text:
    BOUTIQUE FOR WOMEN, INC., an Illinois corporation, Plaintiff, v. UNITED STATES of America, Defendant.
    No. 84 C 3380.
    United States District Court, N.D. Illinois, E.D.
    April 29, 1985.
    Robert Weber, Highland Park, for plaintiff.
    Jeffrey N. Kaplan, Trial Atty., Tax Div., U.S. Dept, of Justice, Washington, D.C., Gregory C. Jones, Acting U.S. Atty. by James P. White, Asst. U.S. Atty., Chicago, Ill., for defendant.
   ORDER

BUA, District Judge.

This action was brought by the Boutique for Women (plaintiff) seeking a refund for federal payroll taxes withheld and paid to the United States of America (defendant). Before the Court are the parties’ cross-motions for summary judgment. The main issue before the Court is whether the plaintiff is entitled to a refund of certain payroll and income taxes paid plus interest and penalties because the wages taxed were never paid. For the reasons stated below, this Court denies the plaintiff’s claim for refund, and grants defendant’s motion for summary judgment.

I. FACTS

The facts in this case are undisputed. The plaintiff is a clothing store which was in full operation during the years in question, 1977, 1978 and 1979. Because the plaintiff had at least one employee, it was required by law to withhold and match certain taxes, namely Social Security taxes and federal income taxes. During the three years in question, the plaintiff filed the appropriate corporate tax returns (Forms 941), although the returns were sometimes filed late and even paid late. Late filings and payments resulted in the assessed interest and penalties which are in question.

On November 7, 1982, the plaintiff filed amended Forms 941 for quarters March, September and December 1977, March, June, September and December 1978, and March, June and December 1979. The plaintiff’s reason for amending was that the prior returns were not prepared correctly.

On the amended returns, the- plaintiff claimed overpayment of $12,578.56 in total. The figure represented a refund of income taxes withheld, the employer’s and employee’s portion of Social Security taxes, and interest paid on late payments. The total claimed refund also included penalties for bad checks, for failure to timely deposit withheld taxes, for late payment of taxes, and for late filing of tax returns. Breaking down the claimed overpayment, $7,690.81 applied to interest and penalty and $4,887.75 applied to income and Social Security taxes withheld: income tax withheld, $2,671.14; employee’s FICA, $1,108.31; employer’s FICA, $1,108.30.

Of the $4,887.75 claimed overpayment, $4,551.10 is traced to checks made to an employee who also serves as president and is sole shareholder of the plaintiff corporation. The controversy lies in the payroll checks made out to this employee/sole shareholder, Rita Eisenstat. She claims that no tax should be paid on her salary checks since she never cashed all of the checks because her store did not have sufficient funds to pay the checks.

II. DISCUSSION

Under 26 U.S.C. § 3402, every employer who pays wages is required by law to deduct and withhold from those wages the estimated income tax liability of each employee. The plaintiff acknowledges that the checks were made out to Rita Eisenstat and the appropriate taxes withheld. However, since Eisenstat never cashed the checks due to the fact that her store did not have sufficient funds to cover her wages, she claims that the taxes should not have been withheld.

Besides requiring an employer to withhold the appropriate taxes, Tres.Reg. § 31.-3402(a)(1) defines when wages are constructively received. The regulation states:

(b) The employer is required to collect the tax by deducting and withholding the amount thereof from the employee’s wages as and when paid, either actually or constructively. Wages are constructively paid when they are credited to the account of or set apart for an employee so that they may be drawn upon by him at any time although not then actually reduced to possession. To constitute payment in such a case, the wages must be credited to or set apart for the employee without any substantial limitation or restriction as to the time or manner of payment or condition upon which payment is to be made, and must be made available to him so that they may be drawn upon at any time, and their payment brought within his own control and disposition.

The regulation supports the conclusion that even on wages “constructively paid ... although not then actually reduced to possession,” the employer must withhold the appropriate tax. Treas.Reg. § 31.3402. In accordance with the regulation, Eisens-tat’s wages were “set apart ... without any substantial limitation or restriction.” Tres.Reg. § 31.3402. As sole shareholder, Eisenstat was free to pay whatever expenses she deemed appropriate. In 1977, with a gross profit of over $40,000, Eisens-tat chose not to burden the corporation by demanding payment of her salary checks. Instead, she chose to wait in the hope that through the normal course of business, the checks would be able to be cashed.

Although Tres.Reg. § 31.3402(a)(1) indicates that the plaintiff “constructively paid” wages to Eisenstat and therefore was required to pay the corresponding withholding taxes for employee wages, plaintiff corporation still maintains that a refund is due. If more than the correct amount of income tax is withheld under I.R.C. § 3402, I.R.C. § 6414 prescribes a rule as to the circumstances under which an overpayment may be credited or refunded.

Under I.R.C. § 6414, a refund is allowed to an employer if the employer pays more than the correct amount of tax under I.R.C. § 3402 or any interest or penalty with respect to such tax. Treasury Regulation § 31.6414-1 goes further to state: “No refund or credit to the employer is allowed for the amount of any overpayment of tax which the employer deducted or withheld from an employee.” Treas.Reg. § 31.6414-1; see also I.R.C. § 6414. Here, the> employer is not allowed a refund of income taxes withheld because the employee receives a credit on his/her tax return for the same' withholdings under I.R.C. § 31. If the employee receives a credit on his/her tax return, the employer cannot also subsequently receive a refund for amounts withheld. The issued checks and exhibits showing amounts of income taxes deducted suggest that too much tax was withheld. However, although a greater tax was withheld from the employee than should have been, I.R.C. § 31 allows for the employee to get full credit for the amounts deducted and withheld. Therefore, since an employer refund under § 6414 is not mandated when an employee does not cash his/her wage check or the check is dishonored and since the employees (Eisenstat included) received a credit for those amounts deducted under I.R.C. § 31, the plaintiff corporation is not entitled to a refund of income taxes withheld.

As previously discussed, the liability of an employer to withhold income taxes arises as soon as the wages are actually or constructively paid to the employee. See Treas.Reg. § 31.3402(a)(1). Also, an employer’s duty to withhold an employee’s portion of the Social Security tax attaches at the time wages are actually or constructively paid. Treas.Reg. § 31.3402(a)(1), Treas.Reg. § 31.3121(a)(2). The employer’s liability for its portion of Social Security taxes also arises at the time the wages are paid to the employee. Treas.Reg. § 31.-3111-3 and § 31.3121(a)(2).

In the instant case, the Court can only conclude that the plaintiff became liable for the payroll tax as soon as its sole shareholder/employee Eisenstat constructively or actually received her paycheck. For this Court to interpret the applicable Treasury regulations as allowing the plaintiff to make the determination of when a payroll tax becomes due, i.e. also making the IRS guess when wages are actually paid or checks honored, would effectively controvert any system of uniform and consistent tax collection and regulation interpretation. Therefore, the plaintiff’s argument that a payroll tax did not attach because the corporation had no money to pay the checks also fails. The Treasury Regulations already mentioned set forth that the liability of the employer (the plaintiff) attached when the check was issued to the employee (Eisenstat) and not when the employee endeavored to cash the check.

The 1978 annual tax return shows that besides a gross profit of over $40,000, the plaintiff expended over $20,000 on business improvements. Again, the plaintiff continued to make out payroll checks to Eisenstat during 1978, later claiming that they were not cashed for lack of funds and consequently no payroll tax liability should attach. This Court’s interpretation of the applicable Treasury Regulations that the payroll tax liability attaches at the moment the wages are received actually or constructively by the employee and not as decided by each individual employer is supported by case law and IRS revenue rulings. Preferring to leave money in the business for creditors and the “good of the business” and not drawing on the salary checks does not negate payment of the wages. Emlen v. Social Security Board, 148 F.2d 927 (3d Cir.1945). In the present case, because the corporation still operates, Eisenstat may still collect on the checks not already cashed, as noted in Revenue Ruling 71-525. In that ruling, the IRS found that the fact that a situation arises which necessitates the cancellation of a paycheck and issuance of another “does not affect the liability of the employer to withhold on the employee’s compensation ...” Rev.Rul. 71-525. To ask that the government go beyond the face of the check is too great a burden for the government to bear.

Therefore, for all reasons mentioned, the Court finds that the liability for the payroll taxes attached at the time the wages were actually or constructively paid and as a result, the plaintiff’s request for a refund of employer’s payroll taxes and employee Social Security taxes is denied.

Also, the plaintiff seeks a refund of interest and penalties paid. However, the Court only need look as far as the Internal Revenue Code to reject the plaintiff’s request. Since the plaintiff violated I.R.C. §§ 6651, 6656, and 6657 by either filing late or remitting bad checks, the interest and penalties cannot be refunded. The interest and penalty fines must be upheld as a means of underscoring the importance of meeting governmental tax deadlines.

Lastly, the Court denies plaintiffs claim for refund for the quarters ending March 31, 1977. The Internal Revenue Code at Section 7422(a) disallows a suit for refund unless an actual claim for refund has been filed. To be classified as filed, a claim for refund must be filed “within three years from the time the return was filed or two years from the time the tax was paid, whichever expires later.” I.R.C. § 6511(a). Here, the quarterly return for March 31, 1977 was filed on April 22, 1977, and the claim for refund was filed on November 8, 1982. Clearly, the claim for refund of the quarter ending March 31, 1977 is barred under I.R.C. § 6511(a).

III. CONCLUSION

Accordingly, the defendant’s motion for summary judgment is granted.

IT IS SO ORDERED.


source: Caselaw Access Project

author: EDWARD C. REED, Jr., District Judge.

license: Public Domain

text:
    Robert Alan KEMP, Plaintiff, v. William BLOCK, Defendant.
    No. CV-R-82-399-ECR.
    United States District Court, D. Nevada.
    April 29, 1985.
    See also, D.C., 586 F.Supp. 330.

      Lawrence J. Semenza, Reno, Nev., for plaintiff.
    Lamond R. Mills, U.S. Atty. by Shirley Smith, Asst., Reno, Nev., for defendant.
   MEMORANDUM DECISION AND ORDER

EDWARD C. REED, Jr., District Judge.

The defendant has moved for summary judgment. The respective parties have submitted affidavits, papers, depositions and memoranda of points and authorities. No hearing has been requested.

On February 25, 1982, the plaintiff and the defendant both were electronic integrated systems mechanics, that is, civilian technicians, with the Nevada Air National Guard. As such they were federal employees for the purposes of this litigation. See 32 U.S.C. § 709. A loud argument took place between the plaintiff and Mr. Darold Roy, who was his foreman. It occurred in the instrument shop where they both worked. The shop itself was approximately 29 ft. square. It contained clothes lockers for the employees, test benches, desks, equipment lockers, a filing cabinet, a coat rack, stools and chairs. The tallest equipment in the shop were the lockers which, at 6 ft. 6 ins., were about 2xk ft. short of the ceiling. The only partition in the shop was 5 ft. 6 ins. in height. Thus, the shop consisted of one room, without any floor-to-ceiling walls, partitions or equipment.

The argument started around 9 A.M. Present in the shop at the time were Mr. Roy, the plaintiff, the defendant, and two other mechanics. The two other mechanics were in and out of the shop during course of the argument, whereas the defendant remained there throughout. Oral disputes between the plaintiff and his foreman, Mr. Roy, had recurred over a period of four months.

The February 25th argument had been going on for a couple of minutes when the defendant, Mr. Block, turned on a cassette recorder that belonged to Mr. Roy. The recorder did not have any sound enhancement capabilities. The defendant placed the recorder on top of a locker, where it recorded the argument. Immediately af-terwards, the defendant showed the recorder to the plaintiff and Mr. Roy and disclosed that he had recorded most of the argument. He declared that he had made the recording in order to prove to the plaintiff that he actually did argue. It seems that the plaintiff had persistently denied that his conversations with Mr. Roy amounted to arguments. Mr. Roy took the recorder from the defendant. The tape later was played before employees of the Air National Guard and, at the plaintiffs insistence, during two personnel proceedings. Those proceedings were decided adversely to the plaintiff, and he was terminated from his employment.

The First Claim for Relief in the Amended Complaint is based on invasion of privacy. The Second Claim alleges that the clandestine recording constituted a violation of 18 U.S.C. § 2511. That statute makes it a criminal offense willfully to use any electronic, mechanical or other device to intercept an oral communication. 18 U.S.C. § 2510(2) defines “oral communication” as “any oral communication uttered by a person exhibiting an expectation that such communication is not subject to interception under circumstances justifying such expectation.” 18 U.S.C. § 2520 authorizes recovery of civil damages by the person whose oral communication has been intercepted.

Invasion of Privacy

The aspect of privacy here involved is the plaintiff’s interest in avoiding disclosure of personal matters, that is, his ability to determine for himself when, how and to what extent information about him is communicated to others. See Crain v. Krehbiel, 443 F.Supp. 202, 207 (N.D.Cal.1977); Thorne v. City of El Segundo, 726 F.2d 459, 468 (9th Cir.1983). The determination of whether he had a legitimate expectation of privacy involves two lines of inquiry: First, by his conduct, the plaintiff must have exhibited an actual (subjective) expectation of privacy, i.e., he must have shown that he sought to preserve his conversation with Mr. Roy as private. Second, it must be decided whether the plaintiffs expectation, viewed objectively, was justifiable under the circumstances. Put another way, his expectation of privacy must have been one that society is prepared to recognize as reasonable. See United States v. Nadler, 698 F.2d 995, 999 (9th Cir.1983); United States v. Fisch, 474 F.2d 1071, 1076-1077 (9th Cir.1973); Ponce v. Craven, 409 F.2d 621, 625 (9th Cir.1969).

The subjective expectation of privacy may be tested by any outward manifestations by the plaintiff that he expected his discussion with Mr. Roy in the instrument shop to be free from eavesdroppers. A comparison of what precautions he took to safeguard his privacy interest with the precautions he might reasonably have taken, is appropriate. See Dow Chemical Co. v. United States, 749 F.2d 307, 312-313 (6th Cir.1984). Nothing was done by the plaintiff in this regard. It seems quite clear that both he and Mr. Roy argued in loud voices. The defendant and the other coworkers who overheard the argument were in a place they had a right to be, namely the instrument shop. Thus, the plaintiff may be deemed to have knowingly exposed the discussion to them. See Ponce v. Craven, supra at 625; United States v. Fisch, supra at 1077; United States v. Mankani, 738 F.2d 538, 543 (2nd Cir.1984); United States v. Llanes, 398 F.2d 880, 884 (2nd Cir.1968). The relatively small size of the instrument shop and its lack of interior walls further indicate that an expectation of privacy within it would not be objectively reasonable. See Dow Chemical Co. v. United States, supra at 313. Nor did the plaintiff have a right to exclude other persons from entering the shop while the argument ensued. See United States v. Nadler, supra at 999. This Court finds that the plaintiff knew that other persons could overhear. He, therefore, had no reasonable expectation of privacy. United States v. Hall, 488 F.2d 193, 198 (9th Cir.1973); see also United States v. Martinez-Miramontes, 494 F.2d 808, 810 (9th Cir.1974).

Unlawful Interception of Oral Communication

The reasonable expectation of privacy requirement discussed above is equally applicable to the alleged violation by the defendant of 18 U.S.C. § 2510 et seq. The essential elements of the offense are: (1) a willful interception of an oral communication by a device; (2) the communication must have been uttered by a person who exhibited an expectation that it would not be intercepted; and (3) the communication must have been uttered under circumstances that justified the expectation. United States v. Carroll, 337 F.Supp. 1260, 1262 (D.D.C.1971).

One of the tests used is to ascertain whether the defendant overheard the communication with the naked ear under uncontrived circumstances. Id. at 1263-1264; see also Holman v. Central Arkansas Broadcasting Co., 610 F.2d 542, 544-545 (8th Cir.1979). If the answer is affirmative, as here, there was no justifiable expectation of privacy. The communication is protected only if the speaker had a subjective expectation of privacy that was objectively reasonable. United States v. McIntyre, 582 F.2d 1221, 1223 (9th Cir.1978); Willamette Subscription Television v. Cawood, 580 F.Supp. 1164, 1169 (D.Ore.1984); United States v. Rose, 669 F.2d 23, 25 (1st Cir.1982). The legislative history of § 2510 notes that an expectation that an oral communication will not be intercepted is unwarranted where the speaker talks too loudly. 1968 U.S.Code Cong. & Ad.News 2112, 2178.

Because the issue of reasonable expectation of privacy is dispositive of both claims for relief, the issue of immunity and the related question of the outer perimeter of the defendant’s line of duty need not be addressed.

IT IS, THEREFORE, HEREBY ORDERED that the defendant’s motion for summary judgment be GRANTED.

IT IS FURTHER ORDERED that the Clerk of Court shall enter judgment in favor of the- defendant dismissing the action, each party to bear his own costs.


author: STAGG, Chief Judge.

text:
    MARSHALL NATIONAL BANK and J.L. Clark v. NORWEL EQUIPMENT COMPANY v. Gordon WILLIAMS, third party defendant.
    Civ. A. No. 83-0149.
    United States District Court, W.D. Louisiana, Shreveport Division.
    April 30, 1985.

      Lawrence L. Jones, Blanchard, Walker, O’Quin & Roberts, Shreveport, La., for plaintiff.

      Bobby S. Gilliam and Jerald N. Jones, Wilkinson, Carmody & Gilliam, Shreveport, La., for defendant.
    Gordon Williams, Marshall, Tex., pro se.
   MEMORANDUM RULING

STAGG, Chief Judge.

Plaintiff sues to recover the unpaid balance due on a promissory note executed by Gordon Williams to procure funds for the purchase of logging equipment from J.L. Clark, including a John Deere 440-B log skidder. A mortgage on all of the equipment secured the debt and it was guaranteed by Mr. Clark, as well. When Mr. Williams failed to pay the installments when due, the bank exercised its option to declare the unpaid balance of $41,320.48 due immediately. In an effort to satisfy the debt, plaintiff attempted to foreclose the mortgage on the log skidder and found it had been sold to defendant as a trade-in on a replacement skidder. Relying upon the provisions of La.R.S. 9:5362, plaintiff now seeks to recover the unpaid balance from defendant. Defendant has filed a motion to dismiss for lack of subject matter jurisdiction contending that the amount in controversy is only $2,750 thus destroying the presence of the requisite jurisdictional amount. Plaintiff opposes the motion.

Louisiana Revised Statute 9:5362 provides:

It shall be unlawful for a resident of any parish to purchase the movable property described in R.S. 9:5351 from any nonresident of such parish, without first obtaining an affidavit from the nonresident that there is no mortgage on the property, nor any money due for the purchase price thereof, and the purchaser who shall buy the movable properties without having obtained the affidavits shall be personally liable to the creditor for the debt secured by the property.

It is the contention of defendant that the value of the log skidder at the time it was traded in was only $2,750 and that the only debt secured by the property was this amount.'

A motion to dismiss for want of jurisdictional amount should not be granted unless it appears to a legal certainty that plaintiff cannot recover the amount claimed in good faith. Johns-Manville Sales Corporation v. Mitchell Enterprises, Inc., 417 F.2d 129 (5th Cir.1969). At the outset it must be noted that plaintiff has not demanded an amount so excessive as to warrant the conclusion that its claims are not pressed in good faith. Instead, plaintiff demands the unpaid balance of the debt founded upon its conclusion that the statute authorizes such an award. The question is, therefore, whether the statutory language creates a legal certainty that the mortgagee is entitled to recover the amount of the indebtedness rather than the actual value of the mortgaged property.

Initially, it must be noted that La.R.S. 9:5362 must be considered “highly technical and ... strictly construed_” C.I.T. Corporation v. J.B. Lee Tractor & Implement Company, 240 So.2d 747 (La.App.1970). See also, Cullen Thompson Motor Company v. Sullivan & Phillips, et al, 126 So. 456 (La.App.1930). Notwithstanding the strict construction given to the statute, the few cases construing it indicate that the statutory language means precisely what it says. See, Harris Finance v. Fridge et al, 55 So.2d 707 (La.1951). In Harris, the Supreme Court refused to accept the purchaser’s argument that the rate of interest provided by law should be awarded rather than the higher interest rate and attorney’s fees provided in the mortgage instrument. The court noted that the higher rates were “an integral part of the debt contracted to by the parties and secured by the property. The statute provides that the purchaser shall be personally liable to the creditor for the debt secured by the property.” Id. at 709. Thus, it appears that it is the amount of the unpaid debt rather than the value of the property which controls in determining the amount in controversy. Other support for this conclusion is found in C.I.T. Corporation, supra. In that case, the court refused to find § 5362 applicable but noted that the effect of the statute would be “to hold [the purchaser] personally liable for the debt.” Id. at 750. Although the result seems somewhat harsh, the language of the statute is clear and the few cases construing it have not deviated from its unambiguous terms. Thus, in an action under § 5362 the amount in controversy is the unpaid balance of the debt secured by the property, not the value of the property. Arrival at this conclusion, does not, however, resolve the question of whether there can be any dispute that an unpaid balance still remains. Before addressing this issue, it is first necessary to determine whether the law of Texas or Louisiana applies.

Defendant has also filed a motion in limine asking the court to hold that Texas law should govern the issues in this suit. It is the contention of defendant that all of the acts relevant to the disputed transaction occurred in Texas and that, under interest analysis, this matter should be governed by the law of Texas. Conversely, plaintiff argues that the determinative transaction in this suit occurred in Louisiana. Neither party disputes that the mortgage given by Mr. Williams to the bank was executed in Texas and that the validity and effect to be given the mortgage must be governed by Texas law. Nor do the parties dispute that plaintiff has its principal place of business in Texas and that defendant is a Louisiana corporation with its principal place of business in Shreveport, Louisiana. Aside from an objection to the property description listed in the financing statement, defendant does not contend that the mortgage was invalid under Texas law. One of the requirements of the statute is that plaintiff must have a valid and enforceable mortgage to avail itself of the provisions of the statute, see, Hub City Motors, Inc. v. Brock, 71 So.2d 700 (La.App.2d Cir.,1954); C.I.T. Corporation v. J.B. Lee Tractor & Implement Company, 240 So.2d 747 (La.App.2d Cir.1970). Defendant has challenged the validity of the mortgage contending that it does not describe with adequate specificity the property mortgaged, in particular, the log skidder. The security agreement describes the mortgaged log skidder as “one John Deere 440-B log skidder with new winch and cable.” Defendant argues that the security interest held by plaintiff is defective because the mortgage gives descriptions and serial numbers of all equipment except the log skidder. In support of its position, plaintiff cites a Louisiana case. Louisiana law has absolutely no bearing on this issue. Instead, the validity of the mortgage must be evaluated in light of Texas law. To be enforceable against the debtor or third parties, a security interest must be evidenced by a security agreement signed by the debtor which describes the collateral. V.T.C.A. § 9.110. Section 9.110 of the Texas Uniform Commercial Codes provides:

Except as provided in Sub-sections (c) and (f) of § 9.402, any description of personal property or real estate is sufficient for the purposes of this chapter whether or not it is specific if it reasonably identifies what is described.

The comment under this section explains the purpose of the statute as follows:

The requirement of description of collateral ... is evidentiary. The test of sufficiency of a description laid down by this section is that the description do the job assigned to it — that it make possible the identification of the thing described. Under this rule, courts should refuse to follow the holdings, often found in the older chattel mortgage cases, that descriptions are insufficient unless they are of the most exact and detailed nature, the so-called ‘serial number’ test. The same test of reasonable identification applies where a description of real estate is required in a financing statement. See Section 9-402.

In construing the description necessary to validate a mortgage the court in Francis v. Reed, 428 S.W.2d 356 (Tex.Civ.App.1968) concluded that a description listed as “one 1963 Ford 6000 tractor” was sufficient:

To suggest inquiry by appellee which, if pursued, would have disclosed the property covered by the mortgage was the same tractor upon which he was accepting the mortgage.

Id. at 358.

Francis was cited with approval in McGehee v. Exchange Bank & Trust Company, 561 S.W.2d 926 (Tex.Civ.App.1978) which stated the general rule as follows:

As between the mortgagee and third parties, it is not essential that the description be so specific that the property may be identified by it alone, such description suggests inquiries or means of identification, which, if pursued, will disclose the property covered by the mortgage.

Id. at 932.

McGehee was a suit by the bank to recover mortgaged property which had been converted. The description contained in the financing statement reflected several typographical errors in relation to the year in which the property was manufactured, as well as inaccurate lettering on the engine numbers. Notwithstanding these discrepancies, the court concluded that the inaccuracies were minor and would not mislead a person examining the statement.

In this case, the description contained in the financing statement describes both the type and item of property mortgaged, a John Deere 440-B log skidder. Upon inquiry by Norwel, it could have been easily discovered that the log skidder was, in fact, the one mortgaged to the bank. Consequently, the description contained in the financing statement is not so inadequate as to render the mortgage invalid. The question, instead, is whether a valid Texas mortgage will be given the same effect as one confected in Louisiana.

Defendant correctly notes that a federal court must apply the choice of law rule of the forum state, Klaxon Company v. Stentor Electric Manufacturing Company, 313 U.S. 487, 61 S.Ct. 1020, 85 L.Ed. 1477 (1941). In determining which state law applies in a given case, Louisiana follows the interest analysis method. Jagers v. Royal Indemnity Company, 276 So.2d 309 (La.1973). Interest analysis requires the court to evaluate the policy considerations of interest to the respective jurisdictions whose law could possibly apply in a particular case. Louisiana has chosen, through La.R.S. 9:5362, to give greater protection to a mortgagee than to innocent purchasers of mortgaged items. Of course, the statute was formulated to protect Louisiana mortgagees. Although perhaps not adverse to extending protection to foreign mortgagees, Louisiana has no particular interest in affording greater protection to the rights of foreign mortgagees than the law of their domicile provides. Conversely, as a matter of policy, Texas has elected to adopt the Uniform Commercial Code which provides no remedy similar to that contained in La.R.S. 9:5362. Consequently, Texas has no interest in seeing that its resident mortgagees receive the protection afforded by the Louisiana statute. Despite Louisiana’s apparent lack of concern in protecting the rights of foreign mortgagees, one other factor must be considered in determining whether a conflict exists. As the court explained in General Motors Acceptance Corporation v. Nuss, 196 So. 323 (La.1940), Louisiana recognizes the validity of foreign mortgages even though they are not recorded in this state. The court’s conclusion was based in part upon the following policy considerations:

It would be an ungracious, if not an impolitic act, for the courts of this state to refuse to reciprocate the generous comity of the many states which recognize the obligation of interstate courtesy upon this subject.

Id. at 327.

Relying upon Nuss, the court in Pacific Finance Loans v. Guidry, 69 So.2d 56 (Orl.La.App.1954), held that Louisiana will extend the application of La.R.S. 9:5362 to foreign mortgages not recorded in this state but valid under the laws of the state in which they were executed.

In reviewing all of the competing policy considerations in this case, the court concludes that a false conflict exists. In Jagers, a false conflict was defined as existing when only a single state has an interest in the application of its laws and that the other state involved has no interest. Id. at 311. In this situation, Louisiana applies its own laws to foster predictability and certainty in the law. Id. at 312. Defendant suffers no hardship in the application of Louisiana law. Norwel is a Louisiana corporation with its principal place of business in this state. It is specious to suggest that Norwel does not expect to be governed by the laws of its domicile. Accordingly, the law of Louisiana determines whether plaintiff has met the statutory requirements of La.R.S. 9:5362. The law of Texas will govern the validity and effect of the mortgage.

Defendant argues that it bears no liability to the bank since Williams’ debt has been satisfied by the guarantor, Clark. Plaintiff resists this contention arguing it is without merit since Clark became subrogated to the rights of the bank to collect the balance of the debt from Williams. As part of a settlement with Clark, however, the bank was assigned Clark’s right to recover the balance of the unpaid debt. The court must consider, therefore, not whether subrogation has occurred but what rights were enjoyed by Clark and then the bank. In the pretrial order, counsel stipulated the following facts:

(3) The said note which was executed by Mr. Gordon Williams and Mr. J.L. Clark, as a “co-maker”, on February 13, 1979 has now been marked “can-celled” by The Marshall National Bank.
(5) The Uniform Commercial Code financing statem.ent securing the note referred to herein is no longer in force and effect as of this date.

The background information underlying these stipulated facts is provided in plaintiff’s proposed findings of fact and conclusions of law. The bank concedes that Williams, unable to pay the balance due on the note, turned the mortgaged equipment over to Clark who executed a new note in favor of the bank dated August 6, 1981. According to plaintiff:

After execution of the note on August 6, 1981, Clark, over the course of approximately two years, reduced the principal of the Williams’ liability and paid the interest which continued to accrue on the unpaid balance. The Williams liability was last renewed by Clark February 11, 1983, when he executed a note for the payment thereof in the amount of $23,-463.30, which represented the remaining unpaid principal balance, plus accrued interest. In a settlement with the bank on July 15, 1983, Clark paid the sum of $80,000 for application to his total indebtedness of $234,597.36 to the Bank, including the indebtedness incurred as a guarantor of Williams’ loan, and as part of his settlement subrogated the Bank to his rights of recovery against Williams and Norwel. The sum of $25,068.62 was applied against the February 11, 1983 note representing full payment of the remaining principal and accrued interest on the Williams liability.

Plaintiff’s amended proposed findings of fact and conclusions of law, page 10-11. The bank is, therefore, seeking to assert the rights of Mr. Clark as the result of the subrogation. It does not matter whether the law of Louisiana or Texas is applied to determine the scope of the bank’s rights as a result of subrogation. In both jurisdictions, subrogation constitutes the substitution of another person in place of the creditor so that he succeeds to the rights of the creditor, although his rights are no greater. See, Means v. United Fidelity Life Insurance Company, 550 S.W.2d 302 (Tex.Civ.App.1977), ref. n.r.e.; Williams v. Feliciana Finance Company, Inc. (La.App.1975) 316 So.2d 833 cert. denied, 320 So.2d 913 (1975). In settling with Mr. Clark, the bank cancelled the note which was secured by the financing statement. Since the mortgage has expired and the debt to the bank has been extinguished, there is, therefore, no “debt secured by the property.” Whatever rights the bank may have against Mr. Williams as a result of subro-gation do not automatically transfer to its action against Norwel. Norwel’s liability to the bank is statutory and not contractual. As explained earlier, § 5362 must be strictly construed. The language of the statute imposes liability upon a purchaser of mortgaged items only to the extent of the unpaid balance of the debt secured by the property. If the debt and the mortgage no longer exist, no liability can attach. In C.I.T. Corporation, supra, the court was presented with a closely analogous situation. In that case defendant purchased three loggers and obtained a loan from plaintiff giving in exchange a promissory note secured by a chattel mortgage on the loggers. The mortgagor ultimately sold the loggers to two purchasers who failed to comply with 9:5362. The trial court held the two subsequent purchasers liable for the balance of the principal indebtedness. The appellate court reversed on the following facts. The mortgagor sold one logger to J.B. Lee Tractor & Implement Company who in turn sold it to another. The second purchaser used the proceeds of the sale to satisfy the debt to plaintiff under the promissory note. The court found that plaintiff should have can-celled the mortgage and that it had no action against the purchaser. Specifically, the court explained:

The statute under which plaintiff seeks to hold Aaron [the second purchaser] personally liable for Lee’s debt is highly technical and must be strictly construed under the facts of this case. To give it literal effect would be most inequitable and work an undue hardship on an innocent purchaser of the property. It would be an empty formality to find as we have, that the property should have been released from the mortgage and then to hold plaintiff personally liable for the debt. The statute does not contemplate nor countenance such inconsistencies.

Id. at 750.

To allow the bank, standing in the shoes of Mr. Clark, to recover the amount paid by him would, in effect, make Norwel the guarantor of the original indebtedness. Section 5362 was not designed to accomplish this end. Its purpose is to allow a mortgagee to protect the security given for a debt. Logically, if the debt no longer exists, the security is no longer necessary to insure repayment. Simply put, § 5362 is not a statutory safety net which allows creditors to ameliorate the losses occasioned by delinquent debtors. It appears, therefore, to a legal certainty, there is no amount in controversy. The facts already in the record lead to the inescapable conclusion that plaintiff simply cannot meet the statutory requirements to maintain a cause of action under La.R.S. 9:5362. Accordingly, plaintiffs demands against defendant will be DISMISSED. Similarly, in the absence of liability on the part of Norwel, its demands against Mr. Williams will be DISMISSED.

An order consistent with the terms of this ruling shall issue herewith.