Barrett Daffin Frappier Teder & Weiss, LLP v. Chu

— 1 — — 2 — — 3 — — 4 — — 5 — — 6 — 7 UNITED STATES DISTRICT COURT 8 NORTHERN DISTRICT OF CALIFORNIA — 9 — BARRETT DAFFIN FRAPPIER TEDER & 10 WEISS, LLP, Case No. 21-cv-08739-RS 11 Plaintiff, ORDER GRANTING MOTION FOR 12 v. STATUTORY DISCHARGE AND MOTION TO DEPOSIT FUNDS, AND 13 STEPHANIE J. CHU, et al., DENYING MOTION FOR ATTORNEY FEES 14 Defendants. — 15 — 16 Barrett Daffin Frappier Teder & Weiss, LLP (“Barrett Daffin”) filed this interpleader 17 action in the Superior Court for the County of San Mateo to resolve competing claims to the 18 surplus funds resulting from a non-judicial foreclosure sale of real property in Foster City, 19 California. The United States, named as a Defendant based on the existence of a federal tax lien 20 against the property, removed the case to federal court. See Dkt. 1. Barrett Daffin has filed three 21 motions: first, it moves to deposit the disputed funds; second, it seeks statutory discharge; and 22 third, it moves for attorney fees and costs stemming from its role as trustee in overseeing the 23 foreclosure sale and initiating the instant suit. These motions are suitable for disposition without 24 oral argument, and the motion hearing set for March 9, 2023, is vacated. See Civ. L.R. 7-1(b). 25 The motion for statutory discharge and the motion to deposit funds are both unopposed. 26 Good cause existing, both motions are granted. However, the motion for attorney fees and costs 27 must be denied. Barrett Daffin argues that, under California law, it is entitled to recover attorney 1 United States, based on the federal tax lien against the property, see Dkt. 5; and Defendant Ray 2 Yeganeh, as a judgment creditor, see Dkt. 21. The United States, in opposition, contends that 3 federal law grants statutory priority to the government’s tax lien, meaning that “an awards of costs 4 to an interpleader plaintiff ahead of the federal tax lien would ‘violate[] the statutory tax lien 5 priority.’” Dkt. 49, at 4 (alteration in original) (quoting Abex Corp. v. Ski’s Enterprises, Inc., 748 6 F.2d 513, 516 (9th Cir. 1984)). 7 As a general matter, “there is considerable confusion whether a federal court is bound by 8 state law concerning the propriety of awarding the stakeholder attorney’s fees out of the fund.” 9 4 WRIGHT, MILLER & KANE, FEDERAL PRACTICE AND PROCEDURE § 1719 (3d ed.), Westlaw 10 (database updated Apr. 2022). At the same time, federal courts typically have broad discretion to 11 award attorney fees in interpleader cases. See id. However, there is “[b]road consensus from case 12 law establishes the federal tax lien exception to the rule that federal courts have the discretion to 13 award attorney’s fees to disinterested interpleader stakeholders.” Island Title Corp. v. Bundy, 488 14 F. Supp. 2d 1084, 1095 (D. Haw. 2007). The Ninth Circuit, along with several other federal Courts 15 of Appeals, have recognized that the federal tax statutes “establish a clear priority to interpleader 16 funds in favor of the government.” Abex, 748 F.2d at 517; see also Millers Mut. Ins. Ass’n of Ill. v. 17 Wassall, 738 F.2d 302 , 303–04 (8th Cir. 1984); Katsaris v. United States, 684 F.2d 758, 763 (11th 18 Cir. 1982) (“[T]he judicial prerogative to award fees must give way to the supremacy of the 19 federal tax lien law whenever a fee award would encroach upon the fund subject to the tax lien.”). 20 These decisions, in turn, are rooted in Supreme Court precedent. See United States v. R.F. Ball. 21 Constr. Co., 355 U.S. 587 (1958); United States v. Liverpool & London & Globe Ins. Co., 348 22 U.S. 215 (1955). 23 The federal tax lien exception has been applied to bar recovery of attorney fees and costs in 24 circumstances functionally identical to the immediate case. In Island Title Corp. v. Bundy, for 25 instance, an escrow company filed an interpleader action following a non-judicial foreclosure sale 26 of real property, and then sought attorney fees. The District of Hawaii agreed with the United 27 States that the federal tax lien exception limited the court’s discretion to award attorney fees, given 1 that it would “diminish a distribution of the fund to satisfy a federal tax lien.” 488 F. Supp. 2d at 2 1094. Likewise, in South Adams Savings Bank v. Martel, 540 F. Supp. 2d 265 (D. Mass. 2008), 3 || the district court concluded it had “little choice but to agree” with the teachings of the Supreme 4 || Court and the Courts of Appeals as to the effect of the federal tax lien exception. /d. at 271. It thus 5 held that a bank could not recover attorney fees from an interpleaded fund created following a 6 || foreclosure sale, to the extent doing so would “imping[e] on the federal tax liens.” Jd.; see also 7 Byers v. Sheets, 643 F. Supp. 695, 697-98 (W.D. Mo. 1986). 8 This well-established principle thus bars exactly what Barrett Daffin seeks to do here: 9 || receive an award of attorney fees and costs from interpleaded funds subject to a federal tax lien. 10 || The motion must therefore be denied. However, the United States suggests merely that the motion 11 is premature, as Barrett Daffin could seek to recover attorney fees from the portion of the fund 12 || owing to Mr. Yeganeh if his claim is found to be senior to that of the United States. This approach 5 13 is endorsed in both Bundy and Martel. See Bundy, 488 F. Supp. 2d at 1094 (citing United States v. 14 Chapman, 281 F.2d 862, 871 (10th Cir. 1960), for the proposition that claimants superior to the 3 15 United States could be “charged a pro rata share of the interpleader stakeholder’s attorney’s fees 16 and costs”); Martel, 540 F. Supp. 2d at 272 (similar). Thus, the motion for attorney fees is denied, 3 17 without prejudice to Barrett Daffin renewing the motion should Mr. Yeganeh be determined to 18 || hold a superior claim to the United States. — 19 — 20 || ITISSO ORDERED. — 21 — 22 Dated: March 3, 2023 — 23 — RICHARD SEEBORG _ Chief United States District Judge — 25 — — 26 — — 27 — 98 ORDER ON MOTIONS FOR STATUTORY DISCHARGE, DEPOSIT, AND ATTORNEY FEES . CASE No. 21-cv-08739-RS