Debts Owed to the Taxpayer page1

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Whiting-Turner/A.L. Johnson, a Joint Venture, Plaintiff v. P.D.H. Development, Inc., United States of America, and Athens First Bank & Trust Company, Defendants

U.S. District Court, Mid. Dist. Ga., Athens Div., 3:98-CV-107(DF), 3/21/2000

[Code Sec. 6321 ]

Tax liens: Security interest: Priority: Accounts receivable: Existence of property.--A bank's security interest in a delinquent subcontractor's accounts receivable from a construction contract had priority over a subsequently filed federal tax lien. The taxpayer had performed part of its contract duties before the tax lien was filed and, thus, had rights to at least a portion of the receivables to which the bank's security interest could attach. Accordingly, the receivables were "in existence" when the tax lien was filed, regardless of whether state (Georgia) law gave the taxpayer an interest in the accounts as soon as the contract arose, or federal law gave the taxpayer an interest in the accounts only after it performed its contract duties.

[Code Sec. 6323 ]

Tax liens: Security interest: Accounts receivable: Existence of property: 45-day safe harbor provision.--A bank's security interest in a delinquent subcontractor's accounts receivable was superior to a subsequently-filed federal tax lien. Moreover, because the security interest arose from a commercial transaction financing agreement, the bank was also entitled to the payments that the subcontractor was owed within 45 days after the tax lien filing. However, a question of fact as to the amount of the receivables that were subject to the tax lien precluded summary judgment.

[Code Sec. 6323 ]

Tax liens: Notice of: Wrong name: Substantial compliance.--A federal tax lien sufficiently identified the delinquent taxpayer. Although the name listed on the lien differed from the taxpayer's incorporated name, under the substantial compliance standard of Code Sec. 6323 , it was sufficiently similar so that a reasonable inspection of the county lien index would have revealed the lien's existence. BACK REFERENCES: ¶38,160.28

[Code Sec. 7402 ]

Tax liens: Security interest: Priority: Evidence: IRS employees: Unsworn declarations: Hearsay: Best evidence.--In an action to determine the priority of competing security interests, unsworn declarations from IRS employees were admitted into evidence because they were made under penalty of perjury and verified as true and correct. However, their statements regarding the taxpayer's employer identification number were stricken as hearsay, and statements regarding the taxpayer's total tax liabilities were accepted only as proving that the taxpayer had a federal tax deficiency.

ORDER

FITZPATRICK, District Judge:

Whiting-Turner/A.L. Johnson ("Whiting-Turner")initiated this lawsuit in the Superior Court of Clarke County by filing a complaint in interpleader, as amended, in which it seeks to determine entitlement to $26,330.14 that it is obligated to pay P.D.H. Development, Inc. ("PDH") as compensation for work performed on the University of Georgia Animal Science Complex . Whiting Turner named three defendants to the action: (1) PDH; (2) Athens First Bank & Trust Company ("Athens First"); and (3) the United States of America . The complaint for interpleader was filed pursuant to 28 U.S.C. §2410, in which the United States waived its sovereign immunity for interpleader actions involving tax liens. The United States subsequently removed the case to federal court pursuant to 28 U.S.C. §1444, which allows the United States to remove any action brought in state court against the United States under §2410 to the district court. This matter is now before the Court on cross-motions for summary judgment filed by the United States and Athens First.

I. STATEMENT OF FACTS

On August 9, 1996, Whiting-Turner entered into a subcontract (the "Subcontract") with PDH to perform all of the grading and site utilities work on a project known as the University of Georgia Animal Science Complex (the "Project"). In subsection (b) of Article 5 of the Subcontract, PDH agreed to submit to Whiting-Turner applications for payment by the fifteenth of each month, or as otherwise provided in the contract documents, so as to enable Whiting-Turner to apply for payment from the Project owner. Subsection (a) of Article 5 of the Subcontract provides for payment of the contract amount as follows: Whiting-Turner was obligated to pay PDH an amount equal to ninety percent (90%) of the value of the work performed as determined by the architect and approved by the construction manager during any calendar month within fifteen (15) days after payment therefore was received by the construction manager from the owner of the project or within such time as specified by law. Additionally, the contract provides that

Retainage and any other balance of the Contract Amount shall be payable within fifteen (15) days . . . after the work under this Agreement has been completed and accepted by Owner, Architect, and [Whiting-Turner] and following approval by the Architect of the final application for payment and settlement of all claims, if any under this Agreement, provided that Trade Contractor has fully performed all of its obligations hereunder.

Article 5(a) of the Subcontract.

On July 18, 1997, Whiting-Turner declared PDH to be in default under the Subcontract. Whiting-Turner terminated the Subcontract and PDH ceased all work on the Project as of July 18, 1997. The amount due and owning PDH for the services it performed on the Project is $26,330.14.

Two independent parties, Athens First and the United States , claim an interest in the money owed to PDH under the Subcontract. PDH has not claimed an independent entitlement to any portion of the fund involved in this case or indicated its support for either of the two claims of entitlement.

Athens First's claim is premised on its security interest in all of PDH's accounts receivable. Over a period of several years, Athens First advanced loans and funds to PDH. PDH executed numerous promissory notes, security agreements, and UCC-1 financing statements granting a security interest in all of PDH's accounts receivable to Athens First (Aff. of A. Middleton Ramsey (tab #22), paras. 3 & 4; Exhibits D, E, F, I, J, K, O, and Q). On February 10, 1994, Athens First filed a UCC-1 financing statement to perfect its interest in "All Furniture, Fixtures, Equipment, Accounts Receivable and General Intangibles now or hereafter existing or created" (Aff. of A. Middleton Ramsey (tab #22), Exhibit O). Athens First filed a second UCC-1 financing statement, covering "All Furniture, Fixtures, Equipment, Inventory, Accounts Receivable and proceeds thereof, all General Intangible instruments, chattel paper and cash of P.D.H. Development, Inc. now owned or hereinafter acquired or created," on June 8, 1995 (Aff. of A. Middleton Ramsey (tab #22), Exhibit Q). Athens First has not advanced any loans or funds to P.D.H. since August 4, 1995 (Aff. of A. Middleton Ramsey (tab #22), para. 5). As of January 31, 1997, the balance owed by PDH to Athens First was $345,678.90 principal and $41,338.45 interest (Aff. Of A. Middleton Ramsey (tab #22), para. 6).

The United States' interest is premised on assessments made by the Internal Revenue Service ("IRS") against P.D. Hill Development, Inc. ¹ On July 15, 1996, the IRS made assessments against P.D. Hill Development, Inc. for $12,873.12 in unpaid Form 941 liabilities for the fourth quarter of 1995 (Athens First's Mot. for Summ. J. (tab #19), Exhibit BB). On January 31, 1997, the IRS fried a Notice of Federal Tax Lien against "PD Hill Development Inc., a corporation DBA Phoenix Pipe & Dirt" in the Clarke County, Georgia Superior Court Clerk's Office (Athens First's Mot. for Summ. J. (tab #19), Exhibit BB). Samuel Elliot, a revenue officer with the IRS in Athens, Georgia, asserts that the "balance of P.D. Hill Development's Form 941 liabilities for the fourth quarter of 1995 as of May 3, 1999, is $23,592.51" (Decl. Of Samuel W. Elliot, para. 5, attached as Exhibit 3 to the United States ' Statement Of Material Facts Not In Dispute (tab #27)).

II. MOTIONS TO STRIKE

Athens First has objected to, and moved to strike, the affidavits of Paul Dennis Hill and Samuel W. Elliot, which the United States presented in support of its motion for summary judgment (Mot. to Strike Unsworn Decl. of Paul Dennis Hill (tab #31); Mot. to Strike Unsworn Decl. of Samuel W. Elliot (tab #33); Mot. to Strike Supplemental Decl. of Paul Dennis Hill and Renewed Mot. to Strike Decl. of Paul Dennis Hill (tab #42); Mot. to Strike Supplemental Decl. of Samuel W. Elliot and Renewed Mot. to Strike Decl. of Samuel W. Elliot (tab #44)). In an effort to cure the objectionable portions of the declarations, the United States filed a Supplemental Declaration of Paul Dennis Hill (tab #41) and a Supplemental Declaration of Samuel W. Elliot (tab #37) following Athens First's initial motions to strike. Given that the United States was able to address many of Athens First's concerns through the supplemental declarations, the Court considers the first motions to strike to be moot and will now address the issues raised in Athens First's motions to strike the supplemental declarations.

In order for the supplemental declarations to be used as summary judgment proof, they must be sworn and meet the requirements of Federal Rule of Civil Procedure 56(e). The unsworn declarations submitted by the United States are of the same force and effect as sworn affidavits because both were made under penalty of perjury and verified as true and correct. 28 U.S.C. §1746. Rule 56(e) also requires that

Supporting and opposing affidavits shall be made on personal knowledge, shall set forth such facts as would be admissible in evidence, and shall show affirmatively that the affiant is competent to testify to the matters stated therein. Sworn or certified copies of all papers or parts thereof referred to in an affidavit shall be attached thereto or served therewith.

Fed.R.Civ.P. 56(e).

With respect to the Supplemental Declaration of Paul Dennis Hill, Athens First objects to paragraph 5, in which Mr. Hill states that "[i]t is well known in the community of Clarke County that 'P.D. Hill Development, Inc.' and 'P.D.H. Development, Inc.' are the same corporation. It is known by all banks, suppliers and construction contractors in the community." In his declaration, Mr. Hill states that, as the president of "P.D. Hill Development, Inc. a/k/a P.D.H. Development, Inc." (para. 2), he has operated his construction business in Clarke County under these names since 1989 (para. 3). Mr. Hill also states that, as an agent for his construction business, he has dealt with every major bank, supplier of materials, and contractor in Clarke County (para. 4). Based on Mr. Hills extensive business dealings in Clarke County , perhaps the Court, or a jury at trial, could reasonably infer that the banks, suppliers and construction contractors in the community do know that "P.D. Hill Development, Inc." and "P.D.H. Development, Inc." are the same corporation. However, a reasonable inference based on specific admissible facts is different from Mr. Hills affirmative statement as to what he believes is known in the community. As Mr. Hills statements as to what is known in the community would not be admissible in evidence, the Court hereby strikes paragraph 5 of the Supplemental Declaration of Paul Dennis Hill pursuant to Rule 56(e).

Athens First also objects to parts of the Supplemental Declaration of Samuel W. Elliot. First, Athens First objects to Mr. Elliot's statements regarding the application for employer identification number filed in the name of "P.D. Hill Development, Inc." (para. 3). Athens First argues that these statements are hearsay and thus would not be admissible at trial. Specifically, Athens First objects to the second Sentence of paragraph 3, which provides that "[t]he name 'P.D. Hill Development, Inc.,' used by the Internal Revenue Service, is derived from the application for employer identification number filed by the taxpayer." The application for employer identification number, rather than Mr. Elliot's testimony about the contents of the application, would be the best evidence of the application's contents at trial. See Fed.R.Evid. 1002. As Mr. Elliot's testimony about the contents of the application would not be admissible at trial and a sworn or certified copy of the application is not attached to Mr. Elliot's declaration, the Court will strike the second sentence of paragraph 3 concerning the application for employer identification number.

Athens First also objects to the second sentence of paragraph 6, which states that "[t]he balance of P.D. Hill Development's Form 941 liabilities for the fourth quarter of 1995 as of May 3, 1999, is $23,592.51." As he is the revenue officer assigned to collect PDH's tax liabilities, Mr. Elliot is certainly competent to testify about the tax liabilities of PDH as a matter within his personal knowledge. The Court agrees, however, that a proper foundation would have to be laid for this testimony to be admissible at trial. However, the Court does not deem it necessary to strike this portion of Mr. Elliot's declaration any more than it deems it necessary to strike the portion of A. Middleton Ramsey's affidavit stating that the amount PDH was indebted to Athens First on January 31, 1997 is $345,678.90 principal and $41,338.45 interest. Thus, for purposes of the United States ' motion for summary judgment, the Court will accept that PDH owes the United States a sum of money for its Form 941 liabilities for the fourth quarter of 1995. If necessary, the precise amount of money owed for PDH's Form 941 liabilities can be determined after the Court determines which of the parties is entitled to the $26,330.14 that Whiting-Turner is obligated to pay PDH.

III. CROSS-MOTIONS FOR SUMMARY JUDGMENT

A. Summary Judgment Standard

Summary judgment is appropriate when "there is no genuine issue as to any material fact . . . and the moving party is entitled to judgment as a matter of law." Fed.R.Civ.Proc. 56(c); Edwards v. Shalala, 64 F.3d 601, 603 (11th Cir. 1995). If the moving party demonstrates that there is "an absence of evidence to support the non-moving party's case," the burden shifts to the non-moving party to go beyond the pleadings and present specific evidence giving rise to a triable issue. Celotex Corp. v. Catrett, 477 U.S. 317, 325, 106 S.Ct. 2548, 2554, 91 L.Ed.2d 265 (1986); Clark v. Coats & Clark, Inc., 929 F.2d 604, 608 (11th Cir. 1991).

In reviewing a motion for summary judgment, the court must construe the evidence and all inferences drawn from the evidence in the light most favorable to the non-moving party. See Maynard v. Williams, 72 F.3d 848, 851 (11th Cir. 1996). Even if there exists some alleged factual dispute between the parties, summary judgment is not necessarily improper; there must be a genuine issue of material fact to render summary judgment improper. See Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248, 106 S.Ct. 2505, 2510, 91 L.Ed.2d 202 (1986).

B. Priority of Athens First's Security Interest to the Federal Tax Lien

Under the Internal Revenue Code, a tax lien arises at the time of assessment, 26 U.S.C. §6322, on "all property and rights to property, whether real or personal, belonging to" a delinquent taxpayer, 26 U.S.C. §6321. The lien also attaches to property acquired by the delinquent taxpayer after the initial imposition of the lien. See, e.g., Glass City Bank v. United States [45-2 USTC ¶9449], 326 U.S. 265, 268, 66 S.Ct. 108, 110, 90 L.Ed. 56 (1945). A tax lien is not valid as against any holder of a security interest under the Federal Tax Lien Act "until notice thereof which meets the requirements of subsection (f) has been filed." 26 U.S.C. §6323(a); see also United States v. Pioneer Am. Ins. Co. [63-2 USTC ¶9532], 374 U.S. 84, 88, 83 S.Ct. 1651, 1655 (1963). The United States ' lien commenced no sooner than January 31, 1997, the date on which the IRS filed a Notice of Federal Tax Lien against "PD Hill Development Inc., a corporation DBA Phoenix Pipe & Dirt" in the Clarke County, Georgia Superior Court Clerk's Office. See United States v. McDermott [93-1 USTC ¶50,164], 507 U.S. 447, 449, 113 S.Ct. 1526, 1528, 123 L.Ed.2d 128(1993).

Athens First argues that its security interest is senior to the federal tax lien under §6323(a) because it possessed a perfected security interest in PDH's accounts receivable prior to the Internal Revenue Service's filing of notice of the tax lien. In order to come within the protections of §6323(a) as a holder of a security interest, both parties agree that Athens First must establish the four conditions set out by the Court of Appeals in Atlantic States Constr., Inc. v. Hand, Arendall, Bedsole, Greaves & Johnston [90-1 USTC ¶50,065], 892 F.2d 1530 (11th Cir. 1990). The four conditions are:

(1) that the security interest was acquired by contract for the purpose of securing payment or performance of an obligation or indemnifying against loss; (2) that the property to which the security interest was to attach was in existence at the time the tax lien was filed; (3) that the security interest was, at the time of the tax lien filing, protected under state law against a judgment lien arising out of an unsecured obligation; and (4) that the holder of the security interest parted with money or money's worth.

Id. at 1535 (citing 26 U.S.C.A. §6323(h)(1)).

Athens First maintains that the four conditions are met in this case. First, Athens First's security interest was acquired through the security agreements executed by PDH for the purpose of securing payment for the substantial funds it advanced to PDH. Second, Athens First contends that the property to which the security interest was to attach, the accounts receivable, were in existence at the time the tax lien was filed. Third, Athens First's security interest was protected under Georgia law by virtue of O.C.G.A. §11-9-310(a) against a judgment lien arising out of an unsecured obligation. Finally, Athens First satisfies the fourth condition because, by advancing substantial funds to PDH, Athens First "parted with money or money's worth."

In response, the United States recognizes that Athens First "has met conditions (1), (3), and (4), of the requirements of a security interest." (Mem. of Law of United States of America (tab #26), p. 6). The United States argues, however, that Athens First has not met the second condition. In support of this argument, the United States argues that federal law, rather than the state law relied on by Athens First, determines when an account receivable comes into existence. Although state law determines the nature of the legal or property interest of the entity With the competing lien, the United States asserts that, in the case of a federal tax lien, the priority of competing liens is a province of federal law. See Aquilino v. United States [60-2 USTC ¶9538], 363 U.S. 509, 512-14, 80 S.Ct. 1277, 1280, 4 L.Ed.2d 1365 (1960). The difficulty faced by the Court when applying this principle to the facts of this case, however, is that the characterization of when an account receivable is in existence differs significantly under Georgia law and the Treasury Regulations. Moreover, the Treasury Regulations appear to require that the federal definition control over an inconsistent state definition when the case involves a federal tax lien.

Under the Uniform Commercial Code, as adopted by the Georgia legislature, an "account" in the sense if collateral is defined as "any right to payment for goods sold or leased or for services rendered which is not evidenced by an instrument or chattel paper, whether or not it has been earned by performance." O.C.G.A. §11-9-106. A security interest does not attach unless: (1) the debtor has signed a security agreement which contains a description of the collateral; (2) value has been given; and (3) the debtor has rights in the collateral. O.C.G.A. §11-9-203(1). A security in accounts may be perfected by filing a financing statement. O.C.G.A. §11-9-302(1). If steps are taken to perfect the security interest before the security interest attaches, the security interest is perfected at the time when it attaches. O.C.G.A. §11-9-303(1).

Applying these principles to this case, the debtor, PDH, signed several security agreements which granted the secured party, Athens First, a security interest in the collateral described, in part, as "All Accounts Receivable, . . . now owned or hereinafter existing" (Aff. of A. Middleton Ramsey (tab #22), Exhibits D, E, F, I, J, & K). In addition, Athens First gave value for the security interest when it advanced loans and funds to PDH. Even though Athens First took steps to perfect its security interest by filing financing statements, Athens First's security interest did not attach until PDH had rights in the collateral.

Athens First argues that, under Georgia law, the account at issue arose upon the signing of the Subcontract on August 9, 1996, when PDH acquired a right to payment under the Subcontract, even though that right to payment had not yet been earned by performance. Following this analysis, Athens First security interest attached to PDH's right to payment for services rendered on August 9, 1996, and, because it previously took steps to perfect its security interest by filing financing statements on February 10, 1994 and June 8, 1995, Athens First's security interest was perfected as of August 9, 1996. Because the account receivable to which the security interest was to attach was in existence at the time the tax lien was filed, the second condition of Atlantic States is satisfied. As a result, if the Court applies the law as suggested by Athens First, Athens First's security interest has priority over the federal tax lien.

The United States argues that, although state law characterizes the property at issue, federal law applies to determine when that property interest, i.e., the account receivable, came into existence. Under the applicable Treasury Regulations, an account receivable, defined as "any right to payment for goods sold or leased or for services rendered which is not evidenced by an instrument or chattel paper" (Treas. Reg. §301.6323(c)-1(c)(2)(ii)), "is in existence when, and to the extent, a right to payment is earned by performance." Treas. Reg. §301.6323(h)-1(a)(1). Furthermore, the regulations require that

A security interest must be in existence within the meaning of this paragraph, at the time as of which its priority against a tax lien is determined. For example, to be afforded priority under the provisions of paragraph (a) of §301.6323(a)-1 a security interest must be in existence within the meaning of this paragraph before a notice of lien is filed. Treas. Reg. §301.6323(h)-1(a)(1). The language of this Treasury Regulation supports the Government's contention that, despite any provision of Georgia law to the contrary, Athens First's security interest must have been in existence in the federal sense for Athens First to benefit from the protections of §6323(a). Thus, PDH's accounts receivable did not come into existence until PDH earned the right to payment under the Subcontract by performance.

Without conceding that federal law determines when PDH's accounts receivable came into existence under the Subcontract, Athens First argues that the account receivable existed for purposes of federal law prior to the filing of the federal tax lien because PDH earned the right to payment of substantial funds by performance prior to January 31, 1997. Apparently, Athens First bases this argument, in part, on the portions of the Subcontract which provide for the withholding of retainage.

As part of its summary judgment proof, Athens First submits the Supplemental Declaration of Scott Saarlas, who was employed as the project engineer or project manager by Whiting-Turner at the times relevant to this cause of action (Supplemental Aff. of Scott Saarlas (tab #30), para. 2). The United States objects to this affidavit on the grounds that (1) the affidavit contains blanks in paragraph 5 which makes the remaining statements in the affidavit nonsensical; (2) there is no evidentiary foundation for the documents attached as exhibits; and (3) the exhibits do not appear to be what the affidavit asserts them to be (Reply of the United States to Athens First's Opp'n to Mot. for Summ. J. (tab #40), p. 4). Although the Court agrees that paragraph 5, which is incomplete, lacks evidentiary value, the Court disagrees that the deficiencies of this paragraph make the remaining statements in the affidavit nonsensical. Similarly, the Court disagrees with the United States ' contentions that there is no evidentiary foundation for the attached exhibits and that the documents do not appear to be what the affidavit asserts them to be. In paragraph 4 of the affidavit, Mr. Saarlas states that the exhibits attached to his affidavit are "true and correct copies" of the pay requests that Whiting-Turner received from PDH for work performed on the Project. The Court has examined the documents and, although documents other than the pay requests are included, the exhibits certainly appear to be what Mr. Saarlas asserts them to be. Thus, although the Court may decline to consider certain portions of the supplemental affidavit, the Court will disregard the assertion by the United States that the entire supplemental affidavit should not be considered for purposes of determining the motions for summary judgment.

Based on the exhibits attached to the Supplemental Affidavit of Scott Saarlas, Athens First argues that, at the time of the filing of the federal tax lien on January 31, 1997, Whiting-Turner owed PDH money for its performance under the Subcontract. PDH began performing its duties under the Subcontract on August 14, 1996 (Supplemental Aff. of Scott Saarlas (tab #30), para. 3). Undoubtedly, as the Subcontract specifically provided that Whiting-Turner would withhold retainage from its payments to PDH, some amount of money for work performed prior to January 31, 1997, was due and owing PDH at the time of the federal tax lien filing. The evidence that Athens First provided the Court with respect to the amount of payment earned by performance, but retained by Whiting-Turner, during the period from August 14, 1996 and January 31, 1997 shows that Whiting-Turner owed PDH $11,115.00 as of October 20, 1996 (Supplemental Aff. of Scott Saarlas (tab #30), Exhibit C). Thus, an account existed as of October 20, 1996 because PDH had earned by performance a right to payment of $11,115.00 for services rendered as of this date.

Athens First also asserts an interest in the $19,801.73 in retainage owed to PDH as of March 12, 1997 (Supplemental Aff. of Scott Saarlas (tab #30), Exhibit D; Brief of Athens First filed June 29, 1999 (tab #36), p. 3). Given that Athens First refers to payments made within forty-five days of the filing of the tax lien, the Court assumes that Athens First is attempting to utilize the provisions of §6323(c). 26 U.S.C. §6323(c) provides as follows:

(c) Protection for certain commercial transactions financing agreements, etc.--

(1) In general.--To the extent provided in this subsection, even though notice of a lien imposed by section 6321 has been filed, such lien shall not be valid with respect to a security interest which came into existence after tax lien filing but which--

(A) is in qualified property covered by the terms of a written agreement entered into before tax lien filing and constituting--

(i) a commercial transactions financing agreement, . . . and

(B) is protected under local law against a judgment lien arising, as of the time of tax lien filing, out of an unsecured obligation.

(2) Commercial transactions financing agreement.--For purposes of this subsection--

(A) Definition.--The term "commercial transactions financing agreement" means an agreement (entered into by a person in the course of his trade or business)--

(i) to make loans to the taxpayer to be secured by commercial financing security acquired by the taxpayer in the ordinary course of his trade or business, . . . but such an agreement shall be treated as coming within the term only to the extent that such loan or purchase is made before the 46th day after the date of tax lien filing or (if earlier) before the lender or purchaser had actual notice or knowledge of such tax lien filing.

(B) Limitation on qualified property.--The term "qualified property", when used with respect to a commercial transactions financing agreement, includes only commercial financing security acquired by the taxpayer before the 46th day after the date of tax lien filing.

(C) Commercial financing security defined.--The term "commercial financing security means . . . (ii) accounts receivable, . . . .

Pursuant to §6323(c), Athens First's security interest prevails as to any account for construction services rendered which became due and owing within 45 days after the tax lien filing. Prior to the tax lien filing, Athens First and PDH entered into several commercial transaction financing agreements. In these agreements, Athens First, in the ordinary course of its business as a bank, agreed to make loans to PDH to be secured by commercial financing security, which includes the accounts receivable acquired by PDH in the ordinary course of its business. Given that no loans or funds have been advanced to PDH since August 4, 1995, Athens First made its loans before the 46th day after the date of tax lien filing. In addition, because PDH acquired the accounts receivable before the 46th day after the date of tax lien filing, the accounts receivable come under the statute's definition of qualified property. The retainage of $19,801.73 represents the amount of accounts receivable generated by the services performed by PDH within the forty-five days following the filing of the tax lien on January 31, 1997. Thus, Athens First's security interest in the accounts receivable takes priority over the federal tax lien on those accounts at least to the extent of $19,801.73.

With respect to the $19,801.73 owed to PDH as retainage, the parties do not address the effect, if any, of the conditional nature of this right to payment under the Subcontract. PDH was entitled to receive payment of the retainage amount only after completion and acceptance of the agreed upon work and following approval by the architect of the final application for payment provided that PDH fully performed all of its obligations under the Subcontract. The Court previously concluded that Athens First's security interest in the accounts receivable existed for purposes of the Federal Tax Lien Act when PDH performed the services giving rise to the accounts receivable. The Court now concludes that, even though the property subject to Athens First's security interest--the amount owing to PDH as of March 12, 1997--was subject to final calculation or computation, the property was still in existence within the meaning of the FTLA at that time. Thus, although the amount of money subject to Athens First's security interest could have been reduced or eliminated in the future, the fact that the amount payable had not been finally ascertained does not affect the existence of the right to payment.

This conclusion is in accord with the case law concerning the doctrine of choateness. Generally, in order for a competing lien to take priority over a federal tax lien, the competing lien must be established, or "choate," prior to the attachment of the federal lien. A lien is "choate" under the federal rule when "the identity of the lienor, the property subject to the lien, and the amount of the lien are established." United States v. New Britain [54-1 USTC ¶9191], 347 U.S. 81, 84, 74 S.Ct. 367, 369, 98 L.Ed. 520 (1954). Athens First's security interest in PDH's accounts receivable satisfies these three requirements. First, the identity of the holder of the security interest (Athens First) was sufficiently established at the time of the tax lien filing. Second, the property subject to the security interest (PDH's right to the account receivable, or retainage, under the Subcontract) was established, even though the exact amount of the property itself--the precise value of the account receivable--had yet to be determined with complete accuracy. See, e.g., Corigliano v. Catla Constr. Co. [64-2 USTC ¶9657], 231 F.Supp. 245, 248-49 (S.D.N.Y. 1964) (concluding that "[a] state-created lien is not inchoate merely because the amount or value of the liened property has not been finally determined") (citing Brief for the Government at 6, Crest Fin. Co. v. United States [62-1 USTC ¶9105], 368 U.S. 347, 82 S.Ct. 384, 7 LEd.2d 342 (1961) (No. 325), rev'g United States v. Crest Finance Co. [61-1 USTC ¶9460], 291 F.2d 1 (7th Cir. 1961). Third, the amount of Athens First's interest (the amount of its loans to PDH) was fixed and specific. Thus, Athens First satisfied the three-part test for choateness with respect to its security interest at the time the IRS filed its notice of tax lien and within forty-five days thereafter.

However, a genuine issue of material fact, precluding summary judgment, remains as to the precise amount of the accounts receivable generated by the services performed before and within the forty-five days following the filing of the first tax lien. The United States offers the declaration of Paul Dennis Hill, the president of PDH, in which he states that "[a]ll of the work performed by [PDH] for Whiting-Turner . . . for which outstanding balances are due was performed after March 17, 1997, and before July 17, 1997" (Supplemental Decl. of Paul Dennis Hill (tab #41), para. 6). However, the exhibits attached to the affidavit of Scott Saarlas clearly show that, as of March 12, 1997, Whiting-Turner owed PDH $19,801.73 in retainage. The Court is unable to determine from the evidence before the Court what amount, if any, of this $19,801.73 remains following the backcharges assessed by Whiting-Turner due to PDH's failure to complete and perform properly its obligations under the Subcontract. Accordingly, the cross-motions for summary judgment are hereby DENIED.

At this time, the Court does not consider a trial on this issue to be necessary. The total amount of funds deposited with the Court's registry is $26,330.14. The Court has determined in this order that Athens First may entitled to some amount of these funds less than or equal to $19,801.73. The United States is entitled to the remaining $6,528.41 of these funds in addition to any amounts that Athens First is not entitled to receive. If Athens First and the United States are able to reach an agreement as to the correct amount that each party should receive consistent with this decision, the Court will direct the disbursement of the funds in the agreed upon manner. If the parties are unable to agree within fifteen (15) days of the date of this order, the Court will consider motions for summary judgment on this issue. Athens First is directed to submit its motion and supporting evidence within fifteen (15) days of the termination of first fifteen (15) day period. The United States will then have fifteen (15) days from the date appearing on the certificate of service attached to Athens First's motion in which to respond.

C. Validity of the Federal Tax Lien

Section 6323(f) governs the place of filing for tax lien notices and gives the Secretary of the Treasury the authority to prescribe the form and content of the notice, 26 U.S.C. §6323(f)(3). Although the parties do not dispute that the notice was filed in the correct place and on the correct form, Athens First disputes whether the notice sufficiently identifies the taxpaying entity. The Treasury Regulation promulgated by the Secretary requires only that the notice of lien "must identify the taxpayer." Treas. Reg. §301.6323(f)-1(c)(2). The notice of federal tax lien filed on January 31, 1997 identifies the taxpayer as "PD Hill Development Inc., a corporation DBA Phoenix Pipe. & Dirt." Relying on the undisputed evidence that PDH is incorporated under the name of "P.D.H. Development, Inc." ( Athens First's Mot. for Summ. J. (tab #19), Exhibit AA), Athens First maintains that the tax lien is not valid because it was not filed against the proper corporate entity. The United States argues in response that the notice filed adequately identified the taxpayer.

In support of its argument, the United States relies on Brightwell v. United States [93-1 USTC ¶50,223], 805 F.Supp. 1464, 1471 (S.D. Ind. 1992), in which the district court stated that "lien notices . . . need to comply only substantially, rather than perfectly, to convey adequate notice of a lien." Several courts have applied, with different results, this substantial compliance standard when considering whether a lien notice adequately identifies the taxpayer. Many courts have enforced liens after finding that there is an error in the taxpayer's name. See, e.g., Kivel v. United States [89-2 USTC ¶9415], 878 F.2d 301 (9th Cir. 1989) ("Bobbie Morgan" rather than "Bobbie Morgan Lane"); United States v. Polk [87-2 USTC ¶9432], 822 F.2d 871 (9th Cir. 1987) ("Roy Bruce Polk" rather than "Bruce Polk"); Richter's Loan Co. v. United States [56-2 USTC ¶9706], 235 F.2d 753 (5th Cir. 1956) ("Freidlander" rather than "Friedlander"); Brightwell v. United States [93-1 USTC ¶50,223], 805 F.Supp. 1464 (S.D. Ind. 1992) ("William S. Van Horn" rather than "William B. Van Horn"); and United States v. Sirico [66-1 USTC ¶9209], 247 F.Supp. 421 (S.D.N.Y. 1965) ("Sirico, George" and "Sirico, A." rather than "Assunta Sirico"). Conversely, other courts have invalidated a federal tax lien where the IRS misspells or otherwise materially alters a taxpayer's name. See, e.g., Fritschler, Pellino, Schrank & Rosen, S.C. v. United States [89-1 USTC ¶9111], 716 F.Supp. 1157 (E.D. Wis. 1988) ("Allen G. Casey" rather than "Allen J. Casey"); Haye v. United States [79-1 USTC ¶9192], 461 F.Supp. 1168 (C.D. Cal. 1978) ("Castello" rather than "Castillo"); United States v. Ruby Luggage Corp. [54-2 USTC ¶9512], 142 F.Supp. 701 (S.D.N.Y. 1954) ("Ruby Luggage Corp." rather than "S. Ruby Luggage Corp."); and Continental Invs. [53-2 USTC ¶9625], 142 F.Supp. 542 (W.D. Tenn. 1953) ("W.R. Clark, Sr." rather than "W.B. Clark, Sr.").

Many of the above listed cases rely on the language of §6323(f)(4) which requires that, in the case of real property, the notice must be filed in such a manner that a reasonable inspection of the index will reveal the existence of the lien. In this case, a reasonable inspection of the Clarke County lien index would have revealed the existence of the federal tax lien. A certified copy of page 773 from the Clarke County Lien Index is attached to the Supplemental Declaration of Samuel W. Elliot as Exhibit C. The federal tax lien in the name of "PD HILL DEVELOPMENT INC." appears directly above a GED lien for "PDH DEVELOPMENT INC." on the same page. As these are the only two entries on the Lien Index under the name of "PD Hill" or "PDH," someone searching diligently under "PD Hill Development Inc." would be likely to notice an entry under "PDH Development Inc." In addition, even if there were multiple entries, the two names are sufficiently similar such that they would appear in close proximity on the Lien Index, which is arranged alphabetically. Because these two names are substantially identical, a reasonable searcher, noticing this similarity, would have looked at the lien notice and taken steps to discover the identity of the taxpayer. Thus, under the substantial compliance standard, the lien notice adequately identifies the taxpayer.

CONCLUSION

Athens First's motions to strike the supplemental declarations are hereby GRANTED in part and DENIED in part. Athens First's motion for summary judgment is hereby DENIED. The United States motion for summary judgment is hereby DENIED.

¹ P.D.H. Development, Inc. and P.D. Hill Development, Inc. are the same entity (Supplemental Decl. of Paul Dennis Hill (tab #41), para. 2).

 

 

 

Plymouth Savings Bank, Plaintiff and Third-Party Plaintiff v. Jordan Hospital, Inc., United States of America, Massachusetts Department of Revenue, Defendants

U.S. District Court, Dist. Mass., CIV. 97-12364-DPW, 7/8/98

[Code Secs. 6321 and 6323 ]

Liens and levies: Lien for taxes: Security interest: Priority: Federal v. state liens: State law: Choateness: 45-day safe harbor provision.--An IRS tax lien had priority over a bank's competing security interest in contract payments arising from a debtor's performance of services to a hospital. Although the state ( Massachusetts ) court held that the bank had possessed a prior perfected security interest in the payments, its interest was not choate before the IRS filed its notices of liens and could not have become choate until the debtor was entitled to the contract payments, which occurred after the IRS filed its second notice of lien. Moreover, since the debtor did not acquire her payment rights within 45 days of the filing of the federal tax liens, the bank did not qualify for the safe harbor provision of Code Sec. 6323(c)(2)(B) .

MEMORANDUM AND ORDER

WOODLOCK, District Judge:

At issue is the priority for payment on debts owed respectively to the defendant United States Internal Revenue Service ("IRS"), and to plaintiff Plymouth Savings Bank ("the Bank"). The debts were incurred by Shirley Dionne, who subsequently filed for bankruptcy. Both the IRS and the Bank assert claims to certain payments, totaling $75,000, due to Dionne under a contract entered into by her and defendant Jordan Hospital, Inc. ("the Hospital"). Before me are cross motions for summary judgment filed by the three parties. ¹

I. BACKGROUND

A. Factual History

The pertinent facts are not in dispute. On April 13, 1994, Dionne, and her husband Warren, in their individual capacities executed a promissory note ("Note") payable to the Bank in the amount of $85,000. (Promissory Note, Pl.'s Mem., Ex. A.) On the same day, Dionne, d/b/a Greenlawn Nursing Home, in consideration of the $85,000 loan, entered into an agreement with the Bank, granting it "a security interest in (including, without limitation, a lien on and pledge of) all of the Borrower's Collateral (as hereafter defined)." (Security Agreement, Pl.'s Mem., Ex. C.) This collateral included "all accounts, accounts, accounts receivable, contract rights . . . general intangibles, regardless of whether or not they constitute proceeds of other Collateral." ( Id. )

The previous year, the Bank had filed a financing statement with the Secretary of the Commonwealth and the Town of Middleborough, on September 22, 1993, describing a "continuing security interest" in a variety of assets and potential assets of Dionne, d/b/a Greenlawn Nursing Home, including "contracts, contract rights, general intangibles, instruments, documents . . . and in the proceeds and products thereof" ("Financing Statement"). (See Financing Statement, Pl.'s Mem., Ex. D.)

According to the Bank, Dionne defaulted on the Note "[b]y December 1, 1994, at the latest." (Pl.'s SOF ¶6; see also, Croacher Aff. ¶¶5-6 (stating that Dionne was in default at all times subsequent to March 11, 1995).)

In addition to defaulting on the Note, Dionne failed to contribute the tax payments required under the Federal Insurance Contribution Act ("FICA") for the second and fourth quarters of 1994. ( U.S. SOF ¶1.) Dionne's liability for the delinquent second quarter payments was assessed on September 19, 1994 and a lien for the unpaid tax was filed in this court on December 19, 1994. (See id. ¶2; Notice of Lien 1, Mem. in Support of United States Mot. for Summ. J. (" U.S. Mem."), Ex. 1.) Dionne's FICA liability for the fourth quarter of 1994 was assessed on February 2, 1995 and a notice of federal tax lien as to this amount was filed on February 14, 1995. (U.S. SOF ¶3; Notice of Lien 2, U.S. Mem., Ex. 2.) As of April 1, 1998, Dionne's outstanding tax liability for these periods was $19,638.87 and $62,766.94 respectively. (See U.S. SOF ¶¶4-5; Behrle Aff. ¶2, U.S. Mem., Ex. 3.)

After the notices of tax liens were filed by the IRS, Dionne executed a contract with the Hospital ("Jordan Agreement"). In the Jordan Agreement, Dionne

agreed to assist [the Hospital] . . . in [its] efforts to obtain the right to operate a skilled nursing facility at its site as may be granted by the Department (the "Contracted Services"), provided, however, that such Contracted Services shall not include any act . . . nor would [the Hospital] acquire any interest in the real estate, license, furnishings, equipment, receivables, notes, or other assets of the [Greenlawn] Nursing Home.

( Jordan Agreement, Art. 1, Pl.'s Mem., Ex. E.) The parties differ in their characterizations of the Agreement. The IRS claims that it is a contract for services rendered, while the Bank claims that it is essentially a contract for the sale of Dionne's license to administer a nursing home facility. (Compare U.S. SOF ¶13 with Pl.'s Mem. at 3.) The Jordan Agreement called for payment of $300,000 to Dionne through a deposit and two additional installments. (See Jordan Agreement, Pl.'s Mem., Ex. E.) The final payment of $75,000 is the subject of this litigation. That payment was never made by the Hospital because Dionne filed a Chapter 7 Bankruptcy action on September 28, 1995, before the final sum could be paid. (Pl.'s SOF ¶12.)

B. Procedural History

On February 12, 1996, the Bank filed an action in the Massachusetts Superior Court against the Hospital alleging, inter alia, that the Bank held a perfected first security interest in all of Dionne's property and as such was entitled to the $75,000 held by the Hospital but payable to Dionne as proceeds of the Jordan Agreement. (See Complaint ¶¶5-11.) The Bank and the Hospital filed cross motions for summary judgment. (See Jordan 's SOF ¶¶5-6 (attached to Jordan 's Mem.).)

In a Memorandum and Order dated February 3, 1997 ("state court order" ². Justice Patrick F. Brady of the Massachusetts Superior Court allowed the Bank's motion and denied the motion of the Hospital.(See Mem. & Order at 1, Jordan 's Mem., Ex. F.) The court rejected the Bank's argument that the transaction between Dionne and the Hospital actually involved the sale to the Hospital of Dionne 's license to operate a nursing home. ( Id. at 9.) As a result, the court refused to find that the Bank had a perfected security interest in the license itself. ( Id. ) Instead, the state court order held that "the $300,000 [the Hospital] owed Dionne under the parties' agreement was compensation for, and thus proceeds from, her rendering of services to [the Hospital]. As such, the $75,000 retained by [the Hospital] under the contract constitutes collateral in which the Bank has a perfected security interest." (See id. at 10.)

At the direction of Justice Brady, the Bank then filed a Third-Party Complaint dated July 30, 1997, naming the Massachusetts Department of Revenue ("DOR") and the IRS as defendants. (See Pl.'s Mot. for Leave to Serve Third-Party Complaint, Jordan's Mem., Ex. H; Third-Party Complaint ¶¶2-3.) While the DOR has not filed an appearance in the case, see note 1 supra, the IRS appeared and filed a motion to remove the action to this Court. (See Notice of Removal (attached to Jordan 's Mem.).) Pursuant to a Scheduling Order issued on December 4, 1997, the Hospital deposited with the Clerk of this court the $75,000 at issue. (See Scheduling Order , Jordan 's Mem., Ex. J; Court Order , Jordan 's Mem., Ex. K; Receipt , Jordan 's Mem., Ex. 1.) Having relinquished any claim to the funds, the Hospital now seeks to be dismissed from this case. ³ See Jordan 's Mem. at 3-4.) In their motions for summary judgment, the IRS and the Bank each assert that their claim to the funds has priority.

II. PRIORITY OF INTERESTS

In arguing for the priority of their respective claims to the $75,000, the Bank and the IRS differ over the type of interest held by the Bank and the application of federal tax law. I will outline the federal and state law generally at issue, before addressing the parties' specific contentions.

When an issue of priority between two liens (or other similar interests) arises and one of the claimants is the IRS, both state and federal issues are implicated. Questions concerning the type of interest held by the non-federal lien-holder are normally ones determined by examining the law of the state where the lien was created. Progressive Consumers Federal Credit Union v. United States [96-1 USTC ¶50,160], 79 F.3d 1228, 1235 (1st Cir. 1996); see also, Bremen Bank & Trust Co. v. United States [98-1 USTC ¶50,116], 131 F.3d 1259, 1266 (8th Cir. 1997); United States v. Bell Credit Union [88-2 USTC ¶9564], 860 F.2d 865, 867 (10th Cir. 1988). By contrast, questions concerning the formation and attachment of a federal item, as well as issues surrounding the priority of competing federal and state created interests, are matters of federal law. Progressive [96-1 USTC ¶50,160], 79 F.3d at 1234. I will first address the state law issues.

A. State Security Interest

Before the federal rules for priority can be properly applied, I must determine the nature of the legal interest held by the Bank. See United States v. Nat'l Bank of Commerce [85-2 USTC ¶9482], 472 U.S. 713, 722 (1985). As discussed above, the Financing Statement filed by the Bank in September, 1993, granted it "a continuing security interest [in] . . . contracts, contract rights, general intangibles, instruments, documents . . . and in the proceeds and products thereof[.]" (Financing Statement, Pl.'s Mem., Ex. D.) In addition, the Security Agreement granted to the Bank a security interest in all of Dionne's collateral including "all accounts, accounts receivable, contract rights . . . general intangibles, regardless of whether or not they constitute proceeds of other Collateral." (Security Agreement, Pl.'s Mem., Ex. C.)

It is clear that the language of these agreements is quite broad and thus could give to the Bank a security interest in a almost any type of collateral that Dionne owned. The more pertinent question is whether the benefits conferred to Dionne under the Jordan Agreement could fairly be characterized as collateral under either the Financing Statement or the Security Agreement. See Bremen, 131 ***** at 1264 (emphasizing the importance of how collateral is defined as either contract rights or accounts receivable.

Before I consider this latter question, I must address the applicability of the state court order deciding this very issue. The state court order stated that the Bank held a perfected security interest in the services rendered under the Jordan Agreement. (Me. & Order at 10.) The court refused to find that the Bank had a perfected security interest in the nursing home license itself. ( Id. at 9.) The Bank argues that the state court order is flawed and suggests it should be reconsidered here. (Pl.'s Mem. at 2-3.) The IRS counters that I am collaterally estopped from reconsidering the state court order concerning the characterization of the Jordan Agreement. ( U.S. Opp'n at 2-3.)

1. Reconsideration of State Court Order

The IRS misconstrues the relevant legal issues at play. Rather than an inquiry regarding issue preclusion, relevant when determining the applicability of a decision by a court in a previous, separate action, Miles v. Aetna Cas. & Surety Co., 412 Mass. 424, 426-27 (1992), the more appropriate question here is whether I should reconsider the state court order.

In 28 U.S.C. §1450, Congress provided that "injunctions, orders, and other proceedings had in such [state] action prior to its removal shall remain in full force and effect until dissolved or modified by the district court." The First Circuit has stated that this statute "establishes the authority of the federal district court to dissolve or modify all injunctions and orders issued prior to removal." Hyde Park Partners, L. P. v. Connolly, 839 F.2d 837, 842 (1st Cir. 1988). See Granny Goose Foods, Inc v. Teamsters, 415 U.S. 423, 437 (1974) (§1450 recognizes district court's authority to dissolve or modify pre-removal state court orders). Thus, under the federal statute, pre-removal state orders remain in effect, but are subject to the district court's modification, where necessary.

In Resolution Trust Corp. v. Northpark Joint Venture, 958 F.2d 1313 (5th Cir. 1992), cert. denied 506 U.S. 1048 (1993), addressing a similar situation, the Fifth Circuit articulated the standards for review when pre-removal orders are challenged. It held that

[a] prior state court order in essence is federalized when the action is removed to federal court, although the order "remains subject to reconsideration just as it had been prior to removal." . . . Federal procedure governs the enforcement of a prior state court order in a case removed to federal court. . . . Thus, where the prior state court order is a summary judgment, the federal court must ensure that the order is consistent with the requirements of Rule 56(c) of the Federal Rules of Civil Procedure. . . If the federal court declines to reconsider the state court summary judgment, then the federal court certifies that the order is indeed consistent with Rule 56(c).

Id. at 1316 (citations omitted).

The state court grant of summary judgment here remains subject to reconsideration just as it had been prior to removal. In deciding whether or not to engage in such reconsideration, I must determine whether the state order comports with the federal law of summary judgment. My decision is, of course, tempered by the deference I owe the state court, both as a matter of comity and because the state findings treat matters of state law within the Superior Court's particular expertise. See 18 Wright, Miller & Cooper, Federal Practice and Procedure §4478 at 798 n.29 (federal court should show special deference to pre-removal findings of state court because of state court's presumed expertise in state law).

In this case, after a careful examination of the state court order, I decline to reconsider the state court's ruling, finding it fully consistent with Fed. R. Civ. P. 56(c). Three points underscore this conclusion.

First, the standard of review employed by Massachusetts state courts when examining motions for summary judgment is virtually identical to the standard mandated by Fed. R. Civ. P. 56(c). It provides:

[t]he judgment sought shall be rendered forthwith if the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to a judgment as a matter of law.

Mass. R. Civ. P. 56(c).

A second point that informs my conclusion is that the questions addressed in the state court order, as well as those before me now, are essentially ones of law. All parties concede here, as they appear to have earlier before the state court, that there are no material issues of fact and thus the pivotal dispute concerns each party's application of the law. Such a case is by definition ripe for summary judgment.

Finally, upon examination of the state court ruling, I find the analysis to be thorough and well-reasoned and the conclusions to be supported by the relevant law. The court's analysis embraces the full spectrum of prior cases dealing with property rights and security interests in government licenses. (See Mem. & Order at 4-9.) The court distinguished the nursing home license at issue here from other licenses, such as those concerning alcoholic beverages and broadcasting, that have been found to be general intangibles. ( Id. ) In doing so, the court relied on reasonable interpretations of Massachusetts statutory law, which strictly prohibited the transfer of nursing home licenses, and appellate court opinions, which found transferability a critical factor in determining whether a license was a general intangible. (See id.) I find no basis to depart from these interpretations of Massachusetts state law at this time. ⁴

Thus, for purposes of analyzing the priority of the relevant interests here, I will treat the Bank's security interest as one in "both cash and noncash proceeds arising from the rendering of services by [Dionne]." ⁵ Mem. & Order at 9.)

B. Federal Tax Lien Act of 1966

The federal law issues at play here specifically implicate the Federal Tax Lien Act of 1966 ("Act"), 26 U.S.C. §§6321-6326, as well as several judicially created glosses surrounding it. ⁶ The Act defines the characteristics of a federal tax lien, such as the ones at issue here, and it creates a general framework for determining the priority of such a tax lien vis a vi a state lien or similar right. See 26 U.S.C. §§6321-6323. As indicated above, this framework implicitly incorporates state law determinations as to the characteristics of the state lien. Progressive [96-1 USTC ¶50,160], 79 F.3d at 1235. In addition, the Supreme Court has recognized that where not explicitly overruled by the Act, the common law principle of "the first in time is the first in right" governs priority issues. United States v. McDermott [93-1 USTC ¶50,164], 507 U.S. 447, 449 (1993). Moreover, the Court has held that a state lien must meet the federal requirements for choateness or perfection in order to be considered in existence for first in time purposes. Id. at 449-50.

The federal requirements for choateness mandate that the "identity of the lienor, the property subject to the lien, and the amount of the lien [be] established." United States v. New Britain [54-1 USTC ¶9191], 347 U.S. 81, 84 (1954). Applying this test in United States v. McDermott, the Supreme Court determined that a general security financing statement does not ripen into a choate lien until it attaches to a particular piece of real property. [93-1 USTC ¶50,164], 507 U.S. at 452. Thus, the Court held that even where a security financing agreement is filed with the proper state authorities, the agreement only becomes choate, for first in time purposes, when the taxpayer acquires the property or collateral. Id.

With respect to the federal lien, the Act codifies the imposition of "a lien in favor of the United States upon all property and rights to property, whether the real or personal", 26 U.S.C. §6321, in cases where an individual has failed to pay certain federal taxes owed after a demand. While this federal lien arises as soon as the taxpayer's delinquency is assessed by the IRS, 26 U.S.C. §6322, the lien will "not be valid as against any purchaser, holder of a security interest, mechanic's lienor, or judgment lien creditor until notice thereof" is made. 26 U.S.C. §6323(a). Even in cases where notice is properly given by the IRS, the priority of the federal tax lien is not guarantied, and such a federal lien

shall not be valid with respect to a security interest which came into existence after tax lien filing but which . . . is in qualified property covered by the terms of a written agreement entered into before tax lien filing and constituting . . . a commercial transactions financing agreement [and] . . . is protected under local law against a judgment lien arising, as of the time of tax lien filing, out of an unsecured obligation.

26 U.S.C. §6323(c)(1). The Act defines a "commercial transactions financing agreement" as "an agreement (entered into by a person in the course of his trade or business) . . . to make loans to the taxpayer to be secured by commercial financing security acquired by the taxpayer in the ordinary course of his trade or business[.]" Id. §6323(c)(2). Finally, "qualified property" as used in the Act "includes only commercial financing security ⁷ acquired by the taxpayer before the 46th day after the date of tax lien filing." Id. §6323(2)(B).

Thus, there are two situations where a state interest, such as a lien or security agreement, will have priority over a federal tax lien. See J.D. Court, Inc. v. United States [83-2 USTC ¶9454], 712 F.2d 258, 261 (7th Cir. 1983), cert. denied 466 U.S. 927 (1984). In the first, the state lien or security interest must become perfected or choate before notice of the federal tax lien is filed. 26 U.S.C. §§6323(a); United States v. Equitable Life Assurance Society [66-1 USTC ¶9444], 384 U.S. 323, 327 (1966); Progressive [96-1 USTC ¶50,160], 79 F.3d at 1235.

In the second instance, the state interest, if not choate before the federal lien is filed, must meet the requirements for the 45-day "safe harbor" provision contained in §6323 of the Act. Bremen [98-1 USTC ¶50,116], 131 F.3d at 1263-64. The elements of this safe harbor require that (1) the state interest be contained in a written security agreement entered into before the federal tax lien is filed; (2) the security agreement be protected under local law against a judgment lien arising as of the time of tax lien filing, out of an unsecured obligation; (3) the loan for which the security agreement is made must be executed before the parties had actual knowledge of the tax lien filing; ⁸ (4) the agreement and the security must be made in the normal course of the taxpayer's business; and (5) the collateral or 'qualified property' actually must be acquired by the taxpayer within 45 days of filing the federal tax lien. 26 U.S.C. §6323(c)(1); Bremen [98-1 USTC ¶50,116], 131 F.3d at 1263-64.

C. Application of Federal Priority Doctrine

Having characterized the competing interests at stake here and set forth the legal framework, it is now necessary for me to determine which interest takes priority as to the $75,000. To review, the IRS filed notice of two separate federal tax liens on December 19, 1994 and February 14, 1995, (Notice of Liens 1 & 2, U.S. Mem., Ex 1-2), while the Bank filed a general financing statement with the Secretary of the Commonwealth on September 22, 1993 and entered into a Security Agreement with Dionne on April 13, 1994. (Financing Statement, Pl.'s Mem., Ex. D.) The relevant sum in dispute, $75,000, was the result of payment owed to Dionne for services rendered pursuant to the Jordan Agreement entered into on March 31, 1995. ( Jordan Agreement, Pl.'s Mem., Ex. E.)

In order for the Bank's security interest to succeed against the IRS' federal tax lien, the security interest must either have become choate before notice of the federal liens were filed, or it must meet the requirements of the §6323(c) safe harbor provision. See J.D. Court [83-2 USTC ¶9454], 712 F.2d at 261. It does neither.

In order to meet the federal choate requirements a security interest or lien must have established "the identity of the lienor, the property subject to the lien, and the amount of the lien[.]" McDermott [93-1 USTC ¶50,164], 507 U.S. at 449. Here, the identity of the lienor (the Bank) and the amount of the lien ($85,000) were established at least at the time of the Security Agreement. ⁹ The property subject to the lien or interest is a different matter. At the time that the Financing Statement and Security Agreement were executed the specific property subject to those documents was unclear. It was not until March 31, 1995, at the earliest, when the Jordan Agreement was executed that the contracts rights of benefits for services rendered, which are the subject of this dispute were crystalized. ¹⁰

The Bank argues that the general terms of the Financing Statement and Security Agreement sufficiently describe the property at issue such that their security interest should be deemed choate. ¹¹ (Pl.'s Mem. at 11-12.) This reading of when the property subject to a security interest is "established" for choateness purposes, is at variance with the Supreme Court's holding in McDermott. In that case, the Court reasoned, in an interchange with the dissent, that such an interpretation "refuses to acknowledge the unavoidable realities that property subject to a lien is not 'established' until one knows what specific property that is, and that a lien cannot be anything other than inchoate with respect to property that is not yet subject to the lien." McDermott [93-1 USTC ¶50,164], 507 U.S. at 452 n.5.

Thus, under the reasoning in McDermott, the Bank's security interest in the services rendered by Dionne could not have become choate until the services were rendered by Dionne in conformance with the Jordan Agreement, which was only executed on March 31, 1995, several weeks after notice of the second tax lien was filed. See Silverman v. United States [94-2 USTC ¶50,370], 1994 WL 408667 (D. Mass. 1994).

Therefore, the Bank's only hope for priority over the federal tax lien is if it can qualify for the 45-day safe harbor provision found in 26 U.S.C. §6323(c). As noted above, this safe harbor provision can be broken down into several elements. The only requirement that need be addressed here, however, is the central element that the collateral or property ¹² be actually acquired by the taxpayer or debtor within 45 days of the filing of the tax lien. See 26 U.S.C. §6323(c)(2)(B). It is not completely clear from the record when the services called for in the Jordan agreement were actually performed by Dionne, thus giving her a right to payment under the contract. ¹³ According to the terms of the Jordan Agreement, Dionne was not entitled to the $75,000 at issue here until two years after the Hospital was approved to receive a license to operate the nursing home facility. (See Jordan Agreement, art 2, §2.02(c).) While it is not clear in the record when the Hospital received approval of its license, whatever that date, was certainly more than 45 days from the date that the second notice of tax lien was filed.

Thus, I must find that the Bank does not qualify for the 45 day, safe harbor provision in 26 U.S.C. sect;6323(c). As a result, I find that the federal tax liens at issue here have priority over the Bank's security interest. ¹⁴

III. CONCLUSION

For the reasons more fully set forth above, the plaintiff Bank's Motion for Summary Judgment is DENIED and the motions of defendant IRS and defendant Hospital for Summary Judgment are GRANTED. Judgment shall enter for the IRS in the amount on deposit with the Clerk.

¹ The Massachusetts Department of Revenue ("DOR"), in addition to the United States Internal Revenue Service ("IRS"), was named as a defendant in Plymouth 's third party complaint. ( See Pl. 's Mot. to File Third-Party Complaint, Def. Jordan's Mot. for Summ. J. (" Jordan 's Mem."), Ex. H.) The docket indicates that the DOR has not filed an appearance or otherwise become involved in this case. At the hearing in this matter, plaintiff's counsel indicated that the DOR had affirmatively determined not to contest the issue in the case.

² According to the Bank, "the Chapter 7 Bankruptcy Trustee of the Estate of Shirley Dionne has reported to the Bankruptcy Court that she has no interest in the proceeds and that the estate has been fully administered." (Third-Party Complaint ¶11). The only evidence in the record of the Trustee's view on this case is a Report of No Distribution filed by the Trustee in United states Bankruptcy Court on April 27, 1997, which states that the Dionne estate has been fully administered. (See Trustee's Report of No Distribution, Third Party Complaint, Ex. C.)

³ According to correspondences between the parties contained in the record, the Hospital sought a stipulation of dismissal from the other active parties in this case after its surrender of the $75,000. The IRS agreed to this resolution of claims against the Hospital, while the Bank refused. (See Willcox Letter , Jordan 's Mem., Ex. M; Devlin Letter , Jordan 's Mem., Ex. N.) Apparently, the Bank feared that dismissal would in some fashion compromise its underlying claim against the Hospital. My allowance of the IRS motion for summary judgment as a result of this Memorandum fully resolves the issues and justifies dismissal of the Hospital.

⁴ This interpretation of the security interest held by the Bank is consistent with the language of the Jordan Agreement which describes the payment of moneys to Dionne for "contracted service" and explicitly eschews reading the agreement as a transfer of "any interest in the real estate, license, furnishings, equipment, receivables, notes, or other assets of the [Greenlawn] Nursing Home." ( Jordan Agreement, art. 1, Pl.'s Mem., Ex. E.)

⁵ As discussed infra, even if I were to reconsider the state court order and treat the nursing home license here as analogous to broadcasting licenses found to be the subject of security agreements in other contexts, the Bank's security interest would remain subordinate to the federal tax lien because that interest in the "proceeds of the transfer of . . . [the] license", State Street Bank & Trust Co. v. Arrow Communications, Inc., 833 F. Supp. 41, 48 (D. Mass. 1993), did not become sufficiently choate until Dionne performed the services required under the Jordan Agreement. See McDermott [93-1 USTC ¶50,164], 507 U.S. at 451-52 (interest not choate until particular property is acquired by taxpayer).

⁶ Issues of priority of liens involving the United States government were, of course, given judicial definition before the enactment of the Federal Tax Lien Act of 1966. Many of these judicial "glosses" to the Act are actually applications from priority doctrines in place before the passage of the Act.

⁷ Commercial Financing Security is defined as "(i) paper of a kind ordinarily arising in commercial transactions, (ii) accounts receivable, (iii) mortgages on real property, and (iv) inventory." 26 U.S.C. §6323(c)(2)(C).

⁸ But in any case, such loan must be made no later than 45 days after the actual filing of the federal tax lien. 26 U.S.C. §6323(c)(2).

⁹ Of course if the relevant agreement is the earlier filed financing statement, that document does not specify the amount of the security interest.

¹⁰ Even at that point, Dionne had not yet performed the required services under the Agreement and thus had not earned the amounts under the contract.

¹¹ The Bank further argues that its filing of the financing statement perfected its interest. (Pl.'s Mem. at 11.) As mentioned previously, the financing statement filed on September 22, 1993, contained no description of the amount of the loan nor the particular property at issue, because it was filed over six months before the Note and Security Agreement were executed. Moreover, the Court in McDermott rejected the motion that filing a lien was sufficient to supercede the three requirements for federal choateness. [93-1 USTC ¶50,164], 507 U.S. at 451-52.

¹² The Act requires that this collateral or property be "commercial financing security." 26 U.S.C. §6323(c)(2)(B). As mentioned above, commercial financing security is defined as "(i) paper of a kind ordinarily arising in commercial transactions, (ii) accounts receivable, (iii) mortgages on real property, and (iv) inventory." Id. §6323(c)(2)(C).

¹³ In its Statement of Undisputed Facts, the Bank contends that the agreement was "consummated" on May 18, 1995. (Pl.'s SOF ¶9.)

¹⁴ This finding, along with the Hospital's act of turning over the $75,000 to this court and relinquishing any claim to the money, justifies dismissing the Hospital from any further proceedings of this case.

 

 

 

United States of America , Plaintiff-Appellee v. Harry S. Stonehill, Robert P. Brooks, Defendants-Appellants

(CA-9), U.S. Court of Appeals, 9th Circuit, 95-17019, 5/20/96, Affirming and remanding an unreported District Court decision

[Code Sec. 6321 ]

Lien for taxes: Lawsuits: Attachment: Property interests: State law: Value.--The government, pursuant to a federal tax lien, could attach and foreclose upon two shareholders' personal lawsuits. The suits, which were filed on the shareholders' behalf by a tax receiver, who was appointed to manage the foreclosure of corporate property, against a city for inverse condemnation and other zoning improprieties regarding the property, constituted personal property under state ( California ) law. Since state law specified that a lawsuit was "a right to recover money or other personal property by a judicial proceeding," the lawsuits constituted property or rights to property to which a federal tax lien could attach. However, the trial court acted within its discretion when it ordered the shareholders to release and dismiss their claims against the city because their personal claims were meritless and had no intrinsic value. As shareholders, they did not own the property themselves; thus, only the corporation could collect damages from the city for the decrease in property value caused by the allegedly improper zoning.

[Code Sec. 7403 ]

Lien for taxes: Sale of property: Appraisals: Purchase price: Inadequate.--The trial court did not abuse its discretion in approving the sale of corporate property to a city by a tax receiver, who was appointed to manage the foreclosure of the property. The corporation's shareholders failed to present any evidence that the property appraisers appointed by the court were biased. They unsuccessfully contended that the accepted purchase price reflected the depressed value of the property caused by the city's allegedly improper zoning and was an inadequate and unfair price.

John McCarthy, Department of Justice, Washington , D.C. 20530 , for plaintiff-appellee. Robert E. Heggestad, Heggestad & Weiss, 601 Thirteenth St., N.W. , Washington , D.C. 20005 , for defendants-appellants.

Before: BOOCHEVER, HALL, and FERNANDEZ, Circuit Judges.

OPINION

HALL, Circuit Judge:

Appellants Harry S. Stonehill and Robert P. Brooks seek to prevent the United States from selling real property in which they have an interest, pursuant to a federal tax lien. The property is held in a tax receivership, and the receiver entered into a contract to sell the property to the Town of Tiburon , California , for $6.8 million. The terms of the contract include a provision requiring dismissal of two state lawsuits filed against Tiburon by the receiver alleging that Tiburon depressed the value of the property through a series of illegal zoning procedures. The receiver agreed to dismiss the lawsuits on behalf of the receivership, but appellants refused to dismiss their personal claims. The district court ordered appellants to dismiss their claims, and they appealed this order. We now affirm.

I

This case began with a tax dispute filed against the appellants by the United States in 1965. Final judgment was entered against appellants in 1980, and the government subsequently secured liens on appellants' property. In 1984, at appellants' request, the court appointed a tax receiver to manage the foreclosure of the property. The real property at issue here is the last remaining property to be liquidated.

The property is owned by one of the appellants' businesses, Pine Street Corporation, and is a 101-acre tract in Tiburon , California , that is zoned for residential use. The value of this property derives mainly from the ability to construct residences thereon. From 1988 to 1994, Pine Street submitted several applications to Tiburon for approval of a development plan for the property. During the same period Tiburon substantially modified its General Development Plan. At one time the General Plan would have allowed Pine Street to develop one home site per acre. In the end, however, Tiburon approved development of only 19 home sites on this property.

Throughout this process appellants contended that Tiburon engaged in illegal down-zoning in order to depress the value of the property so that the town could purchase the parcel for use as designated open space. The tax receiver filed two suits in California state court against Tiburon on behalf of Pine Street and the appellants, claiming inverse condemnation and other zoning improprieties.

After the second lawsuit was filed, the town of Tiburon and the Marin County Open Space Committee entered into negotiations to purchase the property for $6.8 million, with the condition that the receiver would dismiss the two lawsuits against the Town. The district court authorized the receiver to finalize the sale and instructed him to present the final offer to the court for approval. Appellants submitted a motion for reconsideration, asserting among other things that they objected to dismissal of their complaints against the Town. The district court denied the motion.

The United States then filed a motion to expand the receivership to encompass appellants' personal claims against the Town, contending that these claims were subject to the federal tax liens. The district court granted this motion on April 6, 1995. Appellants then filed a motion to stay in Marin County Superior Court, requesting that court not to take any action to settle or dismiss the state lawsuits pending resolution of the federal proceeding. Before the California Superior Court ruled on this motion, the district court confirmed the sale of the property, and ordered appellants to dismiss their personal claims. On October 10, 1995, the district court issued its final order confirming the sale. Appellants appealed this order on October 17, 1995, and we granted an emergency stay on November 7, 1995.

We review a district court's decision involving its supervision of an equitable receivership for abuse of discretion. SEC v. Hardy, 803 F.2d 1034, 1037 (9th Cir. 1986). Therefore, the district court's order expanding the receivership is reviewed under this standard.

II

The first issue on appeal concerns whether the government may attach and foreclose upon the appellants' personal lawsuits pursuant to the federal tax lien. We hold that the lawsuits, as choses in action, ¹ are personal property subject to attachment and foreclosure by the government.

The Internal Revenue Code provides that: "If any person liable to pay any tax neglects or refuses to pay the same after demand, the amount ... shall be a lien in favor of the United States upon all property and rights to property, whether real or personal, belonging to such person." 26 U.S.C. §6321 (emphasis added). The Supreme Court has broadly construed this statutory language, noting that the statute "reveals on its face that Congress meant to reach every interest in property that a taxpayer might have." United States v. National Bank of Commerce [85-2 USTC ¶9482 ], 472 U.S. 713, 719-20 (1985). To determine whether the property is subject to the federal tax lien, the court conducts a two-part analysis. First, state law determines the nature of the legal interest the taxpayer has in the property. Id. at 722; Little v. United States [83-1 USTC ¶9343 ], 704 F.2d 1100, 1105 (9th Cir. 1983). Once the court determines the state-law right possessed by the taxpayer, then the federal tax consequences are solely a matter of federal law. National Bank of Commerce [85-2 USTC ¶9482 ], 472 U.S. at 722; Little [83-1 USTC ¶9343 ], 704 F.2d at 1105. Thus, federal law controls whether the state-law right constitutes property or rights to property attachable by a federal tax lien. National Bank of Commerce [85-2 USTC ¶9482 ], 472 U.S. at 722; Little [83-1 USTC ¶9343 ], 704 F.2d at 1105; In re Kimura [92-2 USTC ¶50,397 ], 969 F.2d 806, 810 (9th Cir. 1992).

Our first inquiry is whether California attaches any property rights to a chose in action, and we find that it does. California courts have consistently construed the Civil Code sections relating to property to include a chose in action, in contract or tort, as personal property. See Cal. Civil Code §§654 and 663 ; Parker v. Walker, 6 Cal. Rptr. 2d 908, 912 (Cal. App. 3 Dist. 1992) ("A cause of action to recover money in damages, as well as money recovered in damages, is a chose in action and therefore a form of personal property."); Carver v. Ferguson, 254 P.2d 44, 45 (Cal. App. 3 Dist. 1953) (holding that a cause of action in tort, being a thing in action, is personal property); Bensinger v. Davidson [57-1 USTC ¶9263 ], 147 F. Supp. 240, 245 (S.D. Cal. 1956) (holding that a chose in action for unjust enrichment is personal property under California law, which is subject to a federal tax lien).

The second question, then, is whether this interest consists of property or rights to property under 26 U.S.C. §6321 . We have held that if the state law interest is "an economic asset in the sense that it has pecuniary worth and is transferable," then it is subject to the federal tax lien. Little [83-1 USTC ¶9343 ], 704 F.2d at 1105-06; Kimura [92-2 USTC ¶50,397 ], 969 F.2d at 811. We conclude that choses in action in California , such as the lawsuits at issue here, satisfy both of these requirements. First, it is obvious that a right to collect damages, albeit speculative, has pecuniary worth. Second, the California Civil Code specifies that a chose in action, which is "a right to recover money or other personal property by a judicial proceeding," Cal. Civil Code §953 , may be transferred or assigned. Cal. Civil Code §954 . Therefore, appellants' causes of action against Tiburon constitute property or rights to property to which federal tax lien consequences may attach. Accord United States v. Comparato [94-2 USTC ¶50,354 ], 22 F.3d 455, 457-58 (2nd Cir.) (holding that the taxpayers' vested interest in their deceased son's medical malpractice claims was subject to a federal tax lien), cert. denied, 115 S. Ct. 481 (1994).

Once a federal lien attaches to taxpayers' property, the government may then foreclose upon the property. See 28 U.S.C. §2001 . We conclude that the government may foreclose upon the taxpayers' causes of action just as it could any other real or personal property. A taxpayer's chose in action represents one of the taxpayer's assets, and the government has the right to pursue the action to judgment, even if the taxpayer may not have done so himself. The complement to the government's ability to pursue the lawsuit is the ability to settle or dismiss it. Cf. National Bank of Commerce [85-2 USTC ¶9482 ], 472 U.S. at 725 ("In a levy proceeding, the IRS steps into the taxpayer's shoes ... [and] acquires whatever rights the taxpayer himself possesses.") (internal quotations omitted). If the government was denied this avenue for resolving the suit, then the receivership may not be able to achieve the most advantageous outcome for all concerned.

The provisions of 28 U.S.C. §2001 govern foreclosures of taxpayers' property. This section limits the government receiver's ability to sell foreclosed property at a private sale for an unfair price: "Before confirmation of any private sale, the court shall appoint three disinterested persons to appraise such property. ... No private sale shall be confirmed at a price less than two-thirds of the appraised value." By its terms, section 2001 applies only to real property. But section 2004 provides that sales of personal property must also be conducted "in accordance with section 2001 ... , unless the court orders otherwise." 28 U.S.C. §2004 (emphasis added). Therefore, it is at the district court's discretion whether to obtain appraisals before foreclosing upon personal property, such as appellants' causes of action.

The district court determined that the appellants' personal claims against Tiburon were meritless, and therefore, had no intrinsic value. Appellants do not own the property themselves. Instead, they are shareholders in Pine Street Corporation, which itself owns the property. They do not claim they are entitled to collect damages from Tiburon for the decrease in property value caused by the allegedly improper zoning. They concede that this claim belongs solely to the Pine Street Corporation, and is therefore controlled by the receiver. Instead, they claim that they are entitled to consequential damages measured by the increased tax liability they incurred due to interest penalties resulting from the delay in selling the property (from 1989 to now), allegedly caused by the improper zoning.

Well-established principles of corporate law prevent a shareholder from bringing an individual direct cause of action for an injury done to the corporation or its property by a third party. Cohen v. Beneficial Indus. Loan Corp., 337 U.S. 541, 548 (1949); Sutter v. General Petroleum Corp., 28 Cal. 2d 525, 530 (1946); Jones v. H. F. Ahmanson & Co., 81 Cal. Rptr. 592, 597-99 ( Cal. 1969). Therefore, the causes of action against Tiburon belong solely to the Pine Street Corporation. Appellants' injuries are merely incidental to the injury caused to the corporation by Tiburon. Cf. J&J Farms, Inc. v. Cargill, Inc., 693 F.2d 830, 836 (8th Cir. 1983) (holding that losses were not recoverable where they "were the projected result of a collateral or secondary enterprise and thus too remote and speculative"); Northern Helex Corp. v. United States, 524 F.2d 707, 720 (Ct. Cl. 1975) (noting that the lost profits from a corporation's collateral undertakings, which could not be carried out due to the defendant's breach, were too remote to be recoverable). The appellants have no valid personal claims against Tiburon, regardless of the fact that they are named in the complaints in their individual capacities. Thus, appellants' causes of action have no value. As a result, the district court was within its discretion when it ordered appellants to release and dismiss any claims they may have against Tiburon in connection with this matter.

III

Even if the district court may properly dismiss their personal claims, appellants contend that the district court erred when it confirmed the sale. They assert three arguments as to why the sale is improper: (1) the statutory requirement of appraisals by three disinterested appraisers was not met, (2) the accepted purchase price represents the depressed value of the property and is therefore unfair, and (3) the purchase price does not include any value for the dismissal of the appellants' personal lawsuits. We have already shown the third argument to be without merit, so we consider only the first two.

A

The statute governing private sales of real property by the government pursuant to a tax lien, 28 U.S.C. §2001(b) , requires that the court "appoint three disinterested persons to appraise such property." Appellants claim that the three appraisers recommended to the district court by the receiver were not disinterested, and therefore, the statutory appraisal requirement was not met.

Appellants presented, at most, vague assertions of bias on the part of the three appraisers, Messrs. Semple, Carneghi, and Mills. They allege that Semple had previously been retained by Tiburon, so therefore he has an interest in placing the lowest possible value on the land to ensure a low purchase price for the town. But of the three appraisals, his was the highest, which would seem to vitiate this argument. Carneghi has appraised the property before, at the request of the current receiver and his predecessor. Appellants contend that this relationship with the receivers, and "possible fidelity" towards the receivership renders Carneghi "interested." Without more evidence of actual bias by these appraisers, the fact that they have appraised this property before does not necessarily prove they are "interested" parties.

Appellants' allegations against Mills are the least persuasive. Carneghi's company was previously called "Mills-Carneghi-Bautovich," raising a suspicion in appellants' minds that Mills has been associated with Carneghi in the past. There is no indication that any such past association, if it existed, would be evidence of bias by Mills.

The district court found this evidence wholly unpersuasive, and we agree. The statute calls for the appraisers to be disinterested, but it does not require them to be completely unfamiliar with the property and the dispute. They must simply be impartial and unbiased. Without more, we cannot conclude that the district court clearly erred when it accepted these appraisals.

B

Appellants allege that the accepted purchase price of $6.8 million reflects the depressed value of the property caused by Tiburon's illegal down-zoning, and is therefore an inadequate and unfair price. Thus, appellants reassert their claims against Tiburon, and suggest that the purchase price should reflect the value of the property without the down-zoning. In other words, they argue that they should be compensated as though the Pine Street Corporation has already prevailed in the lawsuits against Tiburon.

By statute, the court must not approve a sale of property pursuant to a tax lien for less than two-thirds of the fair market value. 28 U.S.C. §2001(b) . The district court accepted the purchase price after reviewing three valid appraisals, which show that $6.8 million clearly exceeds two-thirds of the fair market value of the property.

But the purchase agreement also requires the receiver to dismiss the receivership's causes of action against Tiburon. Unlike appellants' meritless personal claims, the receivership has valid claims against Tiburon. However, any value these claims may have is speculative at best, and the district court did consider the value of the lawsuits when it decided to approve the sale.

An attorney experienced in land use litigation submitted his recommendations to the district court regarding the viability of the lawsuits. He ultimately concluded that there is a low probability of a recovery exceeding the current purchase offer, plus the additional cost of litigation and the continuously accruing interest on appellants' tax liability. Furthermore, the receiver, an experienced real estate attorney, indicated that Tiburon would most likely rescind the purchase offer if it did not include dismissal of the lawsuits. If this offer were rejected then the receiver estimated that a sale to a private developer, if an interested buyer were found, would net far less than the $6.8 million offered. The district court considered this information, and noted that: "After carefully studying the proposed agreement, the receiver's motion and supporting documents ... I conclude that the proposed sale achieves the highest possible return on the Tiburon property. ... Even the most optimistic evaluation of the claims shows that it is extremely unlikely that defendants could recover enough damages to offset the high expense and long delay of litigation." District Court's Order of August 18, 1995. On this basis, the district court judge then exercised his discretion to forgo appraisals of the lawsuits.

Under these facts we cannot conclude that the district court abused its discretion in approving the sale. We therefore affirm the district court's order approving the sale of the property to Tiburon for the purchase price of $6.8 million.

IV

For the foregoing reasons, we find that appellants' personal lawsuits are subject to the federal tax lien, and thus, the district court did not abuse its discretion when it expanded the receivership to encompass the lawsuits. Furthermore, we affirm the district court's order confirming the sale of the property. Therefore, we remand so that the district court may order appellants to dismiss and release any claims they may have against Tiburon in connection with this matter, and we order the emergency stay lifted so that the sale can proceed apace.

AFFIRMED and REMANDED.

¹ Literally, a thing in action."A personal right not reduced into possession, but recoverable by a suit at law. ... A right to receive or recover a debt, demand, or damages on a cause of action ex contractu or for a tort or omission of a duty. ... Personalty to which the owner has right of possession in future, or a right of immediate possession, wrongfully withheld." Black's Law Dictionary 241 (6th ed. 1990).

 

 

 

Tregan P. Albers, Stakeholder, Plaintiff v. Internal Revenue Service, Appellee, Kenneth E. Schroeder, Norma L. Schroeder, Appellants, Douglas C. Schroeder, Susan J. Keim, Glen R. Schroeder, David A. Schroeder, Defendants

(CA-8), U.S. Court of Appeals, 8th Circuit, 96-1587, 1/6/97, Affirming a District Court decision, 96-1 USTC ¶50,197

[Code Sec. 6321 and Fed. R. App. P. 38 ]

Jurisdiction: Assessment and collection: Interpleader: Sanctions: Frivolous appeal.--The trial court was correct in rejecting a couple's arguments that it did not have jurisdiction over an interpleader action filed by a stakeholder because they are nonresident aliens, their case should have been remanded to state court, the IRS's assessment and collection actions against them in order to seize rent money owed on their farmland to satisfy unpaid federal tax assessments were based on fraud, coercion and fear, and they should be able to contest their tax liability in the interpleader action. Moreover, sanctions were imposed against the couple for bringing a frivolous appeal.

Sally Renee Johnson, 487 Federal Bldg., Lincoln, Neb. 68508-3865, Gary R. Allen, Carol E. Schultze, Janet Arlene Bradley, Kenneth W. Rosenberg, Teresa E. McLaughlin, Department of Justice, Washington, D.C. 20530, for defendant-appellee. Kenneth E. Schroeder, Norma L. Schroeder, R.R. 1, Box 72, Davenport, Neb. 68335, pro se.

Before: BEAM, HANSEN, and ARNOLD , Circuit Judges.

 Caution: This court has designated this opinion as NOT FOR PUBLICATION. Consult the Rules of the Court before citing this case.

Per Curiam"

EC: Kenneth and Norma Schroeder appeal from the district court's ¹ order granting the United States' motion for disbursement of interpleaded funds and its order denying their motion to remand the case to state court. The Internal Revenue Service served Notices of Levy on Tregan P. Albers to seize rent money he owed for the 1994 crop year on the Schroeders' farm land, in order to partially satisfy unpaid federal tax assessments. Albers filed this interpleader action in Nebraska state court, and the government removed the case to federal district court pursuant to 28 U.S.C. §1441(a) and (b). The Schroeders argue that the district court did not have jurisdiction over the action, and thus should have remanded it to state court because they are "Non-resident Aliens," that the IRS assessment and collection actions were based on "fraud coercion and fear," and that they should be able to contest their tax liability in this interpleader action. We conclude the judgment of the district court was correct and that an opinion would lack precedential value. See 8th Cir. R. 47B.

As we conclude that appellants' appeal is based entirely on contentions that have repeatedly been rejected as frivolous, we grant the government's request that we assess $2,000 in sanctions against appellants. See Fed. R. App. P. 38; see, e.g., United States v. Gerads, 999 F.2d 1255, 1256-57 (8th Cir. 1993) (per curiam), cert. denied, 114 S. Ct. 1300 (1994); Lonsdale v. United States [90-2 USTC ¶50,581], 919 F.2d 1440, 1448 (10th Cir. 1990); Becraft v. Nelson, 885 F.2d 547, 548-50 (9th Cir. 1989) (per curiam).

Accordingly we affirm the district court's judgment and impose sanctions in the amount of $2,000.

¹ The Honorable Warren K. Urbom, United States District Judge for the District of Nebraska.

 

 

 

Tregan P. Albers, Plaintiff v. Internal Revenue Service, Kenneth Schroeder, et al., Defendants

U.S. District Court, Dist. Neb., 4:CV95-3068, 2/15/96

[Code Secs. 6321 and 6322 ]

Lien for taxes: Third-party funds: Surrender of property.--The IRS was entitled to levy on funds owed by a third party to delinquent taxpayers pursuant to an oral contract for the lease of real property. The IRS's tax lien against the taxpayers' property was perfected against third parties because a notice of lien was properly filed. The taxpayers' arguments that they were nonresident aliens and that the Tax Code did not apply to them were rejected as meritless. Furthermore, the taxpayers had a sufficient interest in the funds for the government to reach those amounts with its levy because, under state ( Nebraska ) law, they had rights under the contract at the time it was entered into. The IRS properly notified the taxpayers of the assessment, made a demand for the unpaid taxes, and levied against the funds held by the third party.

Jerry D. Anderson, Heinisch, Bryan Law Firm, P.O. Box 311, Geneva, Neb. 68361, for plaintiff. Tregan P. Albers, R.R. 1, Box 93, Davenport, Neb. 68335, pro se. Sally R. Johnson, Assistant United States Attorney, Lincoln, Neb. 68508-3865, Carol E. Schultze, Department of Justice, Washington, D.C. 20530, for defendant. Kenneth E. Schroeder, R.R. 1, Box 72 , Davenport , Neb. 68335 , pro se.

MEMORANDUM AND ORDER ON DEFENDANTS' MOTION TO DISBURSE FUNDS

URBOM, District Judge:

Pending are Kenneth and Norma Schroeder's and the United States' cross motions to disburse funds, filings 39 and 35, respectively, that were deposited with this court by Tregan P. Albers, the named plaintiff. The plaintiff filed a state interpleader action after receiving notice from the Internal Revenue Service (IRS) that funds he owed to the Schroeders for the rental of farmland were subject to a federal tax lien and levy. Albers' state court action was removed to this court by the United States Attorney pursuant to 28 U.S.C. §1441 (Supp. V 1993). The defendants claim adverse interests to the deposited funds.

I. FACTUAL BACKGROUND

During the 1994 crop year, the plaintiff, Tregan P. Albers, rented from the Schroeders several parcels of farmland located in Thayer County , Nebraska . At the end of the period he calculated that he owed them $12,064.70 for the use of the land. See (Petition, Affidavit & Application for Interpleader Remedy, Filing 1.) However, before he could pay, Albers received several notices from the IRS requesting that he turn over to that agency any property owned by the Schroeders or to which they were entitled, which he possessed. See (Ex.'s B, C, D, and Albers Aff. at ¶¶4-6, filing 32.) The IRS sought the property from the plaintiff because the Schroeders had failed to pay any federal income tax assessed against them between 1980 and 1990. The IRS has filed a lien against the Schroeders and sought to satisfy the lien amount through levying against property that was in the possession of Albers, but to which the Schroeders were entitled. In response to the levies, Albers turned over to the IRS $3294.00, but did not turn over the rent monies. Instead, the plaintiff filed an interpleader action in Nebraska state court. He named the Schroeders, the IRS, ¹ and the Schroeders' children as potential claimants to the funds.

The United States Attorney, representing the IRS, (i.e., the United States ), pursuant to 28 U.S.C. §1441 , removed the case from state court. (Filing 1.) The Schroeders, in response, moved to have it remanded to the state court in which it was originally filed. (Filing 6.) Magistrate Judge Piester denied their motion. (Filing 7.) Dissatisfied, the Schroeders appealed his ruling to the Eighth Circuit, but their appeal was dismissed for lack of an appealable order. (Filing 19.) Following the failure of their appeal and a hearing on the matter, I ordered the plaintiff discharged of liability to the defendants with respect to the disputed monies and dismissed him from this action following his depositing the funds into the registry of this court. (Filing 29.) I ordered all persons with any claim to the funds to file a notice of such by September 28, 1995. Only Kenneth and Norma Schroeder and the United States have filed any claim to the funds.

II. STANDARD OF REVIEW

I will treat the parties' motion for disbursement of interpleaded funds as cross-motions for summary judgment, as they involve materials outside the pleadings. See FED. R. CIV. P. 7 & 12. A motion for summary judgment shall be granted when, viewing the facts and reasonable inferences arising therefrom in the light most favorable to the nonmoving party, "there is no genuine issue as to any material fact and ... the moving party is entitled to a judgment as a matter of law." FED. R. CIV. P. 56(c); Buller v. Buechler, 706 F.2d 844, 846 (8th Cir. 1983). A genuine issue of material fact exists when there is sufficient evidence favoring the party opposing the motion for a jury to return a verdict for that party. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248 (1986). In determining whether a genuine issue of material fact exists, the evidence is to be taken in the light most favorable to the nonmoving party. Adickes v. S.H. Kress & Co., 398 U.S. 144, 157 (1970). If the moving party meets the initial burden of establishing the nonexistence of a genuine issue, then the burden shifts to the opposing party to produce evidence of the existence of a genuine issue for trial. Celotex Corp. v. Catrett, 477 U.S. 317 (1986). The opposing party "may not rest upon mere allegation or denials of his pleading, but must set forth specific facts showing that there is a genuine issue for trial," and "must present affirmative evidence in order to defeat a properly supported motion for summary judgment." Anderson, 477 U.S. at 256-57 (citations omitted).

III. LEGAL DISCUSSION

The United States removed this case from Nebraska state court pursuant to 28 U.S.C. §1441 , contending that this is an interpleader action over which the district courts have original jurisdiction and arises under the Constitution, treaties, or laws of the United States, 28 U.S.C. §1441(a) & (b) (Supp. V 1993). (Filing 1.) Removal of this matter pursuant to the above statute is proper. Pursuant to 28 U.S.C. §1335 (Supp. V 1993), the federal statutory interpleader provision, a plaintiff who in good faith believes he faces two or more adverse claims, or potential claims, to money or property in his possession or custody, valued at $500.00 or more, may place the money or property into the registry of the district court and seek the court's assistance in determining the party rightfully entitled to it. The district courts are granted original jurisdiction over such claims. There must be minimum diversity, however, meaning that any two defendants claiming adversely to each other meet the diverse citizenship requirements of 28 U.S.C. §1332 (Supp. V 1993). The United States, which is not a citizen of any state, may not be considered for the purpose of establishing the minimum diversity required, however, See e.g., Commercial Union Ins. Co. v. United States, 999 F.2d 581, 584 (D.C. Cir. 1993) (citing General Ry. Signal Co. v. Corcoran, 921 F.2d 700, 703 (7th Cir. 1991)). In this case, the plaintiff also named the Schroeders' children, several of whom reside in states other than Nebraska. While they did not submit claims for the disputed funds by the deadline I established, the jurisdiction of this court must be determined at the time the lawsuit is filed. Thus, when the action was removed from state court, the children were still potential claimants to the disputed funds, regardless of whether they subsequently filed claims. Therefore, the minimum diversity needed for the purposes of this action was established at the time of filing (removal, in this case).

Even if, however, subject-matter jurisdiction is lacking under the statutory interpleader provisions of Section 1335, subject-matter jurisdiction may also be based on federal-question jurisdiction under 28 U.S.C. §1340 (Supp. V 1993). Section 1340 grants the district courts original jurisdiction over "any civil action arising under any Act of Congress providing for internal revenue...." Id. The question as to which claimant is entitled to the disputed funds is a question involving the application of the internal revenue laws of the United States. The plaintiff is seeking an adjudication of his obligation to pay a party claiming entitlement to the disputed funds. In this case, this necessarily involves a federal question because one of the parties claiming the fund does so by the operation of a federal statute. Therefore, I find that this action is properly founded on Section 1340 and that this court has subject-matter jurisdiction. I also consider this action to have retained its interpleader character pursuant to Federal Rule of Civil Procedure 22, "rule interpleader." ² Furthermore, I understand the Eighth Circuit in St. Louis Union Trust Co. v. Stone [78-1 USTC ¶9259 ], 570 F.2d 833, 835 (8th Cir. 1978), to mean what it said, and in an intepleader action, "matters directly affecting the nature or operation of such [federal tax] liens are federal questions, regardless of whether the federal statutory scheme deals with them or not." St. Louis Union Trust Co. [78-1 USTC ¶9259 ], 570 F.2d at 835 (quoting United States v. Brosnan [60-2 USTC ¶9516 ], 363 U.S. 237.240 (1960)). ³

Several other related issues should be noted at this point. All lawsuits for the purpose of restraining the assessment or collection of any tax, other than those specifically permitted by statute, regardless of the person bringing them, are barred by 26 U.S.C. §7421(a) (Supp. V 1993). I do not find that the plaintiff's action is within this provision. He merely seeks the court's assistance in determining the party rightfully entitled to the interpleaded funds, having himself denied any stake in the disputed funds. Furthermore, he partially complied with the IRS levies, remitting approximately $3,000.00, in response to one such levy. See (Ex.'s B & C, Filing 32.) In light of this, and in the absence of other facts suggesting an improper purpose, I do not conclude that he interposed this suit for the purpose of frustrating the collection of taxes owed to the United States by the Schroeders. Therefore, I do not believe this lawsuit violates the limitations imposed in Section 7421 .

With respect to the Schroeders' claims, I shall deal with their arguments insofar as they relate to the issue of entitlement to the disputed funds. In addressing any argument which may be considered to be directed at the merits of the levy or assessment of their tax liability I will construe them to be raising solely procedural issues. 28 U.S.C. §2410 (Supp. V 1993), permits a lawsuit regarding the procedural validity of a tax lien. See, e.g., Schmidt v. King [90-2 USTC ¶50,487 ], 913 F.2d 837, 839 (10th Cir. 1990); Elias v. Connet [90-2 USTC ¶50,397 ], 908 F.2d 521, 527 (9th Cir. 1990); Pollack v. United States [87-2 USTC ¶9463 ], 819 F.2d 144, 145 (6th Cir. 1987); Aqua Bar & Lounge, Inc. v. United States Dep't of Treas. Internal Rev. Serv. [76-2 USTC ¶9554 ], 539 F.2d 935, 939 (3d Cir. 1976). As stated, I will construe the Schroeder's claims as being such a procedural attack. ⁴

The Schroeders claim that the United States has no claim to the deposited rent monies for a number of reasons. ⁵ Among these are that: this court does not have original jurisdiction of this matter, the Schroeders are non-resident aliens to the United States, and that they do not fall within the provisions of the tax code and, thus, are not subject to it. All of these claims are without merit.

First, as noted above, this court has original jurisdiction of this matter pursuant to 28 U.S.C. §1335, because it involves potential or actual adverse claims to disputed property valued at $500.00 or more, with at least, minimum diversity among the adverse claims. Further, and as discussed above, this court's jurisdiction is also founded on 28 U.S.C. §1340, as this matter involves the internal revenue laws of the United States. Finally, the United States is a proper party in that it has a claim to the property arising from a lien imposed by federal law. See 28 U.S.C. §2410(a)(5) (Supp. V 1993). While Section 2410 does not provide an independent basis of subject-matter jurisdiction for the federal courts, see Shaw v. United States [64-1 USTC ¶9421 ], 331 F.2d 493 (9th Cir. 1964); St. Louis Union Tr. Co. v. Stone, 428 F.Supp. 988 (E.D. Mo. 1977), it is recognized as a waiver of sovereign immunity, under certain circumstances, in those cases included in its provisions in which a court's subject-matter jurisdiction already exists. ⁶ See Aqua Bar & Lounge, Inc. [76-2 USTC ¶9554 ], 539 F.2d at 938-40 (holding Section 2410 constitutes waiver of sovereign immunity where plaintiff does not contest merits of underlying tax assessment). Therefore, the Schroeders' contention that this court does not have original jurisdiction is incorrect.

The Schroeders also contend that they are non-resident aliens to the United States, seeming to interpret "United States" to mean only where the seat of its government is located, the District of Columbia. In their capacity as non-resident aliens, they assert they can have no tax liability to the United States. This position is wholly without merit. The term "United States" is properly used to "designate the territory over which the sovereignty of the United States extends." Hooven & Allison Co. v. Evatt, 324 U.S. 652, 671-72 (1945), overruled on other grounds sub nom. Limbach v. Hooven & Allison Co., 466 U.S. 353 (1984). The sovereignty of the United States extends to all the states comprising it. The United States was not created as a separate state, but as a union of other states, of which each state is a part. Thus, at the time of the ratification of the Constitution, the "United States" referred to those states which had adopted the Constitution. Since that time, the United States has come to comprise the fifty states. Furthermore, when the United States came into being it was not limited to the territory of the District of Columbia, which did not yet even exist. Instead, the authority of the United States under the Constitution was understood to extend to the area bounded by the "several states."

In addition, the United States Constitution provides for the admission of new states to the Union. See UNITED STATES CONST. art. IV, §3 , cl. 1. Pursuant to that provision, Nebraska voluntarily entered into the Union created by the United States Constitution on March 1, 1867. The Proclamation of Admission of the State reads:

[The people of Nebraska] now ask for admission into the Union: Therefore, Be it enacted by the Senate and House of representatives of the United States of America, in Congress Assembled, That the constitution and State government which the people of Nebraska have formed for themselves be, and the same is hereby, accepted, ratified, and confirmed, and that the said State of Nebraska shall be, and is hereby, declared to be one of the United States of America; and is hereby admitted into the Union upon an equal footing with the original States, in all respects whatsoever.

Thus, Nebraska entered the Union by actions initiated by its own citizens. As a state of the Union, it became subject to the laws of the United States, including those enacted by Congress dealing with the generation of revenue for the federal government. ⁷ Nebraska is a part of the whole of the United States of America, rather than a state foreign to it. Thus, its residents are residents of the United States. Therefore, the Schroeders are not "non-resident aliens" to the United States. As a result, any claim that they are not subject to its revenue laws because they are non-resident aliens is without merit. ⁸

The Schroeders also argue that Nebraska is not a State as that term is defined by 26 U.S.C. §§3121(e)(1) and (2) , 4612(a)(4)(A) , and 7701(a)(9) and (10) (Supp. V 1993). The Schroeders in citing these statutes in support of their position, fail to note that these sections define the stated term (for example, "State" and "United States" in §3121(e)(1) & (2), "United States" in §4612(a)(4)(A) , and "United States" and "State" in §7701(a)(9) & (10)) to be more inclusive than might otherwise be commonly understood. This result is easily reached by reading each of these sections in conjunction with the definition of "includes" and "including" contained in 26 U.S.C. §7701(c) (Supp. V 1993), which states that "[t]he terms 'includes' and 'including' when used in a definition contained in this title [i.e. Title 26] shall not be deemed to exclude other things otherwise within the meaning of the term defined." Thus, the definition of "State" clearly includes that would be its commonly understood meaning--one of the fifty states forming a part of the entire United States. So, too, with "United States," the Union and sovereign entity produced through the association of all of the states. The Schroeders attempt, unsuccessfully, to remove from the language of the statutes its commonly understood meaning and usage. ⁹

The Schroeders base their claim to the disputed funds on the existence of a private, oral contract for the lease of real estate entered into between themselves and the plaintiff, Tregan Albers. They contend that under the Nebraska State Constitution no law may be made that impairs the obligation of such a contract. NEB. CONST., art. I, §16 . The implication to be drawn is that the federal statues pursuant to which the United States makes its claim to the disputed funds are laws impairing the obligation of contract. ¹⁰ However, the Schroeders have failed to understand that the United States Constitution and laws enacted pursuant to it, as well as treaties, are the supreme law of the land, notwithstanding any state law or constitution to the contrary. U.S. CONST. art VI, Cl. 2. Thus, they cannot base their argument on Nebraska law. Furthermore, the impairment provision of the Nebraska Constitution is understood to provide that state laws in force at the time when the contract is entered into form a part of the contract, see Norris v. Tower, 102 Neb. 434 (1918), and that the state may not subsequently enact laws that retroactively alter obligations under an existing contract, see Travelers Inc. Co. v. Ohler, 119 Neb. 121 (1929). Thus, the federal tax laws remain unaffected by the application of this state constitution provision.

The United States' claim to the rental monies now deposited with this court is based on the existence of a federal tax lien ¹¹ against the Schroeders. At the time when the tax is assessed, a federal tax lien in favor of the United States automatically arises on "all property and rights to property, whether real or personal," of "any person liable to pay any tax [who] neglects or refuses to pay [the] same after demand." 26 U.S.C. §6321 (Supp. V 1993). It remains in effect until satisfied or becomes unenforceable because of lapse of time. 26 U.S.C. §6322 (Supp. V 1993). It is, therefore, valid against the taxpayer at the time of assessment.

The lien given by Section 6321 is both broad and comprehensive. It attaches to all property and rights to property which are subject to ownership and which can be transferred; it attaches not only to land and tangible personal property but also to claims, demands, and causes of action which the taxpayer can assert against third persons. See, e.g., Bank of Nevada v. United States [58-1 USTC ¶9228 ], 251 F.2d 820 (9th Cir.), cert. denied, 356 U.S. 938 (1958); United States v. Barndollar & Crosbie [48-1 USTC ¶9203 ], 166 F.2d 793 (10th Cir. 1948); Citizens State Bank of Barstow, Tex. v. Vidal [40-2 USTC ¶9603 ], 114 F.2d 380 (10th Cir. 1940). The lien also attaches to the defaulting taxpayer's after-acquired property. Glass City Bank v. United States [45-2 USTC ¶9449 ], 326 U.S. 265 (1945).

To be perfected against certain claims of third parties to the taxpayer's property or rights to property, and as a result to receive priority over these other claims, notice of the lien imposed by Section 6321 may need to be filed. Thus, a federal tax lien against the real property of the taxpayer who fails to pay his taxes must be filed in one office in the State or county or other governmental subdivision, according to state law, in which the property is situated. 26 U.S.C. §6323(f)(1)(A) (Supp. V 1993). Pursuant to Nebraska law, the proper place to record a federal lien (that is, to file notice of a lien) against real property is in the Office of the Register of Deeds of the county in which the property is located. See NEB. REV. STAT. §52 -1001(1) (1993 Reissue). The notice of lien ¹² was properly filed on June 20, 1994, in the Thayer County, Nebraska, Office of the Register of Deeds, the county in which the property is located. The government has provided a certified copy of the lien notice. (Ex. 3, Filing 32.) Therefore, the Schroeders' argument that the lien was not properly filed because it was not filed in the District of Columbia is baseless. ¹³ The government was not required to file its lien as against the Schroeders, in Nebraska, the state in which the property is situated, let alone in the District of Columbia, where none of the taxpayers' property is found. It filed in order to protect itself against third parties who might subsequently make a claim against the same property held by the taxpayer. However, as against the taxpayer, the lien, filed or unfiled, is superior.

For the purposes of Title 26, a levy includes the "power of distraint and seizure by any means," 26 U.S.C. §6331(b) (Supp. V 1993), and extends to "property possessed and obligations existing at the time [it is made]." Id. Contrary to the Schroeders' arguments, no judicial action is required to seize the defaulting taxpayer's property. ¹⁴ As was recognized in Phelps v. United States [75-1 USTC ¶9467 ], 421 U.S. 330 (1975), service of notice historically has been sufficient to seize a debt. Id. at 337 (citing Miller v. United States, 11 Wall. 268, 297 (1871)); see also Sims v. United States [59-1 USTC ¶9338 ], 359 U.S. 108 (1959) (holding notice of levy and demand equivalent to seizure). However, in order for the federal government to levy on the property of a taxpayer who fails to pay any tax to which he is obligated, the property sought by the levy must be the taxpayer's, or he must have an interest in that property. His interest in the property is derived from the operation of state law and is not federally created. See, e.g., Peoples Nat'l Bank of Wash. v. United States [85-1 USTC ¶9172 ], 608 F. Supp. 672 (D. Wash. 1984) (state law determines nature of property rights to which federal tax lien attaches). Thus, if the taxpayer has a right to the property under state law, that property may be reached by the United States in the form of a levy, whether possessed by the taxpayer himself or by a third party. See Expoimpe v. United States [85-1 USTC ¶9393 ], 609 F. Supp. 1098 (D. Fla. 1985).

In addition, in order to effectuate its levy, other than in circumstances where the collection of the tax is in jeopardy, the government must notify the defaulting taxpayer of its intention to levy. 26 U.S.C. §6331(a) & (d)(3). It then makes demand on the party in possession of the taxpayer's property, or right to property, to surrender such to the federal government. 26 U.S.C. §6332(a) (Supp. V 1993). That party is obligated to do so, or himself be liable for the amount of the property he refuses to turn over (up to the amount of the tax owed), as well as penalties. 26 U.S.C. §6332(c)(1) & (2) (Supp. V 1993). As stated above, no judicial action is required to obtain possession of the property. Phelps v. United States [75-1 USTC ¶9467 ], 421 U.S. at 337. If the United States notified the Schroeders of its intention to levy, made demand on the person in possession of the property, and if under Nebraska law, the Schroeders were entitled to the funds as against anyone other than the United States at the time of the levy, the United States is rightfully entitled to the deposited funds.

Nebraska law provides that an oral lease of real property for a period not exceeding one year, is valid even though not in writing. Guynan v. Guynan, 208 Neb. 775, 782-83 (1981). This lease did not extend beyond one year. Both the plaintiff and the Schroeders state that the amount of the rent to which the Schroeders are entitled is the $12,064.70 now held by this court. In addition, neither the plaintiff nor the Schroeders dispute that they entered into the contract. Based on the aforementioned facts, I accept that a valid contract existed between Albers and the Schroeders. Nebraska law also provides that in the case of an oral lease for the rental of real property, where the date of payment of the rent amount is not established, the rent is due at the end of the period of the tenancy. In Holtman v. Lallman, 122 Neb. 183, 239 N.W. 820 (1931), the court said: "Generally in this state, in the absence of any different agreement, a yearly lease of farm lands begins on March 1 and ends on February 28, of the succeeding year, and the rental becomes due at the expiration of the term." Holtman, 122 Neb. at 183 (Syllabus of the court). ¹⁵ Regardless of the payment terms under the oral contract, however, the Schroeders had rights under the contract at the time it was entered into.

Nebraska recognizes the contract law doctrine of "anticipatory breach." See Chadd v. Midwest Franchise Corp., 226 Neb. 502 (1987). An anticipatory breach of contract is one committed by a contracting party before the time for whose present duty to perform his promise under the contract has arisen. It is the result of actions or words that indicate a party to the contract will not perform his promises thereunder. In the case of a purely executory contract, the party faced with the breach may do any of three things. He may act as if there never was a contract, he may perform his obligations under the contract and wait for the time when the other party has a present duty to perform and then claim breach, or he may claim anticipatory breach and sue immediately. Further, under Nebraska law a lease is to be construed as any other contract. Omaha Country Club v. Dworak, 186 Neb. 336 (1971). Therefore, from the moment the lease between the plaintiff and the Schroeders was entered into, the Schroeders had legal rights under it, Had the tenant, Tregan Albers, failed to perform, the Schroeders had legal recourse against him. I find that this is a sufficient interest in property on which the federal tax lien could attach. Therefore, the proceeds were subject to the lien and levy of the United States at any point following the creation of the contract.

The existence of the property interest noted above, the United States' unrefuted contentions that it notified the Schroeders of the tax assessments and made demand for the unpaid taxes, (filing 32, ¶¶4, 5, 6), proof that it filed a notice of lien, and then levied against their interest in property held by the plaintiff, are sufficient to establish the United States' claim to the rent monies as superior to the Schroeders. Therefore, Albers was obligated to pay over to the government the entire amount of the rent when the United States first made its levy. I find that the United States' claim to the interpleaded funds deposited with this court, in the amount of $12,064.70, is superior and its motion for the disbursement of interpleaded funds should be granted.

The Schroeders make several other claims. The Schroeders claim that Section 6331 only applies to employees of the federal government and that only the "Secretary" is permitted to collect the tax due by means of levy. See (Schroeder Aff. at ¶6, filing 31; Def.'s Rebuttal to Schultze's Mot. For Disbursement of Funds at ¶3.) Their interpretation is incorrect for two reasons. First, as the Supreme Court made clear in Sims v. United States [59-1 USTC ¶9338 ], 359 U.S. 108, 113 (1959), the language in Section 6331 referring to "any officer, employee, or elected official, of the United States ..." was included in order to "subject the salaries of federal employees to the same collection procedures as are available against all other taxpayers...." Id. (emphasis added). By its terms Section 6331 otherwise applies to "any person liable to pay any tax...." 26 U.S.C. §6331 ; United States v. National Bank of Commerce [85-2 USTC ¶9482 ], 472 U.S. 713, 714-15 (1985). Therefore, the Schroeders' property is subject to levy. ¹⁶ Second, the term"Secretary" when used in this Title is defined to include the Secretary of the Treasury as well as his delegate, 26 U.S.C. §7701(a)(11)(B) (Supp. V 1993), where his delegate includes any "officer, employee, or agency ... duly authorized ... directly, or indirectly by one or more redelegations of authority, to perform the function mentioned...." 26 U.S.C. §7701(a)(12)(A)(i) . ¹⁷ Since the Schroeders have failed to present any evidence that IRS employee, Patricia Price, was without proper authority to levy pursuant to Section 6331 as a "duly authorized" delegate of the Secretary, I find that their allegation is meritless.

IT IS THEREFORE ORDERED that the Schroeders' motions for disbursement of interpleaded funds, filings 37 and 39, are hereby denied.

IT IS FURTHER ORDERED that the United States' motion for disbursement of interpleaded funds, filing 35, is hereby granted in full.

¹ The plaintiff named the IRS as a defendant in his state court complaint. In doing so, I understand him to have named the United States of America as a defendant.

² Rule 22 is similar to its counterpart, although not provided subject-matter jurisdiction, unlike Section 1335. See FED. R. CIV. P. 82. Rule 22 permits a plaintiff who faces multiple liability from person with claims to disputed funds, regardless of their value, to deposit these with the district court and implead the claimants. The underlying cause of action, however, must provide the proper subject-matter jurisdiction to the court (e.g., 28 U.S.C. §1332, or some other statutory or constitutional grant of jurisdiction). In the present case, as was mentioned above, I find that the court's subject-matter jurisdiction is founded on 28 U.S.C. §1340.

³ I would also add that I am not alone in this circuit in finding subject-matter jurisdiction over an interpleader action involving a federal tax lien. See Blackmon Auctions v. Van Buren Truck Ctr., Inc., 901 F.Supp. 287 (W.D. Ark. 1995), as well as the Stone case above.

⁴ In this motion for disbursement of the interpleaded, filing 35, the United States asserts that because this is an interpleader action, it is an inappropriate forum for the taxpayer to contest his tax liabilities. I agree, the taxpayer should not be permitted to bring an interpleader action in order to contest his federal tax obligation. The taxpayer is entitled to contest his tax liability pursuant to 26 U.S.C. §7422 (Supp. V 1993). He may do so in district court pursuant to 28 U.S.C. §1346(a)(1) (Supp. V 1993), provided he first pays the tax owing. See Flora v. United States [60-1 USTC ¶9347 ], 362 U.S. 145 (1960). He may also file a claim in the United States Tax Court. The benefit of doing so that the taxpayer does not have to first pay the tax. A taxpayer who does not follow one of these methods may not rely on 28 U.S.C. §1340 instead. Geurkink Farms, Inc. v. United States [71-2 USTC ¶9692 ], 452 F.2d 643 (7th Cir. 1971). However, I believe the preceding discussion makes it clear that this is a proper action by a third party, and that the Schroeders' claim will be considered as raising procedural issues.

⁵ As the Schroeders are represented by counsel, I shall construe all of their pleadings liberally and draw from them the claims I understand them to be making. In doing so, I have particularly considered filings 6, 31 and 39, as well as the rebuttal to the government's response to the Schroeders' claim fro disbursement of the interpleaded funds.

⁶ Section 2410(a)(5) allows the United States to be made a party to any interpleader action with respect to "real or personal property on which the United States claims a mortgage or other lien." Id.

⁷ The authority of Congress to "lay and collect" taxes is granted by U.S. CONST. art. 1, §8 , Cl. 1. The laws created by Congress are the "supreme Law of the Land." U.S. CONST. art. VI, cl.2.

⁸ This makes irrelevant the Schroeders' denial of being dual status citizens, (Filing 6.), as well as their claim that they are not taxpayers within the meaning of Section 7701(a)(14) . Moreover, it also disposes of their circular argument, as I understand them to be making, that because Nebraska Revised Statute §77 -2715 "defines" federal income tax liability as a function of whether the persons paid any federal income tax, and since they are non-resident aliens to the United States they did not pay any tax, therefore, they are not required to do so. (Filing 31 at ¶14.) (Their reading of the Nebraska statute at issue is incorrect, in any case, and Nebraska law would have no bearing on the applicability of federal tax law were the Schroeders' interpretation correct.) Having concluded that they are residents of the United States, the question of whether they paid any tax is irrelevant; they were obligated to do so under federal law.

The Schroeders also assert that I previously declared them to be nonresident aliens in the case of Joeckel, et al., v. Collector of Internal Revenue. 4:CV95-3016, by saying:

"The simple truth is, however, that the moment the plaintiffs voluntarily paid their federal income tax, whether or not at that time they were also non-resident aliens, they each became a taxpayer ..."

The Schroeders evidently have overlooked or have ignored the words "whether or not." In no sense does the sentence say that the plaintiffs were or are non-resident aliens.

⁹ The Schroeders also rely on provisions found under Title 28 to support their contentions that the terms used do not include their commonly understood meanings. As under Title 26, however, such a reading of the provisions at issue is not accurate.

¹⁰ The Schroeders also imply that because the funds arise out of a private contract involving private property they are not income subject to federal taxation. However, this view is erroneous. Under 26 U.S.C. §61(a) (Supp. V. 1993), "gross income" is defined as "income from whatever source derived," and Section 61(a)(5) specifically enumerates "rents" as income. Therefore, they are subject to federal income tax.

¹¹ The establishment of a tax lien by Congress is the exercise of its constitutional power to "lay and collect taxes." State of Michigan v. United States [43-1 USTC ¶9225 ], 317 U.S. 338 (1943).

¹² The Schroeders' claim that the "notice of lien" did not comply with NEB. REV. STAT. §53 -1002, is not accurate, as that section provides that a federal lien may be filed on the "notice" of such a lien, as well as a "certificate" of lien or a "certification of notice" of lien. Any of these three documents is to be accepted for filing. Id. Furthermore, pursuant to Treasury Regulation 301.6323(f)-1(d)(1) & (2), Form 668 is valid for filing a notice of lien. Exhibit 3, Form 668(Y), is a Notice of Federal Tax Lien. See Filing 32. In response to the Schroeders' claim that there must be a "formal" lien to be effective it should be understood that because a federal tax lien arises by operation of law, it is a "formal" lien at the instant of its creation.

¹³ The Schroeders base this claim on their belief that, because they do not reside in the District of Columbia, they reside outside of the United States. As was demonstrated earlier, they do reside within the United States and are residents of it. Therefore, the Code provides that the lien is to be filed where the real property of the United States resident is situated. 26 U.S.C. §6323(t).

¹⁴ Thus, the Schroeders' argument that the United States must first receive a "warrant of distraint" from a state court before it may enforce its lien, pursuant to the uniform commercial code is erroneous.

¹⁵ This result is in accord with the RESTATEMENT (SECOND) OF PROPERTY §12.1 emt. c.

¹⁶ Also defeated is the Schroeders' claim that Section 6331 applies only to taxes assessed under Title 27, (Filing 31 at ¶13.) Again, by its own language Section 6331 applies to any tax, clearly including taxes owed under Title 26 of the United States Code. This result is reached notwithstanding the Schroeders' citation of California Bankers Ass'n v. Shultz [74-1 USTC ¶9318 ], 416 U.S. 21 (1974). This proposition, for which they cite Shultz, is not even implied in that case. Shultz dealt with the constitutionality of the Bank Secrecy Act of 1970. Pub. L. No. 91-508, 84 Stat. 1114 (codified at 12 U.S.C. §§1730(d), 1928(b), 1951-59, and 31 U.S.C. §§1051 -62, 1081-83, 1101-05, 1121-22).

¹⁷ The Schroeders also contend that there is no delegated authority to execute a tax return on their behalf. (Filing 31 at ¶11.) Pursuant to 26 U.S.C. §6020(b)(1) (Supp. V 1993), the secretary, or his delegate may execute a tax return on behalf of any person who fails to file, or who willfully files a false or fraudulent return. However, although the IRS has the authority to do so, it is not required to make or file such return for the taxpayer, and it properly may determine or assess a deficiency in the absence of such a return. See, e.g., Maisano v. Commissioner, 894 F.2d 1344 (9th Cir. 1990); Roat v. Commissioner [88-1 USTC ¶9364 ], 847 F.2d 1379, 1382 n.1 (9th Cir. 1988); Smalldridge v. Commissioner [86-2 USTC ¶9764 ], 804 F.2d 125, 127-28 n.2 (10th Cir. 1986); Moore v. Commissioner [84-1 USTC ¶9129 ], 722 F.2d 193, 196 (5th Cir. 1984); United States v. Verkuilen [82-2 USTC ¶9618 ], 690 F.2d 648, 657 (7th Cirl. 1982). Moreover, the tax court in Harrman v. Commissioner [CCH Dec. 33,543 ], 65 T.C. 542 (1975), held that 26 U.S.C. §6020(b)(1) does not make it mandatory that the Secretary of the Treasury file a tax return before issuing a statutory notice of deficiency. Therefore, their argument lacks merit.

 

 

 

Berlin Properties, Inc. v. United States of America (IRS) and the Estate of Guido Orlandi

U.S. District Court, Dist. Vt., Civ. 89-238, 9/13/89

[Code Sec. 6321 ]

Lien for taxes: Property subject to: Debts owed to taxpayer.--The IRS was entitled to levy upon a debtor corporation's escrow fund, a portion of which fund the corporation voted to commit to repayment of its debt to the taxpayer, in order to satisfy the delinquent taxes of the taxpayer. The IRS could levy upon the entire escrow fund for the full amount of the debt recognized and was not limited to the portion of the fund committed to repayment of the debt. The IRS acquired the property interest of the taxpayer in the escrow fund, which under state (Vermont) law was equal to the entire amount of the debt owed by the corporation.

OPINION AND ORDER

BILLINGS, JR., District Judge:

The plaintiff, Berlin Properties, Inc., brought this action for declaratory relief alleging that the defendant, United States, had wrongfully levied on the plaintiff's corporate assets. The plaintiff moved for summary judgment pursuant to Fed. R. Civ. P. 56. The defendant cross-moved for summary judgment. For the reasons discussed below, the plaintiff's motion for summary judgment is DENIED and the defendant's cross-motion for summary judgment is GRANTED.

BACKGROUND

The undisputed facts of this case establish that as of October, 1987, plaintiff Berlin Properties was indebted to defendant Guido Orlandi ("Orlandi Estate") in the amount of $174,987.14 for loans advanced to the corporation. On October 30, 1987, the plaintiff corporation recognized and acknowledged this indebtedness by a vote of the Board of Directors. However, no repayment schedule was established at this time. On May 16, 1988, defendant United States served a Notice of Levy upon plaintiff, demanding that plaintiff turn over all property and rights of the Orlandi Estate. The levy indicated that the Orlandi Estate owed the United States $621,022.82 for unpaid income taxes. On August 25, 1988, approximately three months after the Notice of Levy, the plaintiff corporation voted to commit $135,000 of its $190,000 uncommitted escrow fund to purchase certain real property, and to commit 54% of the balance of the escrow fund to repay the Orlandi Estate's outstanding loans.

Plaintiff moved for summary judgment on the ground that the defendant Orlandi Estate has no interest or property right in the first $135,000 of the corporate escrow funds or 46% of the funds over $135,000 and that the defendant United States, therefore, can not rightfully levy on these funds. Plaintiff acknowledges that the Orlandi Estate has a property right in 54% of the funds in excess of $135,000, and that the defendant United States may rightfully levy on that amount. Defendant United States moves by way of cross-motion for summary judgment on the grounds that the tax levy extends to the total $174,987.14 which the corporate plaintiff acknowledged to be due and owing the Orlandi Estate.

DISCUSSION

The only issue on this motion is whether the United States can rightfully levy on the plaintiff's entire escrow fund or whether the levy must be limited to the funds committed to repayment of the Orlandi Estate debt. No genuine issue of material fact exists. The only issue is a matter of law as to the validity and extent of the defendant United States' levy.

The United States may levy "upon all property and rights to property" of a taxpayer to secure the repayment of taxes. 26 U.S.C. §6321 (1982). It is well established that this lien "can be asserted against intangible property such as a debt." United States v. Eiland [55-1 USTC ¶9487 ], 223 F. 2d 118, 121 (4th Cir. 1955). However, "whether and to what extent the taxpayer had 'property' or 'rights to property' to which the tax lien could attach" is a matter of state law. Aquilino v. United States [60-2 USTC ¶9538 ], 363 U.S. 509, 512 (1960). Thus, we must look to Vermont law to determine what interest the Orlandi Estate has in the plaintiff's escrow fund. Since the United States stands in the shoes of the Orlandi Estate under the levy, it is entitled to only those funds in which the Orlandi Estate has a property interest.

It is generally accepted that an acknowledgment that a debt is due and owing justifies finding a promise to repay. A. Corbin, 1A Corbin on Contracts §216 (1963). Indeed, under Vermont law, the Statute of Frauds does not bar one who loaned money pursuant to an oral agreement from proving the existence of that agreement through parol evidence. Mason v. Miner, 146 Vt. 242 (1985). Under this analysis, the Orlandi Estate had a property interest in plaintiff's escrow account for the full amount of the debt recognized on October 30, 1987. The defendant United States' levy attached to this amount. The fact that the corporation subsequently made a repayment schedule does not limit the amount of the levy. See United States v. Guittard Chocolate Company, 81-2 USTC ¶9805 , p. 88,678 (N.D. Cal. 1981). The levy here was not wrongful and extended to the total amount of the indebtedness owed to the Orlandi Estate.

CONCLUSION

For the reasons discussed above, defendant United States' cross-motion for summary judgment is GRANTED. Plaintiff's motion for summary judgment is DENIED.

SO ORDERED.

 

 

 

Transwestern Pipeline Company, Plaintiff v. Allied Bank of Texas, et al., Defendants

U.S. District Court, So. Dist. Tex., Houston Div., C.A. No. H-85-4347, 1/9/89

[Code Secs. 6321 and 6323 ]

Tax lien: Priority over private lien: Interpleaded funds: Qualified property.--A federal tax lien on payments owed by a pipeline company to a taxpayer under a gas purchase agreement had priority over an earlier lien by a bank on production proceeds of the taxpayer related to the gas interests. The funds interpleaded resulted from three years of purchases by the pipeline company arising approximately nine months after the federal tax lien was filed. The court noted that the protection afforded a private lien is limited in relation to property acquired after the federal tax lien has been filed. Property acquired by the taxpayer more than 45 days after the filing of a federal tax lien was not "qualified property," according to the court. Thus, the private lien could not take priority over the federal tax lien.

Sherrie Nichols Rutherford, Dorothy Lancaster McCoppin, Enron Interstate Pipeline Co., 1400 Smith St., Houston, Tex. 77001, for plaintiff. Linda C. Groves, Department of Justice, Dallas, Tex. 75242, for defendants.

MEMORANDUM AND ORDER

LAKE, District Judge:

This case involves competing claims to interpleaded funds on a stipulated factual record. Both the United States and Allied Bank claim superior liens on funds interpleaded by plaintiff, Transwestern Pipeline Company, which owes these funds to taxpayer, Mac Energy. Allied Bank asserts the priority of its lien based upon a security agreement executed by Mac Energy, Inc. in favor of Allied Bank, while the federal government asserts the priority of its subsequent tax lien. Transwestern is a mere stakeholder and asserts no claims to the interpleaded funds.

I. STATEMENT OF THE FACTS

There is general agreement as to the facts in this case. The basis of Allied Bank's claim goes back to a loan agreement made on July 31, 1981. On that date Mac Energy executed a deed of trust, security agreement, financing statement and assignment of production covering certain interests in oil, gas and/or mineral estates in property located in Washita County, Oklahoma, in favor of Allied Bank. On August 12, 1981, Allied Bank properly and timely filed a form UCC-1 in Washita County, Oklahoma, covering all of Mac's right, title and interest in and to personal property, including all proceeds from production on such property. On August 13, 1981, Allied Bank properly and timely filed such a form in Oklahoma County, Oklahoma, and recorded a deed of trust there. On February 26, 1982, the deed of trust was properly recorded in Washita County, Oklahoma. Mac Energy currently owes Allied Bank $1,582,588.42.

In September 1981 Mac Energy entered into a gas purchase agreement with Transwestern Pipeline Company, pursuant to which Transwestern purchased gas from wells in which Mac had a working interest. The funds interpleaded in this action are payments owed by Transwestern to Mac Energy under this gas purchase agreement for purchases made from December 31, 1984, to February 8, 1988.

Having assessed Mac for employment taxes, penalties and interest, the Internal Revenue Service ("IRS") filed a Notice of Federal Tax Lien against Mac on August 3, 1983, in the amount of $28,540.26, in Oklahoma County, Oklahoma. On March 5, 1984, the IRS filed a Notice of Federal Tax Lien against Mac in Oklahoma County, Oklahoma, for further assessments in the amount of $12,389.88. Mac Energy currently owes the federal government $50,381.27.

II. DISCUSSION

Neither party disputes the legitimacy of the other's lien. The government's lien arises under §6321 of the Internal Revenue Code, 26 U.S.C. §6321 , which provides: "If any person liable to pay any tax neglects or refuses to pay the same after demand, the amount . . . shall be a lien in favor of the United States upon all property and rights to property, whether real or personal, belonging to such person." The United States does not dispute that Allied Bank perfected its lien under Oklahoma law. The only issue is which lien has priority.

Allied Bank asserts that because it perfected its security interest under state law almost two years before the first Notice of Federal Tax Lien was filed, the bank's lien is superior to the federal tax lien. This argument must be rejected, however, because federal law, not state law, determines the priority of competing liens asserted against a taxpayer's property. Aquilino v. U.S. [60-2 USTC ¶9538 ], 363 U.S. 509, 514 (1960).

Priority of liens is governed by §6323 of the Internal Revenue Code, 26 U.S.C. §6323 . Prior to the 1966 amendments to this section, courts relied on the federal common law "choateness" doctrine, which gave the federal tax lien "the upper hand in its battles with competing private liens." Texas Oil & Gas Corporation v. U.S. [72-2 USTC ¶9653 ], 466 F.2d 1040, 1044 (5th Cir. 1972). Congress enacted the Federal Tax Lien Act of 1966 to mitigate the perceived harshness of the choateness doctrine for commercial lenders. Rice Investment Co. v. U.S. [80-2 USTC ¶9654 ], 625 F.2d 565, 569 (5th Cir. 1980). The choateness rule has been supplanted by the provisions of §6323 with respect to tax lien priority questions as to which that statute provides an unambiguous federal law answer. Aetna Insurance Co. v. Texas Thermal Industries, Inc. [79-1 USTC ¶9287 ], 591 F.2d 1035, 1038 (5th Cir. 1979). To prevail, Allied Bank must bring itself within the "safe haven" of §6323 . Rice Investment Co., 625 F.2d at 571. To a great extent the resolution of this case depends upon the breadth of protection now offered by §6323 .

Under §6323(c) , a lien imposed by §6321 shall not be valid with respect to a security interest in "qualified property covered by the terms of a written agreement entered into before tax lien filing and constituting a commercial transactions financing agreement." The dispositive issue in this case is whether the interpleaded funds constitute "qualified property" within the meaning of this section.

In construing §6323(c) , the Fifth Circuit has noted that "the protection given to a private lien in competition with a government tax lien for after-acquired property . . . is a limited protection." Texas Oil & Gas, 1040 F.2d at 1048. Only property acquired by the taxpayer-debtor within 45 days of the filing of Notice of Federal Tax Lien comes within the term "qualified property." Id. at 1049. Thus, even when property acquired by the taxpayer comes within the terms of a security agreement executed before the filing of a federal tax lien, it falls outside the protection of §6323 when it is acquired more than 45 days after notice of the federal tax lien. Texas Oil & Gas, 466 F.2d at 1040 (federal tax lien filed three years after bank perfected its security interest takes priority in dispute over taxpayer-debtor's accounts receivable acquired more than 45 days after notice of tax lien). Rice Investment Co., 625 F.2d at 565 (federal tax lien filed after execution of security agreement takes priority in dispute over inventory received by taxpayer more than 45 days after notice of tax lien). In both of these cases, the Fifth Circuit noted that it was following clear expressions of congressional intent to limit the protection of secured property to that acquired before 45 days have elapsed. See, e.g., Rice Investment Co., 625 F.2d at 569 n.17.

The property involved in this dispute is payments owed to the taxpayer for purchases of natural gas made on or after December 31, 1984. From a reading of Texas Oil & Gas and Rice Investment Co., it is clear that whether these payments are characterized as accounts receivable, as the government urges, or as inventory, as Allied Bank urges, the interpleaded funds do not fall within the term "qualified property." Because these payments are for purchases made more than 45 days after the filing of Notice of Federal Tax Lien, they fall outside the scope of §6323 . Therefore, the private lien of Allied Bank cannot take priority over the federal tax lien.

This Court is not without sympathy for Allied Bank and similarly situated commercial lenders. A 45-day notice period may be of limited utility where, as here, a loan agreement is entered into two years before Notice of Federal Tax Lien. However, this Court may not supplant the congressional intent embodied in this statutory scheme. Efforts to increase fairness to secured lenders should, as Judge Randall indicated in Rice Investment Co., 625 F.2d at 572, be directed to Congress and not to the courts.

III. CONCLUSION

The federal tax lien has priority. It is therefore ORDERED that the Internal Revenue Service receive from the interpleaded funds the full amount of the taxpayer's tax liability plus interest and that Allied Bank receive any remaining amount.