Summer 2009 • Issue 33, page 11

Does a State Court's Approval of a Final Account & Report Bind Federal Entities?

By Rosen, Charles*

The issue is whether a receiver’s final account and report (FAR) submitted to a state court and that court’s subsequent approval is binding on the Internal Revenue Service? Perhaps a better way of stating the question is whether the approved FAR is binding on the United States Government?

While the IRS is the most likely Federal entity to be owed funds, I prefer to broaden the question since agencies other than the IRS may be entitled to object to such a report and to the report’s allocation of estate funds to an entity other than the Federal government. After all, funds could be owed to various Federal agencies for a variety of taxes, such as for tobacco, liquor or firearms, to the Coast Guard for licenses or fees, to the FAA for aircraft registration fees, to the SEC, FTC, etc. for penalties related to activities governed by those agencies, to the BLM for lease payments or for livestock grazing permits, and on and on.

What does state law say about notice? Rule 3.1184, Cal. Rules of Court, states, "Notice of the motion... must be given to every person or entity known to the receiver to have a substantial, unsatisfied claim that will be affected by the order..., whether or not the person is a party to the action..."

In practice, the receiver gives notice to every person or entity with whom or which the estate had any contact. This is to prevent later argument that a person or other entity with a claim against the estate or receiver was deprived of due process and right to be heard. All persons and entities given notice of the FAR who do not object are bound by court's order approving the report and distribution.

There is no specific provision for giving notice to the Federal government, but receivers routinely give notice to taxing authorities to preserve the argument that the Federal taxing authorities had notice and didn't object. This is probably not binding on the Federal government, but it goes a long way in having mid-level management at the U.S. Department of Justice deny approval for trial attorneys to file any type of action in the state court proceeding to undue actions taken or payments made to claimants in the case or to hold the receiver personally liable for funds not paid to the government.

What does Federal law say? The United States Government is technically immune from jurisdiction in state courts unless a Federal statute specifically waives jurisdiction or the U.S. Attorney General specifically waives jurisdiction in a particular case. This is not likely to happen. However, there are few Federal statutes that, for limited purposes, specifically waive jurisdiction for the limited purposes stated in the statute. But even then the statutory waiver usually includes the method by which service of process must be made on the government.

The clearest example I can think of is 28 U.S.C. ' 2410 that permits state courts to exercise jurisdiction in any civil suit if the subject matter is with respect to real or personal property and the purpose of the litigation is to quiet title, foreclose a mortgage or other lien, to partition, to condemn or to interplead with respect to property on which the United States has or claims a mortgage or other tax lien. See also the Federal Tort Claims Act at 28 U.S.C. ' 1346.

Is the Federal government bound by decisions of a state court? In Commissioner v. Bosch, 387 U.S 456, 87 S.Ct. 1776 (1967), the Supreme Court held the United States is not bound by a decision of a lower state court, in contrast to a decision of the highest state court, unless it is a party to the action. The doctrine of Federal government sovereign immunity was first directly addressed by Chief Justice John Marshall in United States v. Clarke, 8 Pet. (33 U.S.) 436, 444 (1834). “Ya’ can’t sue the Feds unless they say ya= can.” [Me, paraphrasing Justice Marshall.]

What does a receiver do to ‘play it safe’? First, the receiver should make a good faith attempt to determine what types of Federal taxes, fees, and penalties might be owed by the receivership or defendants in the receivership. (This of course assumes that debts of some or all of the defendants are likely valid claims against funds held in the receivership.) Look to the nature of the business(es) in the receivership, the types of real and personal property in the estate (or that may have been sold by the estate or may have been owned by the defendants before the receivership). Review prior receipts and cancelled checks and ledgers to see what types of taxes, civil penalties or other Federal debts were paid in the past. If you can attest at some later date, if need be, that you conducted a thorough due diligence search it can help to resolve good faith efforts should the issue later arise.

The practical solution is as follows. First, let’s assume a good faith effort was made to determine and schedule all known Federal debts and—to the reasonable extent possible­—pay such ‘known’ Federal debts. If reasonable notice is given to the affected Federal entity, to the local U.S. Attorney and to the U.S. Department of Justice, the Feds are far less likely to bring a later action against the receiver or receivership estate to have the ‘other Federal debts’ paid or the FAR set aside completely.1 Full actual notice is usually that as defined in the Federal Rules of Civil Procedure (FRCP) for giving notice to the Federal government in a proceeding occurring in Federal court. FRCP 4(d)(i), ‘Serving the United States and Its Agencies, Corporations, Officers, or Employees’, provides direction of how this is to be done in Federal courts, but it is also often applied to matters in state court. Sometimes state court rules do not require as full and complete a notice as required by the FRCP, so it’s usually better to follow the broader rule, i.e. usually the FRCP.

Also, to be most cautious consider following the federal rules on the amount of time for notice to be sent before any response is required to be filed or any hearing held.2 This may require having the hearing on the FAR scheduled for a date that is more than 60 days following the notice to parties.

So how does the receiver accomplish good proof of service on the Feds? This is usually a three-pronged process. Service of process should be made on the U.S. Attorney General ( U.S. Department of Justice in Washington), on the U.S. Attorney for the local district within which the state court is located, and on the Federal entity itself. This last prong is often the most difficult to achieve because the receiver may have to contact various parties at the affected agency to determine where service of process is to be made. It can also often be found by researching the Code of Federal Regulations to see if the agency has published any directive on where service of process is to be paid.3 Often an agency’s internet web site may provide you with the necessary information or a contact point at which you can get the correct service of process information.

P.S. This will be my final column for the Receivership News. After working for 30 years for the Federal government and 9 years in private practice, I am choosing to retire from work. It has been a true pleasure writing this column, answering your questions, and generally working with receivers, accountants and counsel on various tax related issues. However, I’m not dead nor out of contact. If you believe I have insight that might assist you with a particular issue or you need an expert witness, please feel free to call. My office will know where I’m hiding.

1Keep in mind that 31 U.S.C. § 3713 states that all Federal debts are to be paid first ahead of everyone else. It’s one of the oldest laws of the United States dating back to 1797. But also keep in mind there is significant case law that hold that reasonable costs and fees of the receivership can prime the payment of the Federal debts.
2Under the FRCP the United States usually has 60 days within which to respond.
3In the case of the I.R.S., service of process should be made on the U.S. Attorney General by mailing the notice to: Tax Division, Civil Trial West, U.S. Department of Justice, P.O. Box 683, Ben Franklin Station, Washington, D.C. 20044; to the local United States Attorney’s office in Los Angeles, San Francisco, San Diego or Sacramento, as appropriate; and to the Insolvency Unit, I.R.S.

[Chuck underestimates both his value to the receivership community and the tenacity of the RN. He cannot escape pesky questions from the RN from time-to-time in the future, and knowing Chuck’s devotion and desire to be of service to those persons he has worked with for so many years, it is our guess he’ll hazard a quick opinion or two. The RN would be diminished too greatly without him. Ed.]