Funds Page 1
United States of America
, Plaintiff v. Talco Contractors, Inc., et al., Defendants
District Court, West. Dist. N.Y.,
Secs. 6321 , 6323 and
Liens for taxes: Interpleaded funds: Priority: Claims: Perfection
of.--Federal tax liens filed on condemnation proceeds owed to a
delinquent taxpayer by a state (New York) had priority over the claim of
a bank's successor-in-interest to the interpleaded funds. The record
established that the bank and the taxpayer intended that the assignment
be for collateral/security purposes; the parties' agreement did not
constitute an outright assignment of the proceeds. As a result, the
successor's position was confined to the original assignment and could
not be expanded because the bank failed to perfect its security
position. Since the successor merely held an unperfected security
interest, the government gained priority by filing valid tax liens
against the condemnation proceeds.
DECISION and ORDER
United States of America ("United States" or "the
government"), moves this Court for an Order directing Payment from
the Court's Registry of certain proceeds deposited by the State of New
York in satisfaction of the government's lien. Kendamar Corporation
("Kendamar") objects to entry of such an order, arguing that
it is entitled to payment of the funds at issue in preference to the
government's lien. For the reasons discussed herein, the
' motion for payment is granted.
A tax dispute
between the government and defendant Talco Contractors, Inc.
("Talco") was settled in February of 1997. As part of a
"Stipulated Judgment," this Court retained jurisdiction to
enforce the terms of the Settlement Agreement ("the
Agreement"). The Agreement contemplated the receipt and
distribution of funds from a Court of Claims condemnation suit brought
by Talco against the State of
. The Agreement provided, in pertinent part, that Talco would pay the
United States the first $400,000 of the proceeds (plus 8% interest), and
an additional 50% of any damages recovery after payment of reasonable
attorneys' fees and litigation expenses.
of 1998, Talco advised this Court that the
condemnation suit trial had been resolved and that the State of
had agreed to settle the case for $850,000. Talco further indicated that
the total amount of attorneys' fees and litigation expenses amounted to
$330,518.24, leaving a balance of $519,481.76.
State of New York insisted upon the release of three recorded liens
before it would pay the settlement proceeds to the Court Registry,
specifically: (1) an assignment of proceeds initially given by Talco to
Chase Manhattan Bank which was ultimately assigned to Kendamar Corp. in
the amount of $124,000; (2) a claim filed by Caledonia Lumber; and (3) a
tax lien filed by the United States Internal Revenue Service (related to
the instant case).
for the United States and the defendants both requested that this Court
enter an Order to Show Cause why the settlement proceeds should not be
released by the State of New York to the Registry of this Court and that
all interested parties show cause why the proceeds should not be
distributed in accordance with the terms of the Agreement.
By Order dated
September 15, 1998
, this Court directed the State of
to issue a check in the amount of $850,000 to the Registry of the court
and ordered that the State would be discharged from all liability with
respect to the various claims upon payment of the condemnation proceeds.
This Court further ordered that the Registry of the Court pay out of
said proceeds the following sums: (1) $320,618.24 to Redmond &
Parrinello, LLP; (2) $400,000 to the United States of America; (3)
$40,690.88 to James S. Grossman, Esq. The remainder of the proceeds,
$88,690.88, were to remain in the Registry of the Court pending further
Order of the Court.
United States of America
now moves for an Order of Payment from the Court's Registry the balance
of the condemnation proceeds, plus any interest accrued thereon. [The
only two remaining claimants to the proceeds are the
and Kendamar.] Although Kendamar has not formally responded to the
United States' current motion, its attorney, in a letter to Court,
indicated that Kendamar objected to any distribution to the United
States, and incorporating by reference Kendamar's response to the August
7, 1998 Order to Show Cause.
argues that its tax liens have priority over Kendamar's unperfected
security interest. In support of its position, the government argues
that Talco's assignment to Chase was a collateral assignment made for
purposes of providing Chase with a security interest, not an outright
assignment of proceeds, and, as such, it was subject to the requirements
of U.C.C. Article 9. Because Chase did not file the appropriate
financing statement with the Department of State and the
argues that Kendamar, as successor in interest to Chase, holds only an
unperfected security interest. Thus, since the government filed its
notices of federal tax lien in 1993, it asserts that its interest in the
remaining proceeds is superior to Kendamar's.
argues that the original assignment by Talco to Chase was not only a
collateral assignment, but also an outright assignment of proceeds and,
accordingly, is not subject to the filing requirements of Article 9.
between Talco and Chase provides that "[f]or value received, . . .
Talco . . . hereby grants a security interest in and assigns,
transfers and sets over unto Chase . . . all of Assignor's right,
title and interest in a certain claim of the Assignor . . . and all
proceeds of the foregoing." (Emphasis mine.) Although the
Agreement appears to refer to both a security interest and an outright
assignment, other provisions of the Agreement reflect that this was
intended by the parties to be an assignment for collateral purposes. The
sixth paragraph of the Agreement provides that "[t]his Assignment
is made by Assignor as collateral and security for any and all
liabilities of Assignor to Bank . . ." Additionally, the last
paragraph on page 1 provides that "[i]f the Condemnation Claim
exceeds the Liabilities, Bank will refund the difference to the
Assignor." Talco also granted Chase the right to file UCC financing
statements without Talco's signature with regard to the Condemnation
Claim, which Chase failed to do.
Chase's Vice President and Senior Counsel, John C. Hart, in letter dated
November 12, 1991
to the New York State Comptroller, indicated that "[a]s collateral
security of all its obligations to Chase, Talco has assigned all of its
right, title and interest in [the Condemnation Claim]." Mr. Hart
also stated that "it is my understanding that The Office of the New
York State Comptroller is the appropriate venue for filing of the
Assignment with the State," citing In re Astoria Blvd., 171
Misc. 1018 (Sup. Ct. Queens County, 1939). 1
the Agreement between Chase and Talco might appear to be ambiguous, it
is clear that the parties' intent was that the assignment of the
condemnation claim proceeds was for collateral/security purposes and not
an outright assignment. Kendamar's position as an assignee of Chase's
claim is confined to the original assignment and cannot be expanded
because Chase failed to perfect its security position.
assignment between Talco and Chase was subject to the filing
requirements of U.C.C. Article 9 as a general intangible. See
N.Y.U.C.C. §9-106 [Defining "general intangible" as
"personal property, including things in action"]; §9-401(1)(c)
[Setting forth filing requirements for perfection of security interest
in general intangibles]. Because Chase did not properly perfect its
security interest, the
gained priority by filing valid tax liens on the condemnation proceeds
in 1993. See N.Y.U.C.C. §9-301(1)(b) [Priority of lien creditor
over unperfected security interest]. Thus, the
' claim has priority over the claim of Kendamar, a successor-in-interest
' motion for an Order of Payment is granted. The Clerk of the Court is
hereby directed to forthwith pay over the remaining proceeds held in the
Registry of the Court in this action, plus any interest which has
accrued thereon, to the
ALL OF THE
ABOVE IS SO ORDERED.
I note that the case cited by Mr. Hart, In re Astoria Blvd., is a
adopted the Uniform Commercial Code on
April 18, 1962
. See N.Y. Session Laws 1962, Chapter 533.
¶50,264] Edna Kathleen Terry, as Trustee, etc., Plaintiff v.
United States of America
, Defendant-Appellant, Professional Technical Representatives Money
Purchase Plan, Defendant-Respondent
Court of Appeal of the State of
, 2nd Appellate Dist., Div. One, B117644, B119401,
, Affirming an unreported SuperCt. of Calif. decision
Secs. 6321 and 6323 ]
Tax liens: Priority against third parties: Attachment of:
After-acquired property: Trust assets: Beneficial interest: Personal v.
real property interests: Equitable conversion: When conversion occurs.--A
lender's security interest in a delinquent taxpayer's residual interest
in trust property was accorded priority over earlier IRS tax liens.
Under state (
) law, the tax liens, which were filed in the county where the taxpayer
resided, attached only to his personal property and to any real property
located in that county. Although the trust's remaining asset was real
property, the IRS did not file its liens in the county where the
property was located. The taxpayer's interest in the trust was equitably
converted to a personal property interest, however, since the trust had
to sell the real estate to distribute the residue to the beneficiaries.
However, such conversion did not occur until the closing date of the
property's sale. As a result, the tax lien did not attach to the
taxpayer's interest until after it was assigned to the lender.
Manella, United States Attorney, Loretta C. Argrett, Assistant Attorney
General, Edward M.
bins, Jr., Thomas D. Coker, Randolph L. Hutter, for defendant-appellant.
Jones, Jones and Jones, for defendant-respondent.
This court has designated this opinion as NOT FOR PUBLICATION. Consult
the Rules of the Court before citing this case.ç
P.J.: In June 1990, Nellie Whitaker Beasley created a revocable trust
into which she transferred both her real and personal property. Beasley,
the trust's sole income beneficiary during her lifetime, used the trust
as a will substitute to pass her assets to her beneficiaries upon her
death, when the trust was to terminate. Beasley died on January 27,
1994. This appeal concerns two competing claims to the interest of
Beasley's grandnephew, Marvin Stone, a residual beneficiary of 30
percent of the trust residue. The two claimants are the United States of
America (on behalf of the Internal Revenue Service), 1
which had assessed $2.8 million in tax liens against Stone for
delinquent federal taxes, penalties, and interest, and Professional
Technical Representatives Money Purchase Plan (Plan), to whom Stone had
assigned his interest in the trust residue as additional security for a
reasons that follow, we affirm the trial court order awarding Stone's
remaining residual interest of $83,985.72 to the Plan. We direct the Los
Angeles County Treasurer, who is holding Stone's interpleaded share of
the residue, to transfer the funds to the Plan.
Beasley's death, a conservatorship was established over Beasley and her
estate. (Conservatorship of the Person and Estate of Nellie Whitaker
Beasley (Super. Ct. L.A. County, 1991, No. BP000175).) The trust
instrument was amended to require the trustee to obtain court approval
before selling, distributing, or transferring any trust assets.
Following Beasley's death, the court exercised its continuing
jurisdiction and supervision over the trustee's disposition of the trust
assets in accordance with Beasley's testamentary intent as expressed in
the trust instrument.
died, the trust had personal property valued at about $380,000 and real
valued at about $400,000. 2
September 1, 1994
, the court entered an order confirming the sale of the trust's real
. (The escrow on that sale did not close, however, until March 21,
1994, the trustee made an initial distribution to the residual
beneficiaries, including Stone. Assets remaining to be distributed to
the residual beneficiaries included the anticipated proceeds from the
sale of the real property (which was in escrow) and about $100,000 in
anticipated that following the close of escrow, he would receive a
second distribution of about $90,000. On
August 4, 1995
, Stone assigned to the Plan his interest in the remaining residue. 3
The assignment served as additional security for a $140,000 loan to
third parties, John and Heather Bomarito. In return for his assignment,
Stone received a portion of the Bomaritos' loan proceeds. With Stone's
approval, the Plan's attorney instructed the trustee to send the
attorney Stone's second distribution check.
the Plan, the IRS had assessed $2.8 million in tax liens against Stone.
In 1993 and 1994, the IRS had filed notices of federal tax lien in
, where Stone resides. 4
The bulk of the tax liens were filed before Beasley's death and well
before Stone assigned his interest to the Plan in August 1995. In 1996,
the IRS served the trustee with a notice of levy against Stone's
interest in the trust. 5
on the real property sale on
March 21, 1996
. After receiving the proceeds from that sale, the trustee filed a final
report asking the court to approve her final distributions to the
residual beneficiaries, except for Stone. Faced with the two competing
claims to Stone's interest, the trustee interpleaded Stone's share of
$83,985.72 by depositing that sum with the Los Angeles County Treasurer.
United States of America
) petitioned for an order establishing its right to the interpleaded
funds. (In re The Nellie W. Beasley Revocable Trust (Super. Ct. L.A.
County, 1997, BP014805).) The IRS contended it was entitled to priority
over the Plan, having recorded its tax liens in 1993 and 1994, well
before the Plan received Stone's assignment as additional security for
the loan. The Plan, on the other hand, contended the notices of lien
were recorded in the wrong county with regard to the trust's real
. The Plan asserted the notices of lien filed in
did not establish the IRS' priority as to Stone's interest in the
court ruled in favor of the Plan. It concluded that the notices of tax
lien filed in Monterey County were "of no force and effect inasmuch
as the Claimant, UNITED STATES OF AMERICA, failed to record the lien in
the County of Los Angeles, where the principal assets were located,
pursuant to the provisions of 26 U.S.C. Section 6323(f)." The trial
court awarded the Plan all of the deposited funds. This appeal followed.
(I) The IRS
contends its notices of tax lien attached to Stone's interest in the
trust's real property before the Plan's security interest arose. The IRS
asserts it is thus entitled to the whole of the interpleaded funds.
Alternatively, the IRS contends its notices of tax lien attached to
Stone's interest in the trust's personal property before the Plan's
security interest arose. The IRS asserts it is thus entitled to a
portion of the interpleaded funds.
, but the trust's real property was located in
. As a general rule, filing the notice of tax lien in
would have had no effect with regard to the trust's property in
. Both parties agree that, as a general rule in
, a tax lien notice recorded in one county has no effect with regard to
real property located in another county. The IRS states in its opening
brief. "Under I[nternal ]R[evenue ]C[ode] section 6323(f) and
applicable California law, the liens must be filed with the office of
the recorder for the county in which the real property is located (where
the [trust] assets involved are real property) or in which the Trust
beneficiary resides (where the [trust] assets involved are personal
contends, however, that under the doctrine of equitable conversion,
Stone's interest in the trust's real property was converted, upon entry
of the order confirming sale, from a real property interest to a
personal property interest. Under the IRS' theory, the tax liens
attached to Stone's personal property interest in the
property as of the date of the order confirming sale.
We will first
ascertain the nature of Stone's interest in the trust assets on the date
of Beasley's death. We begin by noting that in federal tax lien cases,
" 'Property' is a concept which draws its definition from state,
not federal, law. Aquilino v. United States [60-2 USTC ¶9538],
363 U.S. 509, 512-13 . . . (1960)." (Cavanaugh v. Cavanaugh
(B.R. Ct., N.D. Ill., E.D. 1993) 153 B.R. 224, 228.) Accordingly, we
law to determine the nature of Stone's property interest in the trust
law, when Beasley transferred her real property to the revocable trust,
she transferred legal title to the trustee. Beasley still retained,
however, her beneficial ownership of the real property as sole
beneficiary of the trust during her lifetime. This conclusion is
real property tax law. When Beasley transferred her real property to the
revocable trust, that transfer did not constitute a change of ownership
to trigger a reassessment because the rights conferred to the residual
beneficiaries were entirely contingent during Beasley's lifetime. "
'If the trust is revocable it is excluded [from reassessment] because
the rights conferred are contingent. If the trustor is the sole
beneficiary during his lifetime, his retained interest is considered to
be "substantially equivalent in value" to the fee interest in
any real property covered by the trust. He is therefore the true owner
and the change in ownership does not occur until the property passes to
the remaindermen on the trustor's death.' " (Empire Properties
v. County of Los Angeles (1996) 44 Cal.App.4th 781, 788, quoting
January 1979 Report of the Task Force on Property Tax Administration
commissioned by the Legislature after passage of Proposition 13.)
January 27, 1994
, the revocable trust became irrevocable and was terminated under the
express provisions of the trust instrument. (Empire Properties v.
County of Los Angeles, supra, 44 Cal.App.4th at pp. 786-787.) At
that time, Stone acquired a present beneficial interest in the trust's
residual assets, including the trust's real property. The question we
face is whether Stone's beneficial interest in the trust's real property
is properly classified as a personal or a real property interest.
because the asset at issue is real property, Stone's beneficial interest
would be classified under
law as a real property interest. The IRS contends that upon entry of the
order confirming sale, however, Stone's beneficial interest in the real
property was equitably converted into a personal property interest.
Under the doctrine of equitable conversion, "Where real property is
conveyed to a trustee with directions to sell in any event it will be
treated in equity as personal property. But where the property in kind
is, or may be, conveyed to the beneficiary no such equitable conversion
results." (Lynch v. Cunningham (1933) 131 Cal.App. 164,
trustee theoretically possessed discretion either to sell the real
property or convey it in kind, Beasley's gifts to the residual
beneficiaries were not so large as to afford the trustee the option of
giving any single beneficiary the real property in whole. Stone, with a
30-percent share of the residuary, received the largest gift of all. By
the time the real property was in escrow, Stone knew he was to receive
only an additional $90.000, less than half the value of the
property. When Stone assigned his interest in the trust's remaining
assets, both he and the lender knew the real property was going to be
sold and Stone was to receive only a portion of the sale proceeds.
We agree with
the IRS that the trustee, by entering into a contract for sale and
obtaining an order confirming sale, had legally bound the trust to sell
the property. "[W]hen a binding agreement of sale is entered into
by the parties, an equitable conversion is worked; the purchaser becomes
the equitable owner of the land and the seller the owner of the purchase
price." (Vigli v. Davis (1947) 79 Cal.App.2d 237, 254; Lynch
v. Cunningham, supra, 131 Cal.App. at p. 173.)
That is not to
say, however, that the conversion occurred upon the date of the order
confirming sale. Prior decisions have held that the conversion occurs on
the closing date, whether or not the sale takes place. " 'The rule
of equitable conversion merely amounts to this, that where there is a
mandate to sell at a future time, equity, upon the principle of
regarding that done which ought to be done, will for certain purposes
and in aid of justice consider the conversion as effected at the time
when the sale ought to take place, whether the land be then really sold
or not.' " (Vigli v. Davis, supra, 79 Cal.App.2d at p. 255.)
The IRS would
have us advance the date of sale in this case to the date of the order
confirming sale. We see no reason to depart from the existing rule. If a
buyer defaults before the closing date, the court may vacate its order
confirming sale and direct the trustee to find another buyer. Although a
defaulting buyer would remain subject to liability for losses, including
consequential damages, caused by the default (Prob. Code. §§10350,
10351), the buyer would not be obligated to purchase the property. We
conclude, applying the usual rule, that the IRS' preexisting tax liens
immediately attached to Stone's personal property interest upon the date
March 21, 1996
Before the IRS
liens could attach, however, Stone had assigned his interest to the Plan
August 4, 1995
. Accordingly, the IRS' liens are not entitled to priority. "Under
federal tax law, a contest between the federally created tax lien and a
competing lien is resolved by the first-in-time, first-in-right rule. United
States v. City of New Britain [54-1 USTC ¶9191], 347 U.S. 81, 85 .
. . (1954)." (Cavanaugh v. Cavanaugh, supra, 153 B.R. at p.
228.) This priority rule applies "unless Congress has created a
different priority rule to govern the particular situation." (Petro
Source Partners, Ltd. v. 3-B Rattlesnake Refining (1990) Ltd., supra
[93-1 USTC ¶70.029; 94-1 USTC ¶50,053], 827 F.Supp. at p. 1269.) There
is no contention that a special priority applies here.
We hold that
the federal tax liens are inferior to the Plan's previously acquired
assignment of Stone's interest in August 1995. Accordingly, the trial
court correctly awarded the interpleaded funds to the Plan.
alternatively contends that it "is entitled to an award of
$55,010.65, or 65.5 percent, of the funds deposited with the Los Angeles
County Treasurer. This is because at the time of Beasley's death
$380,704.90, or 65.5 percent of the total Trust assets worth
$580,996.57, consisted of cash, stocks, and bonds, i.e., personal
property. This fact is reflected in the Trustee's Final Report--to
which no party filed an objection and which the Superior Court
approved--and nothing in the record contradicts it."
final report, however, was not filed until
July 31, 1996
, several months after the escrow on the sale of real property had
March 21, 1996
. The final report indicated that "a significant portion of the
residue of the Trust was distributed to the residuary
beneficiaries" pursuant to a court order entered on
December 29, 1994
. That order and the resulting initial distribution were made while the
real property transaction was still in escrow. Accordingly, the initial
distribution could not have been made with proceeds traceable to the
sale of the real property, and must necessarily have been made with
personal property assets. It thus follows that the IRS' reliance upon
the final report to show the ratio of real and personal property held by
the trust at the time of Beasley's death is misplaced. Even assuming
there was once a 65.5 to 34.5 percent ratio of real to personal property
assets when Beasley died, that ratio no longer existed when the
trustee's final report was filed, due to the initial distribution made
by the trustee while the real property transaction was in escrow.
The IRS has
failed to demonstrate that the trial court's award of the whole of the
interpleaded funds to the Plan was erroneous. We rely on the familiar
rule that, " 'A judgment or order of the lower court is presumed
correct. All intendments and presumptions are indulged to support it
on matters as to which the record is silent, and error must be
affirmatively shown. . . .' [Citations.]" (Denham v. Superior
Court (1970) 2 Cal.3d 557, 564.)
We affirm the
order awarding the interpleaded funds to the Plan. We direct the county
treasurer to release the funds accordingly. The Plan is entitled to
costs on appeal.
VOGEL (Miriam A.), J.
DUNN, J. *
For the sake of convenience, all further references to the Internal
Revenue Service (IRS) are meant to include the appellant
This initial $400,000 valuation was only an estimate by the trustee of
the property's value. According to the trustee's final report, the
$400,000 valuation was "arbitrarily placed on the property for
purposes of this Trust by [the trustee], without benefit of any
appraisal, at the time of the creation of this Trust in 1990."
Ultimately, the property was sold in 1996 for about $200,000. The
trustee's final report explained that the property value "declined
substantially because of the effects of both the general real estate
depression in Southern California as well as the civil unrest which
occurred in the area of
in which the property was located." In her final report, the
trustee reported a loss (for accounting purposes) on the sale of
The trust instrument contained a spendthrift clause that prohibited the
beneficiaries from selling, assigning, pledging, mortgaging,
encumbering, alienating, or impairing all or any part of their interest
in the trust or in the trust's principal or income. The Plan argued
successfully below that the spendthrift clause was extinguished upon
Beasley's death, when the trust terminated. The IRS does not challenge
on appeal the trial court's ruling on this point. Accordingly, we will
not address it.
When a federal tax liability is assessed, a lien automatically attaches
as of the date of the assessment unless the liability is paid within the
allotted time. (26 U.S.C. §6321.) When a notice of federal tax lien is
filed, it gives "notice to the rest of the world that the IRS has a
tax lien against the taxpayer." (Petro Source Partners, Ltd. v.
3-B Rattlesnake Refining (1990) Ltd. (W.D. Tex. 1993) [93-1 USTC ¶70,029;
94-1 USTC ¶50,053], 827 F.Supp. 1265, 1268.) The notice of tax lien
does not affect the validity of the lien itself. It does, however,
affect the priority of the lien as against the claim of a third party
against the taxpayer's property. (Id. at pp. 1268-1269.)
The IRS does not, as a general rule, have to levy against the taxpayer's
property in order to perfect its liens. In most cases a tax lien is
perfected when the notice of federal tax lien is filed. (Petro Source
Partners, Ltd. v. 3-B Rattlesnake Refining (1990) Ltd., supra [93-1
USTC ¶70,029; 94-1 USTC ¶50,053], 827 F.Supp. at p. 1269.)
When notices of tax lien are filed, they attach and " 'continue[to
exist] until the taxpayer satisfies the debt, or the statute of
limitations runs.' Texas Commerce Bank[-
, N.A. v.
(5th Cir. 1990)] [90-1 USTC ¶50,155], 896 F.2d[ 152.] 161; 26
U.S.C. §6322." (Petro Source Partners, Ltd. v. 3-B Rattlesnake
Refining (1990) Ltd., supra [93-1 USTC ¶70,029; 94-1 USTC ¶50,053],
827 F.Supp. at p. 1268.)
Judge of the Municipal Court for the Long Beach Judicial District
assigned by the Chief Justice pursuant to article VI, section 6 of the
¶50,893] In re
L. Bruder and Jill R. Bruder, Debtors. Joseph D. Olsen, Trustee,
Plaintiff-Counter-Defendant-Appellee v. Bank One Rockford, NA, a banking
corporation, f/k/a First National Bank & Trust Co.,
Defendant-Cross-Defendant-Appellant and Banc One Mortgage Corporation,
Intervenor-Cross Defendant-Appellant and Randolph L. Bruder, Jill R.
Bruder, Mott Bros. Co., a corporation,
Defendants-Cross-Defendants-Appellees and United States of America,
District Court, No. Dist.
, West. Div., 94 B 52222, 95 B 51057, 96 C 50408,
, 207 BR 151. Affirming unreported Bankruptcy Court decision
Liens: Priority: Security interest.--An assignee bank's interest
in mortgaged property did not take priority over an IRS tax lien because
the bank's interest was not a protected security interest under state (
) law. Assignment of the mortgage was outside the chain of title and,
therefore, ineffective against creditors and subsequent purchasers.
Further, satisfaction and discharge of the mortgage filed by the
assignor bank released the mortgage; thus, the mortgage no longer
existed. Since the assignee bank was no longer a secured creditor, the
IRS's lien was superior.
Bankruptcy: Jurisdiction: Standing: Property rights involved.--A
bank that assigned its mortgage on a debtor's property to another bank
lacked standing to appeal the Bankruptcy Court's orders on motions for
summary judgment because those orders did not diminish any property or
rights of the bank. Since the bank had assigned its interest in the
mortgage and a note, it had no claim in the property involved.
Olsen, David A. Aaby, Yalden & Olsen, 1318 E. State St., Rockford,
Ill. 61104-2228, for plaintiff. Karl F. Winkler, Oliver, Close, Worden,
Winkler, Greenwald & Maier, 124 N. Water St., Rockford, Ill.
61110-4749, Bernard J. Natale, 308 W. State St., Rockford, Ill. 61101,
Thomas A. Green, Jason H. Rock, Barrick, Switzer, Long, Balsley &
Van Evera, 1 Madison St., Rockford, Ill. 61104, for defendants. Joel R.
Nathan, Special Assistant Attorney General,
OPINION AND ORDER
, NA ("Bank One"), and Banc One Mortgage Corporation
("Banc One Mortgage"), appeal the judgment of the bankruptcy
court and its denial of their motion to reconsider entered in the
adversary proceeding related to the Chapter 7 bankruptcy petitions filed
by the debtors, Randolph L. Bruder and Jill R. Bruder. The court has
jurisdiction to hear this appeal pursuant to 28 U.S.C. §158(a).
relevant to this appeal are not in dispute and are as follows. The
Bruders were joint tenant owners of property commonly known as
5815 Chandler Drive
("the property"). On or about
July 12, 1991
, the Bruders borrowed $106,500.00 from First National Bank & Trust
Co. ("First National"), a national bank operating in
. In addition to executing a note, the Bruders granted First National a
mortgage in the property, which was recorded with the recorder of deeds
June 12, 1991
February 1993, First National changed its name to Bank One. Although
First National's interest in the note and mortgage devolved and inured
to Bank One upon the name-change, see 12 U.S.C. §31, no
instrument of record was filed with the recorder of deeds in connection
with the mortgage to reflect that Bank One was the successor to First
October 29, 1993
, Bank One assigned the mortgage and note to Banc One Mortgage.
Significantly, the assignment did not mention Bank One's prior name or
the fact that it was formerly known as First National. Thus, when the
assignment was recorded with the recorder of deeds on
November 12, 1993
, the grantor-grantee index merely reflected an assignment of the
mortgage by an entity known as Bank One to Banc One Mortgage.
March 11, 1994
, a satisfaction and discharge of mortgage was executed. The document,
in pertinent part, stated:
undersigned certifies that it is the present owner of a mortgage
executed by RANDOLPH L. BRUDER AND JILL R. BRUDER to FIRST NATIONAL BANK
& TRUST CO. . . . The above described mortgage is, with the note
accompanying it, fully paid, satisfied, and discharged.
document gave a full description of the property, cross-referenced the
mortgage recorded earlier, and was executed by "FIRST NATIONAL BANK
& TRUST CO. NKA BANK ONE, ROCKFORD, NA, by BANC ONE MORTGAGE
CORPORATION, their attorney in fact." This document was recorded
with the recorder of deeds on
April 25, 1994
. The problem with the satisfaction and release was not that it was
executed by one having no authority, as Bank One had previously granted
a power of attorney in favor of Banc One Mortgage to execute documents
of this sort. The problem was that the satisfaction and discharge should
not have been issued because the note and mortgage were not, in fact,
satisfied. The foregoing errors apparently went unnoticed by Bank One
and Banc One Mortgage, as no corrective documents were filed.
August 22, 1994
September 19, 1994
, the IRS assessed Randolph Bruder for unpaid employment taxes for the
third and fourth quarters of 1993 and the second quarter of 1994,
November 21, 1994
, the IRS recorded a notice of federal tax lien for those assessments
against Randolph Bruder with the recorder of deeds in the sum of
approximately $35,000. Thereafter, on
December 1, 1994
, Randolph Bruder filed a voluntary petition for bankruptcy under
Chapter 7 of the Bankruptcy Code.
January 31, 1995
, Mott Bros. Co. ("Mott") filed a memorandum of judgment
against Jill Bruder with the recorder of deeds for approximately
May 23, 1995
, Jill Bruder filed a separate voluntary petition for bankruptcy under
Olsen was appointed trustee in both bankruptcy cases. During the course
of the bankruptcy proceedings, the trustee sought authority to sell the
property free and clear of all liens. A title commitment issued prior to
the sale of the property listed both the IRS's tax lien and Mott's
judgment lien. The mortgage assigned to Banc One Mortgage, however, was
not listed as a lien encumbering the property. Because the Bruders had
listed Banc One Mortgage as holding a security interest in the property
on the schedules attached to their bankruptcy petitions, the trustee and
the Bruders notified the title insurance company that there may be
another incumbrance on the property. Upon learning of Banc One
Mortgage's potential interest in the property, the title insurance
company insisted on a court order that required any and all liens to
attach to the sale proceeds. On
October 20, 1995
, the trustee filed an adversary complaint against the Bruders, Bank
One, Mott and the IRS for an order permitting a sale of the property
free and clear of all liens and to determine the priority of the various
liens. Thereafter, Banc One Mortgage moved to intervene as a defendant.
The trustee obtained approval from the bankruptcy court to sell the
property for $122,000. The IRS, Mott, Bank One and the Bruders all
answered the trustee's complaint, as did Banc One Mortgage once it
intervened. The IRS then filed a counter-claim against the trustee and
cross-claims against all defendants, asserting that its tax lien was
senior in priority to all other liens.
trustee, the Bruders, Mott, Bank One and Banc One Mortgage answered the
IRS's counter/cross-claims, the IRS and Banc One Mortgage each filed a
motion for summary judgment in which the IRS and Banc One Mortgage 1
each claimed their lien was senior in priority to all others. Mott did
not oppose the IRS's motion, as its claim was only against Jill Bruder's
interest in the property. Similarly, neither the trustee nor the Bruders
disputed the priority of the IRS's and Mott's claims to the separate
half interests of Randolph and Jill Bruder in the property. All parties
(excluding Bank One and Banc One Mortgage) disputed the validity of Banc
One Mortgage's claim that the mortgage was effective against any of
them. Thus, in an unusual alignment of the parties, Banc One Mortgage
stood alone in contending that its interest was both valid and senior in
priority. The bankruptcy court denied Banc One Mortgage's motion and
granted the IRS's motion. The bankruptcy court found that the assignment
of the note and mortgage from Bank One to Banc One Mortgage filed with
the recorder of deeds was not in the chain of title. This finding, in
turn, rendered the satisfaction and release effective as to all judgment
lien creditors, including the IRS and Mott. This relegated Bank One and
Banc One Mortgage to the status of unsecured creditors in both of the
Bruders' bankruptcy proceedings.
court ordered distribution of the net proceeds of the sale of the
property in the following manner. The net proceeds were ordered to be
divided in half. As to the first half, the trustee was ordered to remit
$42,019.52 to the IRS (the amount of its tax lien, at that time), then
$7,500.00 to Randolph Bruder for his homestead exemption, and to retain
any remaining proceeds, subject to further order of the court. As to the
second half, the trustee was ordered to remit $7,500.00 to Jill Bruder
for her homestead exemption, then $28,371.63 to Mott, and to retain any
remaining proceeds, subject to further order of the court.
Bank One and
Banc One Mortgage filed a motion to reconsider and clarify the
bankruptcy court's memorandum opinion which denied Banc One Mortgage's
motion and granted the IRS's motion. Bank One's sudden reappearance in
the litigation was noted by both the bankruptcy court and the other
parties, see Transcript of Proceedings of
October 23, 1996
, pp. 4-5, 13, but the anomaly was not engaged by any of the parties or
the court. For reasons stated on the record during the hearing of
October 23, 1996
, the bankruptcy court denied Bank One's and Banc One Mortgage's motion
to reconsider and clarify. This appeal ensued.
A party takes
an appeal from the bankruptcy court to the district court pursuant to 28
U.S.C. §158(a) in the same manner a party in a civil proceeding takes
an appeal from the district court to the court of appeals. 28 U.S.C. §158(c).
The district court, therefore, reviews the factual findings of the
bankruptcy court for clear error, but reviews legal conclusions de novo.
In re Rivinius, Inc., 977 F.2d 1171, 1175 (7th Cir. 1992); In
re Newman, 903 F.2d 1150, 1152 (7th Cir. 1990). Bank One and Banc
One Mortgage seek review of the bankruptcy court's grant and denial of
motions for summary judgment. Therefore, this court reviews the judgment
of the bankruptcy court de novo. Flaherty v. Gas Research Inst.,
31 F.3d 451, 456 (7th Cir. 1994).
first addresses whether Bank One has standing to take this appeal. 2
None of the parties raise or address this issue in their briefs, but
because it is jurisdictional, the court is obliged to address it,
particularly when it emerges from the record as it does here. Children's
Healthcare is a Legal Duty, Inc. v. Deters, 92 F.3d 1412, 1419 n. 1
(6th Cir. 1996) (Batchelder, J., concurring), cert. denied, --
U.S. --, 117 S.Ct. 1082, 137 L.Ed.2d 217 (1997); Skrzypczak v.
Kauger, 92 F.3d 1050, 1052 (10th Cir. 1996), cert. denied, --
U.S. --, 117 S.Ct. 957, 136 L.Ed.2d 844 (1997); Pashaian v. Eccelston
Properties, Ltd., 88 F.3d 77, 82 (2d Cir. 1996); FOCUS v.
Allegheny County Court of Common Pleas, 75 F.3d 834, 838 (3d Cir.
1996). In order to appeal a bankruptcy court's order, a litigant must
qualify as a "person aggrieved" by the order. Depoister v.
Mary M. Holloway Found., 36 F.3d 582, 585 (7th Cir. 1994) (quoting Matter
of Andreuccetti, 975 F.2d 413, 416 (7th Cir. 1992)). A "person
aggrieved" by a bankruptcy court's order must demonstrate that the
order diminishes the person's property, increases the person's burdens,
or impairs the person's rights.
The court has
difficulty understanding how the bankruptcy court's orders diminish any
property or rights of Bank One. Bank One's answer to the adversary
complaint denies that it has any claim in the property and admits that
it assigned its interest in the note and mortgage to Banc One Mortgage.
Moreover, the uncontroverted facts adduced during the pendency of the
motions for summary judgment showed that Bank One had, in fact, assigned
its interest in the note and mortgage to Banc One Mortgage. Bank One did
not join in Banc One Mortgage's motion, nor did it contest either of the
motions for summary judgment. 3
Although Banc One Mortgage's reply brief submitted in connection with
its motion contains a reference to Bank One, that reference, appearing
in the "Relief Requested" portion of the brief, is cryptic at
best, and relates to Banc One Mortgage's equitable mortgage argument. 4
It is not until after the bankruptcy court granted the IRS's motion and
denied Banc One Mortgage's motion that Bank One resurfaced in the
litigation, jointly filing a motion to reconsider and clarify with Banc
One Mortgage. And as noted by the bankruptcy court, Bank One's motion to
clarify could have used a little clarification itself. 5
Bank One's reappearance in the litigation served only to confuse
matters, and the bankruptcy court understandably declined to fully
engage the issue of whether an equitable mortgage lien exists and in
which entity's favor, other than to note that even if one did, it would
not change the result of its order. See Transcript of Proceedings
October 23, 1996
, pp. 5-6.
court's opinion, the only way in which Bank One could be aggrieved by
the bankruptcy court's order is by the bankruptcy court's conclusion
that Bank One assigned its interest in the property to Banc One Mortgage
in-fact; for having assigned its interest, it would not be entitled to
an equitable mortgage absent setting aside the assignment. See
generally Pacini v. Regopoulos, 281 Ill.App.3d 274, 216 Ill.Dec.
433, 439, 665 N.E.2d 493, 499 (1996); Citizens State Bank v. United
States [91-1 USTC ¶50,228], 932 F.2d 490, 494-95 (6th Cir. 1991).
Notably, the bankruptcy court's conclusion in this regard was not a
finding of fact, it was a fact that no party contested, including Bank
One. Not only that, but it was admitted to by Bank One twice below--once
in its answer and again when it failed to respond to the motions for
summary judgment and the statements of fact filed pursuant to Local
General Rules 12M and 12N. Thus, having admitted to this fact below, it
is difficult to perceive of how Bank One can be an entity aggrieved by
the bankruptcy court's order. Clearly, it was not, and Bank One's brief
in support of this appeal is a dead give-a-way.
Bank One and Banc One Mortgage request on appeal in connection with the
equitable mortgage lien argument requests the court to find an equitable
mortgage lien in favor of Banc One Mortgage, not Bank One. Thus, not
only did Bank One never seriously contend it had an interest in this
litigation when it was before the bankruptcy court, it clearly does not
claim to have any interest in this appeal. Whether this is purely a lack
of standing, or a blend of this and other related doctrines, see Wright,
Miller & Cooper, FEDERAL PRACTICE AND PROCEDURE: JURISDICTION 2d §3902,
Bank One has no standing in this appeal. Accordingly, the court
dismisses Bank One's appeal for lack of jurisdiction.
Validity/Seniority of the Competing Liens
reaching the heart of the issue in this case, the court must first
acknowledge the over-all framework within which the court must consider
the various competing liens. The court shall first address the priority
of the IRS's tax lien. The priority of the IRS's lien vis-a-vis all
others is a question of federal law, and the Internal Revenue Code, 26
U.S.C. §§6321-6323, governs the validity and priority of the lien. Dragstrem
v. Obermeyer [77-1 USTC ¶9301], 549 F.2d 20, 22-23 (7th Cir. 1977).
Absent provisions to the contrary, priority of federal tax liens is
governed by the common-law principle that "the first in time is the
first in right."
v. McDermott, 507
447, 449, 113 S.Ct. 1526, 1528, 123 L.Ed.2d 128 (1993).
6323(a) provides: "[t]he lien imposed by section 6321 shall not be
valid as against any purchaser, holder of a security interest,
mechanic's lienor, or judgment lien creditor until notice thereof which
meets the requirements of subsection (f) has been filed by the
Secretary." No party disputes the fact that a valid tax lien under
section 6321 arose against Randolph Bruder's half-interest in the
property and that such lien was properly filed in compliance with
section 6323(f). The disputed issue is whether Banc One Mortgage's
interest in the property is a protected security interest under section
6323(a), for if it is, then its mortgage on the property takes priority
over the IRS's tax lien. "Security interest" is defined as:
interest in property acquired by contract for purposes of securing
payment or performance of an obligation or indemnifying against loss or
liability. A security interest exists at any time (A) if, at such time,
the property is in existence and the interest has become protected under
local law against a subsequent judgment lien arising out of an unsecured
obligation, and (B) to the extent that, at such time, the holder has
parted with money or money's worth."
U.S.C. §6323(h)(1). In considering whether the security interest is
"in existence" and "has become protected under local
law," the court looks to Illinois law and examines whether, under
Illinois law, Banc One Mortgage's interest was protected against any
"hypothetical judgment lien creditor" that might arise,
regardless of whether the IRS had actual notice of the security
interest. Dragstrem [77-1 USTC ¶9301], 549 F.2d at 26; see
also In re Haas [94-2 USTC ¶50,496], 31 F.3d 1081, 1087 (11th Cir.
1994), cert. denied, --
--, 115 S.Ct. 2578, 132 L.Ed.2d 828 (1995). Thus, if any subsequent
judgment lien creditor could prevail over Banc One Mortgage, then the
IRS's lien will be found to be senior in priority. Resolution of this
issue will also resolve the priority of Mott's lien vis-a-vis Banc One
Mortgage's interest, but for now, the court limits its discussion to the
is a race-notice jurisdiction, which means that the first to record,
without notice, has superior rights to those who record later. 765 ILCS
5/30; Davis v.
, 705 F.Supp. 446, 450 (C.D.Ill.1989). If, for example
"O," the owner of real property, simultaneously executes
mortgages on his property to both "A" and "B," and A
and B are not aware of each other's interests, the first one to record
the mortgage has the senior lien. The reason for this is that the first
to give notice of its lien on real property has the senior lien, and, by
recording the mortgage with the recorder of deeds, the individual filing
that mortgage is said to give "constructive notice" of its
lien to all others. See Skidmore, Owings & Merrill v. Pathway
Fin., 173 Ill.App.3d 512, 123 Ill.Dec. 395, 397, 527 N.E.2d 1033,
1035 (1988). 6
Constructive notice, however, arises only when the encumbrances or
conveyances are in the direct chain of title. Estate of Welliver v.
Alberts, 278 Ill.App.3d 1028, 215 Ill.Dec. 580, 586, 663 N.E.2d
1094, 1100, appeal denied, 168 Ill.2d 587, 219 Ill.Dec. 562, 671
N.E.2d 729 (1996); Hillblom v. Ivancsits, 76 Ill.App.3d 306, 32
Ill.Dec. 172, 175, 395 N.E.2d 119, 122 (1979). Thus, contrary to Banc
One Mortgage's contentions, an instrument will not operate to give
constructive notice "to the world" merely because it is filed
with the recorder of deeds--it must also be in the chain of title to the
property. Glen Ellyn Sav. and Loan Ass'n v. State Bank of
, 65 Ill.App.3d 916, 22 Ill.Dec. 569, 575, 382 N.E.2d 1267, 1273
Chain of title
is defined as "the successive conveyances commencing with the
patent from the government or some other source and including the
conveyance to the one claiming title." Seefeldt v. City of
, 57 Ill.App.3d 417, 14 Ill.Dec. 954, 956, 373 N.E.2d 85, 87 (1978)
(quoting Capper v. Poulsen, 321
480, 152 N.E. 587, 588 (1926)). An instrument which is recorded, but
which cannot be traced back to the original grant because some previous
instrument connecting it to the chain of title is unrecorded, lies
outside the chain of title and is said to be a "wild" or
"stray" instrument. See Exchange Nat'l Bank of Chicago v.
Lawndale Nat'l Bank of Chicago, 41 Ill.2d 316, 319, 243 N.E.2d 193,
196 (1968); see also Gregory M. Power, Case Note, Killam v. Texas
Oil & Gas Corp.: A Portrait of Uncertainty for Title Examiners
and Mineral Interest Owners, 45 Ark.L.Rev. 679, 685-86 (1992). The
chain of title can be traced using the grantor-grantee index maintained
by the local recorder of deeds, and in order for a recorded instrument
to be effective as against subsequent purchasers and creditors, it must
operate to give notice to those looking through the grantor-grantee
index. Skidmore, 123 Ill.Dec. at 396, 527 N.E.2d at 1034. A wild
or stray instrument which merely appears in other indices, such as the
tract index, does not operate to give constructive notice.
at 397, 527 N.E.2d at 1035.
An example of
these principles at work can be illustrated by the following example:
O, the owner
of record of certain real property, conveys the property by deed to A
for value. A does not record his deed. A then conveys the property to B
for value, who does not record either. O, who never liked A to begin
with, and being dissatisfied with the price the property fetched when he
sold it to A, conveys the same property by deed to C for value. B
records his deed, after which C records his deed. Neither B nor C have
actual notice of each other's interest. Who has good title?
law, C has good title, notwithstanding the fact that B purchased the
property first and recorded his deed first. B's deed is a wild deed; it
cannot be traced back to O without A's deed being recorded, and, because
A did not record his deed, B's deed lies outside the chain of title.
In this case,
the Bruders, owners of the property as joint tenants, conveyed a
mortgage to "First National Bank & Trust Co." in return
for a loan. First National recorded its interest. First National then
changed its name to "Bank One,
, NA," and, under its new name only, recorded an instrument
assigning its interest in the property to "Banc One Mortgage
Corporation." Thereafter, an instrument executed by Banc One
Mortgage acting as attorney-in-fact for "First National Bank &
Trust Co., n/k/a Bank One,
, NA," was recorded, releasing the mortgage. After the release was
recorded, the IRS and Mott filed their liens. To further add to the mix,
the instrument releasing the mortgage was executed by mistake and was
intended to release a mortgage on a different property and for a
court held that Bank One's assignment to Banc One Mortgage was outside
the chain of title because there was no prior conveyance or instrument
of record linking Bank One to First National. The bankruptcy court then
held that the satisfaction and discharge filed by First National, in
effect, released the mortgage. These findings led the bankruptcy court
to conclude that the assignment was ineffective against creditors and
subsequent purchasers and that the mortgage no longer existed. This, in
turn, meant that Banc One Mortgage was no longer a secured creditor and
that the IRS's and Mott's liens were superior to all others. On appeal,
Bane One Mortgage challenges these findings by offering three main
arguments. The court addresses each argument in turn.
Mortgage's first argument is that, as a matter of contract, the mortgage
is still valid and is prime as against all other lien holders. The
argument is outlined as follows. First National held the note and
mortgage, and these interests automatically inured to Bank One pursuant
to federal law upon First National changing its name to Bank One. Bank
One then assigned its interest to Banc One Mortgage. Having already
assigned its interest by contract to Banc One Mortgage, Bank One's
satisfaction and discharge had no effect because it had no interest to
release. Therefore, there is still a valid mortgage and Banc One
Mortgage's lien is prime.
is a red herring. The priority of the liens in this case is not
determined merely by reference to contract law, but by reference to the
Illinois Conveyance Act, of which notice and recording are the key
inquiries. Although the assignment was recorded, it was recorded outside
the chain of title. Just like "B" in the last example, no
prior instrument of record existed giving any interest in the property
to the entity known as Bank One, and the assignment itself failed to
recite Bank One's former name. Therefore, the assignment was a wild
instrument that did not operate to give constructive notice to
subsequent judgment lien creditors. This, in turn, made the satisfaction
and discharge executed by First National n/k/a Bank One to be the only
other instrument of record within the chain of title, and when it was
recorded, it had the effect of releasing the mortgage. That is, while it
may not have released the Bruder's personal obligation to pay the debt,
as the mortgage was no longer, in fact, Bank One's interest to release,
the satisfaction and discharge had the effect of releasing Banc One
Mortgage's security interest in the property as to other creditors and
lien holders. Thus, the bankruptcy court was correct in finding Banc One
Mortgage to be an unsecured creditor.
Mortgage's second argument is that its mortgage interest cannot be
construed to be void because a standard title search of the property
would have disclosed its interest, or that it would have at least put
the title examiner on "inquiry notice." Banc One Mortgage
contends that a standard title search would have revealed all documents
relating to the property, including the assignment and the power of
attorney executed by Bank One. All of this, it claims, would have put a
reasonable person on notice that Banc One Mortgage, and not Bank One,
was the holder of the mortgage at the time the satisfaction and
discharge was executed.
several problems with this argument, not the least of which is that the
authority cited by Banc One Mortgage for these propositions belies its
contention that a standard title search would have disclosed its
interest. Quoting portions of Ward on Title Examination, IICLE
(1986), Banc One Mortgage states in its brief:
". . . is bound to examine those documents which are executed . .
." during the period of ownership. They are not bound to examine
those executed prior to ownership or after the last conveyance from
ownership. (pp. 11-11, 11-12)
quoted portion of Ward on Title Examination, this time including
the language omitted by Banc One Mortgage, reads:
the title searcher is bound to examine those documents which are
executed by owners of real estate during the period of time when they
own the real estate. The title searcher is not bound to examine,
however, documents executed by persons having no apparent interest of
record in the real estate, including documents executed by an owner
prior to the time he became the owner or subsequent to the time he
conveyed title. These instruments are outside the chain of title and are
said to be "wild" instruments. [emphasis added to omitted
One Mortgage's argument (and its selective use of authority) ignores the
significance of chain of title. Wild instruments do not operate to give
constructive notice under
law, see Estate of Welliver, 215 Ill.Dec. at 586, 663 N.E.2d at
1100; Hillblom, 32 Ill.Dec. at 175, 395 N.E.2d at 122; Glen
Ellyn Sav. and Loan Assoc., 22 Ill.Dec. at 575, 382 N.E.2d at 1273,
and even if the proper analysis was whether the interest would be
disclosed during a "standard title search," that search would
not encompass wild instruments.
Mortgage also relies on the doctrine of inquiry notice. Inquiry notice
is when one has notice of facts which would put a prudent person on
inquiry. Miller v. Bullington, 381
238, 44 N.E.2d 850, 852 (1942). Once one is put on inquiry notice, that
person is chargeable with knowledge of other facts that might have been
discovered by diligent inquiry.
; Pacemaker Food Stores, Inc. v. Seventh Mont Corp., 117
App.3d 636, 72 Ill.Dec. 931, 938, 453 N.E.2d 806, 813 (1983). A finding
of inquiry notice is one of fact, Pelfresne v. Village of Williams
Bay, 917 F.2d 1017, 1022 (7th Cir. 1991), and the bankruptcy court
made no such finding. In fact, the bankruptcy court did not even address
the issue. Thus, this court conducts a de novo review to determine
whether the bankruptcy court erred in not making such a finding.
At the outset,
the court observes that this aspect of Banc One Mortgage's argument was
not raised below until its reply brief filed in support of its motion
for summary judgment (perhaps accounting for the bankruptcy court's
failure to address it), and even then, Banc One Mortgage only advanced
it as against the trustee, not the IRS or Mott. On appeal, Banc One
Mortgage argues the presence of inquiry notice but does not specify as
to which party it applies. Instead of attempting to untangle Banc One
Mortgage's argument in this respect, it is simpler for the court to
address this argument as it relates to all three, even though there is
good reason to find this argument waived.
As a matter of
federal law, see Dragstrem [77-1 USTC ¶9301], 549 F.2d at 26,
the IRS has the status of a hypothetical judgment lien creditor without
actual notice. The trustee likewise has the same status, see 11
U.S.C. §544(a)(1) and (3), and Mott is, in actuality, a judgment lien
creditor without actual notice. The only possible way any of these three
could be put on inquiry notice, therefore, is if there are matters of
record which would put them on inquiry notice--that is, only those
matters of which they are held to be on constructive notice can be used
to determine whether they were put on inquiry notice. For reasons stated
earlier, the only documents for which these parties are deemed to have
knowledge of based on constructive notice are the mortgage and the
satisfaction and discharge releasing the mortgage. The assignment, a
wild instrument, cannot operate (based merely on constructive notice) to
put any of these parties on inquiry notice because they are not deemed
to have knowledge of it. 7
Without knowledge of the assignment, there is no conceivable way a party
could be put on inquiry notice that the satisfaction and discharge was
ineffective because Bank One had already assigned its interest in the
property. Because inquiry notice is an impossibility in this case, as a
matter of law, the bankruptcy court committed no error in not making a
finding on this issue. For this reason, the court rejects Banc One
Mortgage's contention based on the doctrine of inquiry notice.
Banc One Mortgage's argument pertaining to an equitable mortgage lien.
In its opinion, the bankruptcy court refused to consider this argument
because it was "raised fleetingly" by Banc One Mortgage in its
reply brief and it was "undeveloped." On appeal, Banc One
Mortgage does not challenge the bankruptcy court's refusal to consider
the argument at that time. Moreover, while it appears from the record
that the bankruptcy court did not preclude Banc One Mortgage from later
raising the issue, see Transcript of Proceedings of
October 23, 1996
, pp. 14-15, it does not appear that Banc One Mortgage pursued the
matter any further below. To the extent Banc One Mortgage seeks to use
this argument to assert priority over the IRS's and Mott's liens, it
fails because, as this court has already determined, the satisfaction
and release operated to render Banc One Mortgage an unsecured creditor.
To the extent Banc One Mortgage seeks to use this argument in any other
respect, it is waived for purposes of this appeal. 8
See In re Mary Dunn, No. 95 C 50305, 1996 WL 210020, at *2
(N.D.Ill. Apr.10, 1996) (holding issue not pressed below in bankruptcy
court is waived on appeal to district court).
court has confined most of its discussion thus far to the priority of
the IRS's lien, the same analysis of
law applies to the priority of Mott's lien. Because, under
law, Banc One Mortgage is an unsecured creditor and Mott had no notice
of Banc One Mortgage's interest in the property, Banc One Mortgage
cannot prevail against Mott in attempting to assert a valid and senior
foregoing reasons, the judgment of the bankruptcy court is affirmed.
Although Bank One joined in Banc One Mortgage's motion to reconsider,
and also appeals the ruling of the bankruptcy court, Bank One did not
join in Banc One Mortgage's motion for summary judgment before the
bankruptcy court. This raises a question of standing, which was
addressed at oral argument and which shall be resolved later herein.
In setting the oral argument for this appeal, the court notified the
parties that they should also be prepared to address this issue at oral
Mr. Winkler entered an appearance on behalf of both Bank One and Banc
One Mortgage. Strangely, the Rule 12M statement of facts submitted in
connection with Banc One Mortgage's motion for summary judgment is not
signed by Mr. Winkler on behalf of Banc One Mortgage, but is instead
signed by Mr. Winkler on behalf of Bank One. This must have been an
oversight, as Bank One never joined in Banc One Mortgage's motion nor
was any relief requested in said motion on behalf of Bank One.
The bankruptcy court refused to consider Banc One Mortgage's argument
regarding the existence of an equitable mortgage lien on the grounds
that the argument was undeveloped and "raised fleetingly" in
its reply brief.
Referring to the motion during the hearing, the bankruptcy court
commented: "I must say there's not been a motion quite like it, and
if the Court could file pleadings, the Court might file a motion asking
Mr. Winkler to clarify his motion to clarify. . . ." Transcript of
October 23, 1996
, p. 4.
Of course, if A had actual notice of B's interest, A could not obtain a
senior lien merely by beating B to the recorder's office. See id.
Because the IRS is given the status of a hypothetical judgment lien
creditor without actual notice, the court need not concern itself with
the effect of actual notice under the Illinois Conveyance Act, 765 ILCS
5/30. Likewise, actual notice does not play any role with respect to
Mott's lien either, as no party claims that Mott had actual notice of
the various transactions which took place in this case.
To be clear, this court is not presented with the situation of a party
having actual knowledge of the wild instrument. Nevertheless, it
is doubtful that a wild instrument could put a party on inquiry notice. See
Power, supra, 45 Ark.L.Rev. at 689.
Whether Banc One Mortgage could have used this theory to step ahead of
the rest of the unsecured creditors or used it to somehow invalidate the
Bruders' homestead exemptions is not clear. What is clear, however, is
that Banc One Mortgage had the opportunity to develop this avenue and
chose not to below.
¶50,105] Wiley P. Waldrep, Waldrep Dairy, Inc. and W&D Dairy, Inc.,
Plaintiffs v. Jewell Mae Detjen, f/k/a Jewell Mae Bell and Roger
Coleman, as Trustees, Beth W. Corporation, and United States of America,
District Court, So. Dist. Fla.,
[Code Sec. 6323 ]
Liens: Priority: Valid security interest: Conveyances: Fraudulent
transactions: Adequate and full consideration.--Creditors that lent
a corporation funds that were secured by a collateral assignment of a
note that was secured by a mortgage on real property did not have a
valid security interest in the property that was superior to a
government lien and were not entitled to foreclose on the mortgage
because the transactions leading to and including the assignment were
fraudulent. The corporation obtained the mortgage by entering into a
land trust agreement whereby it transferred the property to two trusts
whose trustee and sole beneficiary was the vice president of the
corporation and of two of the creditors. The land trust agreement was in
substance a gift and not supported by full and adequate consideration.
Although both trusts defaulted on the loan, the corporation did not have
the intent to enforce the loan and forgave the loan. In addition, the
collateral assignment of the mortgage was not supported by full and
adequate consideration. Even though the corporation assigned the
mortgage in exchange for the advancement of funds that, in part, were
used to pay real estate taxes, the government presented testimony as to
the interrelatedness of the parties. Further, at the time of the
collateral assignment of the mortgage, the mortgage was in default.
White, Rogers, Morris & Ziegler, 1401 E. Broward Blvd., Fort
Lauderdale, Fla. 33301, for plaintiffs. Mark Stier, Department of
, for defendants.
JUDGMENT: FINDINGS OF FACT AND CONCLUSIONS OF LAW
THIS CAUSE was
tried before the Court without a jury commencing on
May 16, 1995
May 17, 1995
. The Plaintiffs, Wiley P. Waldrep, Waldrep Dairy, Inc., and W & D
Dairy, Inc., commenced the instant action by filing a Complaint in
state court to foreclose a mortgage on 55.91 acres of real property
. The Defendant,
United States of America
, timely removed the above-styled cause to Federal court pursuant to 28
U.S.C. §1444 . In its
Answer (DE 4) to the Plaintiffs' Amended Complaint (annexed to DE 1),
the Defendant, United States of America, claimed a lien on the subject
property by virtue of an estate tax lien and a gift tax lien pursuant to
Internal Revenue Code Section
In the Amended
Complaint (annexed to DE 1) filed herein, the Plaintiffs seek to recover
the principal amount on the promissory note which secured the mortgage
aforementioned, plus interest thereon from March, 1990 to the present.
In addition, the Plaintiffs seek to recover sums certain, including
interest, advanced by Plaintiffs to the Defendant, Beth W. Corporation,
to pay real estate taxes on the subject real property.
notes that the Clerk of the United States District Court for the
Southern District of Florida entered a Default (DE 14) against the
Defendant, Beth W. Corporation, on
March 3, 1994
. The Court further notes that although the Defendant, Jewell Mae Detjen
did file an Answer (DE 9) in this action in which she admitted the
material allegations of the Amended Complaint, said Defendant, failed to
appear at the trial of the above-styled cause. Lastly, Defendant, Roger
Coleman, also filed an Answer (DE 8) admitting the material allegations
of the Amended Complaint, and appeared as the sole witness for the
Plaintiffs at trial. Accordingly, the only Defendant remaining in this
action is the
United States of America
carefully considered the testimony and evidence presented at the trial
of the above-styled cause, and pursuant to Rule 52(a) of the Federal
Rules of Civil Procedure, the Court makes the following findings of fact
and conclusions of law.
December 23, 1986
, Jewell E. Gray established an irrevocable trust (hereinafter
"Trust No. 1") for the benefit of her granddaughter, Jewell
Mae Detjen. Jewell Mae Detjen, Jeffrey H. Beck and Irwin A. Weiser were
named as trustees of said trust.
March 19, 1987
, Jewell E. Gray established a second irrevocable trust (hereinafter
"Trust No. 2") for the benefit of her granddaughter, Jewell
Mae Detjen. Jewell Mae Detjen, Jeffrey H. Beck and Irwin A. Weiser were
named as trustees of this second trust, and proceeded in such capacity
until Roger Coleman replaced Jeffrey H. Beck and Irwin A. Weiser as
March 19, 1987
, Jewell E. Gray and her granddaughter, Jewell Mae Detjen, were
president and vice-president respectively of Beth W. Corporation, a
corporation which did not engage in any trade or business.
March 19, 1987
, Jewell E. Gray, acting in her capacity as president of Beth W.
Corporation, entered into a Land Trust Agreement with the trustees,
including Jewell Mae Detjen, of Trust No. 1 and Trust No. 2 (Plaintiffs'
Exhibit 7). Pursuant thereto, Beth W. Corporation transferred 55.91
acres of real property located in Broward County, Florida, to Trust No.
1 and Trust No. 2 in exchange for a promissory note in the amount of
$2,265,000.00 (See Plaintiffs' Exhibit 7). Said promissory note bore
interest at the rate of 6.15% per annum, which was payable to Beth W.
Corporation in annual installments (See Plaintiffs' Exhibit 1). The
principal of said promissory note was to be paid in full by the
respective Trusts on
March 19, 1990
promissory note aforementioned was secured by a mortgage on the 55.91
acres of real estate, which mortgage was duly recorded in Official
Records Book 14322, Page 363 of the Public Records of Broward County,
Florida (Plaintiffs' Exhibit 2). The mortgage provided that in the event
of a default, the mortgagee, Beth W. Corporation, was entitled to seek
foreclosure of the mortgage, but that the mortgagors would not be
personally liable on said promissory note.
March 19, 1987
, during the course of the transactions described above, Jewell Mae
Detjen acted in a dual capacity as a Trustee of Trust No. 1 and Trust
No. 2 which granted the mortgage to the Beth W. Corporation, and as
vice-president of the mortgagee, Beth W. Corporation. In addition,
Jewell Mae Detjen was the granddaughter of the majority shareholder and
president of Beth W. Corporation, Jewell E. Gray.
March 19, 1987
, at the time of the Land Trust Agreement aforementioned, neither Trust
No. 1 nor Trust No. 2 had any assets with which to make payments of the
interest or the principal. Further, it is undisputed by the parties that
the execution of the Land Trust Agreement was an estate-planning device
made on behalf of Jewell E. Gray.
neither Trust No. 1 nor Trust No. 2 fulfilled its obligations under the
Land Trust Agreement to pay the interest and principal due and owing on
the promissory note, the mortgagee, Beth W. Corporation did not
foreclose on the mortgage securing said note.
9. On January
3, 1991, Jewell Mae Detjen, acting on behalf of Beth W. Corporation,
signed three promissory notes in the following amounts: $200,000.00 to
Plaintiff, Wiley P. Waldrep (Plaintiffs' Exhibit 6); $215,000.00 to
Plaintiff, Waldrep Dairy, Inc. (Plaintiffs' Exhibit 5); and $260,000.00
to Plaintiff, W & D Dairy, Inc. (Plaintiffs' Exhibit 4). Said notes
were secured by a collateral assignment of the previously executed
$2,265,000.00 note, which was in default at this time, and the mortgage
on the 55.91 acres of real property (Plaintiffs' Exhibit 3).
10. Under the
three promissory notes aforementioned, the Plaintiffs advanced
$619,582.00 to Beth W. Corporation. Beth W. Corporation used $120,362.03
of the above sum advanced by Plaintiffs to pay real property taxes upon
the aforementioned 55.91 acres of real estate for the years 1990 and
1991. As of
May 16, 1995
, the interest which had accrued on the $120,362.03 advance was
collateral assignment of the mortgage and note between the Plaintiffs
and Beth W. Corporation was duly recorded in the Official Records Book
of Broward County, Florida on
January 8, 1991
(See Plaintiffs' Exhibit 3).
12. As with
the Land Trust Agreement described in Paragraph 4 above, Jewell Mae
Detjen acted in a dual capacity in executing the collateral assignment.
In addition to now being president of Beth W. Corporation, Jewell Mae
Detjen was vice-president of Waldrep Dairy, Inc. and W & D Dairy,
August 30, 1989
, Jewell E. Gray died. Thereafter, the estate of Jewell E. Gray filed a
federal estate tax return, on which a deduction for the expense of an
appraisal for the 55.91 acres of real estate was claimed. Said tax
return was then selected for audit by the Internal Revenue Service.
Internal Revenue Service determined that the transfer of the 55.91 acres
of real estate to the two trusts aforementioned was a gift. Accordingly,
a statutory notice of deficiency of gift tax was issued on
May 28, 1993
(Defendant's Exhibit 2). In the alternative, the Internal Revenue
Service determined that the 55.91 acres remained an asset of Beth W.
Corporation and was, therefore, an asset of Jewell E. Gray's estate.
Accordingly, a statutory notice of deficiency of estate tax was issued
by the Internal Revenue Service.
Thereafter, the personal representative of the estate of Jewell E. Gray
filed a petition (Defendant's Exhibit 1) in the United States Tax Court
challenging the alleged gift tax deficiency. Said petition is presently
pending before the United States Tax Court.
1986 and 1993, the 55.91 acres of real estate was the subject of several
real estate appraisals. On
January 8, 1987
, Vance Real Estate Service appraised the property for a value of
$1,385,000.00 (Defendant's Exhibit 12A). On
January 27, 1987
, Marvin E. Meacham and Associates, Inc. appraised the property for a
value of $2,379,000.00 (Defendant's Exhibit 12B). On
August 30, 1989
, Appraisal Services appraised the property for a value of
$11,000,000.00 (Defendant's Exhibit 12C).
This Court has
jurisdiction over the parties hereto and the subject matter herein
pursuant to 28 U.S.C. §§1444
Plaintiffs, Wiley P. Waldrep, Waldrep Dairy, Inc., and W & D Dairy,
Inc., assert that valuable consideration was given by the Plaintiffs to
Beth W. Corporation in exchange for the collateral assignment of the
purchase money mortgage on
January 3, 1991
. Accordingly, the Plaintiffs contend that the Plaintiffs have a lien on
the subject property which has priority over any lien asserted by the
United States of America
. The United States disputes the priority of the Plaintiffs' asserted
lien and has raised as an affirmative defense the fraudulent (sham)
nature surrounding the initial Land Trust Agreement and the subsequent
collateral assignment, and in particular, the lack of adequate and full
consideration for such transactions. Therefore, the sole issues before
this Court are the validity and priority of the Plaintiffs' purchase
money mortgage and the amounts due thereunder. Specifically, the Court
must determine whether the Plaintiffs, as a result of the collateral
assignment in January, 1991, have a valid security interest in the real
property which is superior to the Defendant's lien and which would
entitle the Plaintiffs to foreclose the mortgage acquired in the
aforementioned collateral assignment.
At the outset,
the Court notes that the issues involving the validity of the
' gift and estate tax liens or the amounts owed thereunder are presently
before the United States Tax Court, and accordingly, will not be
addressed by this Court.
pursuant to Title 26, United States Code, Section
2501 , of chapter 12 of subtitle A of the Code, a gift tax is
imposed upon gifts made by any individual. Further, any individual who
in any calendar year makes any transfer by gift shall make a return for
such year with respect to the gift tax. 26 U.S.C. §6019
. In addition, Title 26, United States Code, Section
6324(b) provides in pertinent part:
... unless the
gift tax imposed by chapter 12 is sooner paid in full or becomes
unenforceable by reason of lapse of time, such tax shall be a lien upon
all gifts made during the period for which the return was filed, for 10
years from the date the gifts are made. If the tax is not paid when due,
the donee of any gift shall be personally liable for such tax to the
extent of the value of such gift.
U.S.C. §6324(b) .
pursuant to Title 26, United States Code, Section
If any person
liable to pay any tax neglects or refuses to pay the same after demand,
the amount (including any interest, additional amount, addition to tax,
or assessable penalty, together with any costs that may accrue in
addition thereto) shall be a lien in favor of the United States upon all
property and rights to property, whether real or personal, belonging to
U.S.C. §6321 .
Before a gift
tax may properly be imposed, there must first be a finding that a gift
has in fact been made. In determining whether a gift has been made, it
is not the form, but "the substance of the transaction which
controls." Deal v. Commissioner [CCH
Dec. 22,822 ], 29 T.C. 730, 736 (1958). For example, where a party
makes a loan secured by a note, and there is no intent to enforce the
loan, the note will not be considered valuable consideration for the
loan, and the lender, in substance, will have made a gift.
Moreover, even if the intent to forgive the loan arises later, the
lender will be determined to have made a gift at the time of the
Rul. 81-264 , 1981-2 C.B. 186.
Court notes that the Defendant concedes that the Plaintiffs are not
purchasers within the meaning of 26 U.S.C. §6323(H)(6)
, but are merely claiming a security interest in the real property.
Therefore, a showing by the Defendant that the Plaintiffs did not pay
the full fair market value for the property is irrelevant. Moreover, the
Defendant concedes that that aspect of a security interest which demands
that the Plaintiffs show that they advanced money or monies worth has
been successfully proven. As evidence thereof, both the Plaintiffs and
the Defendant point to the Plaintiffs' advancement of $619,582.00 to
Beth W. Corporation which was used in part for the payment of real
law, an assignee of a mortgage takes the mortgage subject to all
defenses available against the assignor, especially if the mortgage is
in default. Dubbin v. Capital National Bank Of
, 264 So.2d 1 (
1972). At the time of the collateral assignment of the purchase money
January 3, 1991
, the subject mortgage was in default as neither Trust No. 1 nor Trust
No. 2 had paid the principal and interest due. Thus, the Plaintiffs as
assignees of the mortgage have taken the mortgage subject to all
defenses that the Defendant might have raised against the assignor, Beth
United States of America
, has raised as a defense the sham nature of the Land Trust Agreement.
This defense is one that could have been raised by the Defendant against
Beth W. Corporation. Thus, the Plaintiffs in this matter have taken the
purchase money mortgage subject to the defense of a sham transaction.
The Court adds that at the trial of the above-styled cause, this Court
indicated that it would be considering the Defendant's affirmative
defense of a sham transaction only from the standpoint that there was
not adequate and full consideration for the Land Trust Agreement and the
subsequent collateral assignment.
The burden of
proof for an affirmative defense lies with the party asserting the
defense, in the instant matter, the Defendant. The Public Health
vs. Holmes, 646 So.2d 266, 267 (Fla. 3rd DCA 1994). Once the
Defendant satisfies this burden by a preponderance of the evidence, the
burden shifts to the Plaintiffs to rebut the Defendant's affirmative
defense and demonstrate that they acquired their interest in the subject
property for full and adequate consideration. See In re Forfeiture Of
1987 Chevrolet Corvette, 571 So.2d 594, 595-596 (Fla. 2d DCA 1990).
party alleging fraud must prove it. Tischler v.
inson, 84 So. 914 (
1920); Department of Revenue v. Rudd, 545 So.2d 369, 371 (Fla.
1st DCA 1989) (citing Nally v. Olsson, 134 So.2d 265 (Fla. 2d DCA
1961) (internal citations omitted)). Thus, the burden of proof
ordinarily lies with the complainant, "the presumption being
against the existence of fraud." Department of Revenue v. Rudd,
545 So.2d at 371. However, under
law, such a rule is not absolute. For example, "where the parties
involved in an alleged fraudulent transaction are relatives or close
associates of the transferor, such close relationship tends to establish
a prima facie case which must be met by evidence on the part of the
[non-complainant], and such transactions are regarded with
; Tornwall v. Carter, 106 So.2d 96, 99 (
1958); see also Harper v.
USTC ¶50,253 ], 769 F.Supp. 362, 367 (M.D. Fla. 1991).
In the instant
matter, this Court has already noted the very close relationship between
the parties involved in the subject transactions. Thus, the Court finds
that such relationships establish a prima facie case of fraud which must
be met by evidence by the Plaintiffs that neither the Land Trust
Agreement nor the collateral assignment of the mortgage was a fraudulent
to the Land Trust Agreement executed on
March 19, 1987
, the Plaintiffs have presented evidence that Trusts Nos. 1 and 2
delivered a promissory note in the amount of $2,265,000.00, secured by a
mortgage, to Beth W. Corporation in exchange for 55.91 acres of real
estate. The Plaintiffs further presented testimony that the appraisal
values of the subject property at or near the date of the Agreement were
reflected at $1,385,000.00 (See Defendant's Exhibit 12A) and
$2,379,000.00 (See Defendant's Exhibit 12B). Thus, in light of the
proximity of these figures, the Plaintiffs assert that the tendered
consideration of $2,265,000.00 was full and adequate.
the Defendant claims that the Land Trust Agreement was, in fact, a gift
by Beth W. Corporation, and Jewell E. Gray as the majority shareholder
thereof, to Trust Nos. 1 and 2, subject to the federal gift tax. The
Defendant presented the testimony of the Plaintiffs' own witness, Roger
Coleman, that the Land Trust Agreement was an estate-planning tool for
the benefit of Jewell E. Gray. Further, the Defendant offered the
undisputed testimony that at the time of the transaction, neither Trust
had the funds necessary to repay either the loan or the accruing
interest on the loan. Moreover, although both Trusts defaulted on the
loan by failing to make principal and interest payments, Beth W.
Corporation did not exercise its option to foreclose the mortgage.
Lastly, the Defendant noted the interrelatedness of the parties to the
Land Trust Agreement as set forth above.
review of the testimony and evidence presented at the trial of the
above-styled cause, it is evident to this Court that Beth W. Corporation
did not have the intent to enforce the loan and did in fact forgive the
loan. The circumstances surrounding the Agreement and the subsequent
failure of Beth W. Corporation to foreclose on the defaulted mortgage
overwhelmingly lead to the conclusion that the transaction was a gift,
wholly unsupported by full and adequate consideration. Further, it is
immaterial to this Court's inquiry at what time the intent to forgive
the loan arose, whether such intent was present on the date of the Land
Trust Agreement, or whether such intent arose at the time Beth W.
Corporation failed to foreclose the mortgage. Consequently, the Court
finds that the Land Trust Agreement between Trust Nos. 1 and 2 and Beth
W. Corporation was in substance a gift, and was not supported by
adequate and full consideration.
to the collateral assignment of the purchase money mortgage executed by
the Plaintiffs and Beth W. Corporation on
January 3, 1991
, the Plaintiffs assert that such assignment was supported by adequate
and full consideration. In particular, the Plaintiffs have demonstrated
that the Beth W. Corporation assigned the aforementioned purchase money
mortgage to the Plaintiffs in exchange for the advancement of
$619,582.00 in three promissory notes.
the Defendant claims that the collateral assignment was not supported by
full and adequate consideration. Again, the Defendant has presented
testimony which reveals the interrelatedness of the parties to the
transaction. Further, the Defendant requested that this Court take
notice of the fact that neither Beth W. Corporation nor Jewell Mae
Detjen appeared at the trial of the above action to assert their
purported rights under the mortgage and collateral assignment. Lastly,
the Defendant has offered testimony and evidence that at the time of the
collateral assignment of the mortgage, the mortgage was in default as
neither Trust had fulfilled its obligations to pay the principal and
interest in full.
Based upon the
testimony and evidence presented at trial, the Court finds that the
collateral assignment of the purchase money mortgage was not supported
by full and adequate consideration. Further, upon careful consideration,
this Court agrees with the Defendant's assessment that the collateral
assignment was a sham transaction and was not entered into in good faith
by the parties thereto.
review of the testimony and evidence presented at the trial of the
above-styled cause, the Court finds that the Defendant has presented a
valid affirmative defense wherein the Defendant has successfully raised
the issue of consideration for the transactions in question and the
fraudulent nature of said transactions. The Court further finds that the
Plaintiffs have failed to rebut said affirmative defense and have failed
to demonstrate that there was full and adequate consideration for either
the Land Trust Agreement or the subsequent collateral assignment.
Therefore, the Court finds as a matter of law, that the Plaintiffs do
not have a valid security interest in the real property which is
superior to the Defendant's lien, and consequently are not entitled to
foreclose the purchase money mortgage.
after due consideration, it is
that Final Judgment be and the same is hereby entered in favor of the
United States of America
, and against the Plaintiffs, Wiley P. Waldrep, Waldrep Dairy, Inc., and
W & D. Dairy, Inc. Said Plaintiffs shall take nothing by this action
and said Defendant shall go hence without day.
To the extent
not otherwise disposed of herein, all pending Motions are hereby DENIED
¶50,253] United States of America, Plaintiff v. Giffels Associates,
Black & Veatch, and Comerica Bank, N.A. as successor in interest of
Manufacturers National Bank, Defendants
District Court, East. Dist.
, So. Div., 95-CV-71316-DT, 4/3/96
[Code Sec. 6331 ]
IRS levy: Bankrupt taxpayer: Account receivables: Assignments to
bank: Security interest.--Two consulting firms improperly failed to
surrender to the IRS funds owed to a bankrupt company, which performed
services for the firms as a subcontractor, upon receipt of a notice of
levy relating to the company's outstanding tax liabilities. Although the
firms had received notices instructing them to pay funds owed the
company to the company's bank, the notices were meaningless since they
referred to nonexistent assignments of the company's accounts receivable
to the bank. The company had merely granted the bank a security interest
in its accounts receivable, not its entire rights to the receivables.
Thus, because the firms had possessed property of the company, they were
liable to the IRS for the amounts they surrendered to the bank.
[Code Sec. 6502 ]
IRS levy: Statute of limitations: Collection: Time levy served:
Filing of suit: Bankruptcy: Tolling.--The statute of limitations did
not bar an IRS suit to enforce a levy against two consulting firms that
failed to surrender funds owed to a bankrupt company. The levy was
served within six years of the date the tax assessments were made
against the company. Even if the IRS had to file suit within the
six-year period rather than merely serve a levy, the limitations period
was suspended as long as the company was in bankruptcy proceedings and
for six months thereafter. The firms' argument that the limitations
period should not have been tolled because the IRS could have sued the
firms or the bank to which the funds were paid once they surrendered the
funds to the bank was rejected. Since a tax collection suit against the
company would have been timely, the suit against the firms that were
derivatively liable for the tax debt was also timely. Further, laches
did not bar the IRS's suit since there is no time limit on the
government's right to pursue claims against those who fail to honor
[Code Sec. 6332 ]
IRS levy: Bankrupt taxpayer: Account receivables: Surrender of
property to third party: 50% penalty: Interest.--Two consulting
firms that failed to surrender to the IRS funds owed to a bankrupt
company upon receipt of a notice of levy relating to the company's tax
liabilities were not liable for the 50% penalty imposed under Code Sec.
6332 because they had reasonable cause for not honoring the levy.
The firms argued that they surrendered the funds to the company's bank
upon receiving notices from the bank that the company had assigned its
interest in the receivables to the bank. Even though the notices were
meaningless since the assignments were nonexistent, there was no great
weight of authority that controlled whether the company's agreements
with its bank were assignments of its rights to the funds. The court did
not issue a judgment containing a final sum owed since the IRS did not
explain how to calculate the interest that it requested.
Cardone, Department of Justice,
, for plaintiff. Michael D. Boutell, Michael R. Main, Christian C.
Nilson, Allan M. Darish, Elias Muawad, Kurt M. Carlson, Comerica, Inc.,
Legal Department, P.O. Box 75000, Detroit, Mich. 48275-18936, for
GRANTING PLAINTIFF'S MOTION FOR SUMMARY JUDGMENT AGAINST DEFENDANTS
GIFFELS ASSOCIATES AND BLACK & VEATCH
having come before the Court on plaintiff's motion for summary judgment
against defendants Giffels Associates and Black & Veatch;
having reviewed the pleadings submitted herein, and being otherwise
fully informed in the matter;
IT IS HEREBY
ORDERED that plaintiff's motion for summary judgment shall be, and
hereby is, GRANTED.
INTRODUCTION AND FACTS
Giffels Associates and Black & Veatch (collectively,
"defendants") are corporate entities located in
. Defendant Comerica Bank, N.A. is the successor in interest to
Manufacturers National Bank ("the Bank"). Defendants
contracted with the City of
to perform consulting services. Chemical Industrial Services, Inc.
("the taxpayer") performed services for defendants as a
subcontractor for one or more of defendants' contracts with the City of
March 28, 1979
February 11, 1982
, the taxpayer and the Bank executed security agreements in which the
taxpayer granted the Bank a security interest in its accounts receivable
in consideration for future loans from the Bank. The Bank filed the
appropriate financing statements with the Michigan Secretary of State.
March 28, 1979
January 9, 1980
July 9, 1982
, the Bank sent to defendants a document labelled as a "Notice of
Assignment of Accounts Receivable and Direction to Pay to [the
Bank]." This document instructed defendants to pay all of their
current and future debts to the taxpayer directly to the Bank.
March 23, 1979
March 26, 1982
, plaintiff filed notices of federal tax liens with the Michigan
Secretary of State for outstanding tax liabilities owed by the taxpayer.
July 7, 1982
, the taxpayer owed plaintiff $65,770.12, including unpaid assessed
taxes and statutory interest. At that time, defendants owed the taxpayer
$62,294.71 in accounts receivable. On
July 7, 1982
, plaintiff issued and served on defendants a notice of levy, notifying
them of the taxes owed by the taxpayer and demanding that they surrender
all of the property and property rights of the taxpayer which they held
in the form of unpaid accounts receivable. To date, defendants have not
honored plaintiff's levy.
filed a bankruptcy petition on
July 22, 1982
January 24, 1983
, and upon the taxpayer's motion, the Bankruptcy Court restrained
defendants from tendering the $62,294.71 to plaintiff. On
March 18, 1983
, the Bankruptcy Court ordered defendants to pay the taxpayer and the
Bank jointly the $62,294.71 owed in accounts receivable. On
April 12, 1983
, however, the Bankruptcy Court vacated that order upon a motion by
June 10, 1983
, the taxpayer commenced an adversary proceeding seeking a turnover of
the $62,294.71. The Bankruptcy Court dismissed this proceeding without
ordering defendants to turnover the funds. On
June 11, 1984
, defendants turned over the $62,294.71 to the Bank, and the Bank agreed
to indemnify defendants for any liability incurred as a result of doing
October 17, 1985
, plaintiff began an adversary proceeding against the taxpayer and the
Bank, seeking payment of the $62,294.71. On
January 8, 1986
, plaintiff stipulated to a dismissal; the stipulation stated that
"the parties hereto agree that the account receivable which is the
subject of this adversary proceeding is not property of the estate and
that this dispute is a priority dispute between the
and the Bank."
May 22, 1991
, the taxpayer's bankruptcy proceeding closed. Plaintiff filed the
instant suit on
April 3, 1995
, seeking to enforce the
July 9, 1982
levy and collect from defendants the $62,294.71 which they paid to the
Bank rather than to plaintiff.
56(c), a court should grant a motion for summary judgment only if the
evidence indicates that no genuine issue of material fact exists. In
order to avoid summary judgment, the opposing party must set out
sufficient evidence in the record to allow a reasonable jury to find for
him at trial. Anderson v. Liberty Lobby, Inc., 477
242, 248 (1986); Matsushita Elec. Ind. Co. v. Zenith Radio Corp.,
574 (1986). A court tests the sufficiency of the evidence against the
substantive standard of proof that would control at trial.
, supra. The moving party must show that there is an absence of
evidence to support the non-moving party's case. Celotex v. Catrett,
317, 325 (1986). "[A] party opposing a properly supported motion
for summary judgment may not rest on mere allegations or denials of his
pleading, but must set forth specific facts showing that there is a
genuine issue for trial." Anderson, 477
at 256. A court disposing of a summary judgment motion must consider the
evidence in the light most favorable to the non-moving party, but may
weigh competing inferences for their persuasiveness. Matsushita,
attempting to collect unpaid taxes through an
istrative levy served upon defendants under 26 U.S.C. §6331
, which provides that plaintiff may collect unpaid taxes "by
levy upon all property and rights to property ... belonging to such
person or on which there is a lien provided in this chapter for the
payment of tax." Because defendants allegedly possessed property of
the delinquent taxpayer in the form of the taxpayer's accounts
receivable, plaintiff proceeds under 26 U.S.C. §6332(d)(1)
, which imposes personal liability for a tax liability on any person
who fails to surrender property which is subject to levy.
first contest whether defendants ever possessed rights to property which
belonged to the taxpayer. Specifically, the parties contest whether the
taxpayer owned the rights to its accounts receivable when plaintiff
served defendants with a notice of levy. If the taxpayer had assigned
its rights to its accounts receivable to the Bank, then all of the funds
owed by defendants to the taxpayer were actually the property of the
bank and not of the taxpayer. Under such facts, defendants would have no
obligation to honor plaintiff's levy because they never possessed rights
to any property of the taxpayer. Conversely, if the taxpayer retained
any property rights to its accounts receivable when defendants received
the notice of levy, then defendants are potentially liable to plaintiff
because they possessed rights to the taxpayer's property.
States v. Gen. Motors Corp. [91-1
USTC ¶50,158 ], 929 F.2d 249 (6th Cir. 1991), the IRS sought to
collect under §6332 a
tax by enforcing a levy served upon third-party General Motors
Corporation ("GM"). As in this case, the IRS asserted that it
had served GM with a notice of levy when GM had possessed property in
the form of a debt owed to the taxpayer.
at 251. GM argued that it was not subject to the levy because it never
possessed any property of the taxpayer because the taxpayer previously
had transferred its entire interest in its accounts receivable to a bank
as security for a loan.
first explained that "state law
determines 'the nature of the legal interest which the taxpayer had in
the property.' "
(quoting United States v. Nat'l Bank of Commerce [85-2
USTC ¶9482 ], 472 U.S. 713, 722 (1985)). The parties did not
dispute that the taxpayer had assigned its accounts receivable to the
at 252. The General Motors Court therefore explained that
law defined an assignment as the following:
or setting over of property, or of some right or interest therein, from
one person to another, and unless in some way qualified, it is properly
the transfer of one's whole interest in the estate, or chattel or other
thing. It is the act by which one person transfers to another or causes
to vest in another, his right to property or interest therein.
(quoting Allardvce v. Dart, 291
642, 644 (1939)). Accordingly, the fact that the taxpayer had assigned
its rights to its accounts receivable to the bank indicated that GM did
not have to honor the levy because GM had not possessed any property of
the taxpayer when the government served the levy.
In the instant
case, defendants argue that the holding in General Motors
mandates a finding that they have no obligation to honor the levy. In General
Motors, however, "[i]t [was] not disputed that [the taxpayer]
assigned its accounts receivable and contract rights to the Bank."
at 252. Here, the government asserts that the taxpayer never assigned
its accounts receivable. Likewise, the General Motors Court found
that the government had no valid lien on future monies owed to the
taxpayer because the taxpayer had assigned its after-acquired accounts
receivable, and because the taxpayer's ability to collect money in the
usual course of business on behalf of the Bank did not defeat the
at 253. General Motors therefore merely outlines the general rule
that the IRS cannot collect from a third-party property which the
taxpayer previously assigned; the case does not explain how to decide
the issue in this case: whether the taxpayer in fact has assigned the
rights to its accounts receivable to a bank.
and the Bank signed two security agreements, dated
March 28, 1979
February 11, 1982
respectively. See Defendant's Response, Exhibit A. A review of
those documents reveals that the taxpayer merely granted the Bank a
security interest in its accounts receivable in consideration for a
loan; the taxpayer did not assign its entire rights to its accounts
receivable to the Bank. Specifically, ¶4 of the security agreements
indicate that the Bank made the loans to the taxpayer on a
The taxpayer therefore could collect its accounts receivable and then
pay the Bank any monies owing. In contrast, if the Bank had made the
loans on a remittance basis, then the taxpayer would have had to, among
other things, (1) keep accounts receivable in a separate fund in trust
for the Bank, and (2) at the Bank's option, deposit its accounts
receivable into an "assignee deposit account," which the Bank
then could use towards payment of monies owed.
at ¶5. Ultimately, the security agreements do not reflect an intent by
the taxpayer to divest itself of all of its rights to all of its
note that the Bank sent to them a document labelled as a "Notice of
Assignment of Accounts Receivable and Direction to Pay to [the
March 28, 1979
January 9, 1980
July 9, 1982
. These documents instructed defendants to begin paying all of their
current and future debts to the taxpayer directly to the Bank. See
id., Exhibits B-E. The security agreements, however, control the
parties' rights; the taxpayer either assigned its accounts receivable to
the Bank in those agreements or it did not. Because it did not, the
Bank's notices of assignment to defendants are meaningless because they
refer to a nonexisting assignment. 1
have suggested that plaintiff's stipulated dismissal of its suit against
the taxpayer during the bankruptcy proceedings is evidence that the
taxpayer assigned its accounts receivable to the Bank. The stipulation,
however, cannot affect whether the agreements at issue in fact created
Defendants' Alleged Failure to Comply with Discovery
points out that many of the documents submitted by defendants in
response to the instant motion, including the notices of assignment, did
not surface until defendants filed their
January 5, 1995
response. Although plaintiff's July, 1995 discovery requests encompassed
the documents, defendants did not provide them. Defendants vaguely
explain their failure to have provided the documents by attaching to
their response an affidavit of an otherwise unidentifiable person named
Beth A. Mier. In her affidavit, Ms. Mier states that "[o]n January
3, 1996, I was notified by the attorney for Giffels Associates, Stephen
McGraw of Kerr, Russell & Weber, that files regarding the Detroit
Water Department matter involved herein, which were thought to have been
destroyed, were located in its warehouse." Plaintiff states that
Fed. R. Civ. P. 37(c)(1) forbids the Court from considering the
previously undisclosed documents when deciding the instant motion.
whether plaintiff is correct that Rule 37(c)(1) necessarily prevents the
Court from considering the previously undisclosed documents, the relief
requested by plaintiff is moot. The Court has found that the security
agreements defined the taxpayer's legal relationship with the Bank, and
that the taxpayer did not assign its accounts receivable to the Bank
through those documents. Subsequent communications by the Bank to
defendants could not alter the legal effect of the security agreements.
Even if the Court considered the previously undisclosed documents,
therefore, plaintiff still would receive summary judgment.
Statute of Limitations and Laches Defenses
dispute whether the statute of limitations bars this suit. As explained infra,
the Court finds that it does not.
26 U.S.C. §6502 provided
for a six-year period of limitations for the collection of a tax after
an assessment. See 26 U.S.C. §6502(a)(1)
(West 1989). In the Sixth Circuit, timely service of a levy upon a
third party complies with the requirements of §6502
. United States v. Weintraub [80-1
USTC ¶9172 ], 613 F.2d 612, 620-21; 624-25 (6th Cir. 1979). In
other words, the government constructively takes possession of property
when it serves a levy concerning the property; if the government serves
the levy within the applicable limitations period, it then may seek to
enforce the levy at its leisure. Id.; see also State Bank of Fraser
v. United States [88-2
USTC ¶9592 ], 861 F.2d 954, 961 n.6 (6th Cir. 1988) (holding the
served its levy in 1982 in order to collect taxes assessed from 1979 to
1982. Under Weintraub, plaintiff complied with the applicable
six-year statute of limitations period.
argue that the rule in Weintraub ignores the holding in United
States v. Updike [2
USTC ¶533 ], 281 U.S. 489 (1930), which ruled that the government
could not seek to collect a dissolved corporation's tax liability from
the corporation's stockholders more than six year after having assessed
the tax at issue. The holding in Updike, however, did not control
the issue in Weintraub of whether the government could comply
with the six-year statute of limitations period by serving a levy, as
opposed to filing suit.
still does not bar this action, even if plaintiff had to file suit
rather than merely serve a levy within the applicable statute of
limitations period. 26 U.S.C. §6503
suspends the limitations period for collecting an assessed tax for
as long as the taxpayer is in bankruptcy proceedings and for six months
thereafter. See 26 U.S.C. §6503(h)
. Plaintiff issued the earliest tax assessment on
May 23, 1979
. The taxpayer filed its bankruptcy petition on
July 22, 1982
. The bankruptcy proceedings extended until
May 22, 1991
, thereby suspending the limitations period for over nine years.
Further, Congress extended the six year period of limitations to ten
years for all tax liabilities which had not expired on or before
November 5, 1990
, see Pub. L. No. 101-508, 104 Stat. 1388-458 (codified as
amended at 26 U.S.C. §6502(a)
(1995)), such as the liability in the instant case. Given the four
year extension on the limitations period and the taxpayer's bankruptcy
proceeding, plaintiff had until
September 22, 1998
in which to file this suit. See Plaintiff's Motion, p. 15, n. 7
(performing the applicable computation of time periods).
nonetheless argue that §6503(h)
fails to suspend the statute of limitations sufficiently because
defendants paid the property at issue to the Bank on
June 4, 1984
. Although defendants do not explain fully the significance of that
date, they presumably are arguing that their payment to the Bank halted
any tolling under §6503(h)
because that section refers only to suspensions "for the period
during which the Secretary is prohibited by reason of such case from ...
collecting." In other words, defendants presumably argue that the
taxpayer's bankruptcy in fact did not prohibit the government from
collecting the tax after
June 4, 1984
because the Bank possessed the property after that date, and the
government thereafter could have sued either the Bank or defendants.
fails. If a tax collection suit would be timely against a taxpayer
because the taxpayer's bankruptcy tolled the limitations period under §6503(h)
, then a suit against a party derivatively liable for the tax debt
also would be timely. United States v. Wright [95-2
USTC ¶50,334 ], 57 F.3d 561, 564 (7th Cir. 1995); see also
United States v. Assoc. Commercial Group [83-2
USTC ¶9689 ], 721 F.2d 1094, 1097 (7th Cir. 1983). Because the
government still could file a timely collection suit against the
taxpayer in the instant case, this suit is timely.
finally argue that laches bar plaintiff's suit. Defendants stress that
plaintiff waited until 1995 to file suit, that the Bank has been unable
to find its credit and legal files pertaining to the transactions at
issue, and that plaintiff stipulated to a dismissal of its suit against
the taxpayer during the bankruptcy proceedings. Defendants cite the Weintraub
case, supra, in support of the proposition that laches is a
possible defense against a collection suit by plaintiff. Defendants,
however, have misconstrued the holding in Weintraub, which
specifically ruled that laches is not a defense in the instant
suit. See Weintraub [80-1
USTC ¶9172 ], 613 F.2d at 618-19; see also Fraser [88-2
USTC ¶9542 ], 861 F.2d at 961 n. 6 ("There is no time limit on
the Government's right to pursue claims against those who fail to honor
U.S.C. §6332(d)(1) ,
plaintiff may collect a 50% penalty on the tax liability unless
defendant had "reasonable cause" for not honoring the levy.
Congress intended that "a bona fide dispute over the amount owing
to the taxpayer (by the property holder) or over the legal effectiveness
of the levy itself is to constitute reasonable cause under [section
6332(c) ]." Fraser [88-2
USTC ¶9592 ], 861 F.2d at 962 n. 8 (quoting S. Rep. No. 1708, 89th
Cong., 2d Sess., reprinted in 1966 U.S. Code Cong. & Admin.
News 3722, 3740). In Fraser, the penalty applied because
"the great weight of authority from other jurisdictions"
refuted the defendant's argument that it could defeat a levy by
exercising its right to setoff.
In the instant
case, defendants have contested the legal effectiveness of the levy by
arguing that it did not have to honor a levy on property which the
taxpayer had assigned to the Bank. The Court finds that the 50% penalty
is inapplicable. This case is distinguishable from Fraser because
no "great weight" of authority controlled whether the
agreements at issue were assignments. More importantly, the General
Motors opinion initially appears to be very helpful to defendants'
case. Accordingly, defendants had a bona fide, albeit ultimately
unsuccessful, dispute with plaintiff.
The Court has
found for plaintiff in the amount of $62,294.71. Plaintiff also has
requested "interest at the rate provided by the Internal Revenue
Code." Plaintiff, however, has not explained how to calculate such
interest. Before the Court issues a judgment containing a final sum,
therefore, plaintiff should submit by
April 19, 1996
a brief regarding the amount of interest that it is requesting. If they
contest the amount, defendants shall have ten work days after having
received the brief in which to respond.
plaintiff's motion for summary judgment shall be, and hereby is, GRANTED.
Plaintiff has argued that the
July 9, 1982
notice of assignment could not defeat the
July 7, 1982
notice of levy. Plaintiff further points out that defendant has no
evidence to support its sudden assertion that it did not receive the
July 7, 1982
notice of levy until
July 10, 1982
. Regardless of whether plaintiff is correct, the notices of assignment
could not transform agreements that did not constitute assignments into
¶50,236] Litton Industrial Automation Systems, Inc., Plaintiff v.
Nationwide Power Corporation, Fitzgerald, Peters, Dakmak & Miller,
P.C., Defendants-Cross-Defendants, United States of America,
Defendant-Cross-Defendant-Appellee, Magna Card, Inc., d.b.a. Highlander
International Corp., John F. Roscoe III,
Defendants-Cross-Defendants-Appellants, Brooks Satellite, f.k.a.
Nationwide Power Corporation, Defendant-Cross-Defendant
Court of Appeals, 11th Circuit, 95-2725,
, 106 F3d 366, 106 F3d 366. Affirming a District Court decision, 95-1
Liens: Priority: Assignment of funds: Security interest: Judgment
lien: Qualification as.--Tax liens that had attached to an
assignor's interest in a judgment against another corporation were
superior to the interests of an assignee because the assignee was not a
purchaser or a holder of a security interest. The assignee did not
perfect its security interest and, therefore, did not acquire an
interest sufficient under state (
) law against subsequent purchasers without actual notice or against a
subsequent judgment lien arising from an unsecured obligation. A
judgment lien, as used for purposes of priority of liens, is equivalent
to the interest of a UCC lien creditor. Because the assignee's interest
in the funds was unperfected under state law against a judgment lien
arising on the date that notice of the tax lien was filed, it was
subordinate to that of a UCC lien creditor. Therefore, the interest was
not protected under local law against a judgment lien arising on that
date and was not a security interest.
John F. Roscow
III, Scruggs & Carmichael, 1 S.E.
, for appellant. Gary R. Allen, Murray S. Horwitz, Paula K. Speck,
Loretta C. Argrett, William S. Estabrook III, Department of Justice,
, for appellee.
Circuit Judge, KRAVITCH *,
Senior Circuit Judge, and SCHWARZER **,
Senior District Judge.
The issue in
this appeal is whether an unperfected security interest in interpleaded
funds is entitled to priority over a competing federal tax lien. The
district court held that the federal tax lien is entitled to priority.
The facts in
this appeal are essentially undisputed. Plaintiff Litton Industrial
Automation Systems, Inc. ("Litton") filed this interpleader
action in the United States District Court for the Eastern District of
Michigan, from which it was transferred to the United States District
Court for the Middle District of Florida. Litton deposited in the
registry of the court $572,627.46, which it owed to Nationwide Power
Corporation ("Nationwide") pursuant to a judgment obtained by
Nationwide on August 15, 1989. The real parties in interest are
Highlander International Corporation ("Highlander") and the
interest in the interpleaded funds stems from an agreement between
Nationwide and Highlander, pursuant to which Nationwide sought to secure
a debt it owed to Highlander. 2
In this agreement, Nationwide granted to Highlander a security interest
in certain "cash collateral," including Nationwide's cause of
action against Litton, which eventually resulted in the money judgment
here in dispute. This interest arose on the date of the agreement, April
15, 1986. Highlander did not file a UCC-1 statement until August 1989,
however. The Government's interest in the interpleaded funds arose from
a tax assessment on June 9, 1986 of tax penalties exceeding $700,000
against Nationwide. On July 3, 1986, the Internal Revenue Service
("IRS") filed a notice of federal tax lien in
, in which Nationwide had its principal executive office.
July 27, 1989
, the IRS served a notice of levy on Litton's attorney, directing him to
deliver to the IRS any monies owed to Nationwide. After judgment was
entered in favor of Nationwide in its suit against Litton, Litton
initiated the instant interpleader action to determine which party is
entitled to the funds. The district court granted summary judgment to
the Government, holding that the federal tax lien was entitled to
priority over Highlander's security interest. This appeal followed.
jurisdiction to review the district court's order under 28 U.S.C. §1291.
Because at least two of the defendants named in this interpleader action
are of diverse citizenship, the district court's jurisdiction was
founded on 28 U.S.C. §1335. The Government has waived its sovereign
immunity for interpleader actions involving tax liens in 28 U.S.C. §2410.
We review the
district court's grant of summary judgment de novo and apply the
same legal standards as the district court. Sultenfuss v. Snow,
35 F.3d 1494, 1499 (11th Cir.1994) (en banc), cert. denied, --
--, 115 S.Ct. 1254, 131 L.Ed.2d 134 (1995). This case involves a pure
question of law: Is Highlander the "holder of a security
interest" which is entitled to priority over the Government's
federal tax lien under the Federal Tax Lien Act of 1966
("FTLA"), 26 U.S.C. §6323?
address the contentions of the parties, we briefly outline the
applicable law. Under the Internal Revenue Code, a tax lien arises at
the time of assessment, 26 U.S.C. §6322, on "all property and
rights of property, whether real or personal, belonging to" a
delinquent taxpayer, id. §6321. The FTLA provides, however, that
the tax lien "shall not be valid as against any . . . holder of a
security interest . . . until notice thereof which meets the
requirements of subsection (f) has been filed."
§6323(a). Therefore, any "security interest" which arises
prior to the proper filing of a federal tax lien takes priority over the
tax lien. See
v. McDermott, 507
447, 449, 113 S.Ct. 1526, 1528, 123 L.Ed.2d 128 (1993). The FTLA defines
a "security interest" as
in property acquired by contract for the purpose of securing payment or
performance of an obligation or indemnifying against loss or liability.
A security interest exists at any time (A) if, at such time, the
property is in existence and the interest has become protected under
local law against a subsequent judgment lien arising out of an unsecured
obligation, and (B) to the extent that, at such time, the holder has
parted with money or money's worth.
U.S.C. §6323(h)(1). The dispute in this case is whether Highlander's
interest qualifies as a security interest as defined by the FTLA.
District Court Opinion and Contentions of the Parties
undisputed in this appeal that a tax lien arose upon all Nationwide's
June 9, 1986
, the first date of the tax penalty assessments against Nationwide. It
is also undisputed that the IRS properly filed a notice of this tax lien
in Nationwide's county of residence, as required by 26 U.S.C. §6323(f)(2)(B),
July 3, 1986
. Therefore, for Highlander's interest to take priority over the tax
lien, Highlander must have been the holder of a "security
interest," as that term is defined in the FTLA, on
July 3, 1986
. To do so, Highlander must establish that its interest satisfies four
(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
v. Internal Revenue Serv. (In re Haas)
¶50,496 ], 31 F.3d 1081, 1085 (11th Cir.1994), cert. denied,
--, 115 S.Ct. 2578, 132 L.Ed.2d 828 (1995). As in Haas, the only
issue on appeal in this case is whether the third condition is
satisfied. In other words, this case turns on whether Highlander's
interest was protected under
law--the applicable local law--against a judgment lien arising out of an
unsecured obligation on
July 3, 1986
Relying on the
"hypothetical judgment lien creditor test" adopted by this
court in Haas, the district court held that Highlander's interest
was not protected under
law against a judgment lien.
hypothetical judgment lien creditor test operates to put the IRS in the
shoes of any subsequent judgment creditor, including the most
favorable shoes. Thus, if any subsequent judgment creditor could prevail
over [Highlander], then the IRS prevails.
¶50,496 ], 31 F.3d at 1089 (footnote omitted). The district court
reasoned that a class of judgment creditors, those who qualify as
"lien creditors" as defined in U.C.C. §9-301(3) and who have
no notice of Highlander's previous unperfected interest, could have
prevailed over Highlander's interest under
law. The court concluded that the Government prevails here.
contends, however, that under
law a "judgment lien" does not attach to intangible
assets, such as the funds at issue in this case, until the judgment
creditor has taken further judicial action--by way of garnishment or an
independent suit to enforce the debt. See Peninsula State Bank v.
, 211 So.2d 3, 5 (Fla.1968). Highlander concludes that the holder of
a simple "judgment lien" on intangibles does not qualify as a
UCC "lien creditor" under
law. Thus, Highlander's security interest, though unperfected, prevails
over the judgment lien because Highlander's interest was the first to
Stat. ch. 679.312(5)(b) (1995).
argues that Haas is distinguishable. The priority contest in Haas
was between a mortgagee who had mistakenly released its mortgage on the
contested real property and a federal tax lien. The applicable local law
law, which provided that the mortgagee's interest is subordinate to that
of a "judgment creditor without notice." Haas [94-2
USTC ¶50,496], 31 F.3d at 1086. The issue decided in that case was
whether knowledge on the part of the IRS of the mistakenly released
mortgage affected the hypothetical priority contest--we decided that it
did not--, not whether the IRS should be treated as a UCC lien creditor.
In other words, the IRS would have won the priority contest in Haas,
whether it was a UCC lien creditor or not, because it was the
hypothetical holder of a "judgment lien" and thus a judgment
creditor entitled to priority under
law. Highlander acknowledges that, in Haas, we noted: "In
interpreting the phrase "protected under local law against a
subsequent judgment lien,' courts and commentators have determined the
phrase is equivalent to being protected against a "lien creditor'
as defined in U.C.C. §9-301(3)." Haas [94-2 USTC ¶50,496],
31 F.3d at 1087. Highlander contends, however, that this statement is dictum,
in light of the discussion of the specific type of interest and
applicable local law at issue in Haas.
also distinguishes Dragstrem v. Obermeyer, 549 F.2d 20 (7th
Cir.1977), which is the first decision of a United States Court of
Appeals to adopt the hypothetical judgment creditor test and upon which
we relied heavily in Haas. Dragstrem involved facts analogous to
those we face here. The priority contest in Dragstrem was between
an unperfected security interest and a subsequent tax lien over an
at 22. The difference between Dragstrem and this case lies,
however, in the applicable local law. The relevant local law in Dragstrem
was U.C.C. §9-301(1)(b), which, as adopted in
at the time, provided that "an unperfected security interest is
subordinate to the rights of . . . (b) a person who becomes a lien
creditor without knowledge of the security interest and before it
at 23 (omission in original) (emphasis added). The equivalent provision
law is a newer version of section 9-301(1)(b) that omits the knowledge
Stat. ch. 679.301(1)(b). Therefore, the central issue decided in Haas
and Dragstrem, whether knowledge on the part of the IRS affects
the priority of the tax lien, is not relevant in this case.
importantly, a judgment lien attaches to intangible property in
upon docketing of a judgment and the delivery of a writ of execution to
the sheriff, Dragstrem, 549 F.2d at 27, without any additional
judicial proceeding as required in
. Highlander argues that the holder of a "simple judgment
lien" is therefore a UCC lien creditor under
law but not under
law. Compare id. ("Upon delivery [of the writ to the
sheriff], the lien would attach to the debtor's property and the
creditor would become a "lien creditor' under the UCC.") with
Peninsula State Bank, 211 So.2d at 5 ("The only way a simple
judgment creditor can reach [intangible property] owed to his debtor is
by way of a separate and independent judicial proceeding . . ..").
According to Highlander, that such holder of a simple judgment lien
law does not mean that it should prevail under
contends, however, that the additional procedural steps that a
judgment creditor must take for its judgment lien to attach to
intangible property are no different from the lack of knowledge
requirement that was at issue in Haas. In order to be in
"the most favorable shoes," Haas [94-2 USTC ¶50,496],
31 F.3d at 1089, the hypothetical judgment creditor must be assumed to
have completed whatever additional steps are required under local law
for the judgment lien to attach. Highlander responds that there is an
important distinction between the knowledge requirement in Haas
and the additional steps necessary under
law for a judgment lien to attach to intangible property. The
underpinning of the hypothetical judgment creditor test is that the FTLA
put the government in the position of a competing holder of a security
interest or judgment lien, but rather describes the legal status
which security interests must obtain under state law in order to have
priority over later filed or unfiled federal tax liens."
¶50,496 ], 31 F.3d at 1087 (quoting Dragstrem, 549 F.2d at
26). Therefore, whether the IRS had knowledge of the security interest
is irrelevant to the inquiry of whether that security interest achieved
a given legal status. Under Haas, we do not engage in "a
case-bycase inquiry into whether the IRS had "notice.' " Haas
¶50,496 ], 31 F.3d at 1088. Instead, we compare the security
interest at issue to a given legal construct, namely a hypothetical
"judgment lien." Just what the phrase "judgment
lien" means was not an issue in Haas, although it was
addressed in dicta. See id. at 1087 (noting that "courts and
commentators have determined the phrase is equivalent to . . . a
"lien creditor' as defined in the U.C.C. §9-301(3)").
Highlander argues that the plain meaning of the phrase "judgment
lien" is a "simple" judgment lien that arises, but not
necessarily attaches to intangible property, upon the entry of a
judgment. Highlander argues further that whether such "judgment
lien" should be considered to have attached to the property in
dispute is a matter of state law. If state law requires separate
judicial action for the lien to attach to the property, then a
"judgment lien" in that state, even a hypothetical judgment
lien, has not attached and its holder is not a UCC lien creditor. Cf.
Peninsula State Bank, 211 So.2d at 5. Highlander adds that defining
a "judgment lien" in this fashion does not defeat the
congressional purpose, implemented in the hypothetical judgment creditor
test, of avoiding a case-by-case inquiry into whether the IRS actually
complied with certain state law requirements--i.e., had no notice (as in
Haas ) or performed the actions necessary under state law for the
judgment lien to attach to the property in question.
We agree with
Highlander that Haas does not necessarily dictate the result in
this case. To determine whether the language of Haas should be
extended to encompass the additional steps needed under Florida law for
a "simple judgment lien" to attach, we must construe the
statute and ascertain what the phrase "judgment lien," as used
by Congress in section 6323(h)(1), means.
In a case
involving statutory construction, our starting point always is the
language of the statute, and we assume that Congress expressed its
intent by the ordinary meaning of the words it used. American Tobacco
Co. v. Patterson, 456
63, 68, 102 S.Ct. 1534, 1537, 71 L.Ed.2d 748 (1982); Gulf Life Ins.
, 809 F.2d 1520, 1522 (11th Cir.1987). The FTLA does not define the
phrase "judgment lien." Highlander relies primarily on the
Florida Supreme Court's decision in Peninsula State Bank to argue
that the plain meaning of the phrase "judgment lien" is a
"simple unperfected judgment lien." Peninsula State Bank,
211 So.2d at 7. The gist of this argument is that, under
law, a simple money judgment against a defendant creates a
"lien" on all of its property. Such a lien, "a simple
judgment lien" in the terminology used by the Florida Supreme
Court, does not attach to the defendant's intangible personal property
until further judicial action is taken.
at 5. Highlander's argument is unconvincing.
not state law, governs a priority contest between a security interest
and a federal tax lien. Haas [94-2 USTC ¶50,496], 31 F.3d at
1084-85 (citing Aquilino v. United States [60-2 USTC ¶9538], 363
U.S. 509, 513-15, 80 S.Ct. 1277, 1280-81, 4 L.Ed.2d 1365 (1960)). Thus,
although the FTLA resolves such a contest by comparing the security
interest to a judgment lien under state priority rules, what constitutes
a "judgment lien" within the meaning of section 6323(h)(1) is
a matter of federal law. We are concerned with what Congress intended
that phrase to mean, not with what state law labels as a judgment lien. Cf.
id. at 1088 n. 10 (definition of "judgment creditor" in a
predecessor to the FTLA is a matter of federal law).
"judgment lien" does not have a generally understood meaning. See
Texas Oil & Gas Corp. v. United States [72-2 USTC ¶9653], 466
F.2d 1040, 1047 (5th Cir.1972) ("The phrase "protected against
a judgment lien' is not a term of art . . .."), cert. denied,
410 U.S. 929, 93 S.Ct. 1367, 35 L.Ed.2d 591 (1973); Peter F. Coogan, The
Effect of the Federal Tax Lien Act of 1966 Upon Security Interests
Created Under the Uniform Commercial Code, 81 Harv. L.Rev. 1369,
1389 (1968) ("The term "judgment lien' is not generally used
in chattel security statutes . . .."). For example, in contrast to
, there appears to be no such thing as a "judgment lien,"
whether labeled "simple" or not, on personal property in some
states. See, e.g., Keep Fresh Filters, Inc. v. Reguli, 888 S.W.2d
437, 443 (Tenn.Ct.App.1994) (Under Tennessee law, "judgment
creditors . . . may obtain two significantly different liens against the
judgment debtor's property. The first is [a] judgment lien . . . that
attaches to . . . real property. The second is [an] execution lien . . .
that attaches to . . . personal property.").; Franchise Tax Bd.
v. Danning (In re Perry), 487 F.2d 84, 89 (9th Cir.1973) (Zirpoli,
J., dissenting) (explaining that "no provision of California law
ever permits that a judgment lien attach to personal property" and
that only an "execution lien" can reach such property), cert.
denied, 415 U.S. 978, 94 S.Ct. 1565, 39 L.Ed.2d 874 (1974). In other
states, a simple judgment creates no lien at all on personal property,
and a judgment lien does not arise until certain additional action is
taken by the judgment creditor. See, e.g., Fore v. United States
[65-1 USTC ¶9101], 339 F.2d 70, 72 (5th Cir.1964) (Under Texas law,
"[t]he filing and indexing of [a] judgment in . . .
entitled [the judgment creditor] to a lien upon all of the real estate
of the defendant . . . situated in the county. It gave him no lien on
the personal property of the defendant."); First Security Bank
v. Friese Mfg., Inc., 489 N.W.2d 342, 345 (N.D.1992) ("Under
North Dakota law, a judgment lien on personal property only arises upon
the "actual levy' of the property in question."). 3
Florida Supreme Court's opinion upon which Highlander relies is
confusing in defining a judgment lien. Although the court eventually
concluded in that opinion that the term "judgment lien" used
in 26 U.S.C. §6323(c)(1)(B) means a "simple judgment lien"
law, it also stated: "[I]nsofar as what we call a "simple
judgment creditor' is concerned, there simply is no such thing as
a judgment lien against [intangible property] in this state." Peninsula
State Bank, 211 So.2d at 5 (emphasis added). What the court was
referring to in its opinion as a "simple judgment lien" is
therefore nothing more than a simple money judgment. This interpretation
of the phrase judgment lien, which Highlander invites us to adopt, in
fact reads the word "lien" out of the statute. As the Eighth
Circuit did in a similar case, we decline this invitation. See
International Fidelity Ins. Co. v. United States [92-1 USTC ¶50,004],
949 F.2d 1042, 1045 (8th Cir.1991).
that the phrase "judgment lien" has no ordinary meaning so as
to compel Highlander's interpretation of the phrase within the context
of the FTLA. The Government argues that "judgment lien," as
used in the FTLA, is equivalent to the interest of a UCC lien creditor.
This interpretation is one that has been adopted almost unanimously by
the commentators, see, e.g, Timothy R. Zinnecker, When Worlds
Collide: Resolving Priority Disputes Between the IRS and the Article
Nine Secured Creditor, 63 Tenn. L.Rev. 585, 605-06 & nn.89-90
(1996) (collecting cases); Coogan, supra, at 1382-83, and by the
courts--though arguably in dicta, see, e.g., Haas [94-2 USTC ¶50,496],
31 F.3d at 1087; Dragstrem [77-1 USTC ¶9301], 549 F.2d at 25.
The rationale for adopting this interpretation is that one of Congress's
main goals in enacting the FTLA was "to conform the lien provisions
of the internal revenue laws to the concepts developed in [the] Uniform
Commercial Code." H.R.Rep. No. 89-1884, at 1-2 (1966), reprinted
in Committee on Ways and Means, 89th Cong., Legislative History
of H.R. 11256: Federal Tax Lien Act of 1966, at 443-44 (1966)
[hereinafter Legislative History ]. The only way in which the
U.C.C. gives effect to the interest of a judgment creditor is the
"lien creditor" concept embodied in section 9-301(3) of the
U.C.C. See Coogan, supra, at 1382-83. The logical
conclusion, though by no means an inevitable one, is that Congress
intended the phrase "judgment lien" to mean the interest,
arising from a judgment (as opposed to assignment, for example), that a
lien creditor has in a given property. 4
This conclusion is further supported by the fact that it gives effect to
Congress's "specific legislative intent . . . to enable creditors
to protect certain types of security interests against subsequent
federal tax liens, and to do so by taking the same steps already
necessary under state law to protect their interests against various
other types of competing claims." 5
Dragstrem [77-1 USTC ¶9301], 549 F.2d at 26.
In short, we
are faced with two possible interpretations of an ambiguous phrase that
Congress used in the FTLA. Cf. Texas Oil & Gas Corp. [72-2
USTC ¶9653], 466 F.2d at 1047 (5th Cir.1972) ("The phrase
"protected against a judgment lien' is not a term of art easily
adaptable to the sometimes equally unartful language of the Uniform
Commercial Code."); David G. Epstein & Steve H. Nickles, Debt:
Bankruptcy, Article 9 and Related Laws, 521 n.56 (1994) (stating
that "[t]he use of the term "judgment lien' was
unfortunate") quoted in Zinnecker, supra, at 606 n.
90; Coogan, supra, at 1388 (characterizing the phrase
"judgment lien" as "baffling language"). Although we
believe that the interpretation offered by the Government is the better
we need not resolve this case solely on the basis of the statutory
analysis described above. Congress has entrusted the
istration of the Internal Revenue Code, which includes the FTLA, to the
United States Department of Treasury and the IRS. In construing an
istrative (or regulatory) statute, we are guided by the framework of
analysis set out by the Supreme Court in Chevron, U.S.A., Inc. v.
Natural Resources Defense Council, Inc., 467 U.S. 837, 104 S.Ct.
2778, 81 L.Ed.2d 694 (1984). "First, always, is the question
whether Congress has directly spoken to the precise question at issue.
If the intent of Congress is clear, that is the end of the matter; for
the court, as well as the agency, must give effect to the unambiguously
expressed intent of Congress."
at 842-43, 104 S.Ct. at 2781. If Congress did not express its intent
unambiguously, we defer to the agency's interpretation if it "is
based on a permissible construction of the statute."
at 843, 104 S.Ct. at 2782.
As we have
already stated, we believe that Congress did not express its intent
unambiguously when it used the phrase "judgment lien" in
section 6323(h)(1). Department of Treasury regulations, however, define
"judgment lien" as "a lien held by a judgment lien
creditor." Treas. Reg. §301.6323(h)-1(a)(2).
"judgment lien creditor" means a person who has obtained a
valid judgment, in a court of record and of competent jurisdiction, for
the recovery of specifically designated property or for a certain sum of
money. In the case of a judgment for the recovery of a certain sum of
money, a judgment lien creditor is a person who has perfected a lien
under the judgment on the property involved . . .. If recording or
docketing is necessary under local law before a judgment becomes
effective against third parties acquiring liens on real property, a
judgment lien under such local law is not perfected . . . until the time
of such recordation or docketing. If under local law levy or seizure is
necessary before a judgment lien becomes effective against third parties
acquiring liens on personal property, then a judgment lien under such
local law is not perfected until levy or seizure of the personal
. In short, the regulation codifies the interpretation of
"judgment lien" that the Government advocates in this case and
that we have already determined is not only permissible, but also is the
better interpretation. This interpretation holds that a judgment lien is
equivalent to the interest of a UCC lien creditor. Under the second step
of Chevron, we must defer to the Department's interpretation.
Highlander's interest in the interpleaded funds was unperfected under
July 3, 1986
, it was subordinate to that of a UCC lien creditor. See Fl.
Stat. ch. 679.301(1)(b). Highlander's interest, therefore, was not
protected under local law against a judgment lien arising on that date;
it was not a "security interest" within the meaning of 26
U.S.C. §6323(h)(1). The Government's tax lien is entitled to priority.
involves a priority contest between an unperfected security interest and
a federal tax lien. The district court held that the tax lien takes
priority. The case turns on whether the security interest is protected
under local law against a "judgment lien"; if the answer is
no, the tax lien takes priority. Because we hold that a judgment lien is
equivalent to the interest of a UCC lien creditor, we conclude that the
unperfected security interest at issue here is subordinate to a judgment
lien under local law. Therefore, the federal tax lien is entitled to
priority. Accordingly, we AFFIRM.
Judge Kravitch was in regular active service when this matter was
originally submitted but has taken senior status effective
January 1, 1997
Honorable William W. Schwarzer, Senior
District Judge for the Northern District of California, sitting by
The district court dismissed Litton from the case as a disinterested
stakeholder. The court also dismissed with prejudice all the defendants,
except Highlander and the IRS. On
February 23, 1995
, John F. Roscoe, attorney for Nationwide, Magna Card, Inc., and
Highlander moved to be substituted as a party for Magna Card and
Highlander. The district court denied Roscoe's motion, and Roscoe
appeals. We summarily affirm the district court's denial of this motion.
A series of commercial transactions preceded this agreement. These
transactions are described in the district court's opinion. See
Litton Indus. Automation Sys. v. Nationwide Power Corp. [95-1 USTC
¶50,270], 75 A.F.T.R.2d (RIA) 2276 No. 91-377-CIV-T-21C (M.D.Fla.
Mar.30, 1995). A detailed description of these transactions is not
necessary here because it has no bearing on the resolution of the narrow
issue on appeal.
The inconsistency between what these courts from other states refer to
as a judgment lien or execution lien and what the Florida Supreme Court
refers to as a "simple judgment lien" in Peninsula State
Bank appears to stem from a different understanding of the word
"lien." For the Reguli, Fore, and First Security
Bank courts, and the dissenting judge in Perry, a lien is an
interest that has actually attached to the defendant's property. The
court uses the word "lien" to mean a claim arising from a
judgment but that has not necessarily attached to the subject property.
This inconsistency may be a good example of what Massachusetts Justice
H.T. Lummus said: "The word "lien' hardly admits of
definition. It is used to describe various kinds of interests in
property or rights over it, and is frequently used in a very loose
way." H.T. Lummus, The Law of Liens with Especial Reference to
Massachusetts & Maine I (1904), quoted in Coogan, supra,
at 1371 n. 11. Unfortunately, Congress did not define the word
"lien" or the phrase "judgment lien" in the FTLA.
Highlander's strongest attack on this conclusion is that a previous
version of the bill that eventually became the FTLA defined
"security interest" in terms equivalent to those used in the
U.C.C., but that this language was deleted from the bill. Compare
26 U.S.C. §6323(h)(1) (enacted definition of security interest) with
H.R. 11256, 89th Cong. §101 (1966) (version initially introduced by
Rep. Mills) (providing in 26 U.S.C. §6323(h)(4) that "[a] security
interest shall be deemed to arise at the time when it becomes protected
under local law as against a subsequent lien upon such property
obtainable by legal or equitable proceedings on a simple
contract"), reprinted in Legislative History, supra, at 50.
Highlander infers that Congress must have intended to develop the law in
a way that is inconsistent with the UCC lien creditor analysis.
Congress, however, could have modified the language for other reasons.
According to Coogan, "[a]pparently, in an effort to conform the
language of other parts of section 6323 to that of subsection (a), where
"judgment lien creditor' is not inappropriate, the language was
changed by Treasury draftsmen who understandably knew more tax law than
lien law." Coogan, supra, at 1389. Moreover, that the
drafters of the statute substituted ambiguous language to more accurate
language in a previous version of the bill does not inevitably lead to
the conclusion that Congress rejected the analysis consistent with the
more accurate language. Congress might have failed to realize that the
new language is ambiguous and might have intended no change in the
substantive provision. In short, while the change in statutory language
casts some doubt on the Government's interpretation, it is not
dispositive of the issue in this case, at least in light of the total
absence of any explanation of the change in the voluminous legislative
history of the FTLA.
When the security interest covers personal property, as it does here,
the steps already necessary under state law to protect the interest from
other types of competing claims include perfecting the security interest
by filing a UCC-1 statement or other means.
We reach this conclusion because the Government's interpretation is
logical and comports with the stated purpose of the statute, while
Highlander's interpretation is unconvincing. As presented by Highlander,
the meaning of the phrase "judgment lien" in section
6323(h)(1) is derived from what the Supreme Court of Florida labels as a
judgment lien. Accepting Highlander's interpretation leads to two
equally unlikely results: First, Congress could have chosen
's interpretation as the federal standard, a result that has no support
whatsoever in the statute or elsewhere. Moreover, as we already
discussed, this result essentially reduces the phrase "judgment
lien" to "simple judgment," thus reading the word
"lien" out of the statute. Second, Congress could have
intended for the meaning of the phrase to be governed by each state's
understanding of what a judgment lien is, a result that defeats the
FTLA's purpose of uniformity. Cf. United States v. Gilbert Assocs.
[53-1 USTC ¶9291], 345 U.S. 361, 364, 73 S.Ct. 701, 703, 97 L.Ed. 1071
(1953) (stating, in the context of a predecessor to the FTLA, "A
cardinal principle of Congress in its tax scheme is uniformity, as far
as may be. Therefore, a "judgment creditor' should have the same
application in all the states").
¶50,043] Michael L. Nichols, Richard Matthews, Rudy Rios and
ert S. Wiley, Plaintiffs v. Vonna J. Glass, Individually and as Trustee
of the Randolph Manufacturing Company Employee Stock Ownership Plan, and
as Trustee of Randolph Manufacturing Company Employee Recreation Plan,
Defendant and Tommy J. Swann, Trustee Garnishee Interpleader v. Michael
L. Nichols, Richard Matthews, Rudy Rios and
ert S. Wiley and United States of America, Defendants
District Court, No. Dist. Tex., Lubbock
Div., Civ. 5:92-CV-0023-W, 10/23/92
[Code Sec. 6323 ]
Validity of lien: Attorneys' fees: Interpleader.--The
Government's lien for taxes held by a trustee was superior to the lien
of individuals that had filed an application for writ of garnishment.
Since the individuals did not file their turnover action, or take any
other action, prior to the Government's perfecting its tax lien, the
Government was entitled to priority and the funds impleaded were paid to
the IRS. Also, attorneys' fees and costs were denied to the stakeholder
of the interpleaded fund because the portion of the interpleaded fund
that was subject to a Government tax lien could not be reduced by an
award of attorneys' fees to the stakeholder for bringing the
2435 20th St.
, for plaintiffs. Gregg D. Stevens, Department of Justice,
, for defendant.
OPINION AND ORDER
On this date
the Court considered the Motion for Summary Judgment filed by the
United States of America
, together with its brief and supporting materials. A response was filed
by Michael L. Nichols, Richard Matthews, Rudy Rios, and
ert S. Wiley (Plaintiffs herein). No response was filed by Tommy J.
the owners of an unsatisfied judgment against Vonna J. Glass, and they
filed an Application for Turnover in Cause No. 87-516,848 [in] the 72nd
District Court of Lubbock County, Texas, seeking an order from the Court
directing Tommy J. Swann, as Trustee, to turnover certain funds in his
possession to Plaintiffs. Swann is the Trustee in bankruptcy for
Randolph Manufacturing Company, Inc. who is required to pay to Vonna J.
Glass, as an unsecured creditor, a stream of payments annually over
several years. Swann had in his possession, on the date of the filing of
the turnover action, the sum of $5,285.50.
service of the Application for Turnover, Swann filed his Answer,
Crossclaim, and Third-Party Claim for Interpleader, and interplead the
$5,285.50 into the registry of the Court. Thereafter, the
United States of America
properly removed the case to this Court.
Plaintiffs and the
United States of America
, on behalf of the Internal Revenue Service, claim an interest in and to
the funds held by Swann. The Internal Revenue Service claims that its
Federal tax lien is entitled to priority over the judgment lien held by
dates and facts are pertinent to the determination of the priority of
the competing liens:
(1) On August
6, 1990, Vonna Glass was assessed $86,506.41 for unpaid income taxes for
the period ending December 31, 1985.
December 7, 1990, Plaintiffs obtained a judgment against Vonna Glass for
the sum of $141,599.19.
filed an Application for Writ of Garnishment in the State Court on
December 12, 1990, seeking to garnish funds being held by Swann, as
Trustee in the Randolph Manufacturing Company bankruptcy proceedings,
for the benefit of Glass.
December 14, 1990, Swann filed his answer in the garnishment
proceedings, indicating that he was indebted to Glass in the sum of
$5,285.50, at the time of service.
(5) The 72nd
District Court of Lubbock County
, entered its Judgment in Garnishment on March 26, 1991, in favor of
Plaintiffs and against Swann, as garnishee, for the sum of $5,285.50.
Swann was ordered to tender the sum of $5,285.50 into the registry of
the Court for payment to Plaintiffs. Subsequent thereto, the funds were
paid to Plaintiffs.
December 3, 1991, the Internal Revenue Service recorded its tax liens
against Glass in the personal and real property record of
filed this turnover action on
December 20, 1991
, to which Swann filed his answer, crossclaim and third-party claim for
interpleader, interpleading the sum of $5,285.50 into the registry of
District Court of Lubbock County
considering the pleadings, briefs, and evidence before the Court, the
Court finds that the Internal Revenue Service's federal tax lien filed
December 3, 1991
, is entitled to priority over the judgment lien held by Plaintiffs
26 U.S.C. §6323(a)
provides that a lien imposed for taxes pursuant to §6321
will not be valid against a judgment lien creditor until the
Internal Revenue Service files its notice as required by §6323(f)
. This section requires the Internal Revenue Service to file notice
of its lien in the office designated by State law. In
this is the
's records--real property and personal property.
Revenue Service complied with §6323
December 3, 1991
, and this is not in dispute.
the priority of an Internal Revenue Service lien, the Second Circuit in U.S.
v. 110-118 Riverside Tenants Corp., 886 F.2d 514, 518 (2nd Cir.
1989) cert. denied 495 U.S. 956 noted as follows:
26 United States Code Section
6321 authorized the imposition by the Government of a tax lien upon
the property of the taxpayer when he is in default. [citation omitted]
priority of a federal tax lien is a matter of federal law. [citation
Sixth Circuit made a more detailed discussion regarding priority and
law determines the priority between a federal tax lien and a judgment
creditor's lien. [citation omitted]. Generally, a federal tax lien
arises against property belonging to a delinquent taxpayer from the time
he refuses or neglects to heed a lawful demand to pay. [citation
omitted]. Congress, however, has chosen to extend special protection to
holders of judgment liens whose interests are perfected before they have
constructive notice of an outstanding federal tax lien. [citation
omitted]. Accordingly, a judgment lien will have priority over a federal
tax lien if the judgment lien is perfected before the government gives
constructive notice of its lien to the public by filing written notice
with the appropriate state or county agency. [citation omitted] Courts
must look to state law to determine whether a competing judgment lien is
perfected. Yardas v. U.S. [90-2
USTC ¶50,390 ], 899 F.2d 550 (6th Cir. 1990), reh. denied 1992 WL
also Don King Productions, Inc. v. Thomas [91-2
USTC ¶50,474 ], 945 F.2d 529 (2nd Cir. 1991).
, a judgment creditor can perfect its judgment lien against real
property by recording an abstract of judgment in the deed records in the
county where the real property is located.
Property Code §52.001 et seq.
are not dealing with real property in the case before the Court.
Execution of a
judgment is the only way to perfect a judgment lien on personal
property--no lien is created by filing an abstract of judgment. See United
States v. Bollinger Mobile Home Sales, Inc. [80-2
USTC ¶9644 ], 492 F.Supp. 496, 497 (N.D.
1980). Since Plaintiffs sought to recover personal property in the
possession of a third party, they first followed the procedures for
obtaining a writ of garnishment regarding the money held by the trustee
at that time, i.e., the December, 1990, $5,285.50 payment owing to
this Court to find that the filing of their application for writ of
garnishment established their right to all payments received by the
trustee--the one the trustee had in his possession and all future
payments. If this were true, then Plaintiffs' lien would have priority
over the Internal Revenue Service lien. However, as discussed below, the
law is not in Plaintiffs' favor.
courts have held that the judgment against the garnishee, or writ of
garnishment, should be in the amount which is absolutely owed at the
time the application for writ of garnishment is served and the garnishee
files his answer. See Burkitt v. Glenney, 371 S.W.2d 412 (Tex.
Civ. App.--Houston 1963, writ dism'd w.o.j., writ ref'd n.r.e.)
("judgment against the garnishee shall be in the amount of the
indebtedness that is shown on trial to have been absolutely owed in an
amount certain when the garnishee is served or files his answer, if
there is an accrual between the date of service and filing of the
answer."); United States v. Wakefield, 572 S.W.2d 569 (Tex.
Civ. App.--Fort Worth 1978, writ dism'd w.o.j.) ("It is well
settled that garnishment should be in the amount of the debt absolutely
owed at the time the garnishee files his answer.")
, supra, the Court found that the debt being garnished was
"contingently" but not absolutely owed.
was seeking a garnishment of her ex-husband's military retirement
benefits. See also Etzel v. U.S. Dept. of Air Force, 620 S.W.2d
853 (Tex. App.--Houston [14th Dist.] 1981, writ ref'd n.r.e.) ("the
Air Force is liable only for the amount absolutely owed at the time its
answer was filed, and to award future retirement benefits that might
accrue would be error.")
v. NBC Bank-Perrin Beitel, 762 S.W.2d 379, 381 (Tex. App.--San
Antonio 1988) the Court made the following discussion regarding
is a statutory proceeding through which a debtor's property, money, or
credit, in the possession of or owing by another, are applied to pay the
debtor's debt to a third party. [citation omitted] The burden is on the
person claiming the benefit of the statute to establish his right to
recover. [citation omitted] The judgment against the garnishee should be
in the amount of the indebtedness shown at trial to have been absolutely
owed in an amount certain at the time the garnishee is served. [citation
omitted]. The only real issue in a garnishment action is whether the
garnishee was indebted to the defendant in the main suit or had in its
possession effects belonging to him at the time of the service of the
writ and the filing of the answer. [citation omitted]
Circuit in Matter of T.B. Westex Foods, Inc., 950 F.2d 1187 (5th
Cir. 1992), quoting United States v. Standard Brass & Mfg. [54-1
USTC ¶9303 ], 266 S.W.2d 407 (Tex. Civ. App. 1954) noted that:
service of a writ of garnishment creates a lien on property subject
to such writ of garnishment from the date of the service of the
writ." [emphasis in original]
Fifth Circuit in Westex Foods, supra at 1191, also noted that:
courts have stated that the garnishor is to be treated as if he stood in
the shoes of the garnishment debtor. [citations omitted] "That is,
the garnishor . . . may enforce whatever rights the debtor could have
enforced had such debtor been suing the garnishee directly."
quoting RepublicBank Dallas v. National Bank of Daingerfield, 705
S.W.2d 310, 311 (Tex. Ct. App. 1986).
case law to the facts of the instant case, it is apparent that the
garnishment action and the writ which issued applied only to the
$5,285.50 Swann had in his possession when he was served with the writ
of garnishment and filed his answer. That payment has already been paid
Plaintiffs did not file their turnover action, or take any other action,
prior to the Internal Revenue Service perfecting its tax lien on
December 3, 1991
, the Internal Revenue Service is entitled to priority and the funds
implead should be paid to the Internal Revenue Service.
Revenue Service also seeks summary judgment that it is not liable for
the attorneys' fees sought by Swann. Swann seeks attorneys' fees for
filing the interpleader action, to be paid out of the funds deposited
into the registry of the court prior to payment to the prevailing party.
Swann did not file a response to the motion for summary judgment.
Circuit, citing United States v. R.F. Ball Construction Co. [58-1
USTC ¶9327 ], 355 U.S. 587 (1958) has found that:
stakeholder of an interpleaded fund is not entitled to attorney's fees
to the extent that they are payable out of a part of the fund impressed
with a federal tax lien. [citations omitted] The judicial prerogative to
award stakeholders their attorney's fees must give way to the supremacy
of the federal tax lien law whenever an award would invade the amount
subject to tax lien . . . The portion of an interpleaded fund that is
subject to a Government tax lien cannot be reduced by an award of
attorney's fees to the stakeholder for bringing the interpleader action.
Spinks v. Jones [74-2
USTC ¶9657 ], 499 F.2d 339 (5th Cir. 1974).
therefore finds that the
United States of America
's federal tax liens take priority over the judgment lien of Plaintiffs,
and judgment awarding the interpleaded funds should be rendered in favor
and against all other claims herein.
All claims for
attorneys' fees and costs are hereby denied. JUDGMENT SHALL BE ENTERED
¶50,474] Don King Productions, Inc. and Don King, Plaintiffs v. Pinklon
Thomas, Jr., Richard Gidron, Roland Jankelson, Althea Jones, and The
, Defendants. Althea Jones and Richard Gidron, Defendants-Appellees.
Richard Gidron and The
U.S. Court of Appeals, 2nd Circuit, 91-6067, 91-6083, 9/23/91, Affirming
and reversing a District Court decision, 90-2
USTC ¶50,524 , 749 F.Supp. 79
[Code Secs. 6321 and
Tax lien: Assignment: Priority.--Federal tax liens on a boxer's
anticipated prize money were superior to the claim of the boxer's former
manager that was based on a stipulation of settlement which predated the
liens. Through the settlement agreement, the former manager was entitled
to a portion of the purse of an upcoming fight; however, the stipulation
was never reduced to a judgment under state (
) law, so the manager did not attain the priority status of a judgment
lien creditor. Furthermore, since the assignment was for prize money to
be earned from a future fight, the manager's claim was inchoate and the
federal liens had priority by being first in time. The subordination of
the federal tax liens to the child support claims was affirmed.
ert M. Sosin, Alspector, Sosin, Mittenthal & Barson, P.C., 30100
, for Althea Jones. Steven K. Meier, Shatz, Meier & Scher,
18 E. 48th St.
, for Richard Gidron. Otto G. Obermaier, United States Attorney,
Kathleen A. Zebrowski, Edward T. Ferguson III, Assistant United States
Attorneys, New York, N.Y. 10007 for defendant-appellant.
CARDAMONE, MINER and MAHONEY, Circuit Judges.
the United States (the "government") and
defendant-appellant-appellee Richard Gidron appeal from a judgment
entered in the United States District Court for the Southern District of
New York (Haight, J.) establishing that the claim of defendant-appellee
Althea Jones to interpleader funds had priority over the claim of
Richard Gidron, which had priority over tax liens of the government. Don
King Prods. v. Thomas [90-2
USTC ¶50,524 ], 749 F.Supp. 79, 85 (S.D.N.Y. 1990).
contends that the district court erred in determining that Gidron's
claim had priority over its tax liens. First, it argues that since the
stipulation of settlement dated December 11, 1985 upon which the claim
is based, never was reduced to judgment, Gidron cannot avail himself of
the statutory exception which protects certain persons, including
"judgment lien creditors," against unrecorded federal tax
liens. Second, the government maintains that the stipulation of
settlement cannot be found to be prior to the government's tax liens
because it represents an inchoate claim. In the stipulation of
settlement, Thomas purported to assign to Gidron proceeds from purses of
three prizefights to occur at some unspecified time in the future.
that the district court erred in finding that Althea Jones' claim of
child support has priority over his claim, since his claim accrued on
December 11, 1985
and Jones' judgment of filiation and order for support is dated
January 6, 1988
We agree with
the government that the district court erred in finding that Gidron's
claim had priority over the federal tax liens. Because Gidron's
stipulation of settlement was not reduced to judgment, Gidron was
required to establish that his lien was "first in time" and
choate. However, the right to the proceeds of future unspecified
prizefight purses arising from the assignment by Thomas, evidenced by
the stipulation of settlement, was inchoate.
order of priority between Gidron and Jones, we hold that the district
court correctly found that a judgment of filiation and order for support
has priority over a stipulation of settlement never reduced to judgment,
even though the support judgment was filed after the stipulation of
settlement was entered into.
holder of the World Boxing Council Heavyweight title, Pinklon Thomas,
Jr. contracted with Don King and Don King Productions (collectively,
"DKP") to receive a purse of $150 thousand for participating
in a boxing match with Evander Holyfield. The event was scheduled to be
December 9, 1988
. In accordance with the terms of the contract, DKP disbursed
$117,090.67 as advances and payments to Thomas, his manager, and his
trainer, Angelo Dundee. Faced with conflicting claims to the balance of
the purse, $32,909.33, DKP commenced an interpleader action, pursuant to
28 U.S.C. §1335(a), placing the $32,909.33 in the registry of the
district court and naming five interpleader defendants. Only three of
the named defendants--the government, Richard Gidron and Althea
Jones--litigated their claims to the interpleaded fund.
("Jones") claimed priority to the funds by reason of a
January 6, 1988
judgment of filiation and order for support entered by a
state court. Apparently, Thomas had acknowledged that he was the father
of Paquana Shareces Jones in a paternity action commenced by Althea
Jones in 1986. Under the judgment of filiation and order for support,
Thomas was required to pay $7,500 in support and maintenance obligations
that had accrued from the time of Paquana Shareces Jones' birth until
November 9, 1987
and to pay $100 per week for support and maintenance from
November 9, 1987
until Paquana reached the age of majority. Additionally, Thomas was
ordered to notify Jones about any professional boxing matches in which
he was to participate. However, Jones learned about the Thomas/Holyfield
bout not from Thomas but through a newspaper advertisement. On
December 6, 1988
, at Jones' request, the
court issued a Writ of Garnishment, which was served on DKP, ordering
DKP to disclose its indebtedness to Thomas. At that time, $14,025 in
unpaid child support allegedly was owed to Jones.
claimed priority by reason of a stipulation of settlement, dated
December 11, 1985
, allegedly entered in the New York Supreme Court,
. At that time, Gidron had initiated an action against Thomas and DKP
for money owed under a management contract between Thomas and Gidron,
which Thomas had breached when he entered into a management contract
with DKP. Under the settlement agreement, Thomas agreed, among other
things, to pay to Gidron $50 thousand from each of his next three
prizefight purses. DKP agreed that in the event it promoted any of the
next three fights, it would withhold $50 thousand per fight and pay that
amount to Gidron. The stipulation of settlement never was docketed as a
claims priority on account of federal tax liens. Thomas owes the
government income taxes for the years 1986 and 1987 in the amounts of
$149,905.90 and $120,361.53, respectively, plus interest and penalties.
The IRS made a deficiency assessment against Thomas for the unpaid 1986
November 9, 1987
and for the unpaid 1987 taxes on
June 6, 1988
. Federal tax lien notices were filed on
December 5, 1988
, the place of the Holyfield-Thomas fight, and on
December 8, 1988
, the place where Thomas resides. On
December 9, 1988
, DKP was served with the government's notice of levy, in which DKP was
directed to pay to the government any wages or other income that was to
be paid to Thomas.
Thomas lost his World Boxing Council heavyweight title to Trevor Berbik;
in accordance with the terms of the stipulation of settlement, $50
thousand was paid to Gidron from the purse for that fight. Thereafter,
in May 1987, Thomas suffered a devastating knockout loss to Michael
Tyson. After defeating Thomas, Tyson went on to defeat Tony Tucker, the
then-International Boxing Federation heavyweight titleholder, resulting
in the unification of the heavyweight championship titles--World Boxing
Council, World Boxing Association and International Boxing
Federation--in one professional boxer. After further litigation, Gidron
was able to recover $50 thousand from the proceeds of the Tyson match.
about the upcoming Thomas/Holyfield match from an advertisement in the
New York Post. Fearing that DKP would not pay the final $50 thousand
from the last of the three fights, Gidron obtained in the
court an order directing Thomas to show cause by
December 16, 1988
why $50 thousand should not be paid to Gidron from the proceeds of the
fight scheduled for
December 9, 1988
. It was in response to that order that DKP filed an interpleader action
in federal district court on
December 12, 1988
. The district court enjoined the state court proceedings. [90-2
USTC ¶50,524 ], 749 F. Supp. at 82.
October 2, 1990
, the district court in a Memorandum Opinion and Order held that Jones
had priority over Gidron and the government, and that Gidron had
priority over the government.
at 85. After further litigation to determine whether additional funds
were to be added to the amount held in the registry of the district
court, the government moved pursuant to Fed. R. Civ. P. 54(b) for entry
of a final judgment on the interpleader priority question. Finding no
just cause to delay the entry of a partial judgment, the district court
granted the government's motion, and a judgment was entered on
January 3, 1991
. Remaining for disposition are cross-claims interposed against DKP to
recover a money judgment. The government appeals from the portion of the
judgment in which the court determined that Gidron's claim had priority
over its federal tax liens. Gidron appeals from the portion of the
judgment in which the court determined that Jones' support claim had
priority over his claim.
contends that the district court's rationale in finding that Gidron's
claim has priority over federal tax liens is flawed. The district court
reasoned that Thomas, having made an assignment of funds to Gidron in
1985, prior to the assessment of taxes and the consequent attachment of
the tax liens, see 26 U.S.C. §6322
, had no further interest in the assigned funds when the tax liens
attached. The court concluded the tax liens could not "attach under
§6321 in the first
place." 749 F. Supp. at 85. The flaw in this, the government
asserts, is that Gidron's claim to proceeds from the Thomas/Holyfield
prizefight purse as assignee was inchoate and, as such, subordinate to
federal tax liens. We agree with the government's position.
6321 of the Internal Revenue Code provides that
person liable to pay 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.
U.S.C. §6321 (1988).
The language of section
6321 is broad, revealing a congressional intent 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, 720 (1985).
A federal tax
lien, described as a "secret lien," see United States v.
Security Trust & Savings Bank [50-2
USTC ¶9492 ], 340 U.S. 47, 53 (1950) (Jackson, J., concurring)
(citation omitted), is effective upon assessment against all persons,
even in the absence of recordation of the lien. See Rice Investment
Co. v. United States [80-2
USTC ¶9654 ], 625 F.2d 565, 568 (5th Cir. 1980). However, under 26
U.S.C. §6323(a) ,
certain persons are protected against unrecorded federal tax liens. Section
imposed by section
6321 shall not be valid as against any purchaser, holder of a
security interest, mechanic's lienor, or judgment lien creditor until
notice thereof which meets the requirement of subsection (f) has been
filed by the Secretary.
those persons specifically listed in the statute are entitled to
priority over unrecorded federal tax liens. See 14 Mertens, Law of
Federal Income Taxation §15A.03, at 15-16 (1991).
argument, Gidron contended that he is a "judgment lien
creditor" by virtue of the stipulation of settlement dated
December 11, 1985
, which he argues was a judgment entered in the
court. If Gidron were a "judgment lien creditor," and his
status as such was acquired prior to December 5 and 8, 1988, when the
government recorded its federal tax liens, Gidron would be entitled to
priority over the government.
"judgment lien creditor," undefined by statute, is described
in treasury regulations as
a person who
has obtained a valid judgment . . . for the recovery of . . . a certain
sum of money. . . . [and as] a person who has perfected a lien under the
judgment on the property involved.
. "In determining . . . whether a judgment creditor's lien is
perfected . . . , we look first to the local law setting forth the lien
procedure and its legal consequences." Hartford Provision Co. v.
United States [78-1
USTC ¶9392 ], 579 F.2d 7, 9 (2d Cir. 1978).
law, a judgment creditor becomes a "judgment lien creditor" as
to personal property only after execution is delivered to the sheriff.
See N.Y. Civ. Prac. L. & R. §5202(a)
1978); see also Corwin Consultants, Inc. v. Interpublic Group of
Companies, Inc. [75-1
USTC ¶9299 ], 512 F.2d 605, 607 n.2 (2d Cir. 1975). Since there is
no evidence that the stipulation of settlement was reduced to and
docketed as a judgment, see 749 F. Supp. at 81 n.1, and there is
no evidence of the delivery of a judgment execution to the sheriff,
clearly, under the
requirements, Gidron cannot be a judgment lien creditor. See Lerner
v. United States [87-1
USTC ¶9339 ], 637 F. Supp. 679, 680 (S.D.N.Y. 1986); In re
bins, 74 Misc. 2d 793, 795, 346 N.Y.S.2d 86, 90 (Sur. Ct. 1973)
("As to personal property, docketing of a judgment [alone] does not
create a lien; such a lien upon personal property comes into being only
when execution is issued to the proper officer.").
persons who are not specifically listed in section
6323 , priority as a lienor is determined by the common law rule of
"first in time is the first in right." United States v.
City of New Britain [54-1
USTC ¶9191 ], 347 U.S. 81, 87-88 (1954). Under that rule, a federal
tax lien takes priority over competing liens unless the competing lien
was choate, or fully established, prior to the attachment of the federal
lien. See id. at 86. Not only does a lienor's interest have to be
first chronologically, but the interest must be choate to defeat the
federal tax lien. A choate lien is one in which the identity of the
lienor, the property subject to the lien and the amount of the lien are
at 84. A lien that is "choate" has been described as a lien
that is "specific and perfected" and for which "nothing
more [need] be done." United States v. Equitable Life Assurance
USTC ¶9444 ], 384 U.S. 323, 327-28 (1966) (citation omitted).