Assignment of Funds Page 1

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[99-1 USTC ¶50,577] United States of America , Plaintiff v. Talco Contractors, Inc., et al., Defendants

U.S. District Court, West. Dist. N.Y., 93-CV-6389T, 5/7/99

[Code Secs. 6321 , 6323 and 7403 ]

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

INTRODUCTION

TELESCA, District Judge:

Plaintiff, the 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 United States ' motion for payment is granted.

BACKGROUND

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 New York . 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.

In September of 1998, Talco advised this Court that the New York condemnation suit trial had been resolved and that the State of New York 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.

However, the 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).

The attorneys 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 New York 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.

The 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 United States 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.

DISCUSSION

The government 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 County of Monroe , the U.S. 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.

Kendamar 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.

The Agreement 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.

Finally, 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

Thus, although 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.

The collateral 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 United States 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 United States ' claim has priority over the claim of Kendamar, a successor-in-interest to Chase.

Accordingly, the United States ' 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 United States .

ALL OF THE ABOVE IS SO ORDERED.

¹ I note that the case cited by Mr. Hart, In re Astoria Blvd., is a pre-U.C.C. case. New York adopted the Uniform Commercial Code on April 18, 1962 . See N.Y. Session Laws 1962, Chapter 533.

 

 

[99-1 USTC ¶50,264] Edna Kathleen Terry, as Trustee, etc., Plaintiff v. United States of America , Defendant-Appellant, Professional Technical Representatives Money Purchase Plan, Defendant-Respondent

U.S. Court of Appeal of the State of Calif. , 2nd Appellate Dist., Div. One, B117644, B119401, 1/21/99 , Affirming an unreported SuperCt. of Calif. decision

[Code 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 ( California ) 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.

Nora M. Manella, United States Attorney, Loretta C. Argrett, Assistant Attorney General, Edward M. Rob bins, Jr., Thomas D. Coker, Randolph L. Hutter, for defendant-appellant. W. Montgomery Jones, Jones and Jones, for defendant-respondent.

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

ORTEGA, Acting 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 loan.

For the 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.

BACKGROUND

Before 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.

When Beasley died, the trust had personal property valued at about $380,000 and real property in Los Angeles valued at about $400,000. ² On September 1, 1994 , the court entered an order confirming the sale of the trust's real property in Los Angeles . (The escrow on that sale did not close, however, until March 21, 1996.)

In December 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 personal property.

Stone 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.

Unbeknownst to 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 Monterey County , 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

Escrow closed 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.

The IRS (through the 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 property in Los Angeles . The Plan asserted the notices of lien filed in Monterey County did not establish the IRS' priority as to Stone's interest in the Los Angeles property.

The trial 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.

CONTENTIONS ON APPEAL

(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.

(II) 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.

DISCUSSION

I

Stone resided in Monterey County , but the trust's real property was located in Los Angeles County . As a general rule, filing the notice of tax lien in Monterey County would have had no effect with regard to the trust's property in Los Angeles County . Both parties agree that, as a general rule in California , 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 property)."

The IRS 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 Los Angeles 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 took to California law to determine the nature of Stone's property interest in the trust assets.

Under California 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 consistent with California 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.)

When Beasley died on 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.

Ordinarily, because the asset at issue is real property, Stone's beneficial interest would be classified under California 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, 173.)

Although the 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 Los Angeles 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 escrow closed, March 21, 1996 . ⁶

Before the IRS liens could attach, however, Stone had assigned his interest to the Plan on 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.

II

The IRS 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."

The trustee's final report, however, was not filed until July 31, 1996 , several months after the escrow on the sale of real property had closed on 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.)

DISPOSITION

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.

We concur:

VOGEL (Miriam A.), J.

DUNN, J. ^*

¹ For the sake of convenience, all further references to the Internal Revenue Service (IRS) are meant to include the appellant United States .

² 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 Los Angeles County in which the property was located." In her final report, the trustee reported a loss (for accounting purposes) on the sale of $199,708.33.

³ 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.

⁴ 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.)

⁵ 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.)

⁶ 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[- Fort Worth , N.A. v. United States (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 California Constitution.

 

 

[97-2 USTC ¶50,893] In re Randolph 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, Defendant-Counter-Plaintiff-Cross-Claimant-Appellee

U.S. District Court, No. Dist. Ill. , West. Div., 94 B 52222, 95 B 51057, 96 C 50408, 4/10/97 , 207 BR 151. Affirming unreported Bankruptcy Court decision

[Code Sec. 6323 ]

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 ( Illinois ) 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.

[Code Sec. 6871 ]

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.

Joseph D. 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, Chicago , Ill. , for U.S.

MEMORANDUM OPINION AND ORDER

INTRODUCTION

REINHARD, District Judge:

Appellants, Bank One, Rockford , 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).

BACKGROUND

The facts 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 , Rockford , Illinois ("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 Rockford , Illinois . In addition to executing a note, the Bruders granted First National a mortgage in the property, which was recorded with the recorder of deeds of Winnebago County , Illinois , on June 12, 1991 .

Sometime in 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 National. On 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.

On March 11, 1994 , a satisfaction and discharge of mortgage was executed. The document, in pertinent part, stated:

The 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.

The 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.

On August 22, 1994 and 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, respectively. On 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.

On January 31, 1995 , Mott Bros. Co. ("Mott") filed a memorandum of judgment against Jill Bruder with the recorder of deeds for approximately $28,000. On May 23, 1995 , Jill Bruder filed a separate voluntary petition for bankruptcy under Chapter 7.

Joseph D. 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.

After the 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.

The bankruptcy 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.

DISCUSSION

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).

A. Standing

The court 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. Id.

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 of October 23, 1996 , pp. 5-6.

In this 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.

The relief 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.

B. Validity/Seniority of the Competing Liens

Before 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." United States v. McDermott, 507 U.S. 447, 449, 113 S.Ct. 1526, 1528, 123 L.Ed.2d 128 (1993).

Section 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:

"any 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."

26 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, -- U.S. --, 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 IRS's lien.

Illinois 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. United States , 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 Geneva , 65 Ill.App.3d 916, 22 Ill.Dec. 569, 575, 382 N.E.2d 1267, 1273 (1978).

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 Lincoln , 57 Ill.App.3d 417, 14 Ill.Dec. 954, 956, 373 N.E.2d 85, 87 (1978) (quoting Capper v. Poulsen, 321 Ill. 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. Id. 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?

Under Illinois 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, Rockford , 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, Rockford , 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 different debtor.

The bankruptcy 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.

Banc One 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.

This argument 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.

Banc One 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.

There are 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:

[T]he examiner ". . . 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)

The quoted portion of Ward on Title Examination, this time including the language omitted by Banc One Mortgage, reads:

Therefore, 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 portions]

Banc 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 Illinois 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.

Banc One 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 Ill. 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. Id. ; Pacemaker Food Stores, Inc. v. Seventh Mont Corp., 117 Ill. 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.

This leaves 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).

Although the court has confined most of its discussion thus far to the priority of the IRS's lien, the same analysis of Illinois law applies to the priority of Mott's lien. Because, under Illinois 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 lien.

CONCLUSION

For the foregoing reasons, the judgment of the bankruptcy court is affirmed.

¹ 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.

² 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 argument.

³ 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.

⁴ 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.

⁵ 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 Proceedings of October 23, 1996 , p. 4.

⁶ 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.

⁷ 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.

⁸ 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.

 

 

[96-1 USTC ¶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, Defendants

U.S. District Court, So. Dist. Fla., 93-6858-CIV-ZLOCH, 1/4/96

[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.

Russell A. White, Rogers, Morris & Ziegler, 1401 E. Broward Blvd., Fort Lauderdale, Fla. 33301, for plaintiffs. Mark Stier, Department of Justice, Washington , D.C. 20530 , for defendants.

FINAL JUDGMENT: FINDINGS OF FACT AND CONCLUSIONS OF LAW

ZLOCH, District Judge:

THIS CAUSE was tried before the Court without a jury commencing on May 16, 1995 and concluding 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 Florida state court to foreclose a mortgage on 55.91 acres of real property located in Broward County , Florida . 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 6324 .

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.

The Court 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 .

Having 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.

FINDINGS OF FACT

1. On 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.

2. On 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 trustee thereof.

3. On 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.

4. On 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 .

5. The 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.

6. On 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.

7. On 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.

8. Although 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 $27,071.05.

11. The 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, Inc.

13. On 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.

14. The 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.

15. 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.

16. Between 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).

CONCLUSIONS OF LAW

This Court has jurisdiction over the parties hereto and the subject matter herein pursuant to 28 U.S.C. §§1444 and 1447(b).

The 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 Defendant, 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 United States ' 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.

Second, 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.

26 U.S.C. §6324(b) .

Lastly, pursuant to Title 26, United States Code, Section 6321 ,

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 such person.

26 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. Id. 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 forgiveness. Rev. Rul. 81-264 , 1981-2 C.B. 186.

Third, the 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 estate taxes.

Under Florida 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 Miami , 264 So.2d 1 ( Fla. 1972). At the time of the collateral assignment of the purchase money mortgage on 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 W. Corporation.

The Defendant, 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 Trust Of Dade County , Florida 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).

Ordinarily, a party alleging fraud must prove it. Tischler v. Rob inson, 84 So. 914 ( Fla. 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 Florida 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 suspicion." Id. ; Tornwall v. Carter, 106 So.2d 96, 99 ( Fla. 1958); see also Harper v. United States [91-1 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 transaction.

Turning first 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.

Conversely, 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.

Upon careful 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.

Turning next 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.

Nevertheless, 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.

Upon careful 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.

Accordingly, after due consideration, it is

ADJUDGED that Final Judgment be and the same is hereby entered in favor of the Defendant, 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 as moot.

 

 

[96-1 USTC ¶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

U.S. District Court, East. Dist. Mich. , 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 levies.

[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.

John V. Cardone, Department of Justice, Washington , D.C. 20530 , 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 defendant.

ORDER GRANTING PLAINTIFF'S MOTION FOR SUMMARY JUDGMENT AGAINST DEFENDANTS GIFFELS ASSOCIATES AND BLACK & VEATCH

WOODS, District Judge:

This matter having come before the Court on plaintiff's motion for summary judgment against defendants Giffels Associates and Black & Veatch;

The Court 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.

I. INTRODUCTION AND FACTS

Defendants Giffels Associates and Black & Veatch (collectively, "defendants") are corporate entities located in Michigan . Defendant Comerica Bank, N.A. is the successor in interest to Manufacturers National Bank ("the Bank"). Defendants contracted with the City of Detroit 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 Detroit .

On March 28, 1979 and 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. On March 28, 1979 , January 9, 1980 and 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.

From March 23, 1979 through March 26, 1982 , plaintiff filed notices of federal tax liens with the Michigan Secretary of State for outstanding tax liabilities owed by the taxpayer. By 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.

The taxpayer filed a bankruptcy petition on July 22, 1982 . On 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 plaintiff.

On 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 so.

On 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 United States and the Bank."

On 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.

II. STANDARD

Under Rule 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 U.S. 242, 248 (1986); Matsushita Elec. Ind. Co. v. Zenith Radio Corp., 475 U.S. 574 (1986). A court tests the sufficiency of the evidence against the substantive standard of proof that would control at trial. Anderson , supra. The moving party must show that there is an absence of evidence to support the non-moving party's case. Celotex v. Catrett, 477 U.S. 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 U.S. 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, supra.

III. ANALYSIS

Plaintiff is attempting to collect unpaid taxes through an admin 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.

The parties 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.

In United 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. Id. 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. Id.

The General Motors Court first explained that "state law determines 'the nature of the legal interest which the taxpayer had in the property.' " Id. (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 bank. Id. at 252. The General Motors Court therefore explained that Michigan law defined an assignment as the following:

[a] transfer 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.

Id. (quoting Allardvce v. Dart, 291 Mich. 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. Id. at 252-53.

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." Id. 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 assignment. Id. 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.

The taxpayer and the Bank signed two security agreements, dated March 28, 1979 and 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 non-remittance basis. Id. 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. Id. 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 accounts receivable.

Defendants note that the Bank sent to them a document labelled as a "Notice of Assignment of Accounts Receivable and Direction to Pay to [the Bank]" on March 28, 1979 , January 9, 1980 and 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

Defendants 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 an assignment.

B. Defendants' Alleged Failure to Comply with Discovery

Plaintiff 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.

Regardless of 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.

C. Statute of Limitations and Laches Defenses

The parties dispute whether the statute of limitations bars this suit. As explained infra, the Court finds that it does not.

Before 1990, 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 same)

Plaintiff 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.

Defendants 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.

Moreover, §6502 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).

Defendants 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.

This argument 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.

Defendants 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 levies").

D. 50% Penalty

Under 26 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. Id. at 962.

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.

E. Statutory Interest

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.

IV. CONCLUSION

Accordingly, plaintiff's motion for summary judgment shall be, and hereby is, GRANTED.

So Ordered.

¹ 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 assignments.

 

 

[97-1 USTC ¶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

(CA-11), U.S. Court of Appeals, 11th Circuit, 95-2725, 2/24/97 , 106 F3d 366, 106 F3d 366. Affirming a District Court decision, 95-1 USTC ¶50,270

[Code Sec. 6323 ]

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 ( Florida ) 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. First Ave. , Gainesville , Fla. 32602 , for appellant. Gary R. Allen, Murray S. Horwitz, Paula K. Speck, Loretta C. Argrett, William S. Estabrook III, Department of Justice, Washington , D.C. 20530 , for appellee.

Before: BIRCH, Circuit Judge, KRAVITCH ^*, Senior Circuit Judge, and SCHWARZER ^**, Senior District Judge.

BIRCH, Circuit 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. We affirm.

I. BACKGROUND

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 United States . ¹

Highlander's 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 Broward County , Florida , in which Nationwide had its principal executive office.

On 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.

II. DISCUSSION

We have 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, -- U.S. --, 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?

A. Applicable Law

Before we 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." Id. §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 United States v. McDermott, 507 U.S. 447, 449, 113 S.Ct. 1526, 1528, 123 L.Ed.2d 128 (1993). The FTLA defines a "security interest" as

any interest 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.

26 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.

B. District Court Opinion and Contentions of the Parties

It is undisputed in this appeal that a tax lien arose upon all Nationwide's property on 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), on 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 conditions:

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

Haas v. Internal Revenue Serv. (In re Haas) [94-2 USTC ¶50,496 ], 31 F.3d 1081, 1085 (11th Cir.1994), cert. denied, -- U.S. --, 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 Florida 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 Florida law against a judgment lien.

[T]he 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.

Haas [94-2 USTC ¶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 Florida law. The court concluded that the Government prevails here.

Highlander contends, however, that under Florida 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. United States , 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 Florida law. Thus, Highlander's security interest, though unperfected, prevails over the judgment lien because Highlander's interest was the first to attach. See Fla. Stat. ch. 679.312(5)(b) (1995).

Highlander 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 was Alabama 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 Alabama 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.

Highlander 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 interpleaded fund. Id. 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 Indiana 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 is perfected." Id. at 23 (omission in original) (emphasis added). The equivalent provision of Florida law is a newer version of section 9-301(1)(b) that omits the knowledge requirement. See Fla. 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.

More importantly, a judgment lien attaches to intangible property in Indiana 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 Florida . Highlander argues that the holder of a "simple judgment lien" is therefore a UCC lien creditor under Indiana law but not under Florida 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 prevailed under Indiana law does not mean that it should prevail under Florida law.

The Government contends, however, that the additional procedural steps that a Florida 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 Florida law for a judgment lien to attach to intangible property. The underpinning of the hypothetical judgment creditor test is that the FTLA

"does not 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."

Haas [94-2 USTC ¶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 [94-2 USTC ¶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.

C. Analysis

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 U.S. 63, 68, 102 S.Ct. 1534, 1537, 71 L.Ed.2d 748 (1982); Gulf Life Ins. Co. v. Arnold , 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 Florida 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. Id. at 5. Highlander's argument is unconvincing.

Federal law, 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).

The phrase "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 Florida , 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 . . . Harrison County 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

Even the 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" under Florida 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).

We conclude 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 one, ⁶ we need not resolve this case solely on the basis of the statutory analysis described above. Congress has entrusted the admin istration of the Internal Revenue Code, which includes the FTLA, to the United States Department of Treasury and the IRS. In construing an admin 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." Id. 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." Id. 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).

The term "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 property involved.

Treas. Reg. §301.6323(h)-1(g) . 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.

Because Highlander's interest in the interpleaded funds was unperfected under Florida law on 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.

III. CONCLUSION

This appeal 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 U.S. District Judge for the Northern District of California, sitting by designation.

¹ 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.

² 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.

³ 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 Florida 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.

⁴ 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.

⁵ 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.

⁶ 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 Florida '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").

 

 

[93-1 USTC ¶50,043] Michael L. Nichols, Richard Matthews, Rudy Rios and Rob 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 Rob ert S. Wiley and United States of America, Defendants

U.S. 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 interpleader action.

Don Cummings, 2435 20th St. , Lubbock , Tex. 79408 , for plaintiffs. Gregg D. Stevens, Department of Justice, Dallas , Tex. 75201 , for defendant.

MEMORANDUM OPINION AND ORDER

WOODWARD, District Judge:

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 Rob ert S. Wiley (Plaintiffs herein). No response was filed by Tommy J. Swann (Swann).

Plaintiffs are 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.

Upon receiving 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.

Both 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 Plaintiffs.

The following 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.

(2) On December 7, 1990, Plaintiffs obtained a judgment against Vonna Glass for the sum of $141,599.19.

(3) Plaintiffs 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.

(4) On 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 , Texas , 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.

(6) On December 3, 1991, the Internal Revenue Service recorded its tax liens against Glass in the personal and real property record of Lubbock County , Texas .

(7) Plaintiffs 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 the 72nd District Court of Lubbock County , Texas .

After considering the pleadings, briefs, and evidence before the Court, the Court finds that the Internal Revenue Service's federal tax lien filed on December 3, 1991 , is entitled to priority over the judgment lien held by Plaintiffs herein.

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 Texas this is the County Clerk 's records--real property and personal property.

The Internal Revenue Service complied with §6323 on December 3, 1991 , and this is not in dispute.

In discussing 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:

Title 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]

The priority of a federal tax lien is a matter of federal law. [citation omitted]

The Sixth Circuit made a more detailed discussion regarding priority and noted that:

Federal 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 176538.

See also Don King Productions, Inc. v. Thomas [91-2 USTC ¶50,474 ], 945 F.2d 529 (2nd Cir. 1991).

In Texas , 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. Texas Property Code §52.001 et seq.

However, we 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. Tex. 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 Glass.

Plaintiffs ask 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.

The Texas 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.")

In Wakefield , supra, the Court found that the debt being garnished was "contingently" but not absolutely owed. Wakefield 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.")

In DeMello v. NBC Bank-Perrin Beitel, 762 S.W.2d 379, 381 (Tex. App.--San Antonio 1988) the Court made the following discussion regarding garnishment:

Garnishment 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]

The Fifth 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:

"the 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]

The Fifth Circuit in Westex Foods, supra at 1191, also noted that:

Texas 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).

Applying the 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 to Plaintiffs.

Since the 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.

The Internal 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.

The Fifth Circuit, citing United States v. R.F. Ball Construction Co. [58-1 USTC ¶9327 ], 355 U.S. 587 (1958) has found that:

The 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).

The Court 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 of the United States and against all other claims herein.

All claims for attorneys' fees and costs are hereby denied. JUDGMENT SHALL BE ENTERED ACCORDINGLY.

 

 

[91-2 USTC ¶50,474] Don King Productions, Inc. and Don King, Plaintiffs v. Pinklon Thomas, Jr., Richard Gidron, Roland Jankelson, Althea Jones, and The United States , Defendants. Althea Jones and Richard Gidron, Defendants-Appellees. Richard Gidron and The United States , Defendants-Appellants

(CA-2), 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 6323 ]

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 ( New York ) 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.

Rob ert M. Sosin, Alspector, Sosin, Mittenthal & Barson, P.C., 30100 Telegraph Rd., Birmingham , Mich. , for Althea Jones. Steven K. Meier, Shatz, Meier & Scher, 18 E. 48th St. , New York , N.Y. , 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.

Before: CARDAMONE, MINER and MAHONEY, Circuit Judges.

MINER, Circuit Judge:

Defendant-appellant 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).

The government 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.

Gidron argues 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.

Regarding the 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.

BACKGROUND

One-time 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 held on December 9, 1988 in Atlantic City , New Jersey . 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.

Althea Jones ("Jones") claimed priority to the funds by reason of a January 6, 1988 judgment of filiation and order for support entered by a Michigan 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 Michigan 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.

Richard Gidron claimed priority by reason of a stipulation of settlement, dated December 11, 1985 , allegedly entered in the New York Supreme Court, Bronx County . 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 judgment.

The government 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 taxes on November 9, 1987 and for the unpaid 1987 taxes on June 6, 1988 . Federal tax lien notices were filed on December 5, 1988 in Atlantic City , the place of the Holyfield-Thomas fight, and on December 8, 1988 , in Oakland County , Michigan , 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.

In 1986, 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.

Gidron learned 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 Bronx County 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.

On 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. Id. 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.

DISCUSSION

The government 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.

Section 6321 of the Internal Revenue Code provides that

[i]f any 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.

26 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 6323(a) provides:

The 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 requirement of subsection (f) has been filed by the Secretary.

Only 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).

During oral 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 Bronx County 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.

A "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.

26 C.F.R. §301.6323(h)-1(g) . "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).

Under New York 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) ( McKinney 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 New York 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 Estate of Rob 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.").

For all 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 established. Id. 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 Society [66-1 USTC ¶9444 ], 384 U.S. 323, 327-28 (1966) (citation omitted).