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Attorney’s Fees in Interpleader Action? Not If It Impairs Recovery of Federal Tax Lien.

Attorney’s Fees in Interpleader Action? Not If It Impairs Recovery of Federal Tax Lien.

Can the party filing an interpleader in California recover the costs and fees of filing the interpleader? No…. not if it impairs the recovery of the United States on its federal tax lien.

California Code of Civil Procedure section 386.6, generally, authorizes the court to make an award of attorney’s fees and costs to an interpleading plaintiff. Federal interpleader actions are authorized by 28 U.S.C. § 1335 and Rule 22 of the Federal Rules of Civil Procedure where persons holding funds to property upon which conflicting claims are being made by others may deposit the funds with the District Court and require the other parties to litigate their interests. Libby v. City Nat’l Bank, 592 F.2d 504, 507 (1978). A federal court has the power to award fees through those rules and 28 U.S.C. § 2361, which empowers courts to “make all appropriate orders to enforce its judgment.” “An award of attorney fees and costs to a stakeholder, however, is not automatic. The decision rests within the discretion of the court.” Underwriters Group, Inc. v. Clear Creek Indep. Sch. Dist., G-05-334, 2006 U.S. Dist. LEXIS 47907 (D. Tex. June 30, 2006).

However, as the Ninth Circuit held in Abex Corp. v. Ski’s Enterprises, Inc., 748 F.2d 513, 516 (9th Cir. 1984), courts have clearly held… that the existence of prior federal tax liens gives the government a statutory priority over the interpleader plaintiff’s ability to diminish the fund by an award of fees.” [Internal citations omitted.]

The priority of federal tax liens is governed by Section 6323 of the Internal Revenue Code, 26 U.S.C. Certain subsections in Section 6323 provide for some interests to be “superpriorities,” entitled to priority over the federal tax lien regardless of whether the interest was perfected before the tax lien – for example, mechanic’s liens under $5,000. Paragraph (a)(8) of Section 6323 provides for an exception for attorneys’ liens where the judgment was procured through the attorneys’ work, so long as the lien was not to procure a judgment against the United States, providing:

With respect to a judgment or other amount in settlement of a claim or of a cause of action, as against an attorney who, under local law, holds a lien upon or a contract enforcible against such judgment or amount, to the extent of his reasonable compensation for obtaining such judgment or procuring such settlement, except that this paragraph shall not apply to any judgment or amount in settlement of a claim or of a cause of action against the United States to the extent that the United States offsets such judgment or amount against any liability of the taxpayer to the United States.

26 U.S.C. § 6323(e)(3) provides for the recovery of attorney’s fees by a lien holder when the fees are “actually incurred in collecting or enforcing [a lien] obligation” superior to the lien(s) of the United States (emphasis added).

However, neither of these exceptions apply to an interpleading plaintiff who is not a lienholder. Thus, an innocent third party may be forced to bear the cost of filing an interpleader action. The Seventh Circuit, in Campagna-Turano Bakery, Inc. v. United States, 632 F.2d 39, 44 (7th Cir. 1980), recognized the apparent inequity in this result in some cases, but found that its hands were statutorily tied:

Campagna argues persuasively that the result we reach is inequitable. Although not legally required to bring an interpleader action, it was forced to do so in order to avoid liability exceeding the amount of the debt owed to Yamo. Now, it is unable to recover costs and attorneys’ fees resulting from the initiation of that action. Perhaps § 6323 should contain an exception for plaintiffs in Campagna’s situation. But it is for Congress, not this court, to write that exception.

Despite the potential lack of reimbursement for bringing the interpleader action, incentive to file exists nonetheless because, under Section 2361 of Title 28, U.S.C., the court may “discharge the plaintiff from further liability” where the conditions satisfy the requirements of the Federal Interpleader Act. See also Metropolitan Life Ins. Co. v. Davis, Civil No. JFM-10-2785, 2011 WL 2148714, at *6 (D. Md. May 31, 2011).

See other blog posts on this topic at https://taxattorneyoc.com/blog/2019/03/12/trustees-and-executors-should-worry-when-taxes-are-owed-the-federal-insolvency-statute/ and https://taxattorneyoc.com/blog/2019/05/05/enforcement-of-money-judgments-against-property-in-jurisdiction-of-california-probate-court-the-interaction-between-cal-code-civ-proc-sections-709-030-695-010-and-697-310/.

Posted on 06/01/2019 by Daniel W. Layton.