Diversified Metal Products v. T-Bow Co. Trust

Citations: 158 F.R.D. 660; 1994 U.S. Dist. LEXIS 16440; 1994 WL 703484Docket: No. 93-405-E-EJL

Court: District Court, D. Idaho; October 25, 1994; Federal District Court

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On September 29, 1994, United States Magistrate Judge Mikel H. Williams issued a Report and Recommendation that included the following rulings: (1) partially granting and partially denying the plaintiffs' motion for dismissal, impleader order, and dismissal of counterclaim; (2) dismissing T-Bow Trust Company’s counterclaim without prejudice; (3) dismissing plaintiff Diversified as a party; and (4) denying without prejudice Diversified’s motion for attorney fees and costs. The parties had ten days to file objections but did not do so. The court, conducting a de novo review, accepted and adopted Judge Williams' recommendations in full, incorporating them by reference into the order. Additionally, the court noted the background of the case, which originated from a complaint filed by Diversified in Idaho, later removed to federal court by the IRS. The case involves claims amongst Diversified, T-Bow, and its agent Morgan related to their business interactions.

The contractual relationship among Morgan, T-Bow, and Diversified has deteriorated. T-Bow, via Mr. Crockett, demanded payment from Diversified in a letter dated September 1, 1993, which Diversified acknowledges it owes. The letter also threatened legal action for non-payment. On August 30, 1993, the IRS filed tax liens against Steven and Koreen Morgan, which Diversified claims are against funds belonging to it but may be claimed by Morgan and/or T-Bow. Diversified deposited checks totaling $849.60 with the Clerk of the Court and requests the Court to resolve entitlement to these funds. It also seeks attorney fees and requests dismissal from the case.

The United States has filed an Answer and Claim, asserting several defenses: 1) Diversified cannot recover attorney fees that would reduce the government's recovery; 2) the IRS is not a proper defendant; 3) the government has not waived sovereign immunity; 4) the Complaint lacks proper service of process on the United States; and 5) it does not establish a jurisdictional basis for the suit. The government also claims against Morgan under 26 U.S.C. §§ 7401 and 7403 for unpaid taxes totaling $5,474.99, with interest and penalties, stemming from three tax assessments for the years ending December 31, 1988, 1989, and 1990. On August 3, 1993, the IRS served a Notice of Levy on Diversified, asserting priority over the interpleaded funds after other claims are settled. The IRS seeks judgment affirming its liens and determining the rights to the funds.

Diversified has filed a Motion for Plaintiffs Dismissal, Impleader Order, and Dismissal of Counterclaim, asking the Court to clarify that the dispute is solely between the government and Morgan/T-Bow, dismiss itself from the action, dismiss T-Bow’s Counterclaim, and award attorney fees and costs to Diversified.

Defendant T-Bow filed a Counterclaim in state court after the case was removed to federal court by the IRS, but this Counterclaim was not properly filed in federal court and is not part of the court's docket. Consequently, the Counterclaim is dismissed without prejudice. Defendants T-Bow and Morgan oppose the dismissal of Plaintiff Diversified, claiming the need to address alleged misrepresentations by Diversified at a hearing. Despite a hearing being held, T-Bow and Morgan failed to present reasons for Diversified to remain a party in the case. Diversified has deposited contested funds with the court, and there is currently no good cause for it to stay in the suit, leading to the conclusion that Diversified should be dismissed.

The government does not oppose Diversified’s dismissal but objects to any award of attorney fees, arguing that such an award would deplete the interpleader fund before satisfying federal tax liens. The Ninth Circuit has established that courts have discretion to award fees to disinterested stakeholders in interpleader cases, yet prior federal tax liens grant the government statutory priority over claims to these funds. The court referenced cases (Abex Corp., Millers Mutual Ins. Ass’n, and Chevron U.S.A. Inc.) affirming that governmental priority under tax lien statutes precludes attorney fee awards that would diminish the fund before the liens are satisfied. In this case, the government's tax lien claims exceed the interpleader fund, meaning any attorney fee award to Diversified would improperly reduce the fund prior to resolving the government's interests. Therefore, Diversified is not entitled to attorney fees and costs until the court determines the rights of all parties regarding the fund.

Defendant IRS has moved to disqualify Lonnie D. Crockett from representing Defendant T-Bow, citing that a non-attorney cannot represent others in federal court, a principle supported by case law and statutes (C.E. Pope Equity Trust v. United States, 818 F.2d 696). Mr. Crockett acknowledged that a trust requires attorney representation and did not oppose the motion. The court agrees to disqualify Mr. Crockett but stays proceedings for 20 days to allow him time to secure legal counsel for T-Bow.

Additionally, Defendants Morgan and T-Bow filed motions for discovery, which the court deems unnecessary since they can serve discovery requests directly to opposing counsel without court permission. The court confirms that the Trust must be represented by an attorney, rendering T-Bow's discovery motion improper and moot.

The court recommends: (1) granting in part and denying in part Plaintiff's Motion for Dismissal; (2) dismissing T-Bow’s counterclaim without prejudice; (3) dismissing Plaintiff Diversified from the case; and (4) denying Diversified’s motion for attorney fees at this time. Parties must file written objections within ten days to preserve their right to appeal. 

The court's order includes: (1) granting IRS’s motion to disqualify Mr. Crockett; (2) staying case activity for 20 days for Mr. Crockett to find counsel; and (3) declaring the discovery motions moot. The court also notes the possibility for T-Bow to refile its counterclaim as a third-party complaint after Diversified’s dismissal.