                                                      United States Court of Appeals
                                                               Fifth Circuit
                                                              F I L E D
                      REVISED JUNE 28, 2006
                                                              June 13, 2006
              IN THE UNITED STATES COURT OF APPEALS
                                                        Charles R. Fulbruge III
                      FOR THE FIFTH CIRCUIT                     Clerk



                          No. 04-20966



     CAPITOL INDEMNITY CORPORATION,


                                      Plaintiff-Appellant


          versus


     UNITED STATES OF AMERICA, ET AL,


                                      Defendants


     UNITED STATES OF AMERICA and
     COMMISSIONER, INTERNAL REVENUE SERVICE,

                                      Defendants-Appellees.



          Appeal from the United States District Court
               for the Southern District of Texas



Before GARWOOD, DeMOSS and BENAVIDES, Circuit Judges.

GARWOOD, Circuit Judge:

     Capitol Indemnity Corporation (Capitol) appeals the adverse

summary judgment in its wrongful levy action against the United

States and the Commissioner of the Internal Revenue Service
(IRS).   Because the government did not show that the liable

taxpayer had a right to the property levied against, we reverse

and render judgment in favor of Capitol.

                    Facts and Proceedings Below

      Beginning in 1999, Capitol acted as a surety for M.E.B.

Engineering, Inc. (MEB) for several City of Houston (City) public

works construction projects.      In April 2000, MEB was awarded a

prime contract by the City in the amount of $875,033.00 for the

construction of a public improvement project known as the Lockwood

Bridge Over Hunting Bayou (Lockwood contract). Also in April 2000,

Capitol issued performance bonds and payment bonds in favor of the

City respecting the Lockwood contract in the full amount thereof.

      On August 28, 2000, the IRS filed a Notice of Federal Tax Lien

with the Texas Secretary of State’s Office in the amount of

$46,821.25 for unpaid employment taxes and corporate income taxes.

On September 6, 2001, under the terms of its indemnity agreement

with MEB, Capitol filed a UCC-1 financing statement with the Texas

Secretary of State’s Office to record its rights and interest in

all property of MEB and MEB’s owners.

      On January 23, 2002, Capitol informed the City that Capitol

had   received   notices   of   default   and   various   claims   from

subcontractors and suppliers of MEB for work performed or materials




                                   2
supplied on the Lockwood contract,1 and Capitol demanded that the

City withhold     all    future   payments   to   MEB    under      the    Lockwood

contract.     On February 1, 2002, MEB submitted an Estimate and

Certificate for Payment (ECP No. 14) based on MEB’s completion of

the work under the Lockwood contract.              The City’s Director of

Public Works     and    Engineering   signed    ECP     No.   14    as    approved,

indicating that $127,922.64 was due to MEB as of February 1, 2002,

and also that an additional $45,594.88 of MEB’s earnings had been

retained by the City.       As it is undisputed that the City did not

make any payment to MEB on ECP No. 14 (or make any payment at all

to MEB after some time before January 23, 2002), it is evident that

the further approval needed for payment was not granted.                         On

February 13, 2002, MEB’s owner (Bhatti) wrote to the IRS regarding

his and MEB’s tax liability, and informed the IRS that he had

“closed all businesses, including MEB” and that “$173,517.52 are

immediately available on a completed City contract.”                     The letter

enclosed a copy of ECP No. 14 as signed “approved.”                In this letter

to the IRS, Bhatti also wrote, “Please make sure to collect these

funds immediately against our payables to IRS.”

      On February 19, 2002, the IRS filed a Notice of Federal Tax

Lien with the Texas Secretary of State’s Office in the amount of

$103,393.99 for unpaid employment taxes and corporate income taxes.



      1
       For example, during August and September of 2001, one supplier (TXI) gave
Capitol statutory notices of a claim for payment in the amount of $96,075.51
against Capitol’s payment bond for MEB.

                                       3
This amount included $44,672.80 still unpaid from the amount

noticed in August 28, 2000 plus $58,721.19 unpaid from assessments

in 2001.    On April 4, 2002, the IRS issued a Notice of Levy to the

City that required the City to turn over to the IRS any of MEB’s

property that the City had, including MEB’s income and rights to

property that the City was already obligated to pay, up to an

amount of $127,845.36.2

      In a letter dated August 5, 2002, the City formally notified

MEB that MEB was in material default of the Lockwood contract

because of its consistent failure to supply an adequate number of

skilled workers and sufficient material to complete the City’s

punchlist items.      In the August 5 letter, the City also informed

MEB that the Lockwood contract would terminate if MEB’s default was

not cured within seven days and that the City would then look to

Capitol to complete the remainder of the work.              MEB’s default was

not cured, the Lockwood contract formally terminated in August

2002, and Capitol entered into a Takeover Agreement with the City

on January 3, 2003, for completion of the project pursuant to its

obligations under the performance bond. When the Lockwood contract

was terminated, the total amount of funds the City had not yet paid

on the contract was $179,687.47.             Capitol eventually incurred

$235,006.23    in   costs   under   its    payment   bond    obligations    and


      2
        The total of $127,845.36 in the April 4, 2002 Notice of Levy represented
the amount noticed in the unpaid balance from the February 19, 2002 Notice of
Federal Tax Lien of $103,393.99, plus an upward adjustment of $42.00 to that
unpaid balance, plus statutory additions of $24,409.37.

                                       4
$22,288.00 in costs under its performance bond obligations for the

Lockwood contract.

      Capitol brought a wrongful levy action under 26 U.S.C. §

7426(a)(1) against the United States, the Commissioner of the IRS,

and   the    City   on    December     19,       2002,    seeking    recovery      of   the

$127,845.36 — the subject of the IRS’s April 4, 2002, Notice of

Levy. After the City paid $127,845.36 into the court’s registry in

February 2004, all claims involving the City were resolved by an

agreed judgment that Capitol and the United States each take

nothing (apart from their claims to the funds so paid into the

registry) against the City and that the City take nothing as

against the United States. Capitol and the government proceeded on

cross-motions for summary judgment, and, on October 1, 2004, the

court granted summary judgment in favor of the government.

                    Jurisdiction and Standard of Review

      The district court had jurisdiction under 28 U.S.C. § 1346(e),

and this court has jurisdiction under 28 U.S.C. § 1291.

      This    court      reviews   a   district          court’s    grant     of   summary

judgment de novo.        U.S. v. Retirement Services Group, 302 F.3d 425,

429 (5th Cir. 2002). Summary judgment is proper if, after adequate

opportunity for discovery, the pleadings, depositions, answers to

interrogatories,         and   admissions         on     file,     together    with     any

affidavits filed in support of the motion, show that there is no

genuine issue as to any material fact and that the moving party is


                                             5
entitled to judgment as a matter of law. See Fed.R.Civ.P. 56(c);

Anderson v. Liberty Lobby, Inc., 106 S.Ct. 2505, 2511 (1986). The

moving party bears the burden of identifying an absence of evidence

to support the nonmoving party’s case.           Celotex Corp. v. Catrett,

106 S.Ct. 2548, 2554 (1986).        Summary judgment is properly granted

if   the   record   does   not    contain   appropriate     summary   judgment

evidence which would sustain a finding in the nonmovant’s favor on

any issue as to which the nonmovant would bear the burden of proof

at trial.    Id. at 2552–53.

                                  Discussion

       Section   7426   allows    any   person   claiming    an   interest   in

property upon which an IRS levy has been made to bring a civil

action against the United States for wrongful levy.               26 U.S.C. §

7426(a)(1).      In a levy proceeding, the IRS acquires only such

rights to property that the taxpayer himself possesses.                 United

States v. National Bank of Commerce, 105 S.Ct. 2919, 2927 (1985).

As a result, we have noted that “[a] levy is ‘wrongful’ if it

seizes property that does not belong, in whole or in part, to the

taxpayer.”    Texas Commerce Bank-Fort Worth, N.A. v. U.S., 896 F.2d

152,   156   (5th   Cir.   1990).       Therefore,   we   first   address    the

threshold question of whether and to what extent MEB owned or had

rights to the property levied upon.          Aquilino v. United States, 80

S.Ct. 1277, 1280 (1960).         To answer this question, we must look to

state law.    Id.


                                        6
      The district court recognized that this was the threshold

question in this case; however, the court did not explicitly

address     Capitol’s    summary-judgment        argument    on     this   issue.3

Nonetheless,      the    court’s      holding      necessarily       implies     a

determination that MEB had property rights in the $127,845.36

levied upon. Capitol argues that this determination was erroneous.

We agree.

      The contract between MEB and the City imposed on MEB diverse

requirements     respecting     payment    by    MEB   to   its   suppliers    and

subcontractors on the job, and entitled the City to withhold

payment from MEB if, among other reasons, MEB failed to meet these

requirements.     On January 23, 2002, Capitol informed the City of

notices of     default    and   demands    for   payment     that    Capitol   had

received from MEB’s subcontractors and suppliers.                    On or about

February 1, 2002, the City refused to pay to MEB the amount

requested in ECP No. 14 (even though the ECP was approved by the

Director of Public Works and Engineering).                  The government has

stipulated that the City’s refusal to pay was proper, and it is

undisputed that MEB never cured its defaults and that the Lockwood



      3
       Specifically, in its brief in support of its motion for summary judgment,
Capitol put forth a plethora of legal arguments for why it should prevail,
including the argument that, due to MEB’s failure to pay its subcontractors and
suppliers, “the City was entitled to withhold payment of the contract funds, and
. . . [therefore] as a matter of law, MEB did not have an interest in the
contract funds remaining under the Lockwood Bridge Contract to which the claimed
tax levy and lien notices . . . could attach.” The government did not respond
to this argument in its summary-judgment filings with the district court. In
addition, at oral argument to this court, the government incorrectly claimed that
Capitol had not made this argument below.

                                       7
contract was eventually terminated due to MEB’s default.4                     In

Victore    Insurance    Company    v.   City    of   Bowie,   23   S.W.3d    499

(Tex.App.—Fort Worth 2000, writ denied), the court addressed a

similar situation in which a city withheld payment to a contractor

based on the terms of a public works contract.                  The court in

Victore determined that the properly withheld funds were not the

property of the contractor:

      “Where a project owner has a contractual right to
      withhold from a contractor amounts necessary to satisfy
      the subcontractors’ and suppliers’ claims, the retained
      funds are not the contractor’s property, and the federal
      government cannot acquire the right to the funds via a
      tax lien against the contractor’s property.” Id. at 503.

In Victore, “[t]he parties stipulated, and the trial court found,

that the City had the contractual right to withhold from the

contract proceeds any amounts that [the contractor] had not paid

suppliers and subcontractors.”          Id.   In this case, the only reason

that the City’s refusal to pay would be proper — as stipulated by

the government — is that the City had the contractual right to

withhold payment.       For the first time on appeal, the government

argues that MEB had “earned the progress payment in dispute, and

thus had acquired a property interest in the payment to which the


      4
       In connection with the deposit into the court’s registry, the City, the
United States and Capitol entered into stipulations (filed with the court) stated
to be “binding on each of them for all purposes,” including the following:

      “On or about February 1, 2002, the City prepared and properly
      refused to pay to MEB the last pay estimate in the amount of
      $127,922.64 (‘Last Pay Estimate’), for work performed by MEB
      pursuant to the Lockwood Contract.”


                                        8
federal tax liens attached, before the City withheld the payment.”

The   government     cites    no    evidence    to   support    this       argument.

Instead, the government merely argues that, because the Lockwood

contract explicitly provides that “[t]he period covered by each

progress payment shall be one calendar month ending on the tenth

day of the month,” the work for which ECP No. 14 was submitted must

have been completed no later than January 10, 2002.                  Based on this

logic, the government concludes that MEB had earned and acquired

the right to receive the payment in question no later than January

10, 2002.     But there is no evidence that MEB was current with its

payment     obligations      to    its   Lockwood    contract       suppliers    and

subcontractors as of January 10, 2002, or at any time thereafter.

The   government’s    argument       ignores   the   terms     of    the    Lockwood

contract. Under that contract, it takes more than completed work

for MEB to be entitled to payment.             The government has pointed to

no evidence that shows that MEB satisfied the terms of the contract

in order to ever have become entitled to payment of the funds in

question (or any particular portion thereof).                       Therefore, the




                                          9
government has failed to prove5 a nexus between the property levied

upon and the taxpayer.6

                                 Conclusion

      For the foregoing reasons, the judgment of the district court

in favor of the government is REVERSED and judgment is RENDERED in

favor of Capitol.      The case is REMANDED to the district court for

determination of attorneys’ fees.

                   REVERSED, RENDERED, and REMANDED.




      5
       In Oxford Capital Corp. v. U.S., we noted a requirement that the
government meet “a heightened standard of proof” to show the nexus between the
property levied upon and the taxpayer. 211 F.3d 280, 283 (5th Cir. 2000). In
this case, the heightened standard of proof is not a factor because the
government has presented no evidence that MEB had a right to the withheld
payment.

      6
        In Victore the court also found that the contractor was not entitled to
the withheld funds because of § 2253.071 of the Texas Government Code, which
provides:

      “The proceeds of a public work contract are not payable, until all
      costs of completion of the contract work are paid by the contractor
      or the contractor's surety, to a contractor who furnishes a bond
      required by this chapter if:
            (1) the contractor abandons performance of the contract; or
            (2) the contractor's right to proceed with performance of the
            contract is lawfully terminated by the awarding governmental
            entity because of the contractor's default.”
      Tex. Gov’t Code Ann. § 2253.071(a) (Vernon 2000).

As our holding regarding the City’s contractual right to withhold payment to MEB
resolves this appeal, we need not address Capitol’s argument that the evidence
shows that MEB abandoned performance of the contract and so Capitol should
prevail under Victore and § 2253.071(a)(1).      Likewise, we need not address
Capitol’s arguments that, even if MEB had a right to the withheld payment,
Capitol should prevail in a priority contest with the IRS based on equitable
subrogation and also based on the obligatory disbursement agreement provision in
§ 6323(a) of the Internal Revenue Code.

                                      10
