DAVID C. GODBEY, District Judge.
This Order addresses Interpleader Defendant Berkley Regional Insurance Company's ("Berkley") motion for summary judgment [21], Interpleader Defendant United States of America's ("IRS")
This dispute arose among creditors of Weir Bros., Inc. ("Weir Bros."), a subcontractor, as to priority over the funds interpled in a state garnishment action Pineda initiated in Texas state court. The interpled funds are comprised of retainage and withheld payments originally held by Hunt, the garnishee, for services rendered by Weir Bros. on a construction contract awarded to it by Hunt.
Pineda's claim to the funds has its genesis in a security agreement executed by Pineda's predecessor-in-interest, Compass Bank ("the Bank"), and Weir Bros. In August 2008, Weir Bros. entered a Revolving Credit and Security Agreement ("the Agreement") with the Bank. Pineda's Mot. Summary Judgment Brief 2 [28]. The Agreement provided a revolving line of credit to Weir Bros. up to $4,000,000.00, which was secured by Weir Bros.'s grant of a security interest in all its after-acquired accounts receivable. Id. at 2-3. The Agreement provided that the collateral secured Weir Bros.'s payment on any funds lent under the Agreement and its performance under the accompanying promissory note to the Bank and its assignees. Id. at 3-4. The Bank perfected its security interest on October 9, 2008, by filing a UCC-1 financing statement with the Texas Secretary of State. Id. at 4.
When Weir Bros.'s loan to the Bank became due in May 2012, Weir Bros. defaulted on its debt, which exceeded $5,000,000.00. Id. at 4-6. Subsequently, the Bank assigned its interest in the Agreement and the promissory note to Pineda Grantor Trust II in November 2012; these interests were assigned to a number of Pineda entities over the next three years. Id. at 6. The Pineda parties amended the UCC filing statement each time the interests were transferred and continued the filing. Id. at 6-7. In May 2015, Pineda NPL-F2, LLC assigned the interest to Pineda REO, LLC, the current owner of the documents and security interest. Id. at 6. In November 2017, after Pineda discovered that Hunt was holding $273,716.25 in retainage and undistributed progress payments for Weir Bros.' work on a contract, Pineda filed a garnishment writ seeking the funds from Hunt. Id. at 1. Hunt filed a crossclaim for interpleader and deposited $273,716.23 into the court registry.
Berkley was interpleaded by Hunt and lays claim to the funds for losses it incurred from Weir Bros.'s defaults on construction contracts. In December 2009, Weir Bros. and other Weir entities executed and delivered to Berkley a General Indemnity Agreement ("GIA"). Berkley's Mot. Summary Judgment Brief 3 [22]. The GIA grants Berkley a security interest in Weir Bros.'s accounts receivable to secure surety performance and payment bonds to cover Weir Bros.'s construction contracts. Berkley's Mot. Summary Judgment Appx., Ex. A 6-7 [23]. Section VII of the GIA also provides in part that "all funds due or to become due under any Contract covered by a Bond are Trust Funds, whether in the possession of an Indemnitor or another . . . for the benefit of Surety (Berkley) for any liability or loss it may sustain or incur by reason of or in consequence of the execution of such Bonds." Berkley's Mot. Summary Judgment Brief 3-4 [22].
Subsequently, Berkley issued several bonds for construction contracts Weir Bros. acquired, including a May 2011 bond for a subcontract Hunt awarded to Weir Bros. for work on the University Hospital for the University of Texas Southwestern Medical Center at Dallas ("University Hospital"). Id. at 4. Weir Bros., however, failed to complete several of its contracts, and Berkley was required to pay for the completion of the contracts its bonds covered to the tune of $4,615,934.70. Id. at 5. When Weir failed to indemnify Berkley for these losses, Berkley filed suit against Weir and procured a judgment in November 2013, which remains outstanding. Id. at 6.
Hunt also added the United States as a party to this action due to a December 10, 2012, tax lien the IRS had filed against Weir for unpaid taxes assessed between August 2011 and July 2012.
Courts "shall grant summary judgment if the movant shows that there is no genuine dispute as to any material fact and the movant is entitled to judgment as a matter of law." Fed. R. Civ. P. 56(a); Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 247 (1986). In making this determination, courts must view all evidence and draw all reasonable inferences in the light most favorable to the party opposing the motion. United States v. Diebold, Inc., 369 U.S. 654, 655 (1962).
The moving party bears the initial burden of informing the court of the basis for its belief that there is no genuine issue for trial. Celotex Corp. v. Catrett, 477 U.S. 317, 323 (1986). Once the movant has made the required showing, the burden shifts to the nonmovant to establish that there is a genuine issue of material fact such that a reasonable jury might return a verdict in its favor. Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 586-87 (1986). Factual controversies are resolved in favor of the nonmoving party "`only when an actual controversy exists, that is, when both parties have submitted evidence of contradictory facts.'" Olabisiomotosho v. City of Houston, 185 F.3d 521, 525 (5th Cir. 1999) (quoting McCallum Highlands, Ltd. v. Washington Capital Dus, Inc., 66 F.3d 89, 92 (5th Cir. 1995)).
The Court finds that Weir Bros. had rights to the contract proceeds in question, that the IRS has a perfected federal tax lien and Pineda has a perfected security interest in those proceeds, and that both the IRS and Pineda have priority to a portion of the funds. Accordingly, the Court grants the IRS's and Pineda's motions for summary judgment.
The IRS claims, and Pineda agrees, that the IRS's 2012 tax lien has priority to $139,653.00 of the interpled funds. For this claim to succeed, the IRS must show that the debtor, Weir Bros., has ownership rights to the claimed property and that the property is eligible for tax lien attachment, that the IRS perfected its tax lien by properly filing notice, and that no other party has a superior interest in the claimed property. The Court finds that the IRS has carried its burden as to each of these prerequisites.
To determine whether a debtor possesses property eligible for federal tax lien attachment, federal courts engage in a two-step inquiry. Courts first look to state law to determine whether a debtor has rights to "property" as defined by state law. United States v. Craft, 535 U.S. 274, 275 (2002) ("The federal statute creates no property rights but merely attaches consequences, federally defined, to rights created under state law.") (internal quotation marks omitted). If state law recognizes property rights, the courts then must assess whether under the federal tax code the debtor's "state-delineated rights qualify as `property' or `rights to property'" to which a federal tax lien may attach. Id.; City of Galveston v. Consol. Concepts, Inc., 274 F.Supp.3d 687, 691 (S.D. Tex. 2017). Here, Texas law provides that a debtor does not have property rights in an "account"
Under this definition, Weir Bros. has property rights to the account receivable generated under the Hunt contract because it rendered services to Hunt and is owed the withheld payments and retainage in compensation for those services.
Because Weir Bros. had property rights recognized by Texas law, the Court next inquires as to whether these rights constitute "property or rights to property" within the meaning of the federal tax statute. A federal tax lien attaches at the time the IRS assesses unpaid taxes to "all property and rights to property" belonging to a debtor, including after-acquired property. 26 U.S.C. §§ 6321-6322; see Tex. Comm. Bank-Ft. Worth, N.A. v. United States, 896 F.2d 152, 161 (5th Cir. 1990). Accounts receivable constitute "rights to property" within the scope of the federal tax code. See Tex. Oil & Gas Corp., 466 F.2d at 1051-53 (holding the IRS's tax lien had priority in debtor's accounts receivable where accounts came into existence more than forty-five days after the IRS filed its lien notice); see also Tex. Comm. Bank-Ft. Worth, N.A., 896 F.2d at 162 (holding federal tax lien had priority interest in debtor's accounts). Consequently, the interpled funds are "property or rights to property" to which the IRS's tax lien may attach.
Federal tax liens are not enforceable against a debtor's secured creditors, however, unless the IRS has perfected its interest by filing notice of its lien in accordance with the requirements of the state in which the property resides.
The only remaining issue is whether this perfected tax lien has priority in the interpled funds as against Weir Bros.'s creditors. In determining the priority of federal tax liens, "the basic priority rule of `first in time, first in right' controls, unless Congress has created a different priority rule to govern the particular situation." Tex. Comm. Bank-Ft. Worth, N.A., 896 F.2d at 161. When the IRS has a federal tax lien and a creditor has an interest in a debtor's after-acquired property, both interests attach once the property exists and the debtor gains rights in it. The Supreme Court has determined that within the context of the federal tax code, the "first-in-time" rule grants the IRS priority in such cases of simultaneous attachment, even if the creditor filed notice of its interest prior to the date that the IRS assessed the tax lien and filed notice. United States v. McDermott, 507 U.S. 447, 454-55 (1993). The tax code does make some exceptions to this general rule, however.
Relevant to this case, the special priority rules of section 6323(c) provide that a security interest
The record shows that Pineda has a security interest because a written commercial financing agreement was executed, notice was filed, and loans were made prior to the date the IRS filed its first tax lien against Weir Bros. Pineda Mot. Summary Judgment Appx., 17, 29 [29.2] 67-72 [29.3]; 339-50 [29.30]. As conceded by the IRS and discussed below, Pineda as a secured creditor has priority to $134,063.25 of the interpled funds, which constitute "qualified property" earned by Weir Bros. prior to or during the forty-five-day period following the IRS's filing of its 2012 tax lien. Evidence proffered by Hunt reveals that $139,653.00 of the funds in the account receivable accrued on or after January 25, 2013, the forty-sixth day after the IRS filed notice of the tax lien. Pineda Mot. Summary Judgment Appx., 378-79 [29.32]. Consequently, the Court finds that the IRS has priority in those funds, even under section 6323's protections for creditors
The IRS has priority over Berkley in all the interpled funds because Berkley is a judgment lien creditor.
The Court holds that Pineda has priority over all other parties to this action as to $134,063.25 of the interpled funds, subject to Hunt's reasonable attorneys' fees. Pineda's priority is dependent on its claim to a perfected UCC-1 security interest,
Under Texas law, to establish a perfected security interest a party must prove both that the interest has attached to the collateral and that the party has properly perfected its interest against other parties. TEX. BUS. & COMM. CODE §§ 9.203, 9.301(A). Attachment occurs once the security interest is enforceable against the debtor. Id. at § 9.203(a). For a security interest to be enforceable with respect to collateral, (1) there must be value given; (2) the debtor must have rights in the collateral; and (3) the debtor must have authenticated a security agreement with a description of the collateral. Id. at § 9.203(b)(1), (2), (3)(A). A security agreement "may create or provide for a security interest in after-acquired collateral," but that interest will not attach until the debtor acquires the collateral. Id. at § 9.204(a), cmt. 2. To perfect an interest in accounts receivable, a financing statement containing the names of the debtor and secured party and indicating the collateral generally must be filed. Id. at §§ 9.310(a); 9.502. No further action is required to perfect an interest in after-acquired accounts receivable. Id. at § 9.204 cmt. 2.
Here, the record establishes that the original assignor of Pineda's security interest, Compass Bank, executed a security agreement with Weir Bros. which granted the Bank an interest in all Weir Bros.'s accounts receivable to secure a revolving line of credit. Pineda Mot. Summary Judgment Appx. 14-66 [29.2]. The Bank advanced $4,000,000.00 that Weir Bros. did not repay by its May 31, 2012, maturity date. Id. at 245-47 [29.23]. On October 9, 2008, the Bank also perfected the security interest by properly filing notice with the Secretary of State. Id. at 339-43 [29.30]. This security interest attached to the interpled funds as soon as Weir Bros. gained rights in that account — once the funds were due for Weir Bros.'s services rendered — without further action by the Bank or Pineda. TEX. BUS. & COMM. CODE §§ 9.308(a); 9.204, cmt. 2. Pineda has also shown that this security interest was assigned to it through a series of assignments
Under section 6323(c)'s special priority rules for secured creditors, Pineda has priority over the IRS as to $134,063.25 of the funds. The security interest Pineda now holds arose in 2008, four years before the IRS filed its notice of its tax lien. Evidence provided by Hunt also shows that Weir Bros. earned $134,063.25, in withheld payments and retainage, prior to or on January 24, 2013, the forty-fifth day after the IRS filed notice of the tax lien. Pineda Mot. Summary Judgment Appx., 378-79 [29.32]. Because both Pineda's security interest was perfected and Weir Bros. gained property rights in the relevant collateral prior to the end of the forty-five-day window, the Court finds that Pineda has priority over the IRS in this portion of the funds. As discussed above, the IRS has priority over Pineda in the remaining $139,653.00 of the interpled funds that Weir Bros. acquired on or after the forty-sixth day after the IRS filed notice of the tax lien.
Pineda's security interest is also superior to Berkley's interest as a judgment lien creditor. Berkley's challenges to Pineda's priority in the funds are largely predicated on Berkley having a valid trust right to the funds that would preclude attachment of a security interest — but as discussed below, Berkley has not shown the existence of a valid express trust. Further, Berkley did not properly file and perfect a security interest and admits that its claim to the interpled funds is based on its express trust theory rather than secured creditor status.
Because the Court finds that the IRS and Pineda are entitled to the entirety of the interpled funds, it denies Berkley's motion for summary judgment. The Court also denies the Weir Group's motion for summary judgment because its rights were acquired from Weir Bros. subject to the IRS and Pineda's interests in Weir Bros.'s collateral and because it has not proven its claims for wrongful garnishment or attorneys' fees.
Berkley claims that it has an equitable interest in the interpled funds that trumps all other interests in the funds, including both the IRS's tax lien and Pineda's security interest. This argument is premised on a series of conclusions: that the general indemnity agreement ("GIA") created a valid trust;
To establish an express trust, Texas trust law requires that "the settlor manifests an intention to create a trust" and that the beneficiary and trust res are identified.
In Sakowitz, the Fifth Circuit determined that parties to a sublease agreement that used trust language could not thereby convert what was facially and functionally a sublease into a trust in order to gain trust beneficiary protections and defeat secured creditors. Sakowitz, Inc., 949 F.2d at 181-83. The Court observed that aspects of the agreement as a whole — such as the fact that one party bore a credit risk and that the alleged beneficiary could not access the supposed trust property on demand — showed that it was not a trust document and that the parties did not truly intend to create a trust. Id. at 183.
Similarly, the agreement here has all the hallmarks of a security agreement rather than a trust. The GIA is self-styled an "agreement of indemnity" and purports to provide a "grant of security interest" in accounts and all contract retainage and withheld payments in exchange for surety bonds. Pineda's Mot. Summary Judgment Appx., 586-87 [29.46]. Like a creditor, Berkley's ability to access the accounts receivable is only permitted "upon the occurrence of an Event of Default," and Weir Bros. is liable to Berkley for defaults under the GIA even in the absence of any available accounts receivable — the alleged trust res. Id. at 586, 588. Throughout the document, the GIA consistently refers to Berkley as a "secured party" with a "security interest" and to the accounts receivable as "collateral." Id. at 586-88, 590. One use of the phrase "trust funds" — in reference to the same receivables previously declared "collateral" for a "security interest" — does not contravene the multiple indicia that the GIA is a security agreement. See In re Mejorado, 605 B.R. 116, 124 (Bankr. N.D. Tex. 2019) ("Mere recitals in a document that an obligation is `in trust' alone will not establish a fiduciary relationship.").
Further evidence that the GIA was not intended to form a trust is seen by what is absent from the document. Neither the section advancing the trust theory nor any other section clearly designates a trustee or beneficiary — in fact, neither those terms nor "grantor" are used at all.
Here, the GIA taken in its entirety belies Berkley's assertion that the parties intended to create a trust. The GIA suggests instead that the parties intended to create a creditor-debtor relationship and security interest but sought to bake in trust beneficiary protections by a singular use of the phrase "trust funds." The Court declines to allow the parties to circumvent the priority schemes of the federal tax code and the UCC by mere recitation of the words "trust funds." Because the Court finds that the parties did not intend to create an express trust, Berkley has only the rights of a judgment lien creditor pursuant to its November 2013 judgment.
The federal statutory provision permitting exceptions to federal tax lien priority does not make an exception for judgment lien creditors like Berkley. See 26 U.S.C. § 6323. Under Texas's codification of the UCC, judgement lien creditors also do not have a superior interest to secured creditors like Pineda. TEX. BUS & COMM. CODE § 9.317(a)(2). The Court thus finds that Berkley's interest is inferior to both the IRS's tax lien and Pineda's security interest and denies Berkley's motion for summary judgment.
Weir Contracting, LLC and Al Weir, as trustee for the Weir Liquidating Group, (collectively, the "Weir Group") intervened in this action asserting a claim to the entirety of the interpled funds on behalf of the IRS,
The Weir Group's claim to the interpled funds and related claim for declaratory relief rest on its assertion that it owns all Weir Bros.'s former assets, including the Hunt account receivable. Specifically, the Weir Group argues that Contracting acquired all Weir Bros.' assets, including the Hunt contract account receivable, pursuant to the Purchasing Agreement executed by Contracting and Weir Bros. on December 4, 2013. This argument is insufficient to overcome Pineda's priority in $134,063.25 of the funds because when the Weir Group acquired Weir Bros.'s assets, it did so subject to any outstanding security interests in those assets. Pineda predecessor-in-interest obtained its security interest via security agreement and properly filed by October 9, 2008 — years prior to the Weir Group's acquisition of Weir Bros.'s assets and obligations — and its interest attached the moment the account receivable came into existence.
Similarly, the Weir Group's reliance on a state court judgment, finding that it has these assets subject to the IRS's priority interest, is unavailing. That judgment does not appear to resolve Pineda's rights to the Weir Bros. collateral acquired by the Weir Group, and the Weir Group has not shown that either Pineda or its predecessor-in-interest, Compass Bank, were parties to that judgment and bound by it. Further, that judgment expressly found that the Weir Group acquired Weir Bros.'s assets subject to any valid and perfected liens. Weir Group's Mot. Summary Judgment, Ex. A-1, 3 [34]. This Court holds that Pineda's interest was a preexisting lien and that the Weir Group took Weir Bros.'s assets subject to it.
The Weir Group's ownership rights are also subject to the IRS's federal tax lien as to the remaining $139,653.00 of the funds for the same reasons that the Weir Group is subject to Pineda's interest. The IRS assessed unpaid taxes and filed its notice of lien on December 10, 2012. It attached immediately once the account came into existence, and the Weir Group takes the account subject to the tax lien with which it is impressed. The IRS is thus entitled to direct payment of the funds.
The Weir Group also alleged an improper garnishment claim, asserting Pineda "wrongfully garnished accounts that do not belong to the judgment debtor," and a claim for attorneys' fees against Pineda and Berkley. Pet. in Intervention 5-6 [1.9]. Although the Weir Group does not pursue these claims in its motion for summary judgment, Pineda seeks judgment on them. The Court finds that the Weir Group has made no showing that Pineda's garnishment writ was improper or explained why it should be awarded fees against Pineda or Berkley. The Court thus denies these claims and grants Pineda's request for judgment on them.
The Court grants in part and denies in part Hunt's motion for summary judgment seeking $23,556.71 in attorneys' fees because Hunt is entitled to attorneys' fees related to answering the garnishment writ and interpleading the funds but not for its involvement in this case after filing interpleader. State law governs "both the award of and the reasonableness of fees awarded" in a state garnishment proceeding removed to federal court unless a conflicting federal law applies. See Walker Int'l Holdings, Ltd. v. Republic of Congo, 415 F.3d 413, 416-17 (5th Cir. 2005). Texas Rule of Civil Procedure 677 provides as follows:
TEX. R. CIV. P. RULE 677. While "the term `costs' has consistently been interpreted to include attorney's fees," courts have varied in their interpretation of the three categories outlined in Rule 677. Weisbrod, Matteis & Copley, PLLC v. Manley Toys, Ltd., 2015 WL 7771075, at *5 (N.D. Tex. 2015); see Rowley v. Lake Area Nat'l Bank, 976 S.W.2d 715, 722 (Tex. App-Houston [1st] Feb. 19, 1998, pet. denied) (observing the "[c]onfused [j]urisprudence" under Rule 677). Both Texas state and federal courts have acknowledged, however, the principle that determinations of reasonable fees are within the broad discretion of the trial court. Walker Int'l Holdings, Ltd., 415 F.3d at 418 ("In garnishment cases, as is generally the case, the amount of an award of attorney's fees rests in the sound discretion of the trial court.") (internal quotation omitted); Weisbrod, Matteis & Copley, PLLC, 2015 WL 7771075, at *6; Rowley, 976 S.W.2d at 724.
Here, the Court finds that Hunt did not contest that it held an unpaid balance under its subcontract with Weir Bros. and should be compensated for the costs of responding to the writ of garnishment and filing its answer, counterclaims, and interpleader action. See Weisbrod, Matteis & Copley, PLLC, 2015 WL 7771075, at *6 ("It is the policy of the rules regarding garnishments to compensate a garnishee who either prevails in a contest or does not contest its debt."). The Court disagrees with Hunt, however, that fees incurred for its involvement in the case beyond this point were reasonable. Hunt argues that it should receive fees incurred in reviewing and responding to other parties' motions, discovery, and disclosures and that it could not have sought dismissal and fees earlier in the case because it was unclear until the close of discovery that the IRS would not seek the entirety of the funds.
The Court finds this argument unpersuasive. A garnishee is not required to wait to seek dismissal and fees until it appears clear to the garnishee that it may be able to receive fees. Even if that were the case, the remaining parties do not unanimously agree that the IRS may not recover all the funds — the Weir Group asks this Court to award all the interpled funds to the IRS. Because the Court finds that the fees incurred in responding to the writ of garnishment and filing Hunt's answer, counterclaims, and interpleader action were reasonable, it awards the $3,691.03 in associated fees. Hunt Mot. Summary Judgment Appx., Ex. A-1 012-013 [32]; Pineda's Resp. Brief 14 [52]. These fees shall be recovered from the portion of the interpled funds that Pineda is entitled to receive and shall not affect the interpled funds to which the IRS has priority.
The Court grants the IRS's motion for summary judgment and holds it is entitled to $139,653.00 of the interpled funds. The Court also grants Pineda's motion for summary judgment and holds it is entitled to $134,063.25 of the interpled funds, subject to Hunt's attorneys' fees in the amount of $3,691.03. The Court denies Berkley's motion for summary judgment because the IRS and Pineda have priority in the interpled funds. The Court denies the Weir Group's motion for summary judgment because the IRS and Pineda have priority in the interpled funds and because the Weir Group has not established its claims for wrongful garnishment or attorneys' fees. The Court grants in part and denies in part Hunt's motion for summary judgment because Hunt is entitled to fees only for the $3,691.03 in costs incurred in answering the garnishment writ and interpleading the funds. Hunt's fees will be subtracted from the portion of funds to which Pineda is entitled and may not be paid from the IRS's portion of the funds. Hunt is not liable to any party for any amount beyond the $273,716.25 of interpled funds.
