     08-1425-cv
     Interworks Sys. Inc. v. Merchant Fin. Corp.

1                       UNITED STATES COURT OF APPEALS

2                           FOR THE SECOND CIRCUIT

3                                August Term, 2008

4    (Argued :    June 3, 2009                       Decided:   May 14, 2010)

5                            Docket No. 08-1425-cv

6                    -------------------------------------

7        INTERWORKS SYSTEMS INC., Debtor and Debtor-In-Possession,
8      Individually and as Trustee for all Trust Beneficiaries under
9                  Article 3-A of the New York Lien Law,

10                                  Plaintiff,

11                         UNITED STATES OF AMERICA,

12                      Intervenor-Plaintiff-Appellant,

13                                     - v -

14                      MERCHANT FINANCIAL CORPORATION,

15                    Defendant-Cross-Defendant-Appellee,


16                         COLONIAL SURETY COMPANY,

17                         Cross-Claimant-Appellee.

18                   -------------------------------------

19   Before:     McLAUGHLIN, CALABRESI, and SACK, Circuit Judges.

20               Appeal from a judgment of the United States District

21   Court for the Eastern District of New York (Nina Gershon, Judge).

22   The court dismissed a complaint-in-intervention by the United

23   States seeking unpaid employment taxes from the defendant,

24   Merchant Financial Corporation, under New York Lien Law §§ 70-

25   79a, customarily referred to as "Article 3-A," on the ground that

26   the United States had not complied with, and was not excused from
1    compliance with, two procedural requirements provided by Article

2    3-A.   We conclude that at least the first of these procedural

3    requirements, that there be no prior pending Article 3-A action,

4    applies to the United States when it brings an action under

5    Article 3-A.   We therefore need not and do not address the other

6    Article 3-A requirement.

7               Affirmed.

 8                              ANDREA R. TEBBETS (Kenneth W. Rosenberg,
 9                              Attorney, Tax Division, Department of
10                              Justice, Benton J. Campbell, United
11                              States Attorney, Eastern District of New
12                              York, of counsel), for Nathan J.
13                              Hochman, Assistant Attorney General, Tax
14                              Division, Department of Justice,
15                              Washington, DC, for Intervenor-
16                              Plaintiff-Appellant.

17                              TAB ROSENFELD, Rosenfeld & Kaplan, New
18                              York, NY, for Defendant-Cross-Defendant-
19                              Appellee.

20                              ROBERT W. McCANN (Richard J. Allen, Jr.,
21                              of counsel) Klotz & McCann, New York,
22                              NY, for Cross-Claimant-Appellee.

23   SACK, Circuit Judge:

24              The United States appeals from a January 30, 2008,

25   judgment of the United States District Court for the Eastern

26   District of New York (Nina Gershon, Judge).    The district court

27   dismissed the United States' complaint-in-intervention in an

28   action brought by Interworks Systems, Inc. ("Interworks") against

29   Merchant Financial Corporation ("Merchant").   The underlying

30   action by Interworks, originally filed in the Southern District

31   of New York and later transferred to the Eastern District of New

32   York, sought to recover funds that Merchant had allegedly

                                       2
1    diverted in violation of New York Lien Law §§ 70-79a ("Article 3-

2    A").   In the complaint-in-intervention, the United States alleged

3    that Merchant, through its first priority lien on all of

4    Interworks' accounts receivable, had received and improperly

5    diverted Article 3-A trust funds that had been paid to Interworks

6    pursuant to certain public works contracts, and was therefore

7    liable to the United States for Interworks' unpaid federal

8    employment taxes related to work stemming from those contracts.

9               The district court dismissed the complaint-in-

10   intervention on the ground that the government had not complied

11   with, and was not excused from compliance with, two separate

12   procedural requirements for bringing an action under Article 3-A:

13   (1) that there be no prior pending Article 3-A action, and (2)

14   that the Article 3-A suit be brought in a representative capacity

15   on behalf of all other beneficiaries of the Article 3-A trust.

16   Interworks Sys., Inc. v. Merchant Fin. Corp., 531 F. Supp. 2d

17   478, 482 (E.D.N.Y. 2008).   On appeal, the government does not

18   dispute that it failed to meet these requirements.   It argues

19   instead that Article 3-A's procedural requirements do not apply

20   to the United States and that, even if they did, the United

21   States' power to enforce federal tax law in federal court either

22   excuses it from compliance with or preempts these requirements.

23              We agree with the district court that where the United

24   States brings an action pursuant to Article 3-A, it is bound by

25   Article 3-A's procedural requirement that there be no prior

26   pending action.   Inasmuch as this conclusion provides a

                                      3
1    sufficient basis for us to affirm the judgment of the district

2    court, we do not reach the question of whether the United States

3    should be excused from compliance or allowed to amend its

4    complaint so as to allege compliance with Article 3-A's

5    representative capacity requirement.

6                               BACKGROUND

7              This case arises out of several public-works

8    improvement contracts entered into by Interworks, a New York

9    corporation in the business of selling, installing, and servicing

10   private telephone switchboard systems and large voice/data

11   structured cabling systems, to provide data and cabling services

12   to customers in the greater New York metropolitan area, and the

13   relationship of those contracts to New York Lien Law §§ 70-79a,

14   generally known as "Article 3-A."   The dispute in this case does

15   not concern the rights of any of the direct parties to the data

16   and cabling contracts themselves.   Instead, at issue here are the

17   rights of three other parties: (1) Colonial Surety Company

18   ("Colonial"), the company that acted as a surety for Interworks

19   in the data and cabling contracts; (2) Merchant, the company that

20   provided financing to Interworks in relation to the data and

21   cabling, as well as other, contracts; and (3) the United States

22   government, which alleges an interest in unpaid employment taxes

23   stemming from the data and cabling contracts.   It is the

24   respective rights of these three parties under Article 3-A that

25   we are faced with here.

26             Article 3-A

                                     4
1               Article 3-A is a New York State statute designed to

2    protect subcontractors, tax collectors, and parties who expend

3    labor or extend financing in construction projects, by impressing

4    with a trust any funds paid to a contractor or received by an

5    owner in connection with an improvement of real property in the

6    state.   See Aspro Mech. Contracting, Inc. v. Fleet Bank, N.A.,    1

7    N.Y.3d 324, 328, 805 N.E.2d 1037, 1039, 773 N.Y.S.2d 735, 737

8    (2004) ("Article 3-A of the Lien Law creates trust funds out of

9    certain construction payments or funds to assure payment of

10   subcontractors, suppliers, architects, engineers, laborers, as

11   well as specified taxes and expenses of construction.") (internal

12   citations and quotation marks omitted); LeChase Data/Telecom

13   Servs., LLC v. Goebert, 6 N.Y.3d 281, 289, 844 N.E.2d 771, 776,

14   811 N.Y.S.2d 317, 322 (2006) ("[T]he primary purpose of article

15   3-A and its predecessors is to ensure that those who have

16   directly expended labor and materials to improve real property or

17   a public improvement at the direction of the owner or a general

18   contractor receive payment for the work actually performed")

19   (internal citation and quotation marks omitted, alterations

20   incorporated).

21              An Article 3-A trust arises automatically by operation

22   of law when fees are paid to the contractor or received by the

23   owner in connection with an improvement of real property.   N.Y.

24   Lien Law § 71.5.   Until all trust fund beneficiaries have been

25   satisfied, it is an unlawful diversion of trust fund assets for

26   the contractor or owner to use any of the trust fund assets for

                                      5
1    any purpose other than satisfying the claims of beneficiaries.

2    See id. § 72.1; LeChase, 6 N.Y.3d at 289.   If the contractor or

3    owner unlawfully diverts the trust assets before a trust

4    beneficiary is satisfied, that beneficiary may recover the trust

5    assets from anyone who has received the assets with knowledge of

6    their trust status.   See N.Y. Lien Law §§ 77.1, 77.3(6); LeChase,

7    6 N.Y.3d at 289.   The beneficiaries of the trust may be, among

8    others, subcontractors, architects, engineers, surveyors,

9    laborers, materialmen, tax authorities, and persons providing

10   surety bonds.   N.Y. Lien Law § 71.2.

11             It is undisputed that the funds paid to Interworks in

12   connection with the public improvement contracts for data and

13   cabling services at issue in this case were Article 3-A trust

14   assets.

15             The Financing and Surety Contracts

16             Interworks entered into two related contracts in

17   connection with the data and cabling services contracts that

18   provide the basis for the underlying lawsuit in this case:   One

19   provided for financing of the data and cabling services

20   contracts, and one provided a surety should Interworks prove

21   unable to perform its obligations under those contracts.

22             In order to obtain financing, Interworks entered into a

23   security agreement with Merchant on February 23, 2001 under the

24   terms of which Merchant promised to lend Interworks money1 in


          1
               Merchant agreed to loan or advance to Interworks the
     lesser of (1) $4,000,000 or (2) the sum of 80 percent of

                                      6
1    return for a first priority lien on substantially all of

2    Interworks' personal property, including all accounts

3    receivables.   As a result, all instruments representing payments

4    under the data and cabling contracts were made out to Interworks

5    but sent directly to Merchant.   Interworks alleges that Merchant

6    received at least $1,000,000 in its capacity as a lien holder

7    over its accounts receivable.

8              New York law generally requires a contractor like

9    Interworks to enter into a surety agreement to ensure completion

10   of its contracts.   See Titan Indem. Co. v. Triborough Bridge and

11   Tunnel Auth., Inc., 135 F.3d 831, 834 (2d Cir. 1998).   To meet

12   this obligation, Interworks contracted with Colonial to act as a

13   surety on its public improvement contracts, pursuant to which

14   Colonial would issue performance and payment bonds for the public

15   improvement contracts.

16             The United States' Interest in This Litigation

17             Interworks failed to pay federal employment taxes in

18   connection with both the public improvement contracts that are

19   the subject of this litigation and other contracts.    On August 2,

20   2002, the Internal Revenue Service ("IRS") filed a tax lien

21   against Interworks in the amount of $686,403.18.   The government

22   later estimated Interworks' tax obligations to total

23   $1,874,971.20, at least $557,129.29 of which allegedly arose out

24   of public improvement contracts for which Merchant had provided


     Interworks' accounts receivables plus 50 percent of Interworks'
     inventory.

                                      7
1    financing to Interworks in return for a first priority lien on

2    Interworks' accounts receivable and other property.

3              Colonial's State-Court Lawsuit

4              On July 7, 2003, Interworks and two of its affiliates

5    filed petitions for relief pursuant to Chapter 11 of the

6    Bankruptcy Code with the United States Bankruptcy Court for the

7    Eastern District of New York.    Because Interworks was unable to

8    complete performance of its public improvement contracts,

9    Colonial, pursuant to the surety agreement, made payments to sub-

10   contractors and fulfilled Interworks' other obligations under the

11   public improvement contracts.    Between Interworks' debts to

12   subcontractors, suppliers, and laborers, and Interworks' federal

13   and state tax obligations for which Colonial, as surety, is

14   potentially liable, Colonial allegedly incurred financial

15   obligations of $1,750,076.90 and suffered claims against the

16   bonds it had issued for Interworks in an amount thought to be in

17   excess of $650,000.

18             As a provider of surety bonds in connection with

19   Interworks' public improvement contracts, Colonial is a

20   beneficiary of the Article 3-A trust funds that arise from

21   payments made pursuant to those contracts.    If those funds are

22   diverted, Colonial is entitled to recover the amount it is owed

23   from whomever diverted the funds, provided that such person was

24   on notice, at the time the funds were diverted, that the funds

25   were trust assets.    N.Y. Lien Law §§ 77.1, 77.3(6).



                                       8
1              In an effort to recoup its expenses and satisfy the

2    liabilities it incurred as a result of Interworks' default on its

3    public improvement contracts, Colonial brought suit against

4    Merchant in New York State Supreme Court in May 2003.   Colonial

5    alleged that under Article 3-A, the funds Merchant received that

6    had been paid to Interworks under the public improvement

7    contracts were trust funds that Merchant, standing in Interworks'

8    place as fiduciary to the trust, was required to pay to trust

9    beneficiaries, and that instead of paying the beneficiaries of

10   the trust created by the public improvement contracts, Merchant

11   had in fact used the assets to satisfy Interworks' obligations to

12   Merchant arising from their separate financing agreement.   See

13   Second Amended Compl. (filed Jan. 13, 2004) ¶¶ 28-74.   Colonial,

14   as a beneficiary of the trust, sought to be recognized as an

15   authorized class representative of all beneficiaries of the

16   Article 3-A trust.   The court allowed Colonial to join another

17   putative class representative, but held the motion in abeyance

18   pending the outcome of a further hearing on class certification.

19             For reasons that are not readily apparent from the

20   record, the United States did not seek to intervene in this state

21   court action in an attempt to collect the unpaid employment taxes

22   that Merchant, standing in Interworks' place as a result of the

23   financing agreement between the two parties, owed on work

24   stemming from the public improvement contracts.

25             Interworks' Federal Lawsuit and the
26             United States' Complaint-in-Intervention


                                      9
1              In July 2005, Interworks brought a parallel suit under

2    Article 3-A against Merchant in the United States District Court

3    for the Southern District of New York -- the instant action --

4    seeking, among other things, the same relief Colonial sought in

5    the New York State Court action.     Interworks' complaint alleged

6    that the Article 3-A beneficiaries to the public improvement

7    contracts were required to be paid from the proceeds of

8    Interworks' accounts receivables, which the financing agreement

9    had placed in the custody and control of Merchant, and that

10   Merchant's failure to satisfy Interworks' obligations to the

11   Article 3-A trust fund beneficiaries amounted to a diversion of

12   trust-fund assets.

13             Unlike the lawsuit in New York Supreme Court, in which

14   the United States did not participate, the United States filed a

15   complaint-in-intervention in this federal suit.    It asserted that

16   Merchant's failure to use trust-fund assets to satisfy the

17   $557,129.29 or more that Interworks owed in employment taxes

18   violated Article 3-A.2   The United States brought the complaint-

19   in-intervention in its own capacity, rather than as a

20   representative of all Article 3-A beneficiaries.

21             The case was transferred from the Southern District to

22   the Eastern District of New York in April 2006.    In November



          2
            The United States also named Colonial as a defendant for
     the sole purpose of establishing its relative priority of
     recovery should liability be found against Merchant. Colonial
     cross-claimed against Merchant under Article 3-A, relying on the
     same arguments it made in its New York action.

                                     10
1    2007, the Eastern District court dismissed the underlying

2    complaint with prejudice after Interworks indicated its intent to

3    voluntarily discontinue the action3 and failed to respond to an

4    order to show cause.   This left the issues raised in the United

5    States' complaint-in-intervention and the cross-claims by

6    Colonial as the only surviving issues for the district court's

7    consideration.

8              Colonial and Merchant then jointly moved to dismiss the

9    United States' complaint-in-intervention on the grounds that the

10   United States had failed to comply with two procedural

11   requirements of Article 3-A suits: (1) that there be no prior

12   pending Article 3-A action, and (2) that such suits be brought in

13   a representative capacity.   Without denying that these

14   requirements were provided for by statute and had not been

15   satisfied, the government opposed the motion to dismiss on the

16   grounds that Article 3-A does not apply to the United States and

17   that, even if it did, the United States' power to enforce federal

18   tax law in federal court either exempts it from compliance with

19   or preempts the procedural requirements of Article 3-A.

20             The district court, finding the government to be in

21   procedural default, granted the motion to dismiss.   Interworks,

22   531 F. Supp. 2d at 482.   Based largely on the fact that the

23   United States had brought suit to enforce its Article 3-A rights



          3
            It appears that Interworks' Chapter 11 bankruptcy case was
     converted into a Chapter 7 proceeding, and the Chapter 7 trustee
     declined to pursue the instant action.

                                     11
1    under New York law, rather than to enforce a tax lien under

2    federal law, the court rejected the government's argument that

3    federal statutes that provide federal courts with original

4    jurisdiction over actions brought to enforce the federal tax laws

5    excuse the government from compliance with Article 3-A's

6    procedural requirements.   Id. at 481.

7              The government appeals.

8                                DISCUSSION

9              Merchant's liability under Article 3-A for diversion of

10   trust funds is not in dispute on appeal.   Nor does any party

11   contest the United States' standing as a beneficiary of the trust

12   to enforce its claim against Merchant for unpaid taxes, or the

13   United States' priority relative to Colonial in recovering the

14   diverted trust funds through a properly filed lawsuit.4    And the

15   government concedes that its claim was not brought in conformance

16   with the requirements set forth in Article 3-A.

17             The sole issue on appeal, then, is whether the United

18   States is excused from compliance with two Article 3-A procedural

19   requirements: (1) that a claimholder to an Article 3-A trust



          4
            Section 77 of the Lien Law sets from the order of priority
     among claimholders to the trust, giving first priority to claims
     for taxes, unemployment insurance, and other employment-related
     contributions. N.Y. Lien Law § 77.8(a). Colonial, as a
     completing surety to Interworks, is equitably subrogated to the
     same rights of Interworks in the contract and cannot satisfy its
     claims against Merchant until all 3-A trust beneficiaries are
     first satisfied. See Titan Indem., 135 F.3d at 834 ("It is
     perfectly clear that the rights of a surety in the trust proceeds
     do not trump those of the Article 3-A trust fund
     beneficiaries.").

                                     12
1    bring a "representative action . . . for the benefit of all

2    beneficiaries of the trust," and (2) that "no other such action

3    [be] pending at the time of the commencement" of the Article 3-A

4    claim.   N.Y. Lien Law §§ 77.1, 77.2.   The government does not

5    contend that it complied with these requirements.      It asserts

6    instead that its compliance is unnecessary.      We conclude that

7    where the United States brings an action pursuant to Article 3-A,

8    it is bound by the procedural requirement that there be no prior

9    pending Article 3-A action.    Because the United States

10   procedurally defaulted by not meeting this requirement, we

11   therefore affirm the judgment of the district court.      We need not

12   decide whether the government was bound by, or should have been

13   granted leave to comply with, the representative capacity

14   requirement.

15              I. Standard of Review

16              We review a district court's decision to grant a motion

17   to dismiss for failure to state a claim upon which relief can be

18   granted de novo, taking the factual allegations in the complaint

19   to be true and drawing all reasonable inferences in the non-

20   movant's favor.    City of New York v. Beretta U.S.A. Corp., 524

21   F.3d 384, 392 (2d Cir. 2008).

22              II.   The "No Other Pending Action"
23                    Requirement of Article 3-A

24              The United States did not intervene in Colonial's prior

25   Article 3-A state action.    Instead, it intervened in the federal

26   action brought by Interworks two years after the action in New


                                        13
1    York State Supreme Court had begun.   The district court concluded

2    that this was improper under Article 3-A, which provides in

3    relevant part that "successive actions may be maintained from

4    time to time . . . provided no other such action is pending at

5    the time of the commencement thereof."   N.Y. Lien Law § 77.2;

6    Interworks, 531 F. Supp. 2d at 481 ("[T]he United States is

7    subject to Article 3-A's prohibition against prior pending

8    actions when asserting its Article 3-A rights . . . .").

9              The government does not contend that Colonial's prior

10   state court action was not a prior pending action for the

11   purposes of section 77.2; nor could it, see, e.g., Premier Elec.

12   Constr. Corp. v. Sec. Nat'l Bank of Long Island, 39 A.D.2d 967,

13   968, 334 N.Y.S.2d 199, 200 (2d Dep't 1972) (interpreting section

14   77.2 to apply to a subsequent action brought by "a new plaintiff

15   who could be said to be a member of the class which the plaintiff

16   bringing the first action intended to benefit.").    Instead, the

17   United States offers three separate reasons why it should be

18   excused from compliance with Article 3-A's procedural

19   requirements:   (1) Article 3-A does not apply to actions by the

20   United States; (2) even if Article 3-A applies to actions by the

21   United States, the United States has an unqualified right to

22   bring this action in federal court pursuant to its power to

23   enforce the federal tax code under 26 U.S.C. § 7402; and (3) to

24   the extent that Article 3-A conflicts with 26 U.S.C. § 7402,

25   Article 3-A is preempted.

26   A. Application of Article 3-A to the United States

                                     14
1              The United States' first argument, relying primarily on

2    Leiter Minerals, Inc. v. United States, 352 U.S. 220 (1957), is

3    that Article 3-A does not apply to it because the statute lacks

4    express words so indicating.   We implicitly rejected this

5    argument in United States v. Certified Indus., Inc., 361 F.2d

6    857, 862 (2d Cir. 1966), where we assumed that the United States

7    would be subject to Article 3-A's statute of limitations.    We now

8    explicitly reject the argument, joining at least one district

9    court in our Circuit that has, in analyzing Article 3-A's

10   representative capacity requirement, found the statute's

11   procedural requirements to be applicable to the United States.

12   See Quantum Corporate Funding v. Bast Hatfield, Inc., No. 5:04-

13   cv-137, 2005 WL 1926610, at *6, 2005 U.S. Dist. LEXIS 14222, *18-

14   *23 (N.D.N.Y. June 8, 1995).

15             As support for its argument, the government cites to a

16   heavily qualified canon of statutory construction recognized in

17   Leiter, which it portrays as a rule of general and wide-ranging

18   applicability: that "'statutes which in general terms divest pre-

19   existing rights or privileges will not be applied to the

20   sovereign without express words to that effect.'"    Leiter, 352

21   U.S. at 224 (quoting United States v. United Mine Workers, 330

22   U.S. 258, 272 (1947)).   The canon is inapplicable to the facts of

23   this case.    Article 3-A does not divest the United States of any

24   "pre-existing rights."   The rights the United States seeks to

25   enforce are   Article 3-A trust fund rights that are created by,

26   and do not exist apart from, the statute itself.    These rights

                                      15
1    therefore cannot be understood as "pre-existing," and the canon

2    therefore does not apply.5

3                The government argues that applying Article 3-A would

4    frustrate its power to collect federal taxes in federal court.

5    Appellant's Br. at 30.   This argument fails because, as discussed

6    further below, an Article 3-A suit does not impede the

7    government's ability to bring an action to enforce taxes owed by

8    any party.   See infra Part II(B).     Even if the United States is

9    unsuccessful in its Article 3-A suit, it may still bring a tax

10   enforcement action against Merchant or any other party to collect

11   unpaid employment taxes that arose out of contracts at issue

12   here.

13               Article 3-A does create, subject to certain procedural

14   limitations, a right for some parties to act by lien or

15   foreclosure against these trust fund assets.      It provides that

16   right to the United States, too.      But the United States has no

17   pre-existing right to these specific assets because, to obtain

18   such a right, it must prevail in the Article 3-A suit, subject to

19   Article 3-A's limitations.




             5
            The Interworks district court distinguished Leiter on
     different grounds, viewing the holding as applicable only where
     the United States' position was defensive. See Interworks Sys.,
     531 F. Supp. 2d at 482 (citing United States v. Certified Indus.,
     Inc., 361 F.2d 857, 860 n.2 (2d Cir. 1966)). Inasmuch as we
     conclude that Leiter does not render Article 3-A inapplicable to
     the United States because it did not divest the United States of
     pre-existing rights, we need not and do not address whether the
     district court's interpretation of Leiter was correct.

                                      16
1               For this reason, we find that Article 3-A applies to

2    the United States.6

3    B. Supremacy of and Preemption by 26 U.S.C. § 7402

4               The government argues that even if Article 3-A is

5    applicable to the United States, it may nonetheless intervene in

6    this federal court action because Congress has elsewhere

7    manifested an intent to provide the United States with an

8    "unqualified right to have [such] case[s] heard in federal

9    court."   Appellant's Br. at 23.    It relies on 26 U.S.C. § 7402,

10   which vests the district courts of the United States with

11   jurisdiction to hear civil actions and to render such judgments

12   and decrees "as may be necessary or appropriate for the

13   enforcement of the internal revenue laws."    26 U.S.C. § 7402(a).

14   It points out that the statute provides that these remedies are

15   "in addition to and not exclusive of any and all other remedies



          6
            Although we do not rely on them, we note that there are
     other possible reasons that Leiter's canon of statutory
     construction probably does not apply here. For example, Leiter
     applies only to statutes that divest the United States of pre-
     existing rights "in general terms." Leiter, 352 U.S. at 224. We
     very much doubt that Article 3-A fits this description. See N.Y.
     Lien Law § 71.2(c) (providing that trust assets shall be used to
     satisfy the payment of employment taxes); id. § 77.8(a)
     (discussing the priority of tax authorities in relation to other
     beneficiaries of the trust).

               And even if we were to apply Leiter's canon, the other
     statutory construction factors discussed in Leiter, see Leiter,
     352 U.S. at 225-26 (looking to legislative intent, the purpose of
     the statute, a reading of the statute as a whole, and whether
     applying the canon would foreclose the ability of the United
     States to finally determine the basic issue in the litigation, in
     deciding whether to apply the canon), would support the district
     court's construction of Article 3-A, not that of the government.

                                        17
1    of the United States in such courts or otherwise to enforce such

2    laws."     Id.

3                 At the heart of the government's argument is the

4    proposition that New York State Article 3-A and federal statute

5    26 U.S.C. § 7402 are in conflict, and that by being forced to

6    proceed in state court to assert its Article 3-A rights, the

7    government is impeded from asserting its right to collect taxes

8    in federal court.     But the district court ruling did not inhibit

9    the United States' ability to bring a tax enforcement action in

10   federal court.     The government may bring such an action to assert

11   its rights to tax, and to collect taxes against, Interworks,

12   Merchant, or any other party.     The district court held only that

13   if the United States chose to bring an action under Article 3-A

14   of the New York Lien Law to enforce a right created by New York

15   statute against specific funds impressed by a state-created

16   trust, it was required to comply with the procedural requirements

17   of that state statute.     See Interworks Sys., 531 F. Supp. 2d at

18   481-82.7

19                To be sure, the result of the district court ruling is

20   that the United States could not collect certain specific assets

21   of Merchant in federal court.     But the ruling in no way impeded


          7
            The United State relies heavily on the argument that its
     action is in personam rather than in rem or quasi in rem. That
     question is irrelevant to this appeal. The distinction between
     in personam and in rem cases that the United States seeks to draw
     from Certified and Leiter related to whether an injunction
     against state court proceedings could issue, not whether the
     United States should be held to the procedural requirements of a
     state statute.

                                       18
1    or otherwise had an impact on the ability of the United States to

2    litigate, in federal court, as to Merchant's legal obligations to

3    pay the federal taxes in question.

4               The government has conceded that this action is not an

5    action to enforce a tax lien.   See Transcript of Pre-Motion

6    Conference, Interworks Sys. Inc. v. Merchant Fin. Corp., No. 06-

7    cv-1981 at 13 (S.D.N.Y. Nov. 29, 2007) (Counsel for United

8    States:   "We're not seeking to enforce a lien.").   Instead, the

9    government is seeking to establish a state-law-created right to

10   certain trust fund assets that would allow it to obtain a tax

11   lien.   In other words, even if the United States has a right to

12   collect taxes from Merchant, it has no right to use these

13   specific trust-fund assets to satisfy Merchant's tax obligations

14   until it has prevailed in its Article 3-A suit.   See Aquilino v.

15   United States, 363 U.S. 509, 513 (1960) (finding that state law

16   governs the nature of the legal interest in the property to be

17   taxed by the federal government).

18              We have recognized in the past that the United States

19   is not divested of any rights by being forced to proceed in state

20   court under Article 3-A.   See Certified, 361 F.2d at 861-62.

21   Article 3-A facilitates rather than impairs the ability of the

22   United States to bring federal tax collection actions, by

23   designating first priority for distribution of trust assets to

24   "trust claims for taxes and for unemployment insurance and other

25   contributions, due by reason of employments, and for amounts of



                                     19
1    taxes withheld or required to be withheld."   N.Y. Lien Law §

2    77.8.

3               The cases on which the United States relies, such as

4    Markham v. Allen, 326 U.S. 490 (1946), do not require a contrary

5    result.   They stand at most for the proposition that if the

6    United States seeks to enforce a federal right that is permitted

7    by statute to be litigated in federal court, then the United

8    States cannot be compelled to litigate in state court.    See id.

9    at 495-96 (allowing a lawsuit to enforce rights under the Trading

10   with the Enemy Act to proceed in federal court, even though

11   resolution of the case required the federal court to make a

12   determination of rights to a decedent's estate that are within

13   the jurisdiction of state probate court).   Here, however, the

14   United States is not seeking to enforce a federal right to

15   collect taxes.   It is asserting a state right to be deemed a

16   beneficiary of a state-law-created trust.

17              For similar reasons, we reject the United States'

18   argument that the Supremacy Clause of the United States

19   Constitution, Art. VI, cl. 2, mandates that New York's Article 3-

20   A is preempted because it conflicts with 26 U.S.C. § 7402.

21   Appellant's Br. at 55-57.   As explained above, Article 3-A is not

22   a tax statute and is not in conflict with 26 U.S.C. § 7402(a).

23   Resolution of the Article 3-A claim would not foreclose an action

24   to enforce the federal tax laws in district court under 26 U.S.C.

25   § 7402(a).   Even if the United States were adjudicated not to be

26   a beneficiary under the Article 3-A trust to these trust fund

                                     20
1    assets, this would not inhibit the United States from bringing an

2    action against Merchant to collect unpaid employment taxes

3    relating to these public employment contracts.

4              We will not conclude that a state statute was

5    "'superseded by [a] Federal Act unless that was the clear and

6    manifest purpose of Congress.'"    Altria Group, Inc. v. Good, 129

7    S.Ct. 538, 543 (2008) (quoting Rice v. Santa Fe Elevator Corp.,

8    331 U.S. 218, 230 (1947)).   Even when Congress expresses an

9    intent to preempt, if the statute can plausibly be read not to

10   preempt in an individual case, courts are to "'accept the reading

11   that disfavors pre-emption.'" Id. (quoting Bates v. Dow

12   Agrosciences LLC, 544 U.S. 431, 449 (2005)).   Inasmuch as we

13   conclude that there is neither a conflict between Article 3-A and

14   the power to enforce federal tax laws, nor an intent by Congress

15   to preempt Article 3-A, a finding of federal preemption is not

16   warranted here.

17             III. The Representative Capacity Requirement
18                  of Article 3-A

19             For the reasons that the "no pending action"

20   requirement applies to the United States, it would appear that

21   the United States is also bound by the "representative capacity"

22   requirement of Article 3-A, as the district court held.   Inasmuch

23   as we affirm the district court's dismissal for lack of

24   compliance with the "no pending action" requirement, however, we

25   need not decide whether that is so or address whether the

26   district court committed error by refusing to allow the United


                                       21
1   States to amend its complaint to conform with the representative

2   capacity requirement.

3                              CONCLUSION

4             For the foregoing reasons, the judgment of the district

5   court is affirmed.




                                   22
