Emmert v. Welkin Engineering, P.C. et al

Filing 35

Amended Order. Denying Plaintiff's Motion for Attorney Fees 15 ; Granting Defendant Berman's Motion for Disbursement of Funds 18 ; Granting IRS's Motion for Disbursement of Funds 20 . $19,798.38 shall be disbursed to defendant Berman; $2,309.29 shall be disbursed to defendant ODR; remaining sum of $31,074.44 shall be disbursed to the IRS. Signed on 05/24/2011 by Chief Judge Ann L. Aiken. (lg)

IN THE UNITED STATES DISTRICT COURT

FOR THE DISTRICT OF OREGON

TERRY W. EMMERT, dba Emmert
Development Company,
Plaintiff,

v.
WELKIN ENGINEERING, P.C., an
Oregon corporation, THE INTERNAL
REVENUE SERVICE, THE OREGON
DEPARTMENT OF REVENUE, JOHN M.
BERMAN, and J. RION BOURGEOIS,
Defendants.
Stuart M. Brown
Wiles Law Group
510 SW 5 th Ave., 6th Floor
Portland, Oregon 97204
Attorney for plaintiff
John M. Berman
Attorney at Law
7175 SE Beveland St., Suite 210
Tigard, Oregon 97223
Attorney for defendant
Welkin Engineering, P.C.
PAGE 1 - AMENDED OPINION AND ORDER

civil No. lO-1168-AA
AMENDED OPINION AND ORDER

Dwight Holton
United States Attorney
District of Oregon
1000 SW Third Avenue, Suite 600
Portland, Oregon 97204
Quinn P. Harrington
Trial Attorney, Tax Division
U.S. Department of Justice
P.O. Box 683
Ben Franklin Station
Washington, D.C. 20044
Attorneys for defendant the
Internal Revenue Service
AIKEN, Chief Judge:
Plaintiff, Terry Emmert, brings this action for attorney
fees pursuant to Or. R. Civ. P. 3l(C).

Defendants, the Internal

Revenue Service and John Berman, individually object to
plaintiff's petition and each move for the distribution of funds.
For the reasons set forth below, plaintiff's petition is denied
and defendants' motions are granted.
BACKGROUND

Welkin Engineering, P.C.

(~Welkin")

brought a lawsuit

against Terry Emmert, dba Emmert Development Company ("Emmert"),
alleging breach of contract and account stated.
(July 31, 2010), Case No. CV 09-100-536.

See Decision

Prior to instituting

the lawsuit, Welkin was served with a levy from the Internal
Revenue Service ("IRS") and the Oregon Department of Revenue
("ODR") for taxes owed.

Welkin instituted the lawsuit against

Emmert with the understanding that any funds obtained would be
owed to the taxing authorities.
On July 31, 2010, Judge Norby issued a decision in favor of
Welkin.

On August 18, 2010, Welkin obtained a judgment against

PAGE 2 - AMENDED OPINION AND ORDER

Emmert.

On August 25, 2010, rather than paying the judgment

pursuant to Or. Rev. Stat.

§

18.235 or paying the levies from the

ODR or the IRS, as well as a claim for attorney fees from
Welkin's counsel, Emmert filed an interpleader complaint in the
Clackamas County Circuit Court.

Emmert sought to deposit

$51,471.69 in order to satisfy its liability against Welkin.

On

September 27, 2010, the IRS removed the interpleader action to
this Court.
On February 16, 2011, plaintiff deposited $53,182.11 into
this Court's registry.

By that time, defendants agreed that they

would receive the following distributions from the interpleaded
funds: first priority, Welkin's counsel, John Berman and J. Roin
Bourgeois (collectively referred as "Berman"), in the amount of
$19,798.38, to fulfill a contingency fee contract; second
priority, the ODR, in the amount of $2,309.29; and third
priority, the IRS, scheduled to receive the balance of the funds
in the amount of $31,074.44.
After depositing the interpleaded funds in the Court's
registry, plaint

f filed a petition for attorney fees and costs,

which total approximately $11,500.

The IRS and Berman each

object to plaintiff's petition, and move for distribution of
funds.
DISCUSSION

Plaintiff alleges that he is a disinterested stakeholder,
and as such, entitled to attorney fees and. costs pursuant to Or.
R. Civ. P 31(C).

The IRS objects to plaintiff's petition for

PAGE 3 - AMENDED OPINION AND ORDER

attorney fees and costs on the ground that such an award would
impermissibly reduce the recovery of its tax lien.

Berman

objects to plaintiff's petition on additional grounds: "1) [t]his
case was never necessary, especially as to the attorney fee
lien[i]

2)

[pllaintiff is not a disinterested party; 3) [i]t is

highly unlikely that [p]laintiff has in fact incurred the legal
fees being sought; 4)

[t]he fees are not reasonable; and 5)

[p]laintiff's conduct does not justify any request for fees or
costs."

r.

Df. Berman Resp. Brf. at pg. 3.

Standard for Awarding Attorney Fees in an Interpleader Action
It is within the discretion of the district court to award

attorney fees and costs to a disinterested stakeholder in an
interpleader action.

First Interstate Bank, N.A. v. U.S. By &

Though I.R.S., 891 F.Supp. 543, 546 (D. Or. 1995).

The attorney

fee award must be "paid from the funds . . . ordered interpleaded
by the court."

Or. R. Civ. P. 31(C).

Courts within this

district define a disinterested stakeholder as "a person or
entity who possesses a fund to which adverse claims are made, but
who personally has no claim or interest in the fund."
Interstate Bank, 891 F.Supp. at 546.
awards absent a showing of bad faith.

First

Courts routinely grant such
Id. at 548.

A court may not, however, reduce a fund encumbered by a
federal tax lien to award attorney fees and costs to an
interpleader plaintiff when such an award would jeopardize
satisfaction of the federal tax lien.

rd.

Thus, a federal tax

lien has priority over an interpleader's claim for attorney fees.
PAGE 4 - AMENDED OPINION AND ORDER

Abex Corp. v. Ski's Enters., Inc., 748 F.2d 513, 516-7 (9th Cir.
1984); see also 26 U.S.C.

§§

6321, 6322.

Consequently, a claim

for attorney fees by a disinterested stakeholder can only be
awarded when the interpleaded funds exceed the amount of the
federal tax lien.

See First Interstate Bank, 891 F.Supp. at 548­

9.
II.

The IRS's Objection to Plaintiff's Petition
Plaintiff does not dispute the fact that its attorney fee

request cannot diminish the amount to be paid to the IRS.
Rather, plaintiff argues that attorney fees should be deducted
from the funds that the ODR and Berman are entitled to receive.
Specifically, plaintiff asserts that because the amount requested
by plaintiff is less than the amount defendants agree is owed to
the ODR and Berman, an award of attorney fees from this amount
will have no impact on the IRS's allocation of the funds, and as
such, will not "reduce the fund impressed by a federal tax lien."
Pl. Reply Brf. at pg.3.
Plaintiff asserts that his claim for attorney fees should
circumvent the priority of all three defendants, since there is
no authority supporting

th~

claims over that of the IRS.

priority of the ODR and Berman's
Plaintiff's argument misconstrues

the law and facts surrounding this case, and the legal concept of
priority in general, in two key ways.
First, because the judgment from the underlying litigation
is insufficient to fully satisfy the IRS's lien, ·the interpleader
fund is immune from attorney fee reductions.
PAGE 5 - AMENDED OPINION AND ORDER

~

First

Interstate Bank, 891 F.Supp. at 548-9.

Here, the IRS made an

assessment of $41,319.01 for unpaid federal payroll taxes, plus
statutory addition, against Welkin in 2008.

As such, a lien,

totaling nearly $55,000 by the date of the Welkin/Emmert trial,
arose in favor of the IRS.

Because the amount owed by Welkin

exceeded the value of the judgment, the IRS received a priority
position to the entirety of the interpleaded funds.
U.S.C. §§ 6321, 6322.

See 26

Thus, the IRS has priority over plaintiff

until its lien is fully satisfied.

Therefore, even assuming that

the ODR and Berman are not entitled to priority over plaintiff,
plaintiff would not be entitled to attorney fees because such an
award would impermissibly

~deplete

satisfaction of the [IRS's] lien."

the fund prior to total
Abex Corp., 748 F.2d at 516­

7.

Second, contrary to plaintiff's contention, ample authority
supports the priority of Berman and the ODR's liens over the IRS.
As discussed above, the IRS is entitled to a lien upon all
property and rights to property belonging Welkin.

Where there

are competing claims, federal law controls the determination of
priority among the parties.
4 (1960).

Aquilino v. U.S., 363 U.S. 509, 513­

Under federal law, any state or local assessment that

precedes the IRS's earliest assessment is entitled to priority.
See U.S. v. City of New Britain, 347 U.S. 81, 85 (1954)

("[tJhe

principle is believed to be universal, that a prior lien gives a
prior claim, which is entitled to prior satisfaction out of the
subject it binds . .

,If).

A valid attorney's lien under local

PAGE 6 - AMENDED OPINION AND ORDER

law is also entitled to priority under federal law.

26 U.S.C.

§

6323 (b) (8) .
Like the IRS, the ODR made tax assessments against Welkin.
Two of the ODR's assessments precede the IRS's earliest
assessment, and as such, are entitled to priority over the IRS's
claim.

See City of New Britain, 347 U.S. at 85.

Therefore, the

ODR has priority for the value of these two earlier assessments,
which now total $2,309.29, over the IRS's tax lien.
In addition, Berman made a valid claim for attorney fees and
costs, based upon a contingency fee agreement with Welkin made
pursuant to the underlying litigation.

Under Oregon law, "the

lien created by ORS 87.445 (Attorney's lien upon actions and
judgments) is superior to all other liens."
87.490.

Or. Rev. Stat.

§

Accordingly, Berman's valid state attorney fee claim is

accorded priority over federal and state liens.
6323(b) (8)

See 26 U.S.C.

§

(attorney liens are accorded priority where the

attorney "under local law, holds a lien upon or a contract
enforcedble against such judgment or amount, to the extent of his
reasonable compensation for obtaining such judgment") .
Therefore, Berman has priority in the amount of $19,788.38
(representing one-third of the Welkin/Emmert judgment plus
approximately $2000 in court costs) over the IRS's and the ODR's
tax liens.
Finally, because Berman and the ODR have priority over the
IRS under state and federal law, and because the IRS'S lien has
priority over a claim for dttorney fees until fully satisfied,
PAGE 7 - AMENDED OPINION AND ORDER

plaintiff's claim for attorney fees pursuant to ORCP 31{C) fails.
Consequently, it is unnecessary for this Court to further discuss
defendant Berman's objections to p'laintiff's petition for
attorney fees and costs.
CONCLUSION

Plaintiff's petition for attorney fees (doc. 15) is DENIED.
Defendants Berman (doc. 20) and the IRS's (doc. 18) motions for
the distribution of funds are GRANTED.
Accordingly, the inderpleaded funds are allocated in the
following manner:
1st: the sum of $19,798.38 shall be disbursed to defendant
Berman;
2nd: the sum of $2,309.29 shall be disbursed to defendant
ODR; and
3rd: the remaining sum of $31,074.44 shall be disbursed to
the IRS.
IT IS SO ORDERED.
Dated this

~~ of

May 2011.

Ann Aiken
United States District Judge

PAGE 8 - AMENDED OPINION AND ORDER