Source: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-ca10-88-01985/USCOURTS-ca10-88-01985-0/pdf.json

Nature of Suit Code: 870
Nature of Suit: Tax Suits
Cause of Action: 

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PUBLISH 

UNITED STATES COURT OF APPEALS 

FOR THE TENTH CIRCUIT 

JEFFERSON BANK AND TRUST, 

Plaintiff-Appellee, 

F[g !5 1990 

ROBERT L. H'.OECKER 

Ck:rk 

vs. 

) 

) 

) 

) 

) 

) 

) 

) 

) 

No. 88-1985 

UNITED STATES OF AMERICA, 

Defendant-Appellant. 

APPEAL FROM THE UNITED STATES DISTRICT COURT 

FOR THE DISTRICT OF COLORADO 

D.C. No. 87-C-279 

John A. Lobus, JOHN A. LO BUS, P. C., of Lakewood, Colorado, for 

Plaintiff-Appellee. 

Robert L. Baker, Tax Division, Department of Justice, Washington, 

D.C. (William S. Rose, Jr., Assistant Attorney General, Gary R. 

Allen, David English Carmack and Stuart E. Horwich, Tax Division, 

Department of Justice, Washington, D. c., and Michael J. Norton, 

United States Attorney, Denver Colorado, with him on the brief) for 

Defendant-Appellant. 

Before HOLLOWAY and BRORBY, Circuit * Judges and BOHANON, District 

Judge. 

BOHANON, District Judge. 

* The Honorable Luther Bohanon, Senior United states 

District Judge for the Eastern, Northern and Western Districts of 

Oklahoma, sitting by designation. 

Appellate Case: 88-1985 Document: 010110149820 Date Filed: 02/05/1990 Page: 1 
This appeal arises after the plaintiff, Jefferson Bank and 

Trust ("Jefferson Bank") commenced this action for wrongful levy 

to secure the return of $93,880.06 paid to the defendant through 

the Internal Revenue Service ("IRS") with interest thereon. The 

district court granted summary judgment in favor of Jefferson Bank. 

we AFFIRM. 

I. 

The material facts of this case are undisputed. 

On October 15, 1984, Jefferson Bank leant $300,000.00 to the 

taxpayer and executed a promissory note containing the following 

clause: 

Any deposits or other sums at any time credited by or 

due from the holder to any maker, endorser or guarantor 

hereof and any securities or other property of the 

endorser or guarantor hereof in the possession of the 

holder may at all times be held and treated as collateral 

security for the payment of this obligation. The holder 

may apply or set off such deposits or other sums against 

said liabilities at any time in case of makers, but only 

with respect to matured liabilities in the case of 

endorsers or guarantors. 

Prior to October 23, 1984, when the taxpayer opened three 

separate checking accounts with Jefferson Bank, the taxpayer had 

no accounts with that bank. On May 1, 1986, the maturity date of 

the taxpayer's obligation to the bank, the promissory note was 

extended with payment due on October 15, 1986. 

On May 12 and October 27, 1986, the IRS made assessments 

against the taxpayer for unpaid federal employer's taxes. On 

November 6 and 17, 1986, notices of federal tax liens were duly 

filed with the Secretary of State of Colorado and were recorded 

\ 

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Appellate Case: 88-1985 Document: 010110149820 Date Filed: 02/05/1990 Page: 2 
with the Jefferson County Recorder. On December 12, 1986, notice 

of levy was served upon Jefferson Bank. 

The bank monitored the accounts at all times to ensure that 

there was a balance sufficient to satisfy the delinquent note. The 

balances in the accounts were never . less than the amount owed 

Jefferson Bank. Thus, the bank took no action to effect an offset 

against the accounts prior to the IRS's notice of levy. 

Jefferson Bank paid $124,839.63 to the IRS pursuant to the 

IRS's final demand, of which $93,880.06 was paid under protest. 

Jefferson Bank brought this action for wrongful levy to secure the 

return of the $93,880.06 plus interest. 

II. 

The issue is whether the district court erred in holding that 

Jefferson Bank had a perfected "security interest" in the checking 

accounts and that such in~erest was choate at the time the notices 

of the federal tax liens were filed. 

A grant of summary judgment is reviewable de nova by this 

court. Vibra-Tech Engineers, Inc. v. United States, 787 F.2d 1416, 

1418 (10th Cir. 1986); Boise City Farmers Corp. v. Palmer, 780 F.2d 

860, 8 66 ( 10th Cir. 1985) . We will affirm when there are no 

genuine issues of material fact and when the party in whose favor 

the judgment was rendered is entitled to judgment as a matter of 

law. United States v. Colorado, 872 F.2d 338, 339 (10th Cir. 1989). 

III. 

When a taxpayer fails or refuses to pay taxes for which he is 

liable, .the United States can impose a tax lien upon "all property 

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Appellate Case: 88-1985 Document: 010110149820 Date Filed: 02/05/1990 Page: 3 
and rights to property whether real or personal, belonging to [the 

taxpayer] . 11 26 u.s.c. § 6321 (1987). The lien arises "at the time 

the assessment is made and ... continue[s] until the liability 

. is satisfied or becomes unenforceable by reason of lapse of 

time." Id. at§ 6322. This lien is junior to any security interest 

acquired prior to the time when notice of the tax lien is filed by 

the IRS. Id. at§ 6323(a). 

The defendant argues that (1) Jefferson Bank did not have a 

perfected security interest in the taxpayer's bank accounts and 

(2) the lien of the bank was not choate at the time the defendant 

notified Jefferson Bank of the tax lien. 1 

IV. 

A judicial remedy is available to a person "who claims an 

interest in or lien on" property upon which the government 

wrongfully levied. 26 u.s.c. § 7426(a) (1) (1987). "A levy is 

wrongful if it •will or does effectively destroy . [an] 

interest in property which is senior to the federal tax lien.'" 

Trust Company of Columbus v. United States, 735 F.2d 447, 448 (11th 

cir. 1984) quoting IRC Reg.§ 301.7426-1-(b) (iv) (d). A federal tax 

lien is not valid against a security interest until proper notice 

of the tax lien has been filed by the Secretary. 26 u.s.c. § 

6323(a) (1987). Under federal law, a security interest is defined 

as: 

1

The bank also argues that the bank had a right to setoff the 

funds in the taxpayer's account but the bank failed to exercise 

that right prior to the government's filing of the tax lien. We 

need not address this issue as the other issues are dispositive. 

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Appellate Case: 88-1985 Document: 010110149820 Date Filed: 02/05/1990 Page: 4 
any interest in property acquired by contract for the 

purpose of securing payment or performance of an 

obligation or indemnifying against loss or liability. 

A security interest exists at the time (A) if, at such 

time, the property is in existence and the interest has 

become protected under local law against a subsequent 

judgment lien arising out of an unsecured obligation, 

and (B) to the extent that, at such time, the holder has 

parted with money or money's worth. 

Id. at § 6323 (h) (1). The United States ·supreme Court has 

interpr~tect this statute to require that the security interest be 

protected under state law and that the interest be choate at the 

time the government filed the tax lien. United States v. Pioneer 

American Insurance Company, 374 U.S. 84, 88 (1962). 

Since it is undisputed that the bank parted with money, the 

issue is whether the bank's interest in the taxpayer's account was 

protected at the relevant tim~ by Colorado law "against a 

subsequent judgment lien arising out of an unsecured obligation," 

26 U.S.C .. ~ 6323(h) (1), and whether the bank's interest was choate 

at the time. Pioneer American Insurance Company, 374 U.S. at 88. 

v. 

Under Colorado law, when money is deposited in an account, 

the title to the · funds passes to the bank, a debtor-creditor 

relationship i$ created, and the money becom.es a chose in action 

in favor of the depositor. United States v. Central Bank of 

Denver, 843 F.2d 1300, 1305 (10th cir. 1988); Cox v. Metropolitan 

state Bank, 138 Colo. 576, 336 P.2d 742 (1959). This chose in 

action is a property right to which a federal tax lien can attach. 

Central Bank of Denver, 843 F.2d at 1305. 

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Appellate Case: 88-1985 Document: 010110149820 Date Filed: 02/05/1990 Page: 5 
"Under the common law, .a creditor may protect its interest in 

a deposit account by means of a pledge or an assignment." Peoples 

National Bank of Washington v. United states, 777 F.2d 459, 461 

(9th Cir. 1985) cited with approval in Central Bank of Denver, 843 

F.2d at 1305. In order for a pledge to be effective, an 

affirmative act, such as the transfer of an indispensable 

instrument, must have occurred. Central Bank of Denver, 843 F.2d 

at 13 05. An assignment occurs if title to the property is 

transferred. Peoples National Bank of Washington, 777 F.2d at 462. 

Under Colorado law, title to the taxpayer's deposit accounts passed 

to the bank creating an effective assignment. And this assignment 

is a security interest protected by the local law. 

Bank of Denver, 843 F.2d 1300. 

See Central 

The government relies on the court's decision in Peoples 

National Bank of Washington, 777 F.2d at 459. In that case, the 

court determined that an assignment had not occurred. The 

assignment was defeated because the agreement did not explicitly 

state that "the collateral was 'delivered, pledged, assigned, 

conveyed and transferred' to the trust company. 11 Id. we agree 

with the district court's order in this case that the language 

required in Peoples National Bank is not necessary here since state 

law provides that title in a deposit account is automatically 

transferred to the bank. 

VI. 

In addition to having protection. under state law, Jefferson 

Bank's interest in the taxpayer's deposit accounts must have been 

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Appellate Case: 88-1985 Document: 010110149820 Date Filed: 02/05/1990 Page: 6 
choate at the time the government gave the bank notice of the tax 

liens. Under federal law, liens become choate "when the identity 

of the lienor, the property subject to the lien, and the amount of 

the lien are established." Central Bank of Denver, 843 F.2d at 

1307, quoting Pioneer American Insurance Company, 374 U.S. at 89. 

It is undisputed that the identity of the lienor and the property 

subject to the lien were established at the time that the agreement 

was signed. The government argues that because the accounts 

fluctuated the amount of Jefferson Bank's lien was not established 

at the time. it received notice of the government's lien. We 

disagree. 

The government argues that so long as the taxpayer had the 

right to withdraw money from the account the property subject to 

the lien was not established. The loan had matured at the time 

the government gave the bank notice of its liens. The amount owing 

the bank was a definite amount of $89,827.83, plus interest at a 

set rate. The monies above this amount constituted an unsecured 

loan. The bank had control of the monies in the accounts and 

could have prevented withdrawal of those monies. 

continually moni tared the accounts to assure 

In fact the bank 

that funds were 

maintained in an amount, equal to or greater than the loan. The 

amount of the lien was established and definite, and Jefferson 

Bank's interest was choate at the time it received notice of the 

government's tax lien. 

With respect to the issue of choateness, we note the 

following: Central Bank was a suit by the government under 26 

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Appellate Case: 88-1985 Document: 010110149820 Date Filed: 02/05/1990 Page: 7 
( 

u.s.c § 633~ to fix liability of the bank for not honoring a notice 

of levy and request for remittance 

deposit account. We held that the 

from a taxpayer's general 

government should prevail 

because the bank's perfected security interest in the taxpayer's 

accounts was not in the general deposits of the taxpayer but only 

in a "Cash Collateral Account;" the bank had not acted as to the 

general account of the taxpayer before notice and filing of the 

federal tax lien; and two of the three requirements of choateness 

were not met - showing the property subject to the lien and the 

amount of the lien as a sum certain - when the federal lien was 

filed. 843 F.2d at 1308. 

Here, however, the district court correctly found that in this 

suit by Jefferson Bank under 26. u.s.c. § 7426 to determine a 

wrongful levy, the bank had acquired a common law security interest 

in the sums in the possession of the bank by the note provision 

(the sums "may be held as collateral security") and by the deposit 

made by the taxpayer, the note had matured before filing of the tax 

lien, and thus the bank's interest was "first in time" and 

prevailed. Order of the District Court (4-27-88) at 8-10. 

VII. 

Jefferson Bank's interest in the taxpayer's deposit accounts 

was choate and protected under local law at the time the government 

notified it of its lien. Under federal law, the government's tax 

lien was junior and inferior to Jefferson Bank's security interest. 

Accordingly, we AFFIRM the judgment of the district court. 

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