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The General Rules Applicable to Federal Interpleader Actions Involving Federal Tax Liens

Interpleader actions are authorized by 28 U.S.C. § 1335 and Rule 22 of the Federal Rules of Civil Procedure where plaintiffs holding funds to property upon which conflicting claims are being made by others may deposit the funds with the District Court and require the defendant parties to litigate their interests.  Libby v. City Nat’l Bank, 592 F.2d 504, 507 (1978).  Rule 22 of the Federal Rules of Civil Procedure permits interpleader in any action that meets the normal jurisdictional requirements to be in federal court, such as a substantial question of federal law.  See Morongo Band of Mission Indians v. Cal. State Board of Equalization, 858 f.2d 1376, 1383 (9th Cir. 1988).  Federal interpleader jurisdiction depends on identifiable property, or a limited fund or pecuniary obligation – as opposed to an inchoate, uncertain claim against the general assets of a party.  Murphy v. Travelers Ins. Co., 534 F.2d 1155, 1159 (5th Cir. 1976).  The United States may be named a party in an interpleader action in federal district court where the United States claims a lien on the subject property.  28 U.S.C. § 2410 (a)(5).

The purpose of the interpleader action is for the court to determine who is entitled to payment from a certain funds, where there is insufficient funds to pay all potentially entitled parties. “[A] stakeholder, acting in good faith, may maintain a suit in interpleader for the purpose of ridding himself of the vexation and expense of resisting adverse claims, even though he believes that only one of them is meritorious. Hunter v. Federal Life Ins. Co., 111 F.2d 551, 556 (8th Cir. Ark. 1940). The interpleader action is often attractive to a third-party holder of the funds because it may allow discharge from liability of the party who deposits the funds (see more in the blog post here and here). “The priority of claims to the res in an interpleader must normally be determined at the time the action is initiated, and cannot be altered by events after the fund becomes viable.”  Texaco, Inc. v. Ponsoldt, 118 F.3d 1367, 1371 (9th Cir. 1997).  This means that actions which affect the priority of the lien (e.g., the expiration of a lien notice) will not change the order of right to payment which existed at the time of the complaint. The general rule that “Federal law governs the relative priority of federal tax liens and state-created liens” applies in interpleader actions.  See Quality Loan Serv. Corp. v. 24702 Pallas Way, 635 F.3d 1128, 1134 (9th Cir. 2011).

The basic rule of priority (i.e., “first in time, first in right”) applies when federal tax liens compete with a private claimant whose claim is based on a right created by state law.  26 U.S.C. §§ 6321-6323; United States v. City of New Brittain, 347 U.S. 81, 85, 74 S.Ct. 367, 370 (1954).  In order to compete with the statutory federal tax liens, other lien claimants must show that their liens became choate and were perfected under state law before the federal tax liens arose.  United States v. McDermott, 507 U.S. 447, 453-55, 113 S. Ct. 1526, 1529-31 (1992).  “The purpose of filing the notice of lien [is] not to create a lien, but only to maintain its priority over certain other liens, as provided in Internal Revenue Code section 6323.”  Baldassari v. United States, 79 Cal. App.3d 267, 272, 144 Cal.Rptr. 741, 743 (emphasis in original).   Purchasers, holders of security interests, mechanic’s lienors, and judgment lien creditors will have priority under 26 U.S.C. § 6323(a) unless the federal tax liens are recorded first.  26 U.S.C. § 6323(a). 

A judgment lien creditor is “a person who has obtained a valid judgment, in a court of record and of competent jurisdiction, for the recovery of specifically designated property or for a certain sum of money.”  Lawyer’s Foreclosure Specialist, Inc. v. Schwarz, 2005 U.S. Dist. LEXIS 24681 *5, 96 A.F.T.R.2d (RIA) 6566 (Dist. Missouri 2005) quoting 26 C.F.R. § 301.6323(h)(1)-(g) (2005).  When the lien involves a money judgment, the claimant must have “perfected a lien under the judgment on the property involved.” Tasemkin, Inc., 196 F.3d at 865, quoting 26 C.F.R. § 301.6323(h)1-(g).   The lien must be choate (see blog here) to obtain perfection, which means “the identity of the lienor, the property subject to the lien, and the amount of the lien” must be established.   City of New Britain, 347 U.S. at 87.  In addition, for a lien to be choate requires the right to summarily enforce the lien (see Minnesota Dep’t of Revenue v. United States, 184 F.3d 725, 728 (8th Cir. 1999); United States v. Vermont, 377 U.S. 351, 359, 84 S. Ct. 1267, 12 L. Ed. 2d 370, 1964-2 C.B. 493 (1964)), with nothing further needed be done to make it enforceable (United States v. Bond, 279 F.2d 837 (4th Cir. 1960)). If such a lien is filed before the IRS files its lien, even if the IRS’s balance due arose first, the interpleader court can determine that the non-IRS lien will be entitled to priority of payment.

Posted on 08/08/2019 by author Daniel Layton.