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United States v. First National City Bank

decided.: June 26, 1963.

UNITED STATES OF AMERICA, APPELLEE,
v.
FIRST NATIONAL CITY BANK, APPELLANT, AND OMAR, S.A., A URUGUAYAN CORPORATION, LAZARD FRERES & CO., LEHMAN BROTHERS, BELGIAN-AMERICAN BANKING CORP., BELGIAN-AMERICAN BANK AND TRUST CO., AND FIRST NATIONAL CITY TRUST CO., DEFENDANTS.



Author: Moore

Before MOORE, FRIENDLY and HAYS, Circuit Judges.

MOORE, Circuit Judge.

This appeal presents an important question concerning the scope of an injunction against an American bank affecting deposits that may be held for the credit of an alleged delinquent taxpayer in a branch bank outside of the United States.

The taxpayer involved is Omar, S.A., a Uruguayan corporation. An investigation into Omar's affairs in this country revealed the likelihood that Omar was indebted to the United States for unpaid taxes and that sometime in June, 1961, Omar commenced a program of liquidating its holdings of securities in this country and transferring the receipts to Uruguay.*fn1 On October 31, 1962, the Internal Revenue Commissioner caused the issuance of jeopardy assessments against the taxpayer for deficiencies in corporate income tax totalling about $19,300,000 for the fiscal years March 31, 1955, through 1961, inclusive. Notice of the assessment and demand for payment was sent to Omar.

On the same day the United States filed a complaint in the District Court for the Southern District of New York naming as defendants Omar, S.A.; two banks, The First National City Bank of New York and Belgian-American Banking Corp.; two brokerage houses, Lazard Freres & Co. and Lehman Bros.; and two trust companies, First National City Trust Co. and Belgian-American Bank & Trust Co. The complaint alleged that defendants, other than Omar, held sums for the account of or to the credit of Omar and prayed that the District Court adjudge Omar indebted to the government for unpaid taxes; find a valid lien existing in favor of the plaintiff on all property or rights to property belonging to the defendant Omar; enjoin the other defendants from in any way transferring or disposing of such property; order the return of all such property to the jurisdiction of the court; and order the foreclosure of plaintiff's lien on any such property held by defendants and its judicial sale. No personal jurisdiction has been obtained over the taxpayer Omar. An application for a temporary restraining order was granted on October 31, 1962, and on November 20, 1962, the district court, after hearing both sides, granted a preliminary injunction enjoining certain defendants from transferring or disposing of any property or rights to property, whether or not located within the United States, held for the account of Omar by defendants, their branches, agents or nominees.*fn2

Defendant First National City Bank of New York [hereinafter referred to as "Citibank"] appeals from so much of the order as applies to property or rights to property that it may hold in branch banks outside the United States.*fn3 Citibank's argument on appeal is that under New York law, a deposit in its branch bank would not be collectible by Omar in New York, Omar's sole right being against any branch bank in which such deposits have been made; that there being no debt in the United States, there is no property or right to property to which a federal lien can attach; and that the district court was without jurisdiction to issue an injunction affecting any such deposits. The Government in turn asserts that Citibank is itself the debtor and that a lien attached to this debt in New York; that the federal lien attached even if the situs of the debt be outside the United States; and that in any event, personal jurisdiction over Citibank was sufficient basis for the issuance of the injunction.

I

To put these contentions in their proper perspective, a short summary of the enforcement provisions of the Internal Revenue Code of 1954 and judicial decisions thereunder is appropriate. The Code provides several alternative methods for the collection of the revenue from those who neglect or refuse to pay.*fn4 Sections 6321 and 6332, 26 U.S.C., provide that a lien upon "all property and rights to property" belonging to a taxpayer who has refused or neglected to pay any tax arises at the time an assessment is made. In addition, the Service is authorized to collect such tax by levy on all property or rights to property either belonging to the taxpayer or on which there is a lien. 26 U.S.C. § 6331(a). Any person in possession of property or rights to property on which a levy has been made who fails to surrender such property to the Service on demand is personally liable in a sum equal to the value of the property or rights not surrendered. 26 U.S.C. § 6332(b).

The statutory scheme also provides for resort to the courts if necessary. Section 7403(a) permits the filing of a civil action in the district court to enforce a federal tax lien, whether or not levy has also been made. In addition, the district courts have jurisdiction to issue all orders or injunctions necessary or appropriate for the enforcement of the internal revenue laws. 26 U.S.C. § 7402(a).

The effect of the foregoing provisions is to create a statutory attachment or garnishment without requiring resort to the court processes normally necessary in ordinary garnishment proceedings. United States v. Eiland, 223 F.2d 118 (4th Cir., 1955). Where for some reason personal jurisdiction over the delinquent taxpayer is unobtainable, the Service is able to proceed in actions quasi in rem to enforce its lien on specific property belonging to the taxpayer within the jurisdiction of the court. See United States v. Balanovski, 236 F.2d 298 (2d Cir., 1956), cert. denied, 352 U.S. 968, 77 S. Ct. 357, 1 L. Ed. 2d 322 (1957).

The crucial question here is whether appellant holds property or rights to property of the taxpayer Omar subject to the jurisdiction of the district court.*fn5 The nature of Omar's right against Citibank arising out of a deposit made in Citibank's Montevideo branch bank is to be determined by state law for the tax lien statute "creates no property rights but merely attaches consequences, federally defined, to rights created under state law." United States v. Bess, 357 U.S. 51, 55, 78 S. Ct. 1054, 1057, 2 L. Ed. 2d 1135 (1958); see Aquilino v. United States, 363 U.S. 509, 80 S. Ct. 1277, 4 L. Ed. 2d 1365 (1960); Raffaele v. Granger, 196 F.2d 620 (3d Cir., 1952).

The proper place to sue to enforce a lien is in the district in which the property is located. United States v. Dallas National Bank, 152 F.2d 582 (5th Cir., 1945). Absent jurisdiction over the person of Omar, this action can proceed only on the ground that Citibank's debt to Omar is within the jurisdiction of the district court. Hanson v. Denckla, 357 U.S. 235, 78 S. Ct. 1228, 2 L. Ed. 2d 1283 (1950), made explicit what had been assumed since Pennoyer v. Neff, 95 U.S. 714, 733, 24 L. Ed. 565 (1877), namely, that a state has no right "to enter a judgment purporting to extinguish the interest of such a person [over whom it has no personal jurisdiction] in property over which the court has no jurisdiction." 357 U.S. at 250, 78 S. Ct. at 1237.

The Government argues that the situs of the debt is irrelevant because a bank account creates a debtor-creditor relationship which is subject to levy, United States v. Bowery Savings Bank, 297 F.2d 380 (2d Cir., 1961); United States v. Manufacturers Trust Co., 198 F.2d 366 (2d Cir., 1952); United States v. Third National Bank & Trust Co., 111 F. Supp. 152 (M.D. Pa. 1953), and that, therefore, jurisdiction exists in the district court because the "obligation of the debtor to pay clings to and accompanies him wherever he goes." Harris v. Balk, 198 U.S. 215, 222, 25 S. Ct. 625, 626, 49 L. Ed. 1023 (1905). Although the Government correctly characterizes the relationship between bank and depositor, its argument merely begs the determinative question, namely, who is the actual debtor in this case, the appellant or its branch banks. The nature of garnishment proceedings is such that the garnishor obtains no greater right against the garnishee than the garnishee's creditor had.Harris v. Balk, supra, 198 U.S. at 222; 25 S. Ct. at 626; Karno-Smith Co. v. Maloney, 112 F.2d 690, 692 (3d Cir., 1940); Wheeler v. Thomas, 31 F. Supp. 702 (D.C.D.C. 1940). But cf. United States v. Manufacturers Trust Co., supra. Thus, only if Omar could sue appellant in New York to recover his deposit, can the Government, as Omar's creditor, sue in New York. Inquiry, therefore, must be made into the nature of the debt owed to Omar under state law.

A review of the New York cases indicates a consistent line of authority holding that accounts in a foreign branch bank are not subject to attachment or execution by the process of a New York court served in New York on a main office, branch or agency of the bank. See Comment, Garnishment of Branch Banks, 56 Mich. L. Rev., 90 (1957). This doctrine finds its inception in English law. An important case is Richardson v. Richardson & National Bank of India, Ltd., [1927] Probate 228, 137 L.T. R492, 163 L.T. 450, involving an attempt by a wife to obtain a garnishee order against the account of her husband in a bank whose head office was in London. The question presented was whether the garnishee order could extend to deposits to the husband's credit in branch banks in Kenya and Tanganyika. The Court, after reviewing prior English authorities such as Woodland v. Fear, 7 E. & B. 519 (1857) and Rex v. Lovitt, [1912] A.C. 212 (P.C.), found that the contractual obligation between bank and customer contains certain implied terms, these being that (1) the promise of the bank is to repay at the branch where the account is kept; and (2) the bank is not required to pay until payment is demanded at the branch where the account is kept. Therefore, since the debt of the bank at its main office did not extend to deposits in its branch banks, it was not property within the jurisdiction of the English court and was not subject to attachment there.

An early case in New York Chrzanowska v. Corn Exchange Bank, 173 App. Div. 285, 159 N.Y.S. 385 (1st Dep't 1916), affirmed, 225 N.Y. 728, 122 N.E. 877 (1919), dealing with the relationship between branch banks, established the proposition that domestic branches within the same city were to be regarded as distinct and separate entities and that deposits made in branch banks are payable there and only there. The court said: "the different branches were as separate and distinct from one another as from any other bank." 173 App. Div. at 291, 159 N.Y.S. at 388. But see Konstantinidis v. The S.S. Tarsus, 196 F. Supp. 433 (E.D.N.Y. 1961). This view was thereafter applied to foreign branches with respect to the collection of forwarded paper, the court stating that "the branch is not a mere 'teller's window'; it is a separate business entity." Pan-American Bank & Trust Co. v. National City Bank, 6 F.2d 762, 767 (2d Cir.), cert. denied 269 U.S. 554, 46 S. Ct. 18, 70 L. Ed. 408 (1925). Furthermore, the contract between the bank and a depositor in a foreign branch is to pay in the currency of the branch in which the deposit is made. Sokoloff v. National City Bank, 250 N.Y. 69, 164 N.E. 745 (1928); Zimmerman v. Hicks, 7 F.2d 443 (2d Cir., 1925), affirmed sub nom. Zimmermann v. Sutherland, 274 U.S. 253, 47 S. Ct. 625, 71 L. Ed. 1034 ...


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