United States v. Ruff

United States Court of Appeals,

Eleventh Circuit.

No. 95-2665.

UNITED STATES of America, Plaintiff-Appellee,

v.

Andrea A. RUFF, individually and as Trustee for the bankruptcy
estate of Central Micrographic Corporation d/b/a Hospital
Cooperative Assn., Defendant-Appellant.

Nov. 21, 1996.

Appeal from the United States District Court for the Middle
District of Florida. (No. 93-604-CIV-ORL-22), Anne C. Conway,
Judge.

Before HATCHETT, Chief Judge, ANDERSON, Circuit Judge, and WOOD*,
Senior Circuit Judge.

ANDERSON, Circuit Judge:

Defendant-appellant Andrea A. Ruff appeals the judgment of the

district court, on summary judgment, in favor of plaintiff-appellee

the United States of America in the amount of $20,000, arising from

Ruff's failure to honor an Internal Revenue Service ("IRS") levy on

property or rights to property of a delinquent taxpayer in her

possession. United States v. Andrea A. Ruff, 179 B.R. 967

(M.D.Fla.1995). Because we find that judgment was properly awarded

to the government, we affirm.

I. STATEMENT OF THE CASE

A. Facts1
The facts in this case are not in dispute. At all times

*
Honorable Harlington Wood, Senior U.S. Circuit Judge,
Seventh Circuit, sitting by designation.
1
Our statement of the facts is taken in large measure
(verbatim in considerable part) from the district court's
excellent opinion.
relevant to this controversy, Ruff served as the Chapter 7 Trustee

in the bankruptcy case In re Central Micrographic Corporation d/b/a

Hospital Cooperative Association, case no. 88-2577-BKC-6S7, filed

in the United States Bankruptcy Court for the Middle District of

Florida. During the pendency of the bankruptcy case, Harold Gene

Artrip approached Ruff and informed her that he had a prospective

buyer for the debtor's assets. On February 24, 1989, Ruff filed an

application with the bankruptcy court to employ Artrip as a

business broker for the bankruptcy estate, under which he would

receive a 10% commission to be shared by Artrip and two other

brokers previously employed by the estate. On March 2, 1989, the

bankruptcy court entered an order granting that application. The

order stated that the commission would be paid "only if his

prospect is the successful buyer of the debtor's business, in which

case any awarded broker commission would be shared equally" with

the two other brokers. The order also stated that payment of the

commission was subject to final approval by the bankruptcy court.

On April 17 and 18, 1989, Ruff, on behalf of the bankruptcy

estate, entered into an Agreement of Sale and Purchase of Real and

Personal Property with the prospective purchasers identified by

Artrip. The agreement was signed by Ruff, as trustee for the

estate, by the purchasers, and by NCNB National Bank of Florida,

which held liens on the debtor's assets. The property thus sold

was that property for which Ruff had employed Artrip as a business

broker. On April 26, 1989, Artrip filed an Application for

Allowance of Broker's Fee for Broker for the Trustee. The parties

agree that at the time he filed this application, Artrip had
completed all of the services for which he was hired pursuant to

the bankruptcy court's March 2 order. Artrip sought $20,000, which

represented one-third of the broker's fee derived from the sale of

the bankruptcy estate's assets, consistent with the March 2 order.

He noted in the application that if the sale to his prospects were

not consummated, he was not entitled to the commission. On May 24,

1989, the bankruptcy court authorized the sale contemplated by the

April 17 and 18 agreement. The closing of that sale occurred on

June 16, 1989.

On July 13, 1989, the bankruptcy court entered a Notice of

Hearing, setting August 3, 1989, as the date for the hearing on

Artrip's fee application. Ruff received this notice before July

27, 1989. Prior to the events discussed above, the IRS assessed a

federal tax liability against Artrip, pursuant to 26 U.S.C. § 6672.

On July 27, 1989, the IRS served on Ruff a Notice of Levy for

Artrip's outstanding tax liabilities, which the Service indicated

exceeded $230,000. The levy sought,

[a]ll property, rights to property, money, credits, and bank
deposits now in your possession and belonging to this taxpayer
(or for which you are obligated), and all money or obligations
you owe this taxpayer....

Ruff indicated on the reverse of the Notice of Levy that she held

no funds due Artrip. In response to the question on that same form

asking when Ruff would next owe Artrip money, Ruff wrote "unknown."

On the day that Ruff received the Notice of Levy, she possessed, as

Trustee in the Central Micrographics case, funds sufficient to pay

Artrip's commission.

On August 10, 1989, the bankruptcy court entered an order

granting Artrip's application for fees in the amount of $20,000,
thus authorizing payment thereof. On August 11, Ruff, acting as

Trustee for the bankruptcy estate, executed a check payable to

Artrip in the amount of $20,000 for his share of the commission

derived from the sale of the assets of Central Micrographics.

B. Issue on appeal

26 U.S.C. § 6332(a) requires that "any person in possession of

(or obligated with respect to) property or rights to property

subject to levy upon which a levy has been made shall, upon demand

of the Secretary, surrender such property or rights to property" to

the Secretary. 26 U.S.C. § 6332(d)(1) provides that any person who

fails to surrender property subject to levy shall be held

personally liable for the value of the property not surrendered.

The sole issue in this case is whether Ruff was "in possession of

(or obligated with respect to) property or rights to property

subject to levy," meaning in this case any property or rights to

property belonging to Artrip, at the time she received the Notice

of Levy from the IRS on July 27, 1989.

II. ANALYSIS

A. Standard of review

We review the district court's grant of summary judgment de

novo, Hutton v. Strickland, 919 F.2d 1531, 1536 (11th Cir.1990),

viewing the facts in the light most favorable to the non-movant.

N.A.A.C.P. v. Hunt, 891 F.2d 1555, 1559-60 (11th Cir.1990).

B. Discussion

The IRS is empowered to levy on the property or rights to

property of a delinquent taxpayer in the hands of a third party

pursuant to 26 U.S.C. § 6331(a). The levy itself does not
determine whether the government's claim is superior to those of

other claimants. Instead, the levy power is designed to enable the

government "promptly to secure its revenues" while competing claims

are resolved. United States v. National Bank of Commerce, 472 U.S.

713, 721, 728, 105 S.Ct. 2919, 2924, 2928, 86 L.Ed.2d 565 (1985).

Upon receipt of a notice of levy, such third parties are required

to surrender that property to the IRS. 26 U.S.C. § 6332(a). The

notice of levy "gives the IRS the right to all property levied upon

... and creates a custodial relationship between the person holding

the property and the IRS so that the property comes into

constructive possession of the Government." National Bank of

Commerce, 472 U.S. at 720, 105 S.Ct. at 2924. Those individuals

who fail to honor the Service's levy incur liability to the

government equal to the full value of the property not surrendered.

26 U.S.C. § 6332(d)(1); United States v. Metropolitan Life Ins.,

874 F.2d 1497, 1499 (11th Cir.1989).

A third party may raise only two defenses to excuse its

failure to surrender levied property to the government. First, it

can show that it was not, pursuant to the language in 26 U.S.C. §

6332(a), "in possession of" any of the delinquent taxpayer's

property or rights to property at the time that it received the

notice of levy. National Bank of Commerce, 472 U.S. at 722, 105

S.Ct. at 2925; Metropolitan Life, 874 F.2d at 1499. Second, it

can show that when it received the notice of levy, the property in

question was subject to attachment or execution under judicial

process. National Bank of Commerce, 472 U.S. at 722, 105 S.Ct. at

2925; Metropolitan Life, 874 F.2d at 1499. Ruff raises only the
first of these defenses.

Ruff argues that she was not "in possession of" any of

Artrip's property or rights to property on July 27, 1989, the day

on which she received the Notice of Levy. In order to determine if

Ruff was in possession of Artrip's property, specifically the

$20,000 commission he eventually received as compensation for his

services as a business broker in the Central Micrographics sale, we

employ a two-step analysis.

A court assessing a levy on a taxpayer's intangible interest
in property held by third parties must determine first the
nature of the taxpayer's interest in the property. This is a
question of state law.... Once the court has determined that
a delinquent taxpayer has rights to property, federal law
determines whether the custodian of the property is obligated
to surrender the property to the IRS.

Metropolitan Life, 874 F.2d at 1500 (citing National Bank of

Commerce, 472 U.S. at 724 n. 8, 105 S.Ct. at 2926 n. 8).

1. Artrip's right to property under Florida law

Under Florida law, a property has been sold, for the purpose

of establishing entitlement to a commission, once the purchaser

executes a binding contract to purchase the property at issue.

Hagans Co. v. Manla, 534 So.2d 750, 751 (Fla. 3d DCA 1988).

However, the broker and the party responsible for payment of the

commission may record in the broker's commission agreement express

conditions precedent to the broker's entitlement to that

commission, and these conditions must be met before the broker is

legally entitled to payment. Id. at 751-52; Harding Realty, Inc.

v. Turnberry Towers Corp., 436 So.2d 983, 984 (Fla. 3d DCA 1983).

Significantly, there is a distinction under Florida law between a

condition precedent to the entitlement to a commission and a
condition precedent to the payment of a commission. See Harding

Realty, 436 So.2d at 984 (broker was not entitled to commission

because commission agreement "expresse[d] that entitlement to the

commission, as opposed to just payment of the commission, [was] to

occur at closing," and closing never occurred).

On April 17 and 18, 1989, Ruff, on behalf of the bankruptcy

estate, entered into a binding contract of sale for the assets of

the estate to the prospect identified by Artrip. The sale was

approved by the bankruptcy court, and was consummated. However,

Ruff argues that Artrip's appointment by the bankruptcy court as a

business broker and the commission agreement were subject to an

express condition precedent to his entitlement to the commission.

That order states:

[A] fee will only be paid upon application, general notice and
approval of the Bankruptcy Court.

In re Central Micrographic Corp., No. 88-2577-BKC-6S7

(Bankr.M.D.Fla. March 2, 1989) (Order appointing Artrip business

broker). Ruff argues that Artrip was not entitled to those fees

until the bankruptcy court gave its final approval, which occurred

on August 10, 1989.

As noted above, there is a difference under Florida law

between entitlement to a commission and payment of a commission.

The broker in Harding Realty was denied his commission because the

commission agreement specifically stated that entitlement to the

commission would occur at closing, and the buyers never closed on

the properties. Harding Realty, 436 So.2d at 984. In this case,

Artrip's commission was agreed upon and approved on March 2, 1989,

by the bankruptcy court. Under that order, Artrip was entitled to
the commission if his prospect was the successful buyer of the

property, which was in fact the case. It is true that the order

also stated that Artrip's commission would be "paid" only upon

subsequent application to and approval by the bankruptcy court.

The court's order conditioned payment, not entitlement, upon

further approval. Under Florida law, the condition as to payment

did not undermine Artrip's entitlement. Thus, Artrip was entitled

to payment, at the latest, when the sale of the property was

consummated pursuant to the April 17 and 18, 1989, contract for

sale. Hagans Co., 534 So.2d at 751. The district court properly

concluded that, under Florida law, Artrip had an entitlement, and

thus had a property interest in the commission.

2. Ruff's obligation to surrender Artrip's commission to the IRS

Once it is determined that a state law property interest

exists, Federal law determines the tax consequences of that

interest. National Bank of Commerce, 472 U.S. at 722, 105 S.Ct. at

2925. State law is not relevant to this inquiry. Id. Federal

law, specifically the Treasury regulations governing the levy

power, establishes the nature of this determination.

[A] levy extends only to property possessed and obligations
which exist at the time of the levy. Obligations exist when
the liability of the obligor is fixed and determinable
although the right to receive payment thereof may be deferred
until a later date.

26 C.F.R. § 301.6331-1(a)(1). The issue of whether Ruff was

obligated to surrender Artrip's commission to the IRS is really a

question of whether the liability of the bankruptcy estate to

Artrip was "fixed and determinable" at the time that the Notice of

Levy was served on Ruff. United States v. Hemmen, 51 F.3d 883, 888
(9th Cir.1995).

At the outset, it is important to note that the quoted

regulations include among obligations which are "fixed and

determinable" those obligations for which the right to receive

payment has been deferred. Thus, an obligation can be fixed and

determinable even if the right to receive payment does not arise

until a later time. The court in Hemmen analogized a fixed and

determinable obligation of this type to "an ordinary contract with

an executory duty to pay for a completed performance by the

obligee." Id. at 890.

The situation confronted by the court in Hemmen is very

similar to that in the case at bar. In Hemmen, the president of a

Chapter 11 debtor, Al-Hadid (hereinafter referred to as taxpayer)

performed certain services for the estate by working to preserve

the assets of the estate. He filed a claim with the bankruptcy

court for administrative expenses. The case was converted into a

Chapter 7 liquidation, and Hemmen was appointed trustee. Id. at

886. The district court entered two separate orders allowing the

taxpayer's claim for administrative expenses. The second of these

orders, dated October 16, 1984, indicated that payment would not be

made "except upon further order of the court." Id. The underlying

performance by the taxpayer was complete at all relevant times.

Approximately one year before the issuance of these orders, the IRS

assessed a civil tax penalty against the taxpayer. Pursuant to

that assessment, on December 17, 1985, after allowance of the claim

for administrative expenses but before the bankruptcy court had

finally approved payment thereof, IRS agents served a notice of
levy on Hemmen demanding the surrender of any of the taxpayer's

property or rights to property in Hemmen's possession as a result

of his status as trustee. Id. However, instead of surrendering

the money owed by the estate to the taxpayer, Hemmen paid those

funds to the taxpayer. The IRS sued Hemmen, arguing that he was

personally liable for the funds paid to the taxpayer.

The court in Hemmen held that the allowed administrative

expenses were fixed and determinable as of the date on which the

Secretary's notice of levy was served. It reached this conclusion

despite the fact that actual payment of those expenses by the

trustee had to await authorization from the bankruptcy court, and

the fact that the claims for expenses could be reduced to money

only if there were sufficient assets left in the estate to satisfy

them. Id. at 890. Additionally, the court noted that the trustee

retained the power to move the bankruptcy court to disallow the

claims. Id. These factors failed to sway the court.

None of these conditions to payment, however, undermines the
proposition that the obligation of the estate to [the
taxpayer] was "fixed" within the meaning of § 301.6331-1(a)(1)
after the underlying performance was completed and the claim
was allowed by the court.... At best, the factors Hemmen
cites establish only that the estate's liability was fixed but
that [the taxpayer's] interest was still subject to possible
defeasance due to factors having no bearing on the underlying
performance.

Id. Further, the court held that the sum due the taxpayer was

determinable because, although there was some uncertainty as to

whether there would be sufficient funds remaining in the estate to

pay the taxpayer's claims, the sums were still capable of precise

measurement in the future. Id. (citing Reiling v. United States,

77-1 U.S. Tax Cas. (CCH) P9269, 1977 WL 1094 (N.D.Ind.1977)).
Thus, according to the Hemmen court, the administrative expenses

due the taxpayer were fixed and determinable because they had been

allowed by the bankruptcy court and the underlying performance had

been completed. The fact that payment might not be made due to a

shortfall in the estate or subsequent disallowance by the

bankruptcy court had no impact on the Hemmen court's determination

that they were fixed and determinable as of the date of the levy.

Similarly, Artrip's commission was fixed and determinable on

July 27, 1989, the date that Ruff received the Secretary's Notice
of Levy.2 It was fixed because the bankruptcy court in its March

2
Ruff argues that the facts of this case are more similar to
those found in Tull v. United States, 69 F.3d 394 (9th Cir.1995),
and that therefore we should adopt the logic of that case.
However, Tull is entirely consistent with the reasoning of
Hemmen, and is distinguishable on its facts from both Hemmen and
the case at bar. In Tull, the IRS served a notice of levy on the
Secretary/Treasurer of a corporation with significant outstanding
tax liabilities, including both payroll withholding and trust
fund liabilities. At the time, the corporation was experiencing
financial difficulties, and sought to auction off some of its
equipment. The IRS served the notice prior to the auction, but
after a contract to auction the property had been made between
the corporation and an auction house. Id. at 395. The court
held that the property of the corporation, in this case the right
to the proceeds of the auction, was not fixed and determinable on
the date of the levy. Id. at 397. It noted that the actual
property to be sold had not been finally set as of the date of
the levy, nor had a buyer come forward to purchase that property.
Thus, the auction house "had an obligation to attempt to sell
some as yet undetermined amount of property for an as yet
undetermined price to as yet undetermined buyers." Id. The
court reasoned, however, that "[a]n actual sale of property would
establish both the price of that property and the duty of the
buyer to pay the price, even if the date of payment were
deferred." Id. at 398.

The court in Tull noted that the situation in Hemmen
was quite different. In Hemmen, "the performance of the
taxpayer had been completed and the amount he was owed for
that performance had been determined, subject to a possible
later defeasance in whole or part if funds were not
available." Tull, 69 F.3d at 398. The situation in the
instant case and in Hemmen are quite different from that in
2, 1989, order approved Artrip's appointment as broker for the

estate with a 10% commission (to be shared equally with two other

brokers), and because the underlying performance required of Artrip

was complete. The buyer identified by Artrip entered into an

agreement with Ruff to purchase those assets in April of 1989, and

the sale was authorized by the bankruptcy court on May 24, 1989.

The closing occurred on June 16, 1989. The commission was

determinable because it was capable of precise measurement, having

been established by previous court order. See In re Central

Micrographics Corp., No. 88-BKC-6S7 (Bankr.M.D.Fla. March 2, 1989)

(Order appointing Artrip business broker). The bankruptcy court

set a date for Artrip's fee hearing by notice to the parties almost

two weeks before Ruff received the Notice of Levy. The fact that

Artrip was entitled to a commission of $20,000 was never in

dispute, and this is unaffected by the potential unavailability

within the bankruptcy estate of the resources needed to pay that

amount. Common sense dictates that the Treasury regulations at

issue here be read this way.3 If the regulations were meant to

Tull. Here, as of the date of the levy, the sale was
complete, and thus the underlying performance required of
Artrip was complete. The amount of the commission due was
firmly established, having been set by previous court order.
The possibility of "later defeasance," as in Hemmen, has an
impact on the fixed and determinable nature of the
commission due Artrip.
3
This common sense reading of 26 C.F.R. 301.6331-1(a)(1) is
consistent with that found in cases interpreting other parts of
the Treasury regulations governing the Service's levy power. In
In re Quakertown Shopping Center, Inc., 366 F.2d 95 (3rd
Cir.1966), the court, interpreting section 301.6331-1(a)(3), held
valid and enforceable a levy served on a receiver in bankruptcy
against any property or rights to property due a creditor of the
estate. The levy sought to secure assessed tax liabilities of
the creditor. As of the date of the levy, however, the creditor
require, as Ruff argues, that the commission must be paid to the

broker before it can be fixed and determinable, then they would

have been written to so require.

Our holding is consistent with the purpose of the levy. The

levy is not designed, as noted above, to give the government's

claims superiority over the claims of others. Instead, the levy is

intended only to protect the government's statutory interest in

"property or rights to property," see 26 U.S.C. § 6332(a), and to

assure the availability of the assets at issue once a final

ordering of claims is made. National Bank of Commerce, 472 U.S. at

721, 728, 105 S.Ct. at 2924-25, 2928. The resolutions reached in

Hemmen and in the case at bar merely insure that this interest is

protected by putting the burden of monitoring the progress of the

bankruptcy estate on the party who can most easily and efficiently

carry it, the trustee.

The interpretation of the statute urged upon us by Ruff would

read out of the statute the phrase "rights to property," and thus

would strictly limit an IRS levy to "property" actually in the

possession of the party upon whom the levy is served. Ruff's

interpretation is also inconsistent with the regulations, and would

had only filed a claim against the bankruptcy estate, but the
bankruptcy court had not yet allowed the claim. The court
reasoned that the levy in this instance operated like an
involuntary assignment of the creditor's claim against the estate
to the United States. Id. at 98. Because the creditor was free
to make a voluntary assignment of his claim without the
permission of the bankruptcy court, the court found that it was
similarly free to transfer its claim in this instance, albeit
involuntarily. Thus, the receiver did have in his possession
property of the taxpayer, namely the claim against the estate,
and the levy validly functioned to transfer that property to the
United States. Id.
eliminate from the property subject to levy "obligations which

exist at the time of the levy." 26 C.F.R. § 301.6331-1(a)(1). It

would render superfluous the regulation's elaboration to the effect

that those obligations upon which levy may be made are those which

are "fixed and determinable" although the right to receive payment

thereof may be deferred. Ruff's interpretation would seriously

undermine the Service's ability to protect the government's

statutory interest.

Analysis of the relevant bankruptcy provisions governing the

payment of professionals from the assets of the estate reinforces

our conclusion that Artrip's commission was fixed and determinable

as of the date of the levy. Section 328 of the Bankruptcy Code

states:

(a) The trustee ..., with the court's approval, may employ ...
a professional person ... on any reasonable terms and
conditions of employment, including on a retainer, on an
hourly basis, or on a contingent fee basis. Notwithstanding
such terms and conditions, the court may allow compensation
different from the compensation provided under such terms and
conditions after the conclusion of such employment, if such
terms and conditions prove to have been improvident in light
of developments not capable of being anticipated at the time
of the fixing of such terms and conditions.

* * * * * *

(c) [Subject to exceptions not relevant here], the court may
deny allowance of compensation for services and reimbursement
of expenses of a professional person employed under section
327 ... if at any time during such professional person's
employment ... such professional person is not a disinterested
person, or represents or holds an interest adverse to the
interest of the estate with respect to the matter on which
such professional person is employed.

11 U.S.C. § 328 (emphasis added).

The bankruptcy court in this case approved Artrip's fee

arrangement, including the provision setting his commission
percentage, on March 2, 1989, well before the Secretary served the

Notice of Levy on Ruff. Because Artrip's prospect was the ultimate

purchaser of the Central Micrographics property, and because the

sale had been consummated, he had completed the tasks required of

him to establish his entitlement to that commission as of the date

of the levy. Section 328 significantly curtails the bankruptcy

court's discretion with respect to the final payment of previously

approved fees to professionals.

The bankruptcy court's power to alter the fee arrangement in

no way diminishes the fixed and determinable nature of Artrip's

commission arrangement, which was approved by the bankruptcy court

on March 2, 1989. The district court noted that there were no

facts upon which the bankruptcy court could have based a decision

to reduce or eliminate Artrip's commission. Ruff, 179 B.R. at 972.

There was no evidence that Artrip was no longer a disinterested

person, nor that the bankruptcy court felt that the fee arrangement

was improvident. The fact that the court scheduled a hearing on

the fee indicates that there was money left in the estate with

which to pay it. Thus, the district court concluded that Ruff

could not have seriously questioned whether Artrip would receive

his fee at the time that she received the Notice of Levy. Id.

III. CONCLUSION

We conclude that Ruff was, within the meaning of 26 U.S.C. §

6332(a), "in possession of ... property or rights to property

subject to levy" on July 27, 1989, the date on which she received

the Secretary's notice of levy for Artrip's outstanding tax

liabilities. She was therefore required to surrender that property
or the rights thereto to the Secretary. She did not do so, and,

pursuant to 26 U.S.C. § 6332(d)(1), is therefore personally liable

to the Secretary for the value of the property not surrendered, in

this case $20,000. We affirm the ruling of the district court.

AFFIRMED.4

4
We agree with the district court that the bankruptcy court
case of In re Ceafco, 28 700, 1977 WL 1273 (S.D.Ala.Dist.Tax
Sept. 21, 1977), was wrongly decided. Ceafco involved facts
almost identical to Hemmen, in that the IRS served a levy upon
the trustee in bankruptcy seeking property of a taxpayer whose
claims for administrative expenses had been allowed. The
bankruptcy court judge reasoned that only the bankruptcy court
had the authority to determine how the assets of the bankruptcy
estate were to be distributed, and because that determination had
not yet been made, the trustee held no right to property
belonging to the taxpayer, and therefore the levy was premature.
The Ceafco court overlooked the fact that an IRS levy does not
determine that the government's claim is superior to that of
other claimants. National Bank of Commerce, 472 U.S. at 721,
728, 105 S.Ct. at 2924-25, 2928. Thus, the levy does not
interfere with a bankruptcy court's determination of how the
assets of the estate are to be distributed.