UNITED STATES COURT OF APPEALS FOR THE SEVENTH CIRCUIT
decided: October 4, 1973.
ROBERT D. BJORK, PLAINTIFF-APPELLEE,
UNITED STATES OF AMERICA, DEFENDANT-APPELLANT, AND GEORGE E. MAHIN, DIRECTOR, ILLINOIS DEPARTMENT OF REVENUE, DEFENDANT-APPELLEE
Fairchild and Sprecher, Circuit Judges, and Grant,*fn* Senior District Judge.
SPRECHER, Circuit Judge:
The Cline Letter Service, Inc. (Cline) made a bulk transfer of its card and gift shop and office supply business to Martin J. Kucera in July, 1971, under the provisions of Article 6 of the Uniform Commercial Code, ILL. REV. STAT. ch. 26, §§ 6-101 to -110 (1971). On July 15, 1971, Kucera gave notice to those creditors of Cline who appeared on the transferee's sworn list of creditors that on July 30 he would purchase Cline's business for $13,000 cash. All the requirements of the Bulk Transfer provisions of the U.C.C., as enacted in Illinois,*fn1 were complied with.
Among Cline's creditors were the United States (the Government) and the Director of the Illinois Department of Revenue (the State). On July 24 the State, acting pursuant to the Retailers' Occupation Tax Act, § 5j (ILL. REV. STAT. ch. 120, § 444j (1971)),*fn2 issued a Bulk Sales Stop Order to Kucera, directing him to withhold $2,500 from the purchase price as a fund from which to satisfy Cline's obligation to the State for taxes due under the Act. At that time, the obligation was undetermined as to amount. In fulfillment of this stop order, Kucera procured a certified check for $2,500 payable to himself and endorsed it to his attorney, Robert D. Bjork, on July 30, 1971, the date the purchase was closed. Bjork thereafter held the check as an escrow deposit pending determination of the exact amount owed to the State by Cline.
On October 10, 1971, the Government assessed income withholding, Social Security and unemployment taxes against Cline in the amount of $2,323.69. Bjork was served with a notice of levy on October 27, and notice of the tax lien was filed in the appropriate public office the same day. When the Government and the State failed to reach agreement on the proper disposition of the fund and both sides continued to press Bjork, he filed this statutory interpleader action (28 U.S.C. § 1335) on January 14, in the district court. Shortly thereafter, when Cline filed its final return on January 31, 1972, the exact amount of the retailers' occupation tax due the State was determined.
In an opinion filed July 24, 1972, the district court denied the Government's motion for summary judgment. The State's subsequent motion for summary judgment was granted on August 7, 1972, and judgment was entered awarding the fund as follows: $1,387.62 to the State, $24.48 in costs and $400.00 in attorney's fees to Bjork and the remaining $687.90 to the Government. The Government has appealed, and we reverse.
The issue presented is whether under Illinois law, the escrow fund was Cline's property on October 10, the date when, if at all, the Government's lien attached.*fn3 As the district court stated:
"Federal tax liens attach only to 'property and rights to property' of the taxpayer. 26 U.S.C. § 6321. State law must be examined to decide whether the taxpayer had any property or rights to property. Aquilino v. United States, 363 U.S. 509, 512-13, [4 L. Ed. 2d 1365, 80 S. Ct. 1277] (1960); [Avco Delta Corp. Canada Ltd. v. United States, 484 F.2d 692 (7th Cir. 1973);] Continental Oil Co. v. United States, 326 F. Supp. 266, 269 (S.D.N.Y. 1971). If under state law the taxpayer does have property or rights to property then it is a question of federal law whether the federal lien has priority over the liens of others. United States v. Security Trust & Savings Bank, 340 U.S. 47, 49-50, [95 L. Ed. 53, 71 S. Ct. 111] (1950)."*fn4
The district court concluded that at the time of the sale when the escrow fund was established (July 30), the State had a vested interest in the fund and taxpayer Cline had only a contingent interest to the extent of any money remaining after that due to the State and, therefore, that the Government's lien attached on October 10 only to this contingent interest. We do not agree that the transfer of funds into an escrow account established a vested interest in the State. ILL. REV. STAT. ch. 120, § 444.
By ascertaining ownership of the property at the time of transfer, we do not seek to determine who had the right to possession or physical custody of the fund. If that were the question, the answer would be simple: the right to possession passed from Kucera to Bjork at the time of the transfer, and it was still in Bjork on October 10. Indeed, it remained in Bjork until he endorsed the check and deposited it in the district court registry. At any time between July 30 and the date of deposit, Bjork could unquestionably have cashed the check and received the proceeds. Just as clearly, he would not have been able to retain the proceeds as his own, for Bjork had no beneficial interest in the fund. The ownership of the beneficial interest is what we seek to determine.
Immediately before the transfer, Kucera had the beneficial interest in the fund. Absent a stop order, there is no question but that the beneficial interest in what became the fund would have shifted to Cline at the time of the transfer. This result is dictated by the contract between Cline and Kucera by which Kucera agreed to give Cline a full $13,000 in cash in return for Cline's business assets. Since Cline performed his part of the bargain, had there been no stop order Cline would have prevailed against Kucera in an action to recover the full $13,000.
How did the stop order affect the shifting of the beneficial interest on July 30th? Section 5j's (supra note 2) purpose is to insure the existence of some cache of the seller's property from which the seller's tax liability can be satisfied. To accomplish this purpose, the statute appeals to the purchaser's self-interest in avoiding personal liability for the tax and gives him a means of doing so without breaching his contract with the seller. It provides for the creation of what the parties have referred to as an "escrow fund". Section 5j does not purport to vest ownership of the held fund in the State. On the contrary, it leaves the State to its usual methods of determining and assessing the tax as set out in §§ 5 and 5a of the Act, ILL. REV. STAT. ch. 120 §§ 444 and 444a.
Under the district court's interpretation of § 5j, the State would be able to acquire a "vested interest" in funds due the taxpayer under a bulk sale contract, an interest good against all creditors who acquire a lien on the property subsequent to the issuance of the stop order. This interpretation effects a suspension of the normal procedures for obtaining a lien,*fn5 a result which is difficult to justify without clearer authority in the statutory language.*fn6 Given Section 5j's apparent reliance on the remedial procedures of Sections 5 and 5a of the Act, the most reasonable interpretation of the effect of a stop order is that it insures some cache of the seller's property from which to satisfy the seller's tax liability only insofar as no perfected lien attaches to the fund prior to the determination of the amount of such liability to the State.*fn7
Accordingly, we conclude that the stop order did not interrupt the transfer of beneficial interest in the fund to Cline on July 30, but only interrupted possession.*fn8 Unless or until the State proceeded to obtain a lien on the funds, beneficial interest resided in Cline. No State lien having arisen by October 10, Cline had sufficient property interest in the fund for the Government's tax lien to attach. Fine Fashions, Inc. v. United States, 328 F.2d 419 (2d Cir. 1964).
The Government must also prevail in its appeal from the award of attorney's fees and costs to Bjork out of the fund. Bjork depends on the district court's holding that the Government's lien did not attach to sustain his award. Since we reverse that holding and since the law on this point is clearly in the Government's favor when it has a valid lien,*fn9 we likewise reverse the award of fees and costs.
The judgment of the district court is reversed and the cause remanded with directions to enter judgment awarding the fund to the Government in the full amount of its lien, as determined by the district court. If any amount should remain after the award to the Government, the district court shall determine if this interpleader action was brought by Bjork in good faith.*fn10 If it should so determine, it shall award Bjork as attorney's fees the amount remaining in the fund, up to $400. If any amount shall remain after the award to Bjork, or if the district court should determine that this action was not brought in good faith, it shall award the remainder to the State, up to the full amount of its lien, as determined by the district court. The remainder, if any, shall be awarded to Cline. Bjork's filing and service fees in the district court are to be assessed against the State.
In view of the relative amounts of the awards reversed herein, we tax costs in this court in favor of the Government, one-fourth of the taxable costs to be assessed against Bjork and three-fourths against the State. No costs shall be paid out of the interpleaded fund.
REVERSED AND REMANDED WITH DIRECTIONS.
Reversed and Remanded.