United States Court of Appeals
Fifth Circuit
F I L E D
REVISED JUNE 28, 2006
June 13, 2006
IN THE UNITED STATES COURT OF APPEALS
Charles R. Fulbruge III
FOR THE FIFTH CIRCUIT Clerk
No. 04-20966
CAPITOL INDEMNITY CORPORATION,
Plaintiff-Appellant
versus
UNITED STATES OF AMERICA, ET AL,
Defendants
UNITED STATES OF AMERICA and
COMMISSIONER, INTERNAL REVENUE SERVICE,
Defendants-Appellees.
Appeal from the United States District Court
for the Southern District of Texas
Before GARWOOD, DeMOSS and BENAVIDES, Circuit Judges.
GARWOOD, Circuit Judge:
Capitol Indemnity Corporation (Capitol) appeals the adverse
summary judgment in its wrongful levy action against the United
States and the Commissioner of the Internal Revenue Service
(IRS). Because the government did not show that the liable
taxpayer had a right to the property levied against, we reverse
and render judgment in favor of Capitol.
Facts and Proceedings Below
Beginning in 1999, Capitol acted as a surety for M.E.B.
Engineering, Inc. (MEB) for several City of Houston (City) public
works construction projects. In April 2000, MEB was awarded a
prime contract by the City in the amount of $875,033.00 for the
construction of a public improvement project known as the Lockwood
Bridge Over Hunting Bayou (Lockwood contract). Also in April 2000,
Capitol issued performance bonds and payment bonds in favor of the
City respecting the Lockwood contract in the full amount thereof.
On August 28, 2000, the IRS filed a Notice of Federal Tax Lien
with the Texas Secretary of State’s Office in the amount of
$46,821.25 for unpaid employment taxes and corporate income taxes.
On September 6, 2001, under the terms of its indemnity agreement
with MEB, Capitol filed a UCC-1 financing statement with the Texas
Secretary of State’s Office to record its rights and interest in
all property of MEB and MEB’s owners.
On January 23, 2002, Capitol informed the City that Capitol
had received notices of default and various claims from
subcontractors and suppliers of MEB for work performed or materials
2
supplied on the Lockwood contract,1 and Capitol demanded that the
City withhold all future payments to MEB under the Lockwood
contract. On February 1, 2002, MEB submitted an Estimate and
Certificate for Payment (ECP No. 14) based on MEB’s completion of
the work under the Lockwood contract. The City’s Director of
Public Works and Engineering signed ECP No. 14 as approved,
indicating that $127,922.64 was due to MEB as of February 1, 2002,
and also that an additional $45,594.88 of MEB’s earnings had been
retained by the City. As it is undisputed that the City did not
make any payment to MEB on ECP No. 14 (or make any payment at all
to MEB after some time before January 23, 2002), it is evident that
the further approval needed for payment was not granted. On
February 13, 2002, MEB’s owner (Bhatti) wrote to the IRS regarding
his and MEB’s tax liability, and informed the IRS that he had
“closed all businesses, including MEB” and that “$173,517.52 are
immediately available on a completed City contract.” The letter
enclosed a copy of ECP No. 14 as signed “approved.” In this letter
to the IRS, Bhatti also wrote, “Please make sure to collect these
funds immediately against our payables to IRS.”
On February 19, 2002, the IRS filed a Notice of Federal Tax
Lien with the Texas Secretary of State’s Office in the amount of
$103,393.99 for unpaid employment taxes and corporate income taxes.
1
For example, during August and September of 2001, one supplier (TXI) gave
Capitol statutory notices of a claim for payment in the amount of $96,075.51
against Capitol’s payment bond for MEB.
3
This amount included $44,672.80 still unpaid from the amount
noticed in August 28, 2000 plus $58,721.19 unpaid from assessments
in 2001. On April 4, 2002, the IRS issued a Notice of Levy to the
City that required the City to turn over to the IRS any of MEB’s
property that the City had, including MEB’s income and rights to
property that the City was already obligated to pay, up to an
amount of $127,845.36.2
In a letter dated August 5, 2002, the City formally notified
MEB that MEB was in material default of the Lockwood contract
because of its consistent failure to supply an adequate number of
skilled workers and sufficient material to complete the City’s
punchlist items. In the August 5 letter, the City also informed
MEB that the Lockwood contract would terminate if MEB’s default was
not cured within seven days and that the City would then look to
Capitol to complete the remainder of the work. MEB’s default was
not cured, the Lockwood contract formally terminated in August
2002, and Capitol entered into a Takeover Agreement with the City
on January 3, 2003, for completion of the project pursuant to its
obligations under the performance bond. When the Lockwood contract
was terminated, the total amount of funds the City had not yet paid
on the contract was $179,687.47. Capitol eventually incurred
$235,006.23 in costs under its payment bond obligations and
2
The total of $127,845.36 in the April 4, 2002 Notice of Levy represented
the amount noticed in the unpaid balance from the February 19, 2002 Notice of
Federal Tax Lien of $103,393.99, plus an upward adjustment of $42.00 to that
unpaid balance, plus statutory additions of $24,409.37.
4
$22,288.00 in costs under its performance bond obligations for the
Lockwood contract.
Capitol brought a wrongful levy action under 26 U.S.C. §
7426(a)(1) against the United States, the Commissioner of the IRS,
and the City on December 19, 2002, seeking recovery of the
$127,845.36 — the subject of the IRS’s April 4, 2002, Notice of
Levy. After the City paid $127,845.36 into the court’s registry in
February 2004, all claims involving the City were resolved by an
agreed judgment that Capitol and the United States each take
nothing (apart from their claims to the funds so paid into the
registry) against the City and that the City take nothing as
against the United States. Capitol and the government proceeded on
cross-motions for summary judgment, and, on October 1, 2004, the
court granted summary judgment in favor of the government.
Jurisdiction and Standard of Review
The district court had jurisdiction under 28 U.S.C. § 1346(e),
and this court has jurisdiction under 28 U.S.C. § 1291.
This court reviews a district court’s grant of summary
judgment de novo. U.S. v. Retirement Services Group, 302 F.3d 425,
429 (5th Cir. 2002). Summary judgment is proper if, after adequate
opportunity for discovery, the pleadings, depositions, answers to
interrogatories, and admissions on file, together with any
affidavits filed in support of the motion, show that there is no
genuine issue as to any material fact and that the moving party is
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entitled to judgment as a matter of law. See Fed.R.Civ.P. 56(c);
Anderson v. Liberty Lobby, Inc., 106 S.Ct. 2505, 2511 (1986). The
moving party bears the burden of identifying an absence of evidence
to support the nonmoving party’s case. Celotex Corp. v. Catrett,
106 S.Ct. 2548, 2554 (1986). Summary judgment is properly granted
if the record does not contain appropriate summary judgment
evidence which would sustain a finding in the nonmovant’s favor on
any issue as to which the nonmovant would bear the burden of proof
at trial. Id. at 2552–53.
Discussion
Section 7426 allows any person claiming an interest in
property upon which an IRS levy has been made to bring a civil
action against the United States for wrongful levy. 26 U.S.C. §
7426(a)(1). In a levy proceeding, the IRS acquires only such
rights to property that the taxpayer himself possesses. United
States v. National Bank of Commerce, 105 S.Ct. 2919, 2927 (1985).
As a result, we have noted that “[a] levy is ‘wrongful’ if it
seizes property that does not belong, in whole or in part, to the
taxpayer.” Texas Commerce Bank-Fort Worth, N.A. v. U.S., 896 F.2d
152, 156 (5th Cir. 1990). Therefore, we first address the
threshold question of whether and to what extent MEB owned or had
rights to the property levied upon. Aquilino v. United States, 80
S.Ct. 1277, 1280 (1960). To answer this question, we must look to
state law. Id.
6
The district court recognized that this was the threshold
question in this case; however, the court did not explicitly
address Capitol’s summary-judgment argument on this issue.3
Nonetheless, the court’s holding necessarily implies a
determination that MEB had property rights in the $127,845.36
levied upon. Capitol argues that this determination was erroneous.
We agree.
The contract between MEB and the City imposed on MEB diverse
requirements respecting payment by MEB to its suppliers and
subcontractors on the job, and entitled the City to withhold
payment from MEB if, among other reasons, MEB failed to meet these
requirements. On January 23, 2002, Capitol informed the City of
notices of default and demands for payment that Capitol had
received from MEB’s subcontractors and suppliers. On or about
February 1, 2002, the City refused to pay to MEB the amount
requested in ECP No. 14 (even though the ECP was approved by the
Director of Public Works and Engineering). The government has
stipulated that the City’s refusal to pay was proper, and it is
undisputed that MEB never cured its defaults and that the Lockwood
3
Specifically, in its brief in support of its motion for summary judgment,
Capitol put forth a plethora of legal arguments for why it should prevail,
including the argument that, due to MEB’s failure to pay its subcontractors and
suppliers, “the City was entitled to withhold payment of the contract funds, and
. . . [therefore] as a matter of law, MEB did not have an interest in the
contract funds remaining under the Lockwood Bridge Contract to which the claimed
tax levy and lien notices . . . could attach.” The government did not respond
to this argument in its summary-judgment filings with the district court. In
addition, at oral argument to this court, the government incorrectly claimed that
Capitol had not made this argument below.
7
contract was eventually terminated due to MEB’s default.4 In
Victore Insurance Company v. City of Bowie, 23 S.W.3d 499
(Tex.App.—Fort Worth 2000, writ denied), the court addressed a
similar situation in which a city withheld payment to a contractor
based on the terms of a public works contract. The court in
Victore determined that the properly withheld funds were not the
property of the contractor:
“Where a project owner has a contractual right to
withhold from a contractor amounts necessary to satisfy
the subcontractors’ and suppliers’ claims, the retained
funds are not the contractor’s property, and the federal
government cannot acquire the right to the funds via a
tax lien against the contractor’s property.” Id. at 503.
In Victore, “[t]he parties stipulated, and the trial court found,
that the City had the contractual right to withhold from the
contract proceeds any amounts that [the contractor] had not paid
suppliers and subcontractors.” Id. In this case, the only reason
that the City’s refusal to pay would be proper — as stipulated by
the government — is that the City had the contractual right to
withhold payment. For the first time on appeal, the government
argues that MEB had “earned the progress payment in dispute, and
thus had acquired a property interest in the payment to which the
4
In connection with the deposit into the court’s registry, the City, the
United States and Capitol entered into stipulations (filed with the court) stated
to be “binding on each of them for all purposes,” including the following:
“On or about February 1, 2002, the City prepared and properly
refused to pay to MEB the last pay estimate in the amount of
$127,922.64 (‘Last Pay Estimate’), for work performed by MEB
pursuant to the Lockwood Contract.”
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federal tax liens attached, before the City withheld the payment.”
The government cites no evidence to support this argument.
Instead, the government merely argues that, because the Lockwood
contract explicitly provides that “[t]he period covered by each
progress payment shall be one calendar month ending on the tenth
day of the month,” the work for which ECP No. 14 was submitted must
have been completed no later than January 10, 2002. Based on this
logic, the government concludes that MEB had earned and acquired
the right to receive the payment in question no later than January
10, 2002. But there is no evidence that MEB was current with its
payment obligations to its Lockwood contract suppliers and
subcontractors as of January 10, 2002, or at any time thereafter.
The government’s argument ignores the terms of the Lockwood
contract. Under that contract, it takes more than completed work
for MEB to be entitled to payment. The government has pointed to
no evidence that shows that MEB satisfied the terms of the contract
in order to ever have become entitled to payment of the funds in
question (or any particular portion thereof). Therefore, the
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government has failed to prove5 a nexus between the property levied
upon and the taxpayer.6
Conclusion
For the foregoing reasons, the judgment of the district court
in favor of the government is REVERSED and judgment is RENDERED in
favor of Capitol. The case is REMANDED to the district court for
determination of attorneys’ fees.
REVERSED, RENDERED, and REMANDED.
5
In Oxford Capital Corp. v. U.S., we noted a requirement that the
government meet “a heightened standard of proof” to show the nexus between the
property levied upon and the taxpayer. 211 F.3d 280, 283 (5th Cir. 2000). In
this case, the heightened standard of proof is not a factor because the
government has presented no evidence that MEB had a right to the withheld
payment.
6
In Victore the court also found that the contractor was not entitled to
the withheld funds because of § 2253.071 of the Texas Government Code, which
provides:
“The proceeds of a public work contract are not payable, until all
costs of completion of the contract work are paid by the contractor
or the contractor's surety, to a contractor who furnishes a bond
required by this chapter if:
(1) the contractor abandons performance of the contract; or
(2) the contractor's right to proceed with performance of the
contract is lawfully terminated by the awarding governmental
entity because of the contractor's default.”
Tex. Gov’t Code Ann. § 2253.071(a) (Vernon 2000).
As our holding regarding the City’s contractual right to withhold payment to MEB
resolves this appeal, we need not address Capitol’s argument that the evidence
shows that MEB abandoned performance of the contract and so Capitol should
prevail under Victore and § 2253.071(a)(1). Likewise, we need not address
Capitol’s arguments that, even if MEB had a right to the withheld payment,
Capitol should prevail in a priority contest with the IRS based on equitable
subrogation and also based on the obligatory disbursement agreement provision in
§ 6323(a) of the Internal Revenue Code.
10