Interworks Sys. Inc. v. Merchant Fin. Corp.

Opinion

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

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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

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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

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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

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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

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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

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

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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.

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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).

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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

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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

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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.

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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.

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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

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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.").

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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

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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

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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

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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.

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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.

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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

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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.

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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

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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

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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

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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.