Peoples National Bank of Washington, a National Banking Association v. United States

Peoples National Bank of Washington brought this action against the United States, asking the district court to declare that the United States’ tax levy against a depositor’s account was invalid. The district court dismissed the action on the ground that the bank had no interest in the account superior to that of the government. In this appeal, the bank argues that its rights in the account are superior by virtue of either its common law right of setoff or a “security agreement,” which the depositor executed before the government provided notice of the tax lien. We hold that neither the right of setoff, which was unexercised, nor the “security agreement,” which transferred no control over the account to the bank, created any interest superior to that of the government. We therefore affirm.

The facts are not in dispute. The Internal Revenue Service assessed income taxes against Jerry and Susan Redwine in 1981. The Redwines failed to pay the assessment after notice and demand. By operation of law, this created a lien on all of their property, including after acquired property. 26 U.S.C. § 6321 .

Two years later, the Redwines borrowed approximately $194,000 from Peoples National…