable by reason of lapse of time.”
United States v. Furr, No. 3:06-cv-215, 2007 WL 1893240, at *1 (S.D. Miss. Apr. 11, 2007)
The Court expresses no opinion on Burnett’s ability to submit additional claims for the remaining recoverable
depreciation in the future.
(quoting 26 U.S.C. §§ 6321 and 6322). “Federal tax liens do not automatically have priority over
all other liens. Absent provision to the contrary, priority for purposes of federal law 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) (internal quotation marks omitted) (quoting United States
v. New Britain, 347 U.S. 81, 85 (1954)).
26 U.S.C. § 6331(a) authorizes the IRS to collect unpaid tax liabilities through the
issuance of a levy:
upon all property and rights to property (except such property as is exempt under
section 6334) belonging to such person.... Levy may be made upon the accrued
salary or wages of any officer, employee, or elected official, of the United States,
the District of Columbia, or any agency or instrumentality of the United States or
the District of Columbia, by serving a notice of levy on the employer (as defined
in section 3401(d)) of such officer, employee, or elected official.
26 U.S.C. § 6331(a). The statute specifies, however, that under certain circumstances, a levy
may not properly be issued:
Installment agreements.--No levy may be made under subsection (a) on the
property or rights to property of any person with respect to any unpaid tax-(A) during the period that an offer by such person for an installment
agreement under section 6159 for payment of such unpaid tax is pending
with the Secretary ...
(C) during the period that such an installment agreement for payment of
such unpaid tax is in effect; …
26 U.S.C. § 6331(k)(2) (emphasis added).
26 C.F.R. § 301.6331-4(b) provides that even if levying is prohibited, the government
may take other actions:9
The Court notes that a levy and a lien operate quite differently:
A levy forces debtors to relinquish their property. It operates as a seizure by the IRS to collect
delinquent income taxes. See American Acceptance Corp. v. Glendora Better Builders, Inc., 550
F.2d 1220, 1223 (9th Cir. 1977); see also Interfirst Bank Dallas, N.A. v. United States, 769 F.2d
(b) Other actions by the IRS while levy is prohibited—(1) In general. The IRS
may take actions other than levy to protect the interests of the Government with
regard to the liability identified in an installment agreement or proposed
installment agreement. Those actions include, for example—
(i) Crediting an overpayment against the liability pursuant to section 6402;
(ii) Filing or refiling notices of Federal tax lien; and
(iii) Taking action to collect from any person who is not named in the installment
agreement or proposed installment agreement but who is liable for the tax to
which the installment agreement relates.
(2) Proceedings in court. Except as otherwise provided in this paragraph (b)(2),
the IRS will not refer a case to the Department of Justice for the commencement
of a proceeding in court, against a person named in an installment agreement or
proposed installment agreement, if levy to collect the liability is prohibited by
paragraph (a)(1) of this section. Without regard to whether a person is named in
an installment agreement or proposed installment agreement, however, the IRS
may authorize the Department of Justice to file a counterclaim or third-party
complaint in a refund action or to join that person in any other proceeding in
which liability for the tax that is the subject of the installment agreement or
proposed installment agreement may be established or disputed, including a suit
against the United States under 28 U.S.C. 2410. In addition, the United States
may file a claim in any bankruptcy proceeding or insolvency action brought by or
against such person. If a person named in an installment agreement is joined in a
proceeding, the United States obtains a judgment against that person, and the case
is referred back to the IRS for collection, collection will continue to occur
pursuant to the terms of the installment agreement.
299, 304–05 (5th Cir. 1985), cert. denied, 475 U.S. 1081, 106 S.Ct. 1458, 89 L.Ed.2d 716 (1986);
Chevron, U.S.A., Inc. v. United States, 705 F.2d 1487, 1489–90 (9th Cir. 1983) (levy operates as a
seizure). The IRS’s levying power is limited because a levy is an immediate seizure not requiring
judicial intervention. See National Bank of Commerce, 472 U.S. at 720–21, 105 S.Ct. at 2924–25.
A levy connotes compulsion or a forcible means of extracting taxes from “a recalcitrant taxpayer.”
Interfirst Bank, 769 F.2d at 305. A taxpayer subject to an IRS levy is provided certain protections
such as notice and an opportunity to pay the taxes due before the seizure. National Bank of
Commerce, 472 U.S. at 720–21, 105 S.Ct. at 2924–25; Interfirst Bank, 769 F.2d at 305; Martinez
v. United States, 669 F.2d 568, 569 (9th Cir. 1981).
A lien, however, is merely a security interest and does not involve the immediate seizure of
property. A lien enables the taxpayer to maintain possession of protected property while allowing
the government to preserve its claim should the status of property later change. If, for instance, the
debtor later sells his exempt personal property for cash, the IRS would be entitled to obtain such
Wagner v. United States, 545 F.3d 298, 302 (5th Cir. 2008) (quoting United States v. Barbier, 896 F.2d 377, 379
(9th Cir. 1990) (emphasis added).
26 C.F.R. § 301.6331-4(b) (emphasis added).
3. Evidence of installment agreement
To the extent the existence of an installment agreement serves as an exception to the IRS’
statutory authority to enforce liens, it is properly characterized as an affirmative defense for
which Burnett bears the burden. See Meacham v. Knolls Atomic Power Lab., 554 U.S. 84, 91
(2008) (“[W]hen a proviso carves an exception out of the body of a statute ... those who set up
such exception must prove it.”) (alterations omitted). In this regard, the United States argues
there is no “competent evidence” in the record establishing an installment agreement in good
standing. However, the Court finds the competent evidence in the record raises a question of
material fact as to the existence of an installment agreement between Burnett and the IRS.
Form 4340 “has been held to be presumptive proof of a valid assessment where the
taxpayer has produced no evidence to counter that presumption.” United States v. McCallum,
970 F.2d 66, 71 (5th Cir. 1992). The United States has submitted a Form 4340 (“Certificates of
Assessments and Payments”) for 2007, 2008, 2009, and 2010. Each form indicates that on May
20, 2013, an installment agreement was “pending,” and shows an entry for an “INSTALLMENT
AGREEMENT” on July 24, 2013, followed by subsequent payments of $500 a month through
May 2016, the end of the report period.10 Form 4340 is presumptive proof of an installment
agreement covering Burnett’s tax liabilities from 2007 through 2010. The IRS has not rebutted
the existence of an installment agreement but has chosen to neither confirm nor deny its
existence. Just as the United States relies on Form 4340 as “sufficient” and “presumptive” proof
of a taxpayer’s assessed liabilities, the Court relies on the Form 4340s in this record as
The report period ends in June 2016, but a month had not passed since the May, 24 2016 payment and the end of
the reporting period.
presumptive proof of an installment agreement. See Doc. #33 at 6. Accordingly, a question of
material fact arises as to the existence of an installment agreement in good standing.
4. Effect of installment agreement
Notwithstanding any factual dispute regarding the existence of an installment agreement,
the United States argues it must still prevail because the installment agreement is irrelevant in
this interpleader action because the United States is not levying on Burnett’s property. Relying
in part on United States v. Stinson, 45 F. App’x 201, 205 (3d Cir. 2002), the United States argues
“section 6631(k) does not prohibit all collection actions,” and that it is “expressly permitted to
collect tax when it is named a defendant in a suit under 28 U.S.C. 2410.” Doc. #41 at 1. The
United States cites “Treas. Reg. §§ 301.6331-4(b), 301.6159-1(f),” without further explanation
While it is correct that § 6631(k) does not prohibit all collection actions,12 Stinson does
not suggest that the United States may collect on insurance proceeds in interpleader actions for
tax liabilities subject to an installment agreement. Stinson held that an installment agreement
was irrelevant because § 6631(k) did not preclude the government from reducing the tax
liabilities to a judgment. However the reasoning in Stinson has been superseded by federal
The Government had initially argued that the termination of the Installment
Agreement was irrelevant because it could seek judgment on the tax liabilities
assessed whether an installment agreement was in effect or not. It based this
argument on the Third Circuit’s opinion in United States v. Stinson, 45 Fed.Appx.
201, 204–205 n.5 (3d Cir. 2002), in which the court held that the existence of an
installment agreement would not bar the government from bringing an action to
The language found in Treasury regulation §301.6331-4(b) and § 301.6159-1(f) is essentially the same.
“The statute prohibits only court action and levy, 26 U.S.C. § 6331(k), and regulation specifically permits the IRS
to take actions other than levy, 26 C.F.R. § 301.6331–4(b).” United States v. Austin, No. 09-10405, 2010 WL
1711294, at *3 n.2 (D. Mass. Apr. 26, 2010), aff’d, 526 F. App’x 2 (1st Cir. 2013).
reduce outstanding tax liability to judgment. The Stinson case, however, pre-dates
26 C.F.R. 301.6331–4(b)(2), the federal regulation expressly barring such an
action while an installment agreement is in effect. Stinson’s reasoning has been
invalidated, and the Government has accordingly revised its argument to focus on
the non-existence of an effective installment agreement at the time this matter was
referred for civil action.
United States v. Margolis, No. 07-4313, 2008 WL 4823599, at *4 n.3 (D.N.J. Nov. 5, 2008).
Thus, under 26 C.F.R. 301.6331–4(b)(2), the government cannot bring an action against the
taxpayer who is a party to an installment agreement. See 26 C.F.R. § 301.6331-4(b)(2) (“Except
as otherwise provided in this paragraph (b)(2), the IRS will not refer a case to the Department of
Justice for the commencement of a proceeding in court, against a person named in an installment
agreement or proposed installment agreement ….”).
Nonetheless, 26 C.F.R. 301.6331–4(b)(2) provides instances when the government can
proceed in court notwithstanding an installment agreement. Specifically, “the IRS may authorize
the Department of Justice … to join that person in any other proceeding in which liability for the
tax that is the subject of the installment agreement … may be established or disputed, including
a suit against the United States under 28 U.S.C. 2410.” 26 C.F.R. 301.6331–4(b)(2)13 (emphasis
As discussed above, this is “a suit against the United States under 28 U.S.C. 2410.”
Aside from this fact, the United States has not explained why it is statutorily entitled to collect
the proceeds in an interpleader action under § 2410 through 26 C.F.R. 301.6331–4(b)(2). The
United States has not established this action falls under this subsection. The Department of
Justice did not “join” Burnett; State Auto named him in the action. Additionally, the United
In its brief, State Auto argues that because the IRS also is permitted to take “action to collect from any person who
is not named in the installment agreement but who is liable for the tax to which the installment agreement relates,” it
may be liable to the IRS. Doc. #35 at 9–10 n.1 (alterations removed); see 26 C.F.R. § 301.6331-4(b)(iii). However,
this subsection does not support a finding that the United States is entitled to the insurance proceeds because State
Auto is not jointly liable for the tax to which the installment agreement relates.
States failed to brief whether this action would qualify as a “proceeding in which liability for the
tax that is the subject of the installment agreement … may be established or disputed.” And,
while the enumerated list under this subsection is not exhaustive, the United States has not
presented any argument that such collection activity would be permitted if it does indeed fall
outside of this subsection.
To determine whether such collection activity is permitted under § 301.6331–4(b)(2), the
Court considers the interpretation advanced by the IRS Bulletin. In considering the bulletin, the
Court affords the document Skidmore deference,14 under which agency interpretations are
entitled to deference but only to the extent that such pronouncements have the power to
persuade. See Emp. Sols. Staffing Grp. II, L.L.C. v. Office of Chief Admin. Hearing Officer, 833
F.3d 480, 490 (5th Cir. 2016) (“Skidmore deference … is a measure of deference proportional to
the thoroughness evident in its consideration, the validity of its reasoning, its consistency with
earlier and later pronouncements, and all those factors which give it power to persuade.”)
(internal quotation marks omitted).
The IRS Bulletin provides, in relevant part:
The IRS will not begin a proceeding in court for the collection of any liability to
which an installment agreement … relates against a person named in the
installment agreement …. In any refund action, however, the IRS may file a
counterclaim or third-party complaint against a person without regard to whether
that person is named in an installment agreement …. In addition, the IRS may join
a person named in an installment agreement in any other proceeding in which
liability for the tax that is the subject of the installment agreement may be
established or disputed, and may file a claim in any bankruptcy proceeding,
insolvency action, or interpleader case commenced by other creditors of the
Interpretive bulletins … receive ‘Skidmore deference’ ….” Humana Health Plan, Inc. v. Nguyen, 785 F.3d 1023,
1027 (5th Cir. 2015) (internal citation omitted); see Bussian v. RJR Nabisco, Inc., 223 F.3d 286, 297 (5th Cir. 2000)
(applying Skidmore deference to Department of Labor Interpretive Bulletin).
Notice of Proposed Rulemaking, IRS Bulletin Reg-104762-00 (2002) (emphases added). In
explaining the meaning of this language, the IRS provided that
the IRS … may file a claim in any … interpleader case commenced by other
creditors of the taxpayer. The IRS may also join the taxpayer in any suit instituted
by or against another person liable for payment of the same liability—i.e., in
situations where the liability for the tax may be established or disputed. Such
proceedings involve taxes for which more than one person may be jointly and
severally liable for the same tax, or may involve persons liable for related
liabilities, such as a trust fund recovery penalty under section 6672 or a personal
liability for excise tax under section 4103.
First, this is not an interpleader case commenced by a creditor of Burnett. Second, the
IRS defined what it meant by “in situations where the liability for the tax may be established or
disputed”—that is, “any suit instituted by or against another person liable for payment of the
same liability.” Third, the IRS provided examples of such proceedings—none of which are
similar to this action.15
While it is likely that in the absence of an installment agreement, the United States’ tax
lien would extend to the proceeds,16 the United States’ motion and supporting materials have not
“Such proceedings involve taxes for which more than one person may be jointly and severally liable for the same
tax, or may involve persons liable for related liabilities, such as a trust fund recovery penalty under section 6672 or a
personal liability for excise tax under section 4103.” Id. These proceedings are permitted because:
While an installment agreement allows the IRS to accept the payment of tax in installments, the
agreement does not conclusively establish the taxpayer’s liability. A taxpayer therefore is not
prohibited from seeking a refund of taxes paid pursuant to an installment agreement. Allowing the
IRS to join the taxpayer in a proceeding where the liability for the tax may be established or
disputed will protect the Government from having to litigate the same tax in multiple forums only
to face the argument in each separate case (including, potentially, from the taxpayer named in the
installment agreement) that the person or persons not party to the suit were solely or principally
liable for non-payment of the tax at issue.
Id. This rationale does not apply to interpleader actions concerning the payment of insurance policy proceeds.
See In re Key West Rest. & Lounge, 54 B.R. 978, 986 (N.D. Ill. Bankr. 1985) (at moment of fire, tax liens that
attached to property interest automatically attached to property right to recover proceeds from insurer).
shown that the United States is entitled to the proceeds notwithstanding an installment
agreement. Accordingly, the Court will deny the IRS’s motion for summary judgment.
Based on the above:
State Auto’s motion to strike  is DENIED.
State Auto’s motion for summary judgment  is GRANTED and State Auto is
DISMISSED from this action.
The United States’ motion for summary judgment  is DENIED.
SO ORDERED, this 29th day of September, 2017.
/s/Debra M. Brown
UNITED STATES DISTRICT JUDGE
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