Opinion ID: 1191028
Heading Depth: 1
Heading Rank: 6

Heading: Interworks' Federal Lawsuit and the United States' Complaint-in-Intervention

Text: In July 2005, Interworks brought a parallel suit under Article 3-A against Merchant in the United States District Court for the Southern District of New York the instant actionseeking, among other things, the same relief Colonial sought in the New York State Court action. Interworks' complaint alleged that the Article 3-A beneficiaries to the public improvement contracts were required to be paid from the proceeds of Interworks' accounts receivables, which the financing agreement had placed in the custody and control of Merchant, and that Merchant's failure to satisfy Interworks' obligations to the Article 3-A trust fund beneficiaries amounted to a diversion of trust-fund assets. Unlike the lawsuit in New York Supreme Court, in which the United States did not participate, the United States filed a complaint-in-intervention in this federal suit. It asserted that Merchant's failure to use trust-fund assets to satisfy the $557,129.29 or more that Interworks owed in employment taxes violated Article 3-A. [2] The United States brought the complaint-in-intervention in its own capacity, rather than as a representative of all Article 3-A beneficiaries. The case was transferred from the Southern District to the Eastern District of New York in April 2006. In November 2007, the Eastern District court dismissed the underlying complaint with prejudice after Interworks indicated its intent to voluntarily discontinue the action [3] and failed to respond to an order to show cause. This left the issues raised in the United States' complaint-in-intervention and the cross-claims by Colonial as the only surviving issues for the district court's consideration. Colonial and Merchant then jointly moved to dismiss the United States' complaint-in-intervention on the grounds that the United States had failed to comply with two procedural requirements of Article 3-A suits: (1) that there be no prior pending Article 3-A action, and (2) that such suits be brought in a representative capacity. Without denying that these requirements were provided for by statute and had not been satisfied, the government opposed the motion to dismiss on the grounds that Article 3-A does not apply to the United States and that, even if it did, the United States' power to enforce federal tax law in federal court either exempts it from compliance with or preempts the procedural requirements of Article 3-A. The district court, finding the government to be in procedural default, granted the motion to dismiss. Interworks, 531 F.Supp.2d at 482. Based largely on the fact that the United States had brought suit to enforce its Article 3-A rights under New York law, rather than to enforce a tax lien under federal law, the court rejected the government's argument that federal statutes that provide federal courts with original jurisdiction over actions brought to enforce the federal tax laws excuse the government from compliance with Article 3-A's procedural requirements. Id. at 481. The government appeals.