Prior Lien of U.S. Page1

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[97-1 USTC ¶50,282] United States of America , Plaintiff v. Rob ert Scher, Esquire, and Scher & Eliasberg, P.C., Defendants

U.S. District Court, East. Dist. N.Y. , 94-CV-3763 (DRH), 2/21/97

[Code Secs. 6323 and 6332 ]

Liens and levies: IRS: Attorney: Priority: Attachment: Choate: Doctrine of Laches.--Simultaneously a federal tax lien attached and the rights assigned to an attorney from a taxpayer became choate to funds held in escrow by the attorney. Therefore, the IRS's lien had priority because the attorney's lien was not "prior" to the IRS lien. The taxpayer's right to the escrow funds, which were part of sale price for the transfer to a third party of her right to purchase her apartment upon its conversion to a cooperative, became fixed upon confirmation of the conversion. Under state ( New York ) law, the transfer of a conditional right creates merely an equitable lien. Thus, pursuant to an IRS levy, the attorney had to turn over the escrow funds to the IRS. Finally, the IRS was not barred by the doctrine of laches or by the state's six-year statute of limitations for contract actions.

[Code Sec. 6323 ]

Liens and levies: IRS: Individual liability: Corporate obligation: Estoppel.--An attorney, who was president of a law firm that was a corporation, could be called on individually to answer to an IRS levy that was served on the firm relating to funds held in escrow for a taxpayer. He asked the IRS to take no action to derail the taxpayer's real estate closing based on his assurance the funds would remain in escrow pending resolution of this issue. Accordingly, he was estopped from asserting any right that could insulate himself from liability for his act performed as a corporate officer.

Zachary W. Carter, United States Attorney, Brooklyn, N.Y. 11201-2744, Thomas A. McFarland, Assistant United States Attorney, Tamara H. Lindquist, Jennifer M. Blunt, Department of Justice, Washington, D.C. 20530, for plaintiff. Scher & Scher, P.C., 111 Great Neck Rd. , Great Neck , N.Y. 11021 , for defendants.

MEMORANDUM AND ORDER

HURLEY, District Judge:

The United States has moved for summary judgment pursuant to Rule 56 of the Federal Rules of Civil Procedure based on the defendant, Rob ert Scher's ("Scher" or "defendant") failure to honor an IRS levy. In response, Scher moved to dismiss the complaint upon the grounds that: (1) at the time he was served with the levy, he was not in possession of an asset owned by Stephanie Winston ("taxpayer"); (2) he may not be held personally responsible for the obligations of Scher & Eliasberg, P.O. ("Scher & Eliasberg"); and (3) the statute of limitations and doctrine of laches preclude any recovery by the United States.

FACTS

The facts which bear on the question presently before the Court are not in dispute. A recitation of those facts, however, is necessary to place the legal arguments in context. The relevant facts are as follows:

(1) On June 24, 1985 , an assessment in the amount of $101,138.55 was made against the taxpayer. The legitimacy of that assessment is not at issue in this action.

(2) Some time prior to December of 1985, the taxpayer assigned to Scher & Eliasberg $10,000 of the $20,000 that she anticipated receiving from Micon Industries of New York ("Micon"). The $20,000 was to be paid by Micon in consideration of the taxpayer transferring her right to purchase the apartment in which she was living upon its conversion to cooperative status. Under her agreement with Micon, she was to be paid the $20,000 thusly:

25% of the consideration shall be placed into the [taxpayer's] attorney's escrow account upon signing of this agreement. An additional 25% of the consideration will be placed into the applicant's attorney's account upon confirmation that the building will convert to Co-operative status. Upon closing of 250 Mercer Street Co-operative status, the 50% consideration will be released to the applicant. The remaining balance of the consideration which is 50%, will be released to the applicant's attorney upon the applicant vacating the apartment.

( See Pl. 's Rule 3(g) Statement, Ex. 4.)

(3) The purpose of the assignment by the taxpayer to defendant was to compensate Scher & Eliasberg, at least in part, for legal services that the firm had provided to her apparently over a fairly extended period of time. ( See Pl. 's Reply Mem. Ex. 2.)

(4) On April 24, 1986 , the IRS served a Notice of Levy on Scher and the law firm of Scher & Eliasberg.

(5) The first two $5,000 payments under the Micon contract were received by defendant in December, 1985 and March, 1986.

(6) Defendant, in a letter dated April 18, 1986 to the IRS: (a) stated that at the time the levy was served, he was not in possession of any taxpayer assets, given her prior assignment of the $10,000 in question to his law firm; (b) asked that the IRS not interfere with the scheduled closing with Micon and; (c) indicated that the firm would hold "the money . . . in escrow pending an amicable attempt to resolve the differences with your office." The closing thereafter did occur. Micon paid the remaining $10,000 directly to the IRS pursuant to a levy which was served upon them. The dispute between the IRS and Scher regarding the other $10,000 was not resolved, leading to the present lawsuit.

DISCUSSION

I. Attachment of the Federal Tax Lien

A federal tax lien arises when unpaid taxes are assessed which in this case, was June 24, 1985 . See 26 U.S.C. §6321. Such liens "continue in full force and effect until the tax liability is extinguished (26 U.S.C. §6322) and attach to all after acquired property of the taxpayer." Seaboard Surety Company v. United States [62-2 USTC 9653], 306 F.2d 855, 859 (9th Cir. 1962).

The attachment of a tax lien to after acquired property, however, does not occur until the taxpayer's right to the property is "fixed" in the sense of not being contingent or uncertain in nature. See Wagner v. United States [78-1 USTC ¶9340], 573 F.2d 447, 454 (7th Cir. 1978); City of New York v. United States [60-2 USTC ¶9767], 283 F.2d 829, 832 (2d Cir. 1960). ¹ See also Corwin Consult. v. Interpublic Group of Companies, Inc. [74-1 USTC ¶9401], 375 F Supp. 186 (S.D.N.Y. 1974) ("It is settled that although tax liens do not attach to contingent rights . . . pre-existing liens do attached as soon as the taxpayer gains a fixed right to property.") (emphasis in original). Prior to that time, the property does not "belong[]" to the taxpayer within the meaning of Section 6321. See United States v. Long Island Drug Company [41-1 USTC ¶9140], 115 F.2d 983, 986 (2d Cir. 1940).

Here, it is debatable precisely when the taxpayer's rights to the subject $10,000 became fixed, but it would seem to be "upon confirmation that the building will convert to Co-operative status." After that, there were no remaining contingencies, nor was there anything further for the taxpayer to do to be entitled to the escrowed monies at closing. Id.

Confirmation of the conversion, and the corresponding second $5,000 payment to defendant (in his role as attorney), both occurred in March 1996. At that point, the government's interest in the taxpayer's after acquired property attached to the $10,000 received from Micon.

The taxpayer, however, had assigned her interest in that property to defendant "sometime prior to December 1995." And that brings us to the gravamen of the present dispute. Although triggered by defendant's receipt of a levy, it is in essence a claim by him of lien priority.

The government's lien "takes priority over competing liens unless the competing lien was choate prior to the attachment of the federal lien. . .." MDC Leasing v. New York Property Ins. Underwriting [79-1 USTC ¶9122], 450 F. Supp. at 181. See also PPG Industries Inc. v. Hartford Fire Ins., Co. [74-2 USTC ¶9823], 384 F. Supp. 91, 94 (S.D.N.Y. 1974), aff'd [76-1 USTC ¶9257], 531 F.2d 58 (2d Cir. 1976).

Had the earlier assignment transferred the legal right to the $10,000 to defendant, his lien would have been superior to that of the government. Defendant's interest did not become choate, or fixed, however, until "confirmation that the building will convert to Co-operative status." Under the law of the State of New York the transfer of a conditional right creates merely an equitable lien. See, e.g., PPG Industries [74-2 USTC ¶9823], 384 F. Supp. at 95; MDC Leasing [79-1 USTC ¶9122], 450 F. Supp. at 181. In sum, the federal tax lien attached, and the rights assigned to defendant became choate, simultaneously in March of 1986. Defendant's lien not being "prior," it is subordinate. See, e.g., United States v. McDermott [93-1 USTC ¶50,164], 113 S. Ct. 1526 (1993); MDC Leasing [79-1 USTC ¶9122], 450 F. Supp. at 181.

In conclusion of this point, the defendant, at the time he was served with the tax levy on April 24, 1986 , was in possession of an asset of the taxpayer, and was required to remit the $10,000 to plaintiff.

II. Additional Issues Raised by Defendant

Defendant also claims that the levy was served on Scher & Eliasberg, and that he may not be called upon individually to answer for a corporate obligation.

Some background information is required at this juncture. Scher was the president of the corporation, which apparently is no longer operational. As such, he dealt with the IRS regarding the levy. He asked plaintiff to take no action to derail the Micon closing based on his assurance that the monies would remain in escrow pending resolution of the dispute. It was he who wrote the October 2, 1987 letter indicating that:

[i]f the District Court tells us to pay it, we'll do so. You may be assured that since we promised Mr. Demetriou that we would hold the money pending the outcome, that we have, indeed done so.

(Pl.'s Reply, Ex. 3.)

Given the defendant's involvement with plaintiff regarding the levy, including his assurances that the $10,000 would be escrowed until the claim was resolved, his disavowance of responsibility is without merit. He was the one of the two lawyer/shareholders in the corporation who handled the levy. Under the circumstances, he is estopped to assert any right that he might otherwise have, arguendo, to insulate himself from liability for his act performed as a corporate officer.

Short shrift may be made of defendant's final argument. The present claim by the United States is not barred by the doctrine of laches or by New York 's six year statute of limitations for contract actions. See, e.g., United States v. Weintraub [80-1 USTC ¶9172], 613 F.2d 612, 619 (6th Cir. 1979), cert. denied, 447 U.S. 905 (1980); United States v. Incorporated Village of Island Park, 791 F. Supp. 354, 369 (E.D.N.Y. 1992).

CONCLUSION

Plaintiff's motion for summary judgment is granted, and defendant's motion to dismiss the complaint is denied.

Plaintiff shall submit a proposed order consistent with this opinion on or before March 7, 1997 , with at least five days prior notice to defendant.

SO ORDERED.

¹ In MDC Leasing V. New York Property Ins. Underwriting [79-1 USTC ¶9122], 450 F. Supp. 179 (S.D.N.Y. 1978), aff'd 603 F.2d 213 (2d Cir. 1979), however, the Court indicated that the federal tax lien took effect as of the filing of the assessment, even though the amount of the proceeds due under a fire insurance policy had not yet come "into existence." Id. at 181. By way of dictum, however, it was noted in MDC that the IRS would also prevail if the tax lien was deemed to attach at the later date when the proceeds came into existence "since in the event of simultaneous attachment the federal liens are accorded priority." Id. In the present case, as in MDC, the IRS levy has priority under either approach.

 

 

[91-2 USTC ¶50,303] First Interstate Bank of Utah , N.A., Appellant v. Internal Revenue Service and Olympus Glass Company, Inc., Appellees

(CA-10), U.S. Court of Appeals, 10th Circuit, 90-4021, 4/25/91 , 930 F.2d 1521. Affirming an unreported District Court decision

[Code Secs. 6323 and 6871 ]

Lien for taxes: Bankruptcy: Priority.--A federal tax lien was superior to the security interest of a bank in a debtor's accounts receivable. The bank did not obtain a purchase money security interest in certain accounts receivable when it advanced funds to the debtor that enabled the debtor to complete performance of specified contractual obligations. Therefore, the bank's interest was not entitled to purchase money priority over a tax lien previously filed by the IRS.

George W. Pratt III, Jerome Romero, Jones, Waldo, Holbrook & McDonough, P.C., 170 S. Main St. , Salt Lake City , Utah 84101 , for appellant. Dee V. Benson, United States Attorney, Salt Lake City, Utah 84101, Shirley D. Peterson, Assistant Attorney General, Deborah Swann, Gary R. Allen, David I. Pincus, Department of Justice, Washington, D.C. 20530, for appellees.

Before LOGAN, Circuit Judge

ALDISERT ^* and SEYMOUR, Circuit Judges.

ALDISERT, Circuit Judge: This appeal from the district court's affirmance of the bankruptcy court's order requires us to interpret Utah Code Ann. §70A-9-107(b), which provides that:

[a] security interest is a purchase money security interest to the extent that it is . . . taken by a person who by making advances or incurring an obligation gives value to enable the debtor to acquire rights in or the use of collateral if such value is in fact so used.

First Interstate Bank of Utah , N.A., the appellant, argues that it obtained a purchase money security interest in certain accounts receivable when it advanced funds to Olympus Glass Company, the debtor in a Chapter 11 proceeding, enabling the debtor to complete performance of specified obligations. This question of statutory construction is a legal issue of first impression before this court. At issue here is whether the statute affords purchase money priority to First Interstate to preempt a tax lien previously asserted by the Federal Government.

Jurisdiction was proper in the bankruptcy court pursuant to 28 U.S.C. §1334(b) and 157 and Rule B-105 of the U.S. District Court for the District of Utah Rules of Bankruptcy Practice. Jurisdiction was proper in the district court based on 28 U.S.C. §158(a). Jurisdiction on appeal is proper based on 28 U.S.C. §1291 . Appeal was timely filed under Rule 4(a), F.R.A.P.

I.

At a time when the debtor's assets were subject to a federal tax lien, First Interstate and Olympus Glass entered into a financing arrangement whereby the bank agreed to fund Olympus ' performance of six glazing contracts. The bank paid the material and labor cost incurred by Olympus . After Olympus went into bankruptcy the question arose as to whether the tax lien was to be afforded the normal consequences of a lien filed prior in time to the extension of credit. While recognizing the existence of orthodox rules of lien priority, First Interstate relies upon a competing legal precept that a purchase money security interest has priority over a previously filed tax lien.

The general proposition is that a security interest based on the extension of purchase money defeats a previously filed federal tax lien. Slodov v. United States [78-1 USTC ¶9447 ], 436 U.S. 238 (1978) ("[T]he [Internal Revenue] Code and established decisional principles subordinate the tax lien, to certain perfected security interests in . . . collateral which is subject to a purchase-money mortgage regardless of whether the agreement was entered into before or after the filing of the tax lien.") Id. at 257-58 (footnotes omitted). Although a statement of this priority is not found in the express language of the Code, "[t]he purchase-money mortgage priority is based upon recognition that the mortgagee's interest merely reflects his contribution of property to the taxpayer's estate and therefore does not prejudice creditors who are prior in time." Id. at 258 n.23.

The parties before us urge diametrically opposed interpretations of the U.C.C. provision defining a purchase money security interest. First Interstate argues that the phrase, "a person who by making advances . . . to enable the debtor to acquire rights in or the use of collateral" brings it within the statutory definition when it extended money secured by accounts receivable. The Internal Revenue Service (IRS) contends that the money was extended to perform pre-existing contracts of the debtor and did not represent funds advanced to acquire property or rights in property.

The facts are not in dispute. The bankruptcy court's conclusions of law affirmed by the district court are subject to de novo review. In re Schneider, 864 F.2d 683, 685 (10th Cir. 1988).

II.

Olympus is a glazing contractor and wholesale supplier of glass. On January 23, 1984 , First Interstate extended to Olympus a $500,000 line of credit. Pursuant to this line of credit, Olympus drew down the entire amount. The line was secured by an Accounts Receivable and Inventory Security and Loan Agreement by which Olympus conveyed to First Interstate a security interest in all of Olympus' accounts (as defined in the agreement) "now existing or hereafter existing" and "all the proceeds of . . . the foregoing." The bank filed the U.C.C.-1 financing statement with the Utah Secretary of State, thereby perfecting its security interest in the debtor's accounts and proceeds. On August 1, 1985 , the IRS filed a Notice of Federal Tax Lien against the debtor in the amount of $57,147.94 for unpaid taxes withheld from the wages of the debtor's employees.

Several months later, First Interstate agreed to extend to the debtor a secured line of credit in the amount of $200,000, known as "[a] revolving loan." Pursuant to the agreement, signed on November 27, 1985 , the loan was to be "secured by specifically assigned contracts." Borrowing was limited to the "amounts necessary for payment of direct labor expense and materials" and in no event was to "exceed 75% of the face value of the assigned contract." These advances were to be based on invoices for materials and appropriate records of labor expended on the contract, "with such invoices and records subject to Bank approval prior to disbursal of each advance." First Interstate signed a promissory note for the loan.

First Interstate did not file a U.C.C.-1 financing statement in conjunction with the November Security Agreement; instead it relied on the financing statement accompanying the previous loan that it had filed on January 23, 1984, some twenty months earlier. The prior financing statement covered "[a]ll present and future accounts" of the debtor. The bankruptcy court accepted the January filing as a document perfecting a security interest, but did not raise it to the dignity of purchase money status. Olympus used no source of financing other than the advances from First Interstate to perform the contracts.

On July 2, 1986 , Olympus filed a voluntary Chapter 11 petition. In November 1986, the debtor, the IRS, and First Interstate entered into a stipulation under which the IRS and First Interstate entered into certain agreements relating to the use by the debtor of certain funds, including a $10,000 deposit with the Clerk of the Bankruptcy Court and $6,012.89 in proceeds of certain other pre-petition accounts, held by the IRS pursuant to the stipulations.

In the bankruptcy court, as before us, First Interstate argued that its lending arrangement with the debtor falls squarely within the definition of a purchase money security interest: It advanced approximately $193,000 to fund the performance of specific, identified glazing contracts by issuing cashier's checks directly to third party suppliers of materials and labor. Accordingly, the bank argued, it is a "person" who "by making advances," gave "value to enable the debtor to acquire rights in . . . the . . . collateral," i.e., the accounts receivable that arose by virtue of performance of the glazing contracts. It conceded that the federal tax lien attached to the debtors's "contingent rights to payments under the Glazing Contracts," but argued that its funds enabled the debtor "to convert the contingent rights into matured rights." Trial Brief at 4-5.

The IRS responded, and the bankruptcy court agreed, that within the concept of purchase money security rights a fundamental difference exists between those funds advanced to purchase or acquire contracts and any accompanying accounts receivable, and those funds advanced to perform contracts which were already in existence at the time the tax lien had attached. The IRS emphasized that the rights to the accounts represented by the glazing contracts were already in existence at the time the lien was filed; all that remained was to perform the preexisting contracts; the debtor has already "acquire[d] rights in or the use of collateral." Reduced to its essence, the IRS argument before the bankruptcy court, and repeated before us, is that First Interstate did nothing more than fund the debtor's performance of its contracts in its ordinary business operations; it did not enable the debtor to acquire a discrete new asset.

The bankruptcy court held for the IRS, ruling that "[u]nless the funds loaned to a debtor are used for the purpose of purchasing accounts directly, the lending creditor would not obtain a purchase money security interest in those accounts." Amended Findings of Fact and Conclusions of Law at 14, ¶13. According to the bankruptcy court, "First Interstate did not obtain a purchase money security interest in accounts because the funds loaned to the debtor did not enable the debtor to acquire accounts, but rather enabled the debtor to generate accounts." Id. The court reasoned that a "contrary ruling would elevate any loan to a purchase money status if the loan enabled the borrower to conduct its business and generate a profit," id, and ruled that the Government had a prior lien against the proceeds of the contracts. Id. at 15, ¶14-15.

First Interstate appealed to the District Court from that part of the bankruptcy court's judgment that held it did not possess a security interest to trump the previous IRS lien. The District Court affirmed the bankruptcy court determination. First Interstate has appealed.

III.

As was the task of the bankruptcy and district courts, our responsibility is to construe the security interest provision of Utah Code Ann. §70A-9-107(b). Under the U.C.C. and the Utah legislature's adoption of its key provisions, this purchase money security interest is generally manifested when taken or retained by the seller of collateral to secure all or part of its price. But such a security interest also may be created when a person gives value to enable a debtor to acquire rights in, or the use of collateral; this is the species of security interest asserted by First National Bank in these proceedings. New value may be given either in the form of advances or the incurring of an obligation. Such value must be used for this purpose in order to form the basis of this type of priority.

By definition, purchase money security interests are available to lenders as well as sellers. A lender may acquire it in collateral to be purchased with a loan provided the proceeds are in fact so used. This special category of security interest is entitled to special priority because it is considered an exception to the first-to-file rule of priority. Accordingly, such an interest takes priority over any pre-existing lien on the theory that because the lender has augmented the capital assets of the borrower, previous creditors are not prejudiced.

It is undisputed that First Interstate agreed to, and did, lend money to the debtor to fund the performance of specific, identified contracts. It is also undisputed that the U.C.C. priority in question is given not only to lenders who permit a borrower to "acquire" collateral, but is conferred whenever the lender enables the borrower to "acquire rights in collateral." The debtor here already had acquired the collateral--the executory contracts--and thus the right to perform the contracts, and accordingly, the federal tax lien attached to these executory contracts. First Interstate anchors its claim on the basis that it advanced the funds that enabled the debtor to "acquire rights in [this] collateral" by converting contingent rights into matured rights.

In support of its argument, First Interstate submits that this case should be governed by the reasoning of In re Halprin [60-2 USTC ¶9564 ], 280 F.2d 407 (3d Cir. 1960), where the Court of Appeals for the Third Circuit, in an opinion by Judge Hastie, protected a lender's contractual right to payment against a previously filed federal tax lien. In Halprin, the lender advanced funds to enable the debtor to perform a specific manufacturing contract, and took as security an assignment of the debtor's right to payment under the contract.

In that case, the court protected the purchase money lender, who by advancing funds, permitted the debtor to acquire a right to payment under the contract, and thus was able to look to those proceeds as collateral. However, Halprin is readily distinguishable from the case at bar. Relying on concepts of property law, the court said that the right to payment was no longer the property of the debtor because it had been assigned to the creditor. The court couched its decision on whether the taxpayer's interest qualified as "property" within the meaning of the federal tax lien statute. Having determined that any right the debtor had in the contracts had been assigned, the court reasoned that a tax lien on the debtor's property could have no effect on property which the debtor no longer owned.

In the case before us, First Interstate acknowledges that it was the debtor, not the bank, who owned the property and that a valid tax lien had attached to that property. It disputes only the priority of the lien vis-a-vis its security interest in that property. Having proceeded on this basis and having acknowledged the validity of the lien on the debtor's property, the lender cannot now avail itself of the teaching and reasoning of Halprin.

IV.

We return then to our task of statutory construction. Professor Grant Gilmore, a primary drafter of the U.C.C., has written that the purchase money security interest provision was narrowly constructed and that such an interest in intangibles would be the extraordinary situation. In describing what could or could not qualify under the statute, he stated:

Farm products which are grown or raised by the debtor (such as crops or the increase of a herd of livestock) cannot become the subject matter of a purchase money security interest, since the secured party's loan does not go directly into their purchase price. Nor could such intangibles as accounts, contract rights, chattel paper, or instruments normally be acquired by the debtor in a purchase money transaction.

Gilmore, The Purchase Money Priority, 76 Harv. L. Rev. 1333, 1385 (1963) (emphasis added).

A.

It is clear that the drafters of the purchase money security interest provision in the U.C.C. used precise and narrow language. First, the lender must have given "value" by making advances or incurring an obligation. Second, the value must have been "to enable the debtor to acquire rights in or the use of collateral." Third, such value must have been "in fact so used." Comment 2 to the Official Text of the Code tells us that this requirement excludes "any security interest taken as security for or in satisfaction of a pre-existing claim or antecedent debt."

Given this narrow construction, we must determine whether the interest in the case before us fits within these three requirements.

B.

Clearly, the lender, First Interstate, gave value. The problem is with the second prong that requires that the value must have been given "to enable the debtor to acquire rights in or the use of collateral." Without surmounting this second requirement we cannot reach the third. We are assisted in our task by previous court decisions that have discussed whether contract rights qualify as "collateral" under this U.C.C. provision.

In Northwestern Nat. Bank Southwest v. Lectro System, Inc., 262 N.W.2d 678 ( Minn. 1977), the court faced the question of whether a "contract right" could be "collateral" under the second requirement. In Lectro System, the lender advanced money to subcontractors to enable them to complete their contract and took back a security interest in their contract right to payment. The lender claimed priority as a purchase money lender over a bank which had a prior perfected security interest in the contract right.

In rejecting the lender's claim, the court held that the loaned funds must be intended, and actually used, for the purchase of an identifiable asset and that "performance of a contract" is not such an asset. Id. at 680; see also MBank Alamo Nat. Ass'n v. Raytheon Co., 886 F.2d 1449, 1454 (5th Cir. 1989) (court declined "to expand the scope of special protection afforded a purchase money security interest [to an account receivable], lest in so doing [it] defeat the underlying purposes of the Code: to bring predictability to commercial transactions") (citation omitted); In the matter Woodworks Contemporary Furniture, Inc., 44 B.R. 971, 973 (1984) (lender did not enable debtor to acquire rights in a contract to which it was already a party thus it was not entitled to purchase money status). We agree with these analyses.

C.

At the risk of being guilty of ad terrorem discourse, we believe that First Interstate's argument proves too much. If accepted, it would make virtually any loan incurred in the course of fulfilling pre-existing business obligations a purchase money loan if it enabled the debtor to operate its business and generate a profit. The conceptual underpinning of our commercial purchase money security tradition with its concomitant priority attributes is that the extension of such funds reflects a contribution of property to the borrower's estate; accordingly, this extension does not prejudice creditors who are prior in time.

An important distinction exists between funds extended for asset acquisition and those extended for the ordinary operation of business. A bright-line demarcation must always exist between these two purposes. To accept the lender's contention in this case would be to blur, if not eliminate, that line.

V.

Court precedent, comments of the Code drafters, and dictates of public policy concerning financing support the principle that the line of demarcation be respected. We see no reason to cross it here. Accordingly, we conclude that the right to perform the pre-existing executory contract in this case is not "collateral" or the "rights in collateral" within the requirements of the U.C.C.

VI.

We have considered all of the contentions of the appellant and find them to be without merit. The judgment of the district court is AFFIRMED.

^* Ruggero J. Aldisert, United States Circuit Judge for the Third Circuit, sitting by designation.

 

 

[89-2 USTC ¶9530] Nevada Savings and Loan Association, Plaintiff v. Davco, Inc., a Wyoming corporation, James Patterson, and Philip Effenbeck, Defendants. D&J, a Nevada corporation, Internal Revenue Service, Spanish Springs Association, and Richard Harris, Claimants

State of Nevada, 2nd Judicial District Court, County of Washoe, 83-9750, 8/28/89

[Code Sec. 6323 ]

Lien for taxes: Priority: Prior lien of U.S.--The judgment obtained by an association and an individual against a commercial residential property development corporation was not obtained until after the IRS's notice of federal tax lien had been filed. The notice of federal tax lien, therefore, was entitled to priority. Accordingly, the lien of the association and the individual was inchoate when the federal notice was recorded, and, therefore, the lien of the United States was prior and superior to their claim. Furthermore, the doctrine of relation back did not require a priority date for the judgment, namely, the date when the notice of a pending suit was filed, because the doctrine is not effective for federal tax purposes.

FINDINGS OF FACT AND CONCLUSIONS OF LAW

SCHOUWEILER, Chief Judge:

This matter came before the Court for hearing on January 17, 1989 , to determine the rights and priorities of the liens asserted by Spanish Springs Association, Richard Harris, and the Internal Revenue Service. Based upon the evidence presented at the hearing, and the pending United States ' Motion for Summary Judgment, a Decision was entered on February 3, 1989 , wherein the Court adopted the statement of law contained in the United States ' Motion. The Court also makes the following findings of fact and conclusions of law.

FINDINGS OF FACT

1. During June 1977, Spanish Springs Association and Davco, Inc. entered into an Agreement to Sell Real Property. Davco, Inc. sought to purchase 1000 acres of real property for the development of residential lots and the construction of houses and other improvements.

2. One of the terms of the Agreement provided as follows:

Sales price. The sales price for the Property and water rights shall be $1250.00 per acre. As further consideration for the sale, Buyer agrees to pay the Spanish Springs Association one percent (1%) of the gross value of all improvements constructed on the Property. The "gross value" of each residential unit and other structure shall be the sale price shown on the final escrow settlement sheet, a copy of which shall be furnished to the Association with the corresponding payment. The obligation to pay this additional one percent shall extend ten (10) years after the purchase of the last increment of Parcel 3.

3. During 1979, Davco, Inc. breached the Agreement, and on May 15, 1981 , Spanish Springs Association and Richard Harris filed a Complaint in the Second Judicial District Court, County of Washoe , State of Nevada , against Davco, Inc. (Case No. 81-4475, Dept. No. 3). Spanish Springs Association and Richard Harris sought a judgment against Davco, Inc. in the amount of the one percent (1%) "vendor's" lien that had not been paid. Additionally, a Notice of Lis Pendens was filed with the County Recorder for Washoe County , State of Nevada , on May 15, 1981 .

4. On November 2, 1982 , the Internal Revenue Service filed a Notice of Federal Tax Lien with the County Recorder for Washoe County , State of Nevada , which set forth the following federal income tax liabilities of Davco, Inc.

                                    Unpaid

Type of               Date of       Balance

  Tax    Tax Period  Assessment  of Assessment

1120        7912      10/29/82   $1,007,199.15

1120        8012      10/29/82      956,045.59

1120        8112      10/29/82      902,808.70

 

5. A Judgment was then entered on July 13, 1984 , in the suit filed by Spanish Springs Association and Richard Harris against Davco, Inc.

6. The instant suit had been initiated on November 28, 1983 , by Nevada Savings and Loan Association. The Court commenced the receivership on December 5, 1983 . At that time, the receiver's Final Report stated tht Davco, Inc. had cash in the amount of $3,882.72. Davco, Inc. was delinquent in its payments to Nevada Savings and Loan Association in the amount of $82,433.98, and the outstanding balance was $775,242.31. In addition, Davco, Inc. was still indebted to the United States in the amount of the assessments, plus interest.

7. Thus, the relevant dates can be summarized with a simple chronology: the Complaint and Notice of Lis Pendens were filed by Spanish Springs Association and Richard Harris; Davco, Inc. was assessed taxes and a Notice of Federal Tax Lien was filed; the receivership was initiated; and, Spanish Springs Association and Richard Harris obtained a Judgment against Davco, Inc.

CONCLUSIONS OF LAW

1. The relative priority between a federal tax lien and a lien under state law is a federal question to be determined under federal law. United States v. Acri [55-1 USTC ¶9138 ], 348 U.S. 211, 213 (1955); Bank of Nevada v. United States [58-1 USTC ¶9228 ], 251 F.2d 820, 824 (9th Cir. 1958).

2. A state-created lien is not choate until the "identity of the lienor, the property subject to the lien, and the amount of the lien are established." United States v. City of New Britain [54-1 USTC ¶9191 ], 347 U.S. 81, 84 (1954); United States v. Vermont [64-2 USTC ¶9520 ], 377 U.S. 351, 358 (1964). The requirements of this showing are rigorous. The United States Supreme Court has made it clear that to meet the requirements, "the lien [must] be attached to certain property by reducing it to possession, on the theory that the United States has no claim against property no longer in the possession of the debtor." United States v. Gilbert Associates, Inc. [53-1 USTC ¶9291 ], 345 U.S. 361, 366 (1953); see also United States v. Estate of Young [84-2 USTC ¶13,594 ], 592 F.Supp 1478, 1483-1484 (E.D. Pa. 1984). "Failure to meet any one of these conditions forecloses priority over the federal lien, even if under state law the nonfederal lien was enforceable for all purposes when the federal lien arose." United States v. Kimbell Foods, Inc., 440 U.S. 715, 721 (1979).

3. "[A federal] tax lien is perfected on the date of assessment, [but] it is not entitled to priority over a choate lien unless notice of lien has been filed pursuant to Section 6323(a) of the Internal Revenue Code before the choate lien arises." United States v. Jenison [80-1 USTC ¶9195 ], 484 F. Supp. 747, 754-755 (R.I. 1980) ( ft. nt. omitted). "Thus, any creditor achieving the status of 'judgment lien creditor' before the filing of the government's notice of lien is entitled to priority over the United States with respect to property subject to the judgment lien even if the government's assessment was made before judgment." United States v. Jenison, supra at 755. "[A] prejudgment attachment is inchoate up until the time of judgment because the amount of the lien has not been conclusively established. In order for a prejudgment attachment to have priority over a federal tax lien, then, judgment must be entered before the notice of lien is filed." United States v. Jenison, supra at 755 n.12.

4. Here, the lien of Spanish Springs Association and Richard Harris was not specific as to amount or the identity of the property to which it attached prior to them receiving the Judgment against Davco, Inc. Thus, prior to judgment, their lien was inchoate and also inferior to the United States ' claim, that is, the properly filed Notice of Federal Tax Lien. United States v. City of New Britain, supra; United States v. Jenison, supra.

5. The Judgment obtained by Spanish Springs Association and Richard Harris against Davco, Inc., was not obtained until after the Notice of Federal Tax Lien was duly filed. The Notice of Federal Tax Lien is therefore entitled to priority. 26 U.S.C., Section 6323(a) ; United States v. Jenison , supra. Accordingly, the lien of Spanish Springs Association and Richard Harris was inchoate when the Notice of Federal Tax Lien was recorded, and therefore, the lien of the United States is prior and superior to their claim.

6. "The effect of a lien in relation to a provision of federal law for the collection of debts owing the United States is always a federal question. Hence, although a state court's classification of a lien as specific and perfected is entitled to weight, it is subject to reexamination by this Court." United States v. Security Trust & Savings Bank [50-2 USTC ¶9492 ], 340 U.S. 47, 49 (1950).

7. In United States v. Security Trust & Savings Bank, supra, (hereinafter Security Trust), the United States Supreme Court was presented with a situation identical to the instant one. In Security Trust, the issue was whether a federal tax lien was prior and superior to an attachment lien (notice of lis pendens), where the federal tax lien was recorded after the date of the attachment lien but prior to the date the attaching creditor obtained a judgment. The Supreme Court stated:

The attachment lien gives the attachment creditor no right to proceed against the property unless he gets a judgment within three years or within such extension as the [state] statute provides. Numerous contingencies might arise that would prevent the attachment lien from ever becoming perfected by a judgment awarded and recorded. Thus the attachment lien is contingent or inchoate--merely a lis pendens notice that a right to perfect a lien exists.

Nor can the doctrine of relation back--which by process of judicial reasoning merges the attachment lien in the judgment and relates the judgment lien back to the date of attachment--operate to destroy the realities of the situation. When the tax liens of the United States were recorded, [the attaching creditor] did not have a judgment lien. He had a mere "caveat of a more perfect lien to come."

Security Trust, supra at 50.

8. The Supreme Court in Security Trust, supra, concluded that the federal tax lien was entitled to priority over the attachment lien, since the attachment lien was an inchoate lien. Additionally, the result was not affected by the doctrine of relation back. See also United States v. Acri, supra; United States v. Liverpool & London Ins. Co. [55-1 USTC ¶9136 ], 348 U.S. 215 (1955); Crocker National Bank v. Trical Manufacturing Co. [76-1 USTC ¶9196 ], 523 F.2d 1037 (9th Cir. 1975); Rialto Publishing Co. v. Bass, 325 F.2d 527 (9th Cir. 1963); Bank of Nevada v. United States, supra; Ward v. Commissioner [55-2 USTC ¶9537 ], 224 F.2d 547 (9th Cir. 1955); United States v. Jenison, supra at 755 n.12. ("The theory of relation back to the date of attachment, although valid as concerns priority between private creditors under state law, is not effective for federal tax purposes.").

9. In this case, the Notice of Federal Tax Lien recorded on November 2, 1982, is prior and superior to the Judgment entered on July 13, 1984, and the doctrine of relation back does not entitle the Judgment to a priority date of May 15, 1981, despite the fact that the Notice of Lis Pendens was recorded on May 15, 1981. Security Trust, supra; United States v. Jenison , supra. Thus, the United States ' claim is prior and superior to the claim of Spanish Springs Association and Richard Harris.

10. Section 3713 of 31 U.S.C., (formerly denoted as Revised Statute, Section 3466 and 31 U.S.C., Section 191 ), states as follows:

§3713. Priority of Government claims

(a)(1) A claim of the United States Government shall be paid first when--

(A) a person indebted to the Government is insolvent and--

(i) the debtor without enough property to pay all debts makes a voluntary assignment of property;

(ii) property of the debtor, if absent, is attached; or

(iii) an act of bankruptcy is committed; or

(B) the estate of a deceased debtor, in the custody of the executor or admin istrator, is not enough to pay all debts of the debtor.

(2) This subsection does not apply to a case under title 11.

(b) A representative of a person or an estate (except a trustee acting under title 11) paying any part of a debt of the person or estate before paying a claim of the Government is liable to the extent of the payment for unpaid claims of the Government.

31 U.S.C., Section 3713.

11. This statute, when applicable, clearly gives the United States priority over all other claimants. Congress intended to improve the position of the United States in relation to all other creditors in order to ensure the collection of money owed to the government. The earliest interpretations of this provision emanate from "motives of public policy, in order to secure an adequate revenue to sustain the public burdens, and discharge the public debts. * * * [A]s the policy has mainly a reference to the public good, there is no reason for giving to [the statute] a strict and narrow interpretation." United States v. State Bank of North Carolina, 6 Pet. 29, 35 (1832) (Justice Story); see also United States v. Moore, 423 U.S. 77, 80-81 (1975). Thus, the provisions of 31 U.S.C., Section 3713, must be read broadly.

12. In this instance, the factual requirements of the statute are clearly met. 31 U.S.C., Section 3713(a)(1). Indeed, Spanish Springs Association and Richard Harris have admitted that the factual requirements of 31 U.S.C., Section 3713(a)(1) have been met by the United States . (Transcript of Hearing dated January 17, 1989, at pg. 34, filed on April 12, 1989). Spanish Springs Association and Richard Harris argue that as a matter of law, Section 3713(a)(1) of 31 U.S.C. is not applicable. The Court rejects their contention.

13. When the receivership was commenced, Davco, Inc. was indebted to the United States for well over $2,000,000 and was insolvent. The assets fell short of the encumbrances against Davco, Inc. Moreover, the property of the debtor had been attached because the property was in danger of being subject to waste and Davco, Inc. was not present. Thus, the statute is applicable and the United States is entitled to be paid first.

14. Therefore, the Court finds that the lien of the United States is prior and superior to the lien of Spanish Springs Association and Richard Harris on two grounds: first, in accordance with the lien priorities set forth in 26 U.S.C., Section 6323 , and second, pursuant to the federal insolvency statute, 31 U.S.C., Section 3713(a)(1). Thus, the United States is entitled to the funds on deposit in the Jonathan H. King Trust Account relating to the instant receivership of Davco, Inc. Jonathan H. King, Esquire, is hereby directed to disburse those funds to the Internal Revenue Service, which total approximately $500,000.00.

15. Any finding of fact found to be a conclusion of law shall be deemed to be a conclusion of law. Any conclusion of law found to be a finding of fact shall be deemed to be a finding of fact.

16. A judgment shall be entered accordingly.

 

 

[89-1 USTC ¶9368] Heller Financial, Inc., Plaintiff v. United States of America , Defendant

U.S. District Court, No. Dist. Tex., Dallas Div., Civ. CA 3-86-0421-G, 2/2/89

[Code Secs. 6323(a) , (c) and (h) and 7426(a) and (b) ]

Lien for taxes: Priority: Purchasers: Security interest holders: Property subject to lien: Suits by nontaxpayers: Assignee.--A Delaware corporation's perfected security interest in a Texas corporation's accounts receivables ceased having priority over a federal tax lien, filed against the Texas corporation for delinquent employment taxes, 45 days after the filing date of the lien. The Delaware corporation was not a purchaser against whom the lien was invalid because, pursuant to the provisions of the loan agreement between it and the Texas corporation, it had only been granted a security interest in the Texas corporation's collateral; it had not purchased all of the Texas corporation's rights to property. The fact that it continued to collect, more than 45 days after the federal tax lien was filed, on the Texas corporation's accounts receivables that had been assigned to it pursuant to the loan agreement rendered the Delaware corporation a third party possessing property or rights to property belonging to the Texas corporation and, as such, it held the property subject to the tax lien. Therefore, the subsequent service by the IRS of a Notice of Levy relating to the lien against the Texas corporation upon the Delaware corporation was not wrongful.

[Code Sec. 6323(f) ]

Lien for taxes: Notice: Filing requirements.--A federal tax lien against the property of a Texas corporation was not invalid where, in accordance with the Texas Tax Code, the notice of federal tax lien was filed in two separate offices. The "one office" requirement of the federal statute means only that a state must designate one office for the filing of notices of federal tax liens on real property, and one office for such notices of liens on personal property in a given governmental subdivision. It does not require them to be the same office.

[Code Sec. 7426 ]

Suits by nontaxpayers: Application of statute.--A levy by the IRS upon the property of a Delaware corporation that had a perfected security interest in the accounts receivables of a tax delinquent Texas corporation did not wrongfully violate the Delaware corporation's Fifth Amendment rights by depriving it of property without due process of law because Code Sec. 7426 provides an opportunity for prompt post-seizure determination of the validity of a levy. Also, the contentions of the Delaware corporation regarding the Texas corporation's tax payments were rejected because Code Sec. 7426(c) precluded the Delaware corporation from trying to adjudicate the Texas corporation's tax liability.

Harry J. Martin, Jr., Vineyard, Drake & Miller, 500 N. Akard St. , Dallas , Tex. 75201 , Thomas R. Hennen, Baker, Mills & Glast, P.C., 2001 Ross Ave. , Dallas , Tex. 75201-2916 , for plaintiff. Joseph A. Pitzinger III, Department of Justice, Dallas , Tex. 75242 , for defendant.

MEMORANDUM ORDER

I. Introduction

FISH, District Judge:

This case was tried before the undersigned without a jury on May 22, 1987 . Most of the relevant facts were stipulated or undisputed. Where the parties were in disagreement, however, the following facts are those supported by a preponderance of the credible evidence.

II. Findings of Fact

A. The Heller/Hi-Mark Relationship

1. Plaintiff Heller Financial, Inc. ("Heller"), successor by merger to Texas Heller Western, a division of Walter E. Heller Western Incorporated, is a Delaware corporation with its principal place of business in Illinois . Heller also maintains an office in Dallas , Dallas County , Texas .

2. Hi-Mark Printing Services, Inc. ("Hi-Mark") is a Texas corporation with its principal place of business and its principal executive office in Forth Worth, Tarrant County , Texas .

B. Loan Agreement

3. On or about May 20, 1983 , Heller and Hi-Mark, in the ordinary course of their business, entered into a loan and security agreement together with accounts and inventory riders (collectively referred to as the "loan agreement").

4. Hi-Mark and Heller executed various UCC-1 financing statements which were filed with the Texas Secretary of State's office on May 24, 1983 , bearing file numbers 112631, 112632, and 112633. On January 31, 1985 , Hi- Mark and Heller filed with the Texas Secretary of State's office an additional UCC-1 financing statement in the name of Sterling Printers, a tradestyle of Hi-Mark, bearing filed stamp number 026958.

5. Pursuant to the loan agreement, Heller--at various times from May 20, 1983 until February, 1985, and at the request of Hi-Mark--advanced certain funds to Hi-Mark under the loan agreement. Hi-Mark granted Heller a security interest in its then owned and subsequently acquired future accounts, chattel paper, contract rights, inventory and general intangibles. Heller had a perfected security interest in all of these assets. Hi-Mark also assigned to Heller all of Hi-Mark's then owned and existing and subsequently acquired future accounts. Such advances were determined by reference to a listing of accounts subject to the loan agreement, which were collected by Hi-Mark and paid over to Heller, and also by reference to a listing of accounts invoiced by Hi-Mark to its customers and made subject to the loan agreement. This information was forwarded to Heller along with a daily report showing the information reflected on the specific schedule of accounts and the collection and other credits and other adjustments with a request by Hi-Mark for an advance. If Heller advanced the money, it was often evidenced by a note.

6. Between September 15, 1984 and February 27, 1985 , Heller advanced at least $957,735.54 to Hi-Mark. During that same period of time, Heller had a security interest in--and assignment of--the accounts receivable of Hi-Mark with a face value of approximately $1,300,000. During the period from September 15, 1984 to February 27, 1985 , Heller collected more than $104,169.80 of these accounts receivable.

7. As of May 15, 1985 , the outstanding balance (face amount) of the accounts receivable generated by Hi-Mark pursuant to the loan agreement was approximately $197,467.97. Of that amount, $116,586.96 was collected by Heller.

8. Upon receipt of any payment of accounts receivable, Hi-Mark deposited the check or any other evidence of the payment of accounts receivable into a bank account at Southwest Bank, Fort Worth , Texas , account number 0084772. The account was styled "Hi-Mark Printing Services, Inc. for Texas Heller Western." Only officers of Heller had the right to withdraw any monies from the account. Once the checks or monies were deposited into the bank account, Hi-Mark had no control over the monies. When any deposits were made to this bank account, the amounts deposited were wire transferred to Heller's bank account at RepublicBank Dallas, N.A. and credited to the indebtedness owed by Hi-Mark to Heller. Therefore, upon receipt of any payment of an account receivable, the payment was immediately credited to the outstanding indebtedness owed by Hi-Mark to Heller. Heller did not maintain a separate account, deposit, reserve account, or any other fund for or on behalf of Hi-Mark.

9. The Accounts Rider to the loan agreement, at paragraph 10, sets forth that Heller:

. . . shall have the right at any time and from time to time hereafter, at its sole election and without notice thereof to Borrower: (a) to notify all account debtors that Accounts have been assigned to Lender and Lender has a security interest therein; (b) to direct all account debtors to make payment to Lender of all Accounts; (c) to enforce payment and collect, by legal proceedings or otherwise, Accounts in the name of Lender; and (d) to take control in any manner of any cash or non-cash items of payment or proceeds of Accounts and of any rejected, returned, stopped in transit or repossessed goods relating to Accounts.

10. Furthermore, paragraph 11 of the Accounts Rider provides that:

Borrower does hereby irrevocably designate, make, constitute and appoint Lender (and any agents designated by Lender) as Borrower's true and lawful attorney, with power, without notice to Borrower and at such time or times hereafter as Lender may in its sole election determine, in Borrower's or Lender's name and at Borrower's Expense: (a) to demand payment of Accounts; (b) to enforce payment of Accounts, by legal proceedings or otherwise; (c) to exercise all of Borrower's rights and remedies with respect to the collection of Accounts; (d) to settle, adjust, compromise, extend or renew any Account; (e) to settle, adjust or compromise any legal proceedings brought to collect an Account; (f) to sell or assign any Account upon such terms, for such amount and at such time or times as Lender deems advisable; (g) to discharge and release any Account; (h) to take control in any manner of any item of payment or proceeds referred to in paragraph 8(e) of this Rider; (i) to prepare, file and sign Borrower's name on any Proof of Claim in Bankruptcy or similar document against an account debtor; (j) to prepare, file and sign Borrower's name on any Notice of Lien, Claim of Mechanic's Lien, Assignment or Satisfaction of Lien or Mechanic's Lien, or similar document in connection with an Account; (k) to do all acts and things necessary, in Lender's sole discretion, to fulfill Borrower's obligations under the Agreement and this Rider; (l) to endorse the name of Borrower upon any of the items of payment or proceeds referred to in paragraph 8(e) of this Rider and to deposit the same to the account of Lender on account of Borrower's Liabilities; (m) to endorse the name of Borrower upon any chattel paper, document, instrument, invoice, freight bill, bill of lading or similar document or agreement relating to any Account or goods pertaining thereto; and (n) to sign the name of Borrower to verifications of Accounts and notices thereof of account debtors.

11. Paragraph 8(e) of the Accounts Rider provides that Hi-Mark, as borrower, shall:

(e) receive, as the sole and exclusive property of Lender and as trustee for Lender, all monies, checks, notes, drafts and other property or properties in the nature of items of payment representing the proceeds of any Account which comes into the possession of Borrower and immediately transmit all such items of payment and proceeds in the exact form received by Borrower to Lender at Lender's principal place of business, or, if directed by Lender in writing, to an agent or account of Lender specified by Lender, and Borrower shall affix appropriate endorsements or assignments upon all such items of payment and proceeds so that the same may be properly deposited by Lender to Lender's account.

C. Federal Tax Lien

12. Hi-Mark had been assessed and had outstanding federal employment taxes ("941 taxes") for the following tax periods and assessment dates listed below. Despite notice and demand to Hi-Mark by the Internal Revenue Service ("IRS"), Hi-Mark failed to pay the 941 taxes in full.

Tax Period Ending                                       Date of Assessment

  
12-31-82
 ............................................      
04-04-83

  
06-30-83
 ............................................      
09-12-83

  
09-30-83
 ............................................      
12-12-83

  
12-31-83
 ............................................      
04-02-84

  
03-31-84
 ............................................      
06-11-84

  
09-30-84
 ............................................      
12-17-84

D. The Notice of Tax Lien

13. On July 25, 1984 , a notice of federal tax lien under the internal revenue laws ("notice of tax lien") was prepared by the IRS against Hi-Mark as taxpayer. This notice of tax lien was for 941 taxes. The notice of tax lien covered the following periods and amounts:

                                                            Unpaid Balance

Tax Period Ending                                           of Assessment

  
06-30-83
 ................................................   $14,394.86

  
09-30-83
 ................................................   $23,857.20

  
12-31-83
 ................................................   $12,747.98

  
03-31-84
 ................................................   $41,657.96

 

14. The notice of tax lien was filed with the Secretary of State of Texas on July 31, 1984 . The amount listed on the notice of tax lien was $96,658.00.

15. The notice of tax lien was also filed with the Tarrant County Clerk in Fort Worth , Texas on July 31, 1984 . The amount listed on this notice of tax lien was $92,658.00.

16. When the notices of tax lien were filed by the IRS, copies of the notices were sent to Hi-Mark. At this time, Heller was not notified by the IRS that a notice of tax lien had been filed with the Secretary of State and the Tarrant County Clerk. Heller did not receive actual knowledge of the notice of tax lien until sometime in February, 1985.

17. A notice of tax lien was filed by the IRS in the Texas Secretary of State's office and in the Tarrant County Clerk's office. The IRS did not file a notice of tax lien with the clerk of this court (i.e., the clerk of the United States district court for the judicial district in which any property of Hi-Mark was situated or where its principal executive office was located). The Secretary of State's office is a separate and distinct office from the Tarrant County Clerk's office for purposes of filing notices of tax liens.

E. The Hi-Mark Bankruptcy

18. On or about February 27, 1985 , Hi-Mark filed its voluntary petition for relief in bankruptcy under Chapter 7 of the Bankruptcy Code in the United States Bankruptcy Court for the Northern District of Texas, Forth Worth Division ("bankruptcy court").

19. On or about March 12, 1985 , Heller filed its motion to obtain relief from stay and other relief as against Hi-Mark in the bankruptcy court. Heller did not serve the IRS with notice of its motion to obtain relief from stay and other relief. On March 12, 1985 , the bankruptcy court entered an order granting Heller's motion to obtain relief from stay and other relief. As a result of the order lifting the stay, Heller (i) moved certain inventory of Hi-Mark to a storage facility in Dallas and (ii) notified all account debtors to make payment directly to Heller on any outstanding accounts receivable.

20. Subsequent to the order lifting the stay, an order was entered on July 29, 1985 authorizing Hi-Mark's trustee in bankruptcy to turn over to Heller funds which the trustee had collected. These funds consisted of pre-petition accounts receivable generated by Hi-Mark in which Heller had a security interest and which had been assigned to it.

21. All of the actions, dealings, and conversations Heller had with Wallace G. Banks, II ("Banks"), Revenue Collection Officer for the IRS, were pursuant to and under the actual, apparent, or implied authority of a revenue officer of the IRS. Heller, as well as its agents and attorneys, dealt with Banks as a representative of the IRS.

22. On or about March 18, 1985 , Banks reviewed the Hi-Mark bankruptcy file and determined that Heller had obtained an order granting relief from the automatic stay to collect accounts receivable.

23. On or about March 20, 1985 , Banks spoke with Clarence Newsome ("Newsome"), Special Procedures Advisor for the IRS, to discuss the possibility of serving a summons and notice of levy on Heller.

24. Banks told Newsome it appeared that Heller was still advancing money to Hi-Mark after the notice of tax lien was filed on July 31, 1984 . On or about March 29, 1985 , Newsome consented to the service on Heller of a summons and notice of levy. On or about April 24, 1985 , Banks requested that the Field Support Group of the IRS prepare a notice of levy as to Heller.

F. The Collection Summons

25. On or about April 29, 1985 , Banks, on behalf of the IRS, served a collection summons on Texas American Bank Westside in Fort Worth , Texas . A notice of levy was not served because, according to Banks, Hi-Mark's bankruptcy proceeding and the provisions of the automatic stay prevented such action.

26. On or about April 30, 1985 , Banks served a collection summons on Southwest Bank in Fort Worth , Texas . According to Banks, a notice of levy was not served because Hi-Mark's bankruptcy proceeding and the provisions of the automatic stay prevented such action.

27. On May 2, 1985 , Banks served a collection summons on Capitol National Bank in Fort Worth , Texas . According to Banks, a notice of levy was not served because Hi-Mark's bankruptcy proceeding and the provisions of the automatic stay prevented such action.

28. On or about May 15, 1985, Banks served upon Heller and its officer, Gary J. Prager, a collection summons commanding Heller to provide the IRS with various documents and records relating to the taxpayer Hi-Mark, including:

(a) Hi-Mark signature cards in effect from April 1, 1983 through May 15, 1985 ;

(b) Corporate resolutions in effect from April 1, 1983 to May 15, 1985 ;

(c) Statements of account from April 1, 1983 through May 15, 1985 ; and

(d) Loan applications and other corporate financial statements of Hi-Mark from April 1, 1983 through May 15, 1985 .

29. When the IRS served the summons upon Heller, Heller requested time to prepare the documents and records demanded under the summons and also to determine what property, rights to property, money, credits and bank accounts, and/or other obligations of Hi-Mark, if any, Heller had in its possession.

30. On May 29, 1985 , Heller's counsel and other representatives of Heller met with Banks of the IRS pursuant to the collection summons. At this meeting, Heller responded to the collection summons by providing to Banks the documents requested, except for Hi-Mark's financial statements and loan applications (which Heller contended it did not have) and except for the voluminous statements of account from April 1, 1983 through May 15, 1985 . At that time, Banks informed Heller that he might want to review more fully the books and records of Heller which specifically evidenced the invoices assigned to Heller, the money advanced to Heller, and the monies collected by Heller. Heller indicated to Banks that if the IRS tax levy matter could not be worked out, Heller would make the voluminous documents and records of Hi-Mark available to the IRS at Heller's offices.

G. The Notice of Levy

31. On May 15, 1985 , Banks, on behalf of the IRS, also served upon Heller and its officer, Gary J. Prager, a notice of levy relating to the taxpayer Hi-Mark for the following tax periods and amounts:

Tax Period Ending                                                   Total

  
12-31-82
 ....................................................  $ 94,693.06

  
06-30-83
 ....................................................     8,434.40

  
09-30-83
 ....................................................    30,076.29

  
12-31-83
 ....................................................    15,565.34

  
03-31-84
 ....................................................    48,786.50

  
09-30-84
 ....................................................    94,693.06

                                                                 -----------

TOTAL AMOUNT DUE ..............................................  $292,248.65

 

32. Pursuant to the notice of levy, the IRS demanded that Heller turn over to the IRS all property, rights to property, monies, credits and bank accounts in Heller's possession belonging to the taxpayer Hi-Mark or for which Heller was obligated, as well as all monies and other obligations owing from Heller to the taxpayer Hi-Mark.

33. Banks, on behalf of the IRS, served the summons and notice of levy on Heller on the basis of his review of Hi-Mark's bankruptcy file, and after consulting with IRS special procedures advisor, Clarence Newsome. Banks believed that the bankruptcy file indicated that Heller had obtained relief from the automatic stay to collect account receivables generated by Hi-Mark, which came into the existence after the filing of the notice of tax lien.

34. At the time the summons and notice of levy were served on Heller, Banks expected Heller to comply with the levy by turning over (i) all checks for payment of accounts receivable which Heller had in its possession as of May 15, 1985 that had not been deposited by Heller and credited to the debt of Hi-Mark, (ii) any cash Heller had collected from accounts receivable after the 45th day after the notice of tax lien was filed and prior to May 15, 1985, and (iii) any and all outstanding accounts receivable generated by Hi-Mark forty-five (45) days after the notice of tax lien that Heller had in its possession as of May 15, 1985.

35. On May 29, 1985 , Banks, on behalf of the IRS, agreed to allow Heller until June 5, 1985 to respond to the notice of levy.

36. On June 5, 1985 , Heller sent a letter to Banks responding to the summons and notice of levy. With this letter, Heller also enclosed an affivavit of an officer of Heller stating that the face amount of receivables assigned to Heller from September 16, 1984 through May 17, 1985 was $1,305,731.68. The amount collected by Heller from September 16, 1984 through May 17, 1985 that was credited to the outstanding indebtedness owed by Hi-Mark to Heller during this time was $1,024,711.44.

37. After receiving Heller's letter dated June 5, 1985, Banks determined that Heller's letter in response to the summons and notice of levy was inadequate and that the IRS wanted (1) all property of Hi-Mark in Heller's possession covered by the notice of levy and (2) all accounts receivable generated by Hi-Mark forty-five (45) days after the notice of tax lien that Heller had in its possession as of May 15, 1985, or nothing at all. He further requested an appointment with Heller to deliver a final demand (a final demand was a prerequisite to the IRS filing suit against Heller). Such a final demand, however, was never delivered to Heller. The IRS informed Heller that if Heller did not turn over the property allegedly belonging to the taxpayer Hi-Mark, the IRS might file suit in the district court to recover the property from Heller and that the IRS might also ask for a fifty percent (50%) penalty against Heller under 26 U.S.C. §6332 .

38. On June 11, 1985 , Heller sent a letter to Banks. The IRS does not contest the receipt of this letter, although Banks was on leave from June 10, 1985 to June 16, 1985 so that he did not receive the letter until June 17, 1985 . Heller requested further information from the IRS concerning payments by Hi-Mark and the application of those payments.

39. According to the notice of levy, the amount owed by Hi-Mark as taxpayer was $292,248.65. However, on May 29, 1985 , Heller pointed out to the IRS that there appeared to be a mistake in the figures on the notice of levy. Specifically, the figure $94,693.06 listed for the tax period 12-31-82 was erroneous. Also, on May 29, 1985, the IRS agreed that, based upon the forty-five (45) day rule stated in 26 U.S.C. §6323 , the notice of levy would only be effective as to the amount of $102,862.53 plus statutory additions for the tax periods ending June 30, 1983, September 30, 1983, December 31, 1983 and March 31, 1984. These four periods were reflected in the notice of tax lien filed on July 31, 1984 .

40. Between June 6, 1985 and June 20, 1985 , the IRS took no further action to determine whether Heller had in its possession property or rights to property of the taxpayer Hi-Mark.

41. On June 17, 1985 , upon his return from annual leave, Banks found several messages from Harry T. Martin, Jr. ("Martin"), attorney for Heller, as well as the letter dated June 11, 1985 . Banks called Martin and left a message to return the call. Banks also requested that a final demand letter be prepared for delivery to Heller.

42. On June 20, 1985 , Heller delivered to the IRS a cashier's check in the amount of $104,169.83. Accompanying this check was a letter dated June 20, 1985 from Heller to Banks. In the letter, Heller denied that it owed any money or that it had any property of the taxpayer Hi-Mark. Heller offered and tendered the check to the IRS pursuant to the levy and under protest. Typed on the back of Heller's check to the IRS was the following:

Payment made by Texas Heller Western relating to Hi-Mark Printing Services, Inc. pursuant to Notice of Levy for tax periods ending June 30, 1983, September 30, 1983, December 31, 1983 and March 31, 1984. Payment is made involuntarily, under protest and reserving all claims, right, title, interest and defenses in said monies and against the Internal Revenue Service for wrongful levy. Payment is subject to the reservations and conditions set forth in the letter from Texas Heller Western's attorney, Harry J. Martin, Jr. to Mr. Wallace Banks, II, Revenue Officer of even date herewith.

Heller further stated in its June 20, 1985 letter to the IRS that the tendering of the check was for the purpose of avoiding any additional interest or penalty which the IRS might claim against Heller and was subject to the reservations in the letter. The IRS cashed the cashier's check.

43. The IRS applied the $104,169.83 payment as follows:

                                                               Amount and

Tax Period Ending                                          Statutory Additions

  
06-30-83
 ...............................................        8,494.71

  
09-30-83
 ...............................................       30,465.34

  
12-31-83
 ...............................................       15,767.22

  
03-31-84
 ...............................................       49,442.56

The amount of $106.72 was refunded to Heller on or about January 31, 1986 .

44. On or about June 25, 1985 , Heller again requested from the IRS an itemization of all payments made to the IRS relating to Hi-Mark and applied to the tax periods shown in the notice of levy. Banks received this letter on June 28, 1985 . On June 28, 1985 , Banks called Martin and left a message. On July 2, 1985 , Martin called Banks; in that conversation, Banks informed Martin that he was waiting for transcripts of the information requested.

45. On July 16, 1985 , Heller again requested the information relating to the payments made by the taxpayer Hi-Mark.

46. On or about July 28, 1985, Heller received from the IRS a record of the assessments and the collections relating to Hi-Mark's 941 taxes covering the tax periods ending 6-30-83, 9-30-83, 12-31-83, 3-31-84, and 9-30-84. Banks sent this record on July 22, 1985 .

47. On or about February 14, 1986, Heller received from Jeanne Paxton, special procedures advisor to the IRS, a record of account relating to Hi-Mark's 941 taxes covering the tax periods ending 12-31-82, 6-30-83, 9-30-83, 12-31-83, 3-31-84, 6-30-84, 9-30-84, and 12-31-84, along with copies of the record of account relating to Hi-Mark's 941 taxes for the tax period ending 12-31-82 and 12-31-85. Paxton furnished these records pursuant to a power of attorney Paxton received from Hi-Mark.

48. As a result of the levy and other action of the IRS, Heller has incurred expenses including reasonable attorneys' fees, together with costs of suit and interest on the principal amount paid to the IRS ($104,063.11) from the date paid (June 20, 1985).

III. Conclusions of Law

1. The federal tax lien arises when unpaid taxes are assessed and continues until the resulting liability is either satisfied or becomes unenforceable through lapse of time. 26 U.S.C. §6322 . Congress provided for this lax lien in 26 U.S.C. §6321 :

If any person liable to pay any tax neglects or refuses to pay the same after demand, the amount . . . shall be a lien in favor of the United States upon all property and rights to property, whether real or personal, belonging to such person.

2. One effect of such a tax lien is that a third party possessing property or rights to property belonging to a taxpayer holds such property subject to the lien, unless the third paty has a prior lien or comes within one of the exceptions listed in 26 U.S.C. §6323 . Where several notices of tax lien have been filed as unpaid taxes accumulate, the priority of each lien relates back to the date of the first notice. 26 U.S.C. §6321 ; Peterson v. United States [81-1 USTC ¶9469 ], 511 F.Supp. 250, 256-257 (D. Utah 1981).

3. In this case, the only notice of federal tax lien was filed on July 31, 1984 . Therefore, the priority of the government's lien for all taxes owed by Hi-Mark relates back to July 31, 1984 .

4. The government possesses multiple options for actually collecting unpaid taxes. One method is to "levy upon property and rights to property . . . belonging to [the taxpayer] or on which there is a lien . . . ." 26 U.S.C. §6331(a) . The levy extends only to such property that is possessed by the person levied on at the time of service of the levy. 26 U.S.C. §6331(b) . The person holding such property must surrender it to the government upon demand, subject to an exception not relevant here. 26 U.S.C. §6332 .

5. A second method available to the government is to bring a lien foreclosure suit pursuant to 26 U.S.C. §7403 . Although a tax lien must exist in order to initiate such an action, the government need not have levied. Id. If property to which a tax lien has attached is held by a third party who also possesses a lien, the issue then becomes one of lien priority, and federal law controls priority disputes. See, e.g., Aquilino v. United States [60-2 USTC ¶9538 ], 363 U.S. 509 (1960); United States v. Acri [55-1 USTC ¶9138 ], 348 U.S. 211, 213 (1955).

6. Whether Heller possessed property or rights to property of Hi-Mark to which the tax lien originally could attach is a question of state law. The federal statutes under consideration create no property interests; they merely attach federally defined consequences to state created rights. Aquilino, above, 363 U.S. at 512-13; United States v. Durham Lumber Company [60-2 USTC ¶9539 ], 363 U.S. 522, 524-26 (1960); United States v. Bess [52-2 USTC ¶9595], 357 U.S. 51, 55 (1958).

7. Federal law, however, governs the question of how far an attached tax lien follows encumbered property. Bess, above, 357 U.S. at 57.

8. 26 U.S.C. §7426(a) provides that if a levy has been made by the IRS, any person who claims an interest in or a lien on the property levied upon senior to the interest of the United States and who claims that such property was wrongfully levied upon may bring a civil action against the United States. See Treas. Reg. §301.7426-1(a) (1974). Section 7426(b) specifically limits, however, the relief the court can grant in such an action.

9. A levy is wrongful within the meaning of §7426(a) if: (1) the property levied upon is exempt from levy under §6334 ; (2) the levy is upon property in which the taxpayer had no interest at the time the lien arose or thereafter; (3) the plaintiff is a purchaser against whom the lien is invalid under §§6323 , 6324(a)(2) , or 6324(b) ; or (4) the levy or sale pursuant to levy will destroy or injure the plaintiff's interest in the property that is superior to the federal tax lien. Treas. Reg. §301.7426-1(b) (1974). Myers v. United States [ 81-2 USTC ¶9490 ], 647 F.2d 591, 603 n.18 (5th Cir. 1981).

10. In this case, the United States is claiming that the taxpayer (Hi-Mark) had an interest in property levied upon at the time the United States federal tax lien arose or thereafter and that Heller was not a purchaser under §6323 nor did Heller have a superior lien to the federal tax lien. The other exceptions do not apply.

11. In this case, the tax liens of the United States arose for the following tax liabilities on the dates indicated:

                                                                Date Assessed

        Tax Liability                                          (Lien Attaches)

Employment Taxes-Period Ending 
12-31-82
 .........................  
04-04-83

Employment Taxes-Period Ending 
06-30-83
 .........................  
09-12-83

Employment Taxes-Period Ending 
09-30-83
 .........................  
12-12-83

Employment Taxes-Period Ending 
12-31-83
 .........................  
04-02-84

Employment Taxes-Period Ending 
03-31-84
 .........................  
06-11-84

Employment Taxes-Period Ending 
09-30-84
 .........................  
12-17-84

See finding of fact number 12.

12. The United States ' tax liens, therefore, attached to the property or right to property of Hi-Mark in the amount of the unpaid tax liability at the date of the various assessments.

13. Heller argues that the loan agreement sold all of Hi-Mark's rights to property at the time the agreement was entered into in 1983. Paragraph 2.1 of the loan agreement specifically states, however, that Hi-Mark "grants a security interest in" the collateral, including existing and future accounts (see Heller's exhibit 1). Therefore, Hi-Mark had property rights in the collateral to which the United States ' tax lien could attach. See Southern Rock, Inc. v. B & B Auto Supply [83-2 USTC ¶9529 ], 711 F.2d 683, 685 (5th Cir. 1983); United States v. Citizens and Southern National Bank [76-2 USTC ¶9665 ], 538 F.2d 1101, 1106 (5th Cir. 1976), cert. denied, 430 U.S. 945 (1977).

14. The United States ' tax lien, however, is not given priority over all other parties. Section 6323(a) specifically provides that the tax lien is not valid against any purchaser, holder of a security interest, mechanic's lienor, or judgment lien creditor until the notice of federal tax lien is filed.

15. In this case, federal tax liens were filed for the following taxes on July 31, 1984 with the Texas Secretary of State and the Tarrant County Clerk's Office:

Employment Tax                                               Unpaid Balance

Period Ending                                             Amount of Assessment

  
6-30-83
 ...............................................      $14,394.86

  
9-30-83
 ...............................................       23,857.20

 
12-31-83
 ...............................................       12,747.98

  
3-31-84
 ...............................................       41,657.96

See findings of fact numbers 13, 14, and 15.

16. The United States does not contest that Heller had perfected its security interest in the collateral granted it under the loan agreement in existence on July 31, 1984 . Therefore to the extent that Heller was a "purchaser, holder of a security interest, mechanic's lienor or judgment lien creditor" as of July 31, 1984 , its security interest had priority over the federal tax lien. See 26 U.S.C. §6323(a) .

17. The United States contends that Heller's protected security interest ceased having priority over the United States ' tax lien for any collateral including, accounts receivable, subject to the loan agreement

(1) acquired more than 45 days after the filing of the notice of federal tax lien or

(2) securing any advances made by Heller to Hi-Mark pursuant to the loan agreement made more than 45 days after the filing of the notice of federal tax lien.

18. In Texas Oil & Gas Corporation v. United States [72-2 USTC ¶9653 ], 466 F.2d 1040 (5th Cir. 1972), cert. denied, 410 U.S. 929 (1973), the court was presented an almost identical arrangement between a lender and a taxpayer. In that case, the lender, Pecos Bank, had agreed to loan the taxpayer money at various times in exchange for a security interest in debtor's accounts receivables, which included future accounts. 466 F.2d at 1044 n.2.

19. The Fifth Circuit concluded in Texas Oil & Gas Corporation that the lender's interest in the accounts receivables was a security interest under §6323(h) and a commercial transactions financing agreement under §6323(c) . The court found that §6323 only afforded protection where the loan or purchase was made not later than the 45 days after the tax lien filing and only where the accounts receivables were acquired before the 45 days had elapsed. See 466 F.2d at 1050-51. See also Rice Investment Company v. United States [80-2 USTC ¶9654 ], 625 F.2d 565, 571-72 (5th Cir. 1980).

20. Heller also contends that it was a purchaser of a security interest in the accounts of Hi-Mark. In order to come under the preference given purchases under §6323(a) , one cannot be a person who acquired a "lien or security interest" in the property. 26 U.S.C. §6323(h)(6) . Furthermore, to the extent the loan agreement was entered into by Heller and Hi-Mark in the ordinary course of their trade or business and provided that Heller was to purchase the accounts receivable of Hi-Mark, §6323(c)(2)(D) would treat such a purchase as an acquisition of a security interest.

21. Between September 15, 1984 (46 days after the filing of the notice of federal tax lien) and the date of the serving the notice of levy on Heller, Heller advanced to Hi-Mark $957,735.54 and its security interest attached to accounts receivables generated by Hi-Mark with a face value over $1,300,000.00. See finding of fact number 6. The United States ' tax lien was therefore superior to any security interest in the $1,300,000 of receivables to the extent that the United States had a filed notice of federal tax lien.

22. Of the $1,300,000 of accounts receivables generated on or after September 15, 1984 , Heller had collected over $104,169.00 prior to February 26, 1985 . At the date the notice of levy was served (May 15, 1985), Heller still had in its possession accounts receivables generated by Hi-Mark of over $197,467.97. Of that amount, Heller subsequently collected $116,586.96. See finding of fact number 7. The United States ' tax lien was therefore superior to any interest Heller had in the accounts receivables collected prior to February 27, 1985 and in the accounts receivables on hand at the time of the levy.

23. With regard to the accounts receivables collected by Heller between September 15, 1984 and February 27, 1985 , Heller claims that any tax lien on the accounts receivable had been extinguished by payment. Whether a tax lien is extinguished, however, is a matter of federal and not state law. A similar argument was presented in United States v. Eads, 82-1 USTC ¶9345 (M.D. Tenn. 1982). The court held that the bank which extended credit to the apparently insolvent taxpayer "clearly received payments subject to a previously attached federal tax lien and any change in the nature of property interests in those payments failed to discharge the lien." To the same effect, see United States v. Bank of Celina [83-2 USTC ¶9688 ], 721 F.2d 163, 168-69 (6th Cir. 1982). Consequently, Heller's contention must be rejected.

24. With regard to the accounts receivables held by Heller at the time of the levy, they were clearly property or rights to property of Hi-Mark and subject to the lien. Contrary to Heller's contentions, on the date the notice of levy was served Heller held property or rights to property of Hi-Mark which was subject to the federal tax lien and which was worth more than the $104,083.82 at issue in this suit.

25. Heller claims that the levy wrongfully violated its Fifth Amendment rights by depriving it of property without due process of law. Heller was not deprived of its due process rights. Section 7426 provides an opportunity for prompt post seizure determination of the validity of the levy. Myers, above, 647 F.2d at 602-603.

26. Heller also contends that the notice of federal tax lien was improperly filed and, therefore, the tax lien is not valid against its perfected security interest.

27. Section 6323(a) requires a notice of federal tax lien to be filed which meets the requirements of §6323(f) before it is valid against a purchaser or holder of a security interest. Heller argues that the IRS filed its notices under Texas law and that Texas law does not meet the one office requirement of §6323(f) .

28. The notices of federal tax lien were filed in accordance with Texas Tax Code §113.201 . This Texas statute conforms to the requirements of §6323(f)(1)(A) and (B) . The one office requirement of §6323(f)(1) means only that a state must designate one office for the filing of notices of federal tax liens on real property and one office for such notices of liens on personal property in a given governmental subdivision. It does not require them to be the same office. See S. D'Antoni, Inc. v. Great Atlantic and Pacific Tea Company, Inc. [74-2 USTC ¶9552 ], 496 F.2d 1378, 1383-84 (5th Cir. 1974) and Gordon White Construction Company, Inc. v. Southland Investment Co. [75-2 USTC ¶9771 ], 521 F.2d 856, 858-59 (5th Cir. 1975).

29. Heller has alleged that the levy by the IRS is void due to the failure of the IRS to obtain relief from the automatic stay provided by §362 of the bankruptcy code.

30. Heller cannot raise this argument. Violations of the stay are voidable, rather than void, at the instance of the debtor or trustee. See In Re Fuel Oil Supply and Terminaling, Inc., 30 B.R. 360, 362 (Bankr. N.D. Texas 1983) and In Re Oliver, 38 B.R. 245, 247-48 (Bankr. D. Minn. 1984). Heller is neither the trustee nor the debtor.

31. In any event, the issue in this case is the priority of secured liens. Hi-Mark would have to pay either the IRS or Heller, depending on which had the superior lien. The bankruptcy court recognized, by its orders of March 12, 1985 (Heller's exhibits 37 and 38) that Hi-Mark had no equity in the receivables and that the receivables were not necessary for an effective reorganization of Hi-Mark.

32. Furthermore, even if the levy were void as to any property possessed by Heller in which Hi-Mark had an interest at the time of the levy, Heller had received proceeds of receivables and extinguished Hi-Mark's interest in more than $104,069.00 prior to the service of the levy. Such conduct did not, however, extinguish the United States ' lien. See Eads and Bank of Celina, above.

33. Heller maintains that the amounts shown as due from Hi-Mark on the notice of tax lien are not correct because, it alleges, the IRS should have applied funds tendered by Hi-Mark to the calendar quarters covered by the lien, which was not done.

34. The basis of Heller's argument is various copies of the check register of Hi-Mark, which the United States correctly contends do not evidence that the checks reflected thereon were received by the IRS. In addition to the absence of proof to sustain Heller's contention, §7426(c) precludes Heller from trying to adjudicate Hi-Mark's tax liability.

IV. Conclusion

The United States is entitled to judgment in accordance with the findings and conclusions announced herein. Within fifteen days of this date, counsel for the United States shall present a form of judgment consistent with these findings and conclusions.

SO ORDERED.

 

 

[86-2 USTC ¶9688] Glen E. Brumfield, et al., Plaintiffs v. Pana Coals, Inc., et al., Defendants

U.S. District Court, So. Dist. W. Va. , 3:85-0779, 9/3/86

[Code Sec. 6323 ]

Tax liens: Validity of lien: Mechanic's liens: Priority of liens: State law.--Mechanic's liens for unpaid wages filed by coal miners employed by a delinquent corporate taxpayer did not have priority over federal tax liens filed by the government for unpaid employment taxes. The court held that under state law, the mechanic's liens were not sufficiently choate to give them priority over the tax liens.

MEMORANDUM OPINION AND ORDER

STAKER, District Judge:

This action is before the court on cross-motions for summary judgment by the plaintiffs and the United States to determine the priority of their competing liens to the property of the defendant Pana Coals, Inc. (hereinafter Pana). Plaintiffs originally brought this action in the Circuit Court of Logan County, West Virginia, against all the defendants except the United States under the West Virginia Wage Payment and Collection Act, W.Va. Code §21 -5-1 thru--16 (1985 Replacement Vol.), to collect unpaid wages and fringe benefits allegedly due to them from their employment for Pana. They also sought to enforce mechanics liens for such wages and benefits which arose under the Act, Farley v. Zapata Coal Corp., -- W.Va. --, 281 S.E.2d 238, 241-42 (1981); W.Va. Code §38 -2-31 (1985 Replacement Vol.), and which they also contend arose under W.Va. Code §38 -2-5 & -6 (1985 Replacement Vol.). By amended complaint, additional parties were added as plaintiffs and the United States was made a defendant because it had asserted tax liens against the defendants Pana and Johnny Dingess and Joe Dingess, the stockholders of Pana. As part of the relief sought, the plaintiffs asked that the court determine the priority of liens against the property of the defendants and to sell such property which was subject to their liens in order to satisfy their claims.

The United States removed the action to this court pursuant to 28 U.S.C.A. §1444 on the ground that we had jurisdiction over the action under 28 U.S.C.A. §2410. Subsequently it asked the court for summary judgment to determine that its liens against the property of Pana for unpaid taxes, 28 U.S.C.A. §6321 , has priority over the mechanics liens thereto of the plaintiffs. The plaintiffs responded asking that the motion of the United States be denied and, instead, that we grant them summary judgment on the ground that their mechanics liens have priority.

The United States has tax liens against the property of Pana as follows:

            Quarter  Date of   Amount of    Lien

Type of Tax Ending  Assessment Assessment  Filed

FICA ....... 06/84   12/17/84  $19,377.13 
01/17/85

FICA ....... 09/84   12/24/84   62,650.92 
01/17/85

FICA ....... 12/84   03/25/85   38,585.14 
06/06/85

FUTA ........ 1984   07/22/85    8,322.41

 

The plaintiffs allege in their motion for summary judgment that they commenced work as coal miners for Pana on or about June 1, 1984, and continued in that employment until they were laid off on February 21, 1985. At the time they were laid off they were owed by Pana wages for the period from January 21 through February 21, 1985 , and accrued fringe benefits, including vacation pay and sick day pay, for both 1984 and two months of 1985. They allege that Pana has never paid them these wages or fringe benefits. On March 8 and April 9, 1985, the various plaintiffs filed mechanics liens against all the real and personal property of Pana (and two other corporate defendants) for the unpaid wages and fringe benefits pursuant to W.Va. Code §38 -2-31. They also included in these mechanics liens certain insurance benefits which Pana failed to provide as it had contractually agreed to do and liquidated damages as provided for in W.Va. Code §21 -5-4(e). In addition, the plaintiffs asserted mechanics liens against all the interests of all the defendants (other than the United States) to certain real property, pursuant to W.Va. Code §38 -2-5 & -6. Thereafter they brought the action sub judice to determine the monies owed to them by Pana and other defendants; to enforce their liens against the various defendants' properties for the amounts claimed in the liens; and other relief.

The question the court is asked to decide is whether the United States ' tax liens or the plaintiffs' mechanics liens have a priority claim to all properties owned by Pana. The United States ' liens for taxes arise pursuant to 26 U.S.C.A. §6321 (1967).

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.

This lien comes into being at the time the assessment for unpaid taxes is made. 26 U.S.C.A. §6322 (1976). At the time the predecessors of these statutes were enacted there was no statute establishing the priority of these tax liens when there were other, competing liens on the property of the taxpayer. Consequently, the courts adopted the common law rule that "first in time is first in right" to determine priority. United States v. City of New Britain [54-1 USTC ¶9191 ], 347 U.S. 81, 85 (1954). Application of this rule here would, at first blush, appear to give at least some of the tax liens priority because they were assessed before the plaintiffs were laid off without being paid by Pana or before they filed their mechanics liens.

The plaintiffs, however, contend that the priority of the competing liens involved herein must be determined by application of 26 U.S.C.A. §6323 (1976 & West Supp. 1986). They assert that subsection (a) thereof--"[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 . . . .", id.--governs this situation. It is their contention that they are mechanics lienors as governed by subsection (a) and as defined in subsection (h)(2) because under West Virginia law labor employed in the extraction of minerals from real property is considered improvement of such property so that mechanics liens arising from such labor can attach to the real property or interests therein. Kanawha Oil & Gas Co. v. Wenner, 71 W.Va. 477, 76 S.E. 893 (1912); see, Southern Erectors, Inc. v. Olga Coal Co., 159 W.Va. 385, 223 S.E.2d 46, 50-51 (1976); Showalter v. Lowndes, 56 W.Va. 462, 49 S.E. 448 (1904). Furthermore, the mechanics liens which they assert under W.Va. Code §38 -2-5, -6 and -31, when filed, are considered to attach at the time they first began to work for Pana--June, 1984. W.Va. Code §38 -2-17 (1985 Replacement Vol.); see, Carolina Lumber Co. v. Cunningham, 156 W.Va. 272, 192 S.E.2d 722 (1972); Kimball v. Sundstrom & Stratton Co., 80 W.Va. 522, 92 S.E. 737 (1917); Thorn v. Barringer, 73 W.Va. 618, 81 S.E. 846 (1914). Therefore, it is the plaintiffs' position that their mechanic liens for unpaid wages for January 21 through February 21, 1985 and for certain fringe benefits for 1984 and 1985, plus the other items enumerated in their liens filing, relate back to and attach to all of Pana's property as of the first day they were originally employed by Pana. Since their liens were thus perfected before Pana's tax liabilities to the United States were even assessed, plaintiffs argue that they should prevail. Hodgins v. Marquette Iron Mining Co., 503 F. Supp. 88 (W.D.Mich. 1980); see, In re Taylorcraft Aviation Corp. [48-1 USTC ¶9288 ], 168 F.2d 808 (6th Cir. 1948).

Plaintiffs, in their memorandum in support of their motion for summary judgment at 7 and 8, also appear to allude to the argument that their liens have priority because the property against which the United States has asserted its tax liens was not in fact the property of Pana and, therefore, the tax liens are invalid. Aquilino v. United States [60-2 USTC ¶9538 ], 363 U.S. 509 (1960); United States v. Durham Lumber Co. [60-2 USTC ¶9539 ], 363 U.S. 522 (1960); Logan Planing Mill Co. v. Fidelity & Casualty Co., 212 F. Supp. 906 (S.D.W.Va. 1962). However, because plaintiffs have failed to develop this argument and to show how it is applicable to this case and because the court believes the decisions cited by plaintiffs are inapposite to the facts of this case, we have not considered that argument in deciding this case.

The United States ' response in opposition to the plaintiffs' claim of priority and in support of its own claims is two fold. First, it contends that the plaintiffs are not mechanics lienors as defined in 26 U.S.C.A. §6323(h)(2) :

The term "mechanic's lienor" means any person who under local law has a lien on real property (or on the proceeds of a contract relating to real property) for services, labor, or materials furnished in connection with the construction or improvement of such property.

It argues that the plaintiffs' labors, as coal miners extracting coal, was not "furnished in connection with the construction or improvement . . .", id., of the property on which the coal mine was located because they did not in fact construct any structures and because their labor in extracting coal did not improve the property but actually diminished its value. Therefore, the plaintiffs were not within the ambit of protection offered by §6323(a) . Second, inasmuch as plaintiffs are not mechanics lienors their liens cannot prevail over those of the United States because they are not choate due to the fact that plaintiffs' liens are not certain as to their amount. E.g., United States v. White Bear Brewing Co. [56-1 USTC ¶9440 ], 350 U.S. 1010 (1956) (per curiam); H.B. Agsten & Sons, Inc. v. Huntington Trust & Savings Bank, 388 F.2d 156 (4th Cir. 1967), cert. denied, 390 U.S. 1025 (1968).

The first issue presented to the court by the parties in their motions is whether or not the plaintiffs are mechanics lienors covered by 26 U.S.C.A. §6323 . This involves the subissue of whether a state's definition of who is a mechanic's lienor or a federal definition of such lienor is controlling. We believe federal law is controlling. United States v. Gilbert Associates [53-1 USTC ¶9291 ], 345 U.S. 361 (1953); Air Power, Inc. v. United States [84-2 USTC ¶9732 ], 741 F.2d 53 (4th Cir. 1984); Enochs v. Smith [66-1 USTC ¶9378 ], 359 F.2d 924 (5th Cir. 1966). Therefore, the fact that the plaintiffs may be considered mechanics lienors under West Virginia law, Farley v. Zapata Coal Corp., -- W.Va. --, 284 S.E.2d 238 (1981), does not decide the question here. This court in its research has been unable to find any case involving the question of whether a person who performs labor in extracting a mineral from real property comes within the definition of mechanic's lienor given in 26 U.S.C.A. §6323(h)(2) so as to be governed by that priority of liens statute. However, we do not need to decide that question here because we have determined that the plaintiffs' liens are not choate so as to give them priority over the United States ' tax liens.

Prior to the Federal Tax Lien Act of 1966 which amended §6323 , S.Rep. No. 1708, 89th Cong., 2nd Sess. (1966), reprinted in 1966 U.S. Code Cong. & Ad. News 3722 et seq., the federal courts required that a competing lien be choate before it could take priority over a federal tax lien. E.g., United States v. Pioneer American Insurance Co., 374 U.S. 84 (1963); United States v. City of New Britain [54-1 USTC ¶9191 ], 347 U.S. 81 (1954). This requirement applied even to those liens set forth in §6323(a) . Pioneer American Insurance Co. at 89-90. The question of whether or not a lien is choate is one of federal law. See, United States v. Acri [55-1 USTC ¶9138 ], 348 U.S. 211, 213 (1955); United States v. Security Trust & Savings Bank [50-2 USTC ¶9492 ], 340 U.S. 47, 49 (1950). In order to be choate the competing lien must be certain as to "the identity of the lienor, the property subject to the lien, and the amount of the lien. . . ." City of New Britain , 347 U.S. at 84.

This requirement of choateness, even of liens covered by §6323 , has continued after the amendment of that statute by the 1966 Federal Tax Lien Act. Air Power, Inc. v. United States [84-2 USTC ¶9732 ], 741 F.2d 53, 56 n.4 (4th Cir. 1984); J.D. Court, Inc. v. United States [83-2 USTC ¶9454 ], 712 F.2d 258, 262 (7th Cir. 1983), cert. denied, 466 U.S. 927 (1984); Srgo v. United States, 609 F.2d 1259, 1261 (7th Cir. 1980); Texas Oil & Gas Corp. v. United States [72-2 USTC ¶9653 ], 466 F.2d 1040, 1049-50 (5th Cir. 1972), cert. denied sub nom., Pecos County State Bank v. United States, 410 U.S. 929 (1973); Peoples National Bank v. United States, 608 F. Supp. 672, 681 n.2 (W.D.Wash. 1984), aff'd, 777 F.2d 459 (9th Cir. 1985); Asher v. United States [78-1 USTC ¶9280 ], 436 F. Supp. 22 (N.D.Ill. 1976), aff'd, [78-1 USTC ¶9281 ] 570 F.2d 682 (7th Cir. 1978); United States v. Truss Tite, Inc. [68-1 USTC ¶9296 ], 285 F. Supp. 88, 91 (S.D.Tex. 1968). But see, Rice Investment Co. v. United States [80-2 USTC ¶9654 ], 625 F.2d 565, 571-72 (5th Cir. 1980); Chicago Title Insurance Co. v. Sherred Village Associates, 568 F.2d 217, 220-221 (1st Cir. 1978), vacated mem. sub nom., Hercoform, Inc. v. Chicago Title Insurance Co., 441 U.S. 901 (1979); Pine Builders, Inc. v. United States [76-1 USTC ¶9402 ], 413 F. Supp. 77, 80-81 (E.D. Va. 1976); Fred Kraus & Sons, Inc. v. United States, 369 F. Supp. 1089 (N.D. Ind. 1974), aff'd mem., 506 F.2d 1404 (7th Cir. 1974). Therefore, we must determine if the plaintiffs' mechanics liens were choate either at the time the tax delinquencies were assessed or at the time the notices of tax liens were filed since apparently no lien notice has ever been filed for the unpaid FUTA taxes for 1984.

We have already stated that the determination of whether or not a lien is choate (perfected) is a question of federal law. "Hence, although a state court's classification of a lien as specific and perfected is entitled to weight, it is subject to reexamination . . . . On the other hand, if the state court itself describes the lien as inchoate, this classification is 'practically conclusive.' " United States v. Security Trust & Savings Bank [50-2 USTC ¶9492 ], 340 U.S. 47, 49-50 (1950) (citation omitted); accord, Texas Oil & Gas Corp., 466 F.2d at 1050. The West Virginia Supreme Court of Appeals has held that a laborer's mechanic's lien under W.Va. Code §38 -2-31 for unpaid wages is not sufficiently choate so as to give it priority over the United States' tax liens when the United States is asserting its priority pursuant to 31 U.S.C.A. §191 (now 31 U.S.C.A. §3713 (1983)) due to the insolvency of the taxpayer. Sturgill v. Lovell Lumber Co., 136 W.Va. 259, 67 S.E.2d 321, 325 (1951). This was because the mechanic's lien did not meet the federal requirements of definiteness as to " '(1) the identity of the lienor, * * *; (2) the amount of the lien, * * *; and (3) the property to which it attaches, * * *.' " Id. (citation omitted). Since the requirements for choateness for 31 U.S.C.A. §191 were the same as they are for 26 U.S.C.A. §6321 -23, we believe that the Sturgill case is a strong indication that the plaintiffs' liens arising under §38 -2-31 would not be considered choate as to the United States ' tax liens by the West Virginia courts. It is certainly support for this court not finding the liens choate. But our main reasons for finding that the liens claimed under §38 -2-31 and the ones asserted under W.Va. Code §38 -2-5 & -6 against Pana are not choate in a federal law sense are that they do not meet the requirements of United States v. City of New Britain for certainty as to the property of Pana subject to their liens nor as to the amounts of such liens. There has been no final determination of those items. Cf., United States v. Pioneer American Insurance Co. [63-2 USTC ¶9532 ], 374 U.S. 84, 90-91 (1963) (amount of attorney fees lien not definite because reasonable fee yet to be determined). In addition, any argument that plaintiffs' liens can relate back to before the United States tax liens were assessed appears to be foreclosed by the Supreme Court's decisions in Pioneer American Insurance Co. at 92 n. 11 and United States v. Security Trust & Savings Bank, 340 U.S. at 50.

The result of the choateness requirement and the plaintiffs' liens' failure to meet it is that all of the United States' tax liens, even for FICA taxes for the quarter ending 12/84 which were assessed after some of the plaintiffs had filed their mechanics liens and for which notice of lien was filed after this action was instituted and for FUTA taxes for 1984 which were assessed after all the plaintiffs had filed their mechanics liens and this action was instituted and for which a notice has never been filed, have priority over the plaintiffs' mechanics liens. It is therefore ORDERED, for the reasons set forth in this memorandum opinion, that:

1. The plaintiffs' motion for partial summary judgment against the United States of America be, and the same hereby is, OVERRULED and DENIED;

2. The United States of America 's motion for summary judgment against the plaintiffs be, and the same hereby is, SUSTAINED and GRANTED.

Furthermore, it is hereby ADJUDGED that the United States of America 's tax liens asserted herein against Pana Coals, Inc. have priority over the mechanics liens of the plaintiffs asserted against the same to all property and rights of property, whether real or personal, belonging to Pana Coals, Inc.

The clerk of the court is directed to mail a certified copy of this order to all counsel of record.

 

 

[80-1 USTC ¶9239] United States of America , Plaintiff v. LeRoy Doyle, City of Milwaukee , Chief Harold Breier, Dennis P. Coffey, and Coffey & Coffey, Attorneys at Law, Defendants

U. S. District Court, East. Dist. of Wis., Civil Action No. 78-C-564, 482 FSupp 1227, 1/25/80

[Code Secs. 6323 and 7429]

Assessment: Jeopardy: Reasonableness: Hearing: Liens: Priority.--The government's jeopardy assessment and levy on money seized by the police upon the arrest of an illegal drug dealer who had not filed a tax return since 1969 and who had attempted to conceal his illegal income and his whereabouts were reasonable and valid. Thus, the levy executed under such assessment had priority over the lien claimed on such funds by the attorneys of the dealer, which was merely an unperfected security interest that could have been defeated by a subsequent judgment creditor and was considered subordinate to the federal tax lien. The fact that a hearing on the reasonableness of the jeopardy assessment was not held within the 20-day period under Code Sec. 7429 did not render the assessment void. The right to an immediate determination of the assessment's reasonableness cannot be precluded by the government's filing of an action to reduce the assessment to judgment. However, the counterclaim did not contain a request for an immediate hearing and the taxpayer was not prejudiced because the funds were still in the custody of the court.

Elizabeth L. Adelman, Assistant United States Attorney, Milwaukee , Wis. 53202 , for plaintiff. Kevin E. O'Neill, Coffey & Coffey, 1100 West Wells St., Milwaukee, Wis. 53233, for Leroy Doyle, Dennis P. Coffey and Coffey & Coffey. Grant F. Langley, Assistant City Attorney, 200 E. Wells St. , Milwaukee , Wis. 53202 , for City of Milwaukee and Harold Breier.

Decision and Order

REYNOLDS, Chief Judge:

This is an action brought by the United States to reduce a federal tax assessment against LeRoy Doyle ("taxpayer") to judgment and to enforce a corresponding federal tax lien against certain property owned by the taxpayer. The taxpayer has counterclaimed for a determination of the reasonableness of the assessment pursuant to the statutory procedure set out in 26 U. S. C. §7429. Currently before the court are the taxpayer's motion for summary judgment and the Government's motion for summary determination of the reasonableness of the assessment and its cross-motion for summary judgment on the issue of the priority of the federal tax lien.

On July 18, 1978 , members of the Milwaukee Police Department seized $5,301.73 during the course of a search of the taxpayer's premises. On August 16, 1978, the Internal Revenue Service ("IRS") issued a jeopardy assessment against the taxpayer pursuant to 26 U. S. C. §6851(a) based on his estimated income tax liability for 1978 computed on the basis of the period from January 1 to July 18, 1978. The amount of the assessment was $41,202.35.

On the same day that the jeopardy assessment was issued, the IRS served a "Notice of Levy" upon the Milwaukee Police Department ("Department") seeking release of the funds previously seized from the taxpayer's premises. The Department refused to release the funds due to the competing claim of taxpayer's attorneys, Coffey & Coffey, who had served a document entitled "Attorney's Lien" on the Department on August 10, 1978 . This action was then commenced on August 30, 1978 .

On September 15, 1978 , taxpayer requested that the IRS admin istratively review the reasonableness and amount of its prior assessment. This request was made pursuant to the procedure set out in 26 U. S. C. §7429(a). On September 29, 1978 , taxpayer was informed that there would be no change in the assessment itself or the amount thereof. Taxpayer then obtained leave or the court to file a counterclaim for summary judicial review of the assessment pursuant to 26 U. S. C. §7429(b). Although §7429(b)(2) requires that a hearing on a request for summary determination be held within twenty days, no such hearing was ever requested or held. The Government did file an answer to the counterclaim, essentially alleging that a §7429(b) summary proceeding is unnecessary once the reasonableness of an assessment is put in issue by a suit to reduce the assessment to judgment.

On August 28, 1979 , the Court granted the Milwaukee Police Department's motion to pay the funds seized from the taxpayer into the court pending outcome of this litigation. The Department has now been dismissed as a party to this action.

Taxpayer's motion for summary judgment is based on the court's failure to conduct a hearing on the reasonableness of the assessment within the twenty days prescribed by statute. Taxpayer argues that if a court fails to hold the hearing within twenty days, the assessment automatically becomes void and unenforceable. As a corollary to this argument, taxpayer's attorneys contend that the government tax levy is also unenforceable, and, consequently, the Court must release the funds seized by the Milwaukee Police Department pursuant to the now prior attorney's lien.

The Government, on the other hand, argues that once it has filed an action to reduce a jeopardy assessment to judgment, a taxpayer has no right to a summary determination of the reasonableness of the assessment pursuant to §7429(b). The summary determination procedure, it is argued, was enacted by Congress to provide taxpayers with a means of securing judicial review of the reasonableness of an assessment without being forced to institute lengthy refund proceedings after their assets have been seized pursuant to the assessment. However, when the government immediately files suit to reduce the assessment to judgment, the taxpayer is already provided with a forum to challenge the assessment and is not entitled to separately avail himself of the §7429(b) procedures. Furthermore, the Government contends, the taxpayer is afforded a better opportunity to challenge an assessment in an action brought by the government to reduce the assessment to judgment than he would be afforded in a §7429(b) proceeding because of the higher standard of proof and fuller range of discovery that is available.

The Court, however, does not accept the argument that the government may preclude a taxpayer from instituting a §7429(b) proceeding for summary determination by first filing an action to reduce the assessment to judgment. It may be that both types of actions raise the issue of the reasonableness of an assessment, and it may also be that an action to reduce an assessment to judgment gives the taxpayer an advantage in terms of burden of proof and scope of discovery. However, a §7429(b) proceeding offers the taxpayer one significant advantage which is not available to him in a government action to reduce an assessment to judgment--a speedy initial determination of the reasonableness of the assessment.

A §7429(b) proceeding is similar to a preliminary examination for probable cause in a criminal proceeding. While such an examination addresses the same basic issue as will be addressed at trial, and although the defendant is faced with a lesser standard of proof and limited discovery, the preliminary examination serves as a means of screening those cases which are obviously without merit and freeing those persons who have been charged without probable cause. Similarly, a §7429 proceeding is designed to provide relief from those assessments which are clearly unreasonable. While it is true that a taxpayer has the right to challenge an assessment at trial on the issue of whether the assessment should be reduced to judgment, he also has a statutory right to an immediate determination of the assessment's reasonableness.

The question then becomes whether the failure to receive an immediate summary determination of the reasonableness of the assessment requires a finding that the assessment is invalid and unenforceable. Taxpayer and his attorneys urge this result, although no supporting authority has been cited. The question is apparently one of first impression.

The automatic invalidity rule urged by the taxpayer appears to the Court to be unduly harsh and inflexible. A wiser approach would be to examine each case on its facts with a special view toward determing the cause of the delay and whether such delay has prejudiced the taxpayer.

In the present case, the failure of the taxpayer to receive a hearing within the allotted time was due for the most part to the unfamiliarity of the parties with the recently enacted §7429. Nowhere in taxpayer's counterclaim is there a request for an immediate hearing or even mention of the twenty-day statutory time limit. The Government's answer simply denies the allegations contaiend in the counterclaim and asserts that a §7429(b) hearing is unnecessary. The Court, not having been apprised by the parties, was unaware that an immediate hearing was called for. Thus, responsibility lies with all of the parties to this action and, to a large part, with the taxpayer himself. Not only did taxpayer fail to request a hearing within the statutory time period, but he failed to request a hearing at any time whatsoever. Taxpayer simply filed his counterclaim, waited for nine months, and then moved for summary judgment. To grant taxpayer's motion would be to reward him for his own inaction. This the Court declines to do.

Furthermore, taxpayer has not been prejudiced by the delay. The only assets that the IRS had sought to seize pursuant to the assessment are the funds that were in the possession of the Milwaukee Police Department. These funds, however, have not been seized and are now in the custody of this court. Thus, taxpayer has lost nothing from his failure to receive an immediate hearing on the reasonableness of the assessment. Accordingly, taxpayer's motion for summary judgment will be denied. The Court must now determine the reasonableness of the assessment.

First, it must be emphasized that this is a preliminary determination which is made pursuant to §7429(b). Thus, this determination has no bearing on taxpayer's ultimate tax liability or whether the Government should be permitted to reduce the assessment to judgment. United States v. Loretto, 440 F. Supp. 1168 (E. D. Pa. 1977). The determination is made solely for the purpose of deciding whether the assessment is reasonable under the circumstances (and appropriate in amount) and whether the IRS may foreclose the levy made pursuant to that assessment.

There are two issues that must be decided: first, whether the assessment is reasonable under the circumstances, and second, whether the assessment is appropriate in amount. The Government has the burden of proof on the first issue; the taxpayer has the burden on the second issue. 26 U. S. C. §7429(g).

The assessment in question was made pursuant to 26 U. S. C. §6851(a)(1) which provides:

"If the Secretary finds that a taxpayer designs quickly to depart from the United States or to remove his property therefrom, or to conccal himself or his property therein, or to do any other act * * * tending to prejudice or to render wholly or partly ineffectual proceedings to collect the income tax for the current or immediately preceding taxable year unless such proceeding be brought without delay, the Secretary shall immediately make a determination of tax for the current taxable year * * * and notwithstanding any other provision of law, such tax shall become immediately due and payable. The Secretary shall immediately assess the amount of the tax so determined * * * and shall cause notice of such determination and assessment to be given the taxpayer, together with a demand for immediate payment of such tax."

It is uncontroverted that taxpayer was arrested on July 18, 1978 , in possession of large amounts of illegal drugs. Records discovered at the time of taxpayer's arrest indicate that he was in the business of selling drugs in large quantities. As noted above, over $5,000 in cash was seized from the taxpayer at the time of his arrest.

Taxpayer has not filed a federal tax return since 1969 when he filed under the name of LeRoy Lake . He has attempted to conceal his illegal income by dealing only in cash and by leasing his residence and automobile in the name of a third party. Petitioner was released on bond and has now apparently disappeared. On these facts, the Court cannot find that it was unreasonable for the IRS to determine that the taxpayer was designing to conceal both himself and his property. As far as the amount of the assessment, the taxpayer has offered no evidence to show that such amount was unreasonable. Since the taxpayer has the burden of proof on this issue, the amount of the assessment must be upheld.

Once it has been established that the assessment was valid, it must also be concluded that the levy executed pursuant to that assessment took priority over the lien that was taken by taxpayer's attorneys. The attorney's lien in question amounted to no more than an unperfected security interest designed to secure payment for future services. Such a lien could have been defeated by a subsequent judgment creditor and is thus subordinate to a federal tax lien. 26 U. S. C. §6323(h)(1); United States v. Smith, 35 A. F. T. R. 2d 75-326 (W. D. Wis. 1974). Accordingly, the Government is entitled to the release of the funds now being held by the court.

IT IS THEREFORE ORDERED that defendants' motion for summary judgment be and hereby is denied.

IT IS FURTHER ORDERED that plaintiff's motion for a summary determination that the jeopardy assessment issued on August 16, 1978, against LeRoy Doyle was reasonable under the circumstances and appropriate in amount be and hereby is granted.

IT IS FURTHER ORDERED that plaintiff's motion for partial summary judgment on the issue of the priority of the levy made upon the property of LeRoy Doyle on August 16, 1978, be and hereby is granted.

IT IS FURTHER ORDERED that the clerk of this court deliver to plaintiff the sum of $5,301.73.

IT IS FURTHER ORDERED that this action be dismissed as to defendants Dennis P. Coffey and Coffey & Coffey, Attorneys at Law.

 

 

[78-2 USTC ¶9780]National Equipment Rental, Ltd., a Corporation, Plaintiff v. United States of America, Defendant United States of America, Counterclaimant v. National Equipment Rental, Ltd., a Corporation, Counterdefendant

U. S. District Court, Cen. Dist. Cal., Civil No. 76-3037-HP, 9/13/78

[Code Sec. 6323 and Sec. 9402 of the California Commercial Code--result unchanged by '76 Tax Reform Act]

Validity of lien: Perfected security interest: Priority over tax lien: Attorney's fees.--Pursuant to financing transactions, the court determined that National had perfected a security interest in a steel floating dry dock and, therefore, in the sale proceeds from such dry dock that had been deposited in a bank in the form of a certificate of deposit. Its security interest was superior to tax liens of the U. S. amounting to $549,995.17 and, of $150,879.26 claimed it was entitled to recover $101,379.26 in principal and interest from the certificate of deposit. It was also entitled to recover the sum of $10,967 from the certificate of deposit for attorneys' fees. The court further ruled that, after receipt of all sums it was entitled to receive from the certificate of deposit, the remainder or principal and interest in the certificate of deposit was to be distributed to the U. S.

Marvin Zinman, 315 W. Ninth St. , Los Angeles , Cal. 90015 , for plaintiff-counterdefendant. Andrea Sheridan Ordin, United States Attorney, Charles H. Magnuson, Arthur M. Greenwald, Assistant United States Attorneys, Los Angeles, Cal. for defendant-counter-claimant.

Memorandum of Decision

PREGERSON, District Judge:

This case, tried to the court on August 29, 30, and 31, 1978, is a contest between National Equipment Rental, Ltd. (plaintiff-counterdefendant) and the United States of America (defendant-counterclaimant) over legal entitlement to all or part of the proceeds from the sale of a steel floating dry dock on which both National and the United States asserted liens.

The sale was held pursuant to an agreement authorized by 26 U. S. C. §6325(b)(3). In that agreement, dated June 10, 1976, the parties provided that the steel floating dry dock would be sold free and clear of all liens, that the proceeds of sale would be substituted for the property, that the asserted liens of the parties would attach to the sale proceeds with the same priority as such liens had with respect to the steel floating dry dock, and that such proceeds would be held as a certificate of deposit with the Union Bank of Los Angeles until the conflicting claims were resolved. As of May 15, 1978 , the full amount of the certificate's principal and accrued interest was $220,122.87.

In its briefs and at trial, National asserted that it had prior liens on or security interests in the steel floating dry dock, and therefore has prior liens on the sale proceeds, by virtue of two financing transactions entered into with Harbor Boat Building Co. of San Pedro, California . The first transaction involved a March 28, 1973 sale to National and lease-back to Harbor of numerous items of property used by it to build boats. The lease was for a term of 5 years and required Harbor to pay National 60 monthly installments of rent for the leased equipment. The second transaction involved an August 28, 1974 loan to Harbor, payable by it in 43 monthly installments.

The property that was the subject of the sale and lease-back transaction was listed in a lengthy inventory that did not list a steel floating dry dock. However, in connection with each transaction, to secure Harbor's obligations to pay rent and to repay the loan, the parties also signed separate security agreements (Exhibits 7 and 14) under which liens were created on Harbor's property described in those instruments in general terms. In october 1975, Harbor defaulted on both transactions, and National declared the remaining payments immediately due. The leased equipment was then surrendered by Harbor to National and sold to reduce the amount of Harbor's indebtedness.

National contends that it perfected security interests in Harbor's assets, specifically in the steel floating dry dock, the only asset involved in this lawsuit, by filing the required financing statements (Exhibits 9 and 24) on April 10, 1973 and September 3, 1974 with the California Secretary of State pursuant to Division 9 of the California Commercial Code, §9101 et seq. National's asserted security interests can be broken down as follows, exclusive of interest:

Amount owing by Harbor to National

for rental payments on 1973

sale and lease-back and for payments

on 1974 loan ..............................         $101,379.26

Amount owing by Harbor to National

on 1973 Purchase Agreement,

which National contends is an integral part

of lease transaction ......................           49,500.00

Total .....................................         $150,879.26

 

On the other hand, the United States asserted that it had a claim on the steel floating dry dock, and therefore has a claim on the sale proceeds, by virtue of tax liens totaling $549,995.17 arising out of successive levies on Harbor's property in 1976 pursuant to 26 U. S. C. §6321. National does not dispute the amount of the tax liens, only their priority. See 26 U. S. C. §7426(c). The United States contends that its claim has priority because the steel floating dry dock was not reasonably identified or specifically described in the pertinent security agreements and financing statements, thereby preventing National from acquiring a security interest in that piece of equipment.

The court has jurisdiction over National's claims to the "substituted sale proceeds" under 26 U. S. C. §7426(a)(3) and 28 U. S. C. §1346(e). Jurisdiction over the counterclaim asserted by the United States is predicated on 26 U. S. C. §7402.

To resolve this dispute, the court is called upon to decide three issues set forth in a stipulation filed prior to closing argument on August 31, 1978 . The court will now address those issues.

The first issue is whether the property descriptions found in the security agreements and financing statements involving National and Harbor (Exhibits 7, 9, 14, and 24) meet the requirements of Cal. Com. Code §§ 9110 and 9402 with respect to reasonably identifying a steel floating dry dock.

Section 9402 provides in part that: "A financing statement is sufficient if it . . . contains a statement indicating the types, or describing the items, of collateral. . . ." Section 9110, which "should be read in conjunction with §9402," Biggins v. Southwest Bank, 490 F. 2d 1304, 1308 (9th Cir. 1973), provides in part:

[A]ny description of personal property . . . is sufficient whether or not it is specific if it reasonably identifies what is described. Personal property may be referred to by general kind or class if the property can be reasonably identified as falling within such kind or class . . .. (Emphasis added.)

The precise question for this court to decide is whether a steel floating dry dock, which is not specifically described in the pertinent security agreements or financing statements, is reasonably identified or falls within the general references to all "docks," "machinery," "tangible personal property," and "equipment" made in those documents.

Before addressing this question, it is important to bear in mind that the Uniform Commercial Code has adopted a system of "notice filing." Cal. Com. Code §9402 "was expressly conceived to dispense with the former requirement of detailed, particularized descriptions of collateral which inevitably fostered formal disputes over meanings and interpretations." Biggins v. Southwest Bank, supra, 490 F. 2d at 1308. The description of collateral in a financing statement on file with the California Secretary of State is sufficient if the description provides enough information to alert a reasonable inquirer to the need for further investigation to determine the identity of the collateral. See In re Amex-Protein Development Corp., 504 F. 2d 1056, 1060 (9th Cir. 1974); In re Munger, 495 F. 2d 511, 512 (9th Cir. 1974); Biggins v. Southwest Bank, supra, 490 F. 2d at 1308; J. White and R. Summers, Handbook of the Law Under the Uniform Commercial Code 833 (1972).

In deciding whether the term "docks" contained in the financing statement filed on April 10, 1973 (Exhibit 9) was sufficient to alert a reasonable inquirer to the need for a further investigation that might have led to identifying a steel floating dry dock as collateral, the court was helped by Webster's Third New International Dictionary (3rd ed. 1965). Webster's defines the noun "dock" has having, among others, the following meanings: "[an] . . . artificial basin or enclosure in connection with a harbor or river for the reception of ships and equipped with means for controlling the water height--see DRY DOCK, FLOATING DOCK. . . ."

A "floating dock" or "floating dry dock" is defined by Webster's as "a dock that floats on the water and can be partly submerged to permit a ship to enter it and afterward floated to raise the ship high and dry as in a dry dock. . . ."

In general terms a steel floating dry dock may be referred to as a piece of equipment, machinery, and tangible personal property.

Without belaboring the point, the court concludes that the above-quoted descriptions were sufficient to alert a reasonable inquirer to the need for a further investigation that would have disclosed the identity of the collateral in question, to wit: the steel floating dry dock.

The court, therefore, concludes that the property descriptions found in Exhibits 7, 9, 14, and 24 meet the requirements of Cal. Com. Code §§ 9110 and 9402 with respect to reasonably identifying a steel floating dry dock. Accordingly, National has a perfected security interest in that equipment, pursuant to Cal. Com. Code §9303, and a "security interest," as that term is defined in 26 U. S. C. §6323(h)(1), superior to the tax liens of the United States . Thus, under the evidence, plaintiff is entitled to be paid $101,379.26 from the principal of the certificate of deposit, plus a proportionate share of accrued interest.

Moving on to the second issue, the court must determine whether Harbor owes National "the option price" of $49,500 referred to in the Purchase Agreement of March 28, 1973 (Exhibit 5).

Despite the fact that the Purchase Agreement recites that it "is a separate and distinct agreement between the parties hereto," National contends that the "option price" of $49,500 is an integral part of the sale and lease-back transaction. In short, National contends that to enjoy the full benefits of its bargain, Harbor owes National the additional sum of $49,500. The rub is that the bargain as structured requires Harbor to pay $49,500 to National only if certain contingencies occurred. First, Harbor must fail to exercise its option to buy back all the leased equipment from National for $49,500. This option, which arose at the end of the term of the lease, was never exercised by Harbor. Since Harbor failed to exercise its option, under the terms of the agreement, National then had the option to force Harbor to purchase the equipment "at the end of the lease term" for $49,500, in which event National was required to transfer title to the leased property to Harbor. National failed to exercise its option. Moreover, having sold the leased property after Harbor's default, National was in no position to transfer title to the property to Harbor. Furthermore, no document signed by National and Harbor states that Harbor definitely owed National the additional sum of $49,500. In short, the obligation was conditional; the contingencies not having occurred, the court concludes that Harbor does not owe National the "option price" of $49,500 referred to in Exhibit 5. The court therefore rules that plaintiff is not entitled to the additional sum of $49,500 from the principal of the certificate of deposit. In light of this ruling, the court need not determine whether that sum was secured by a perfected security interest in the floating dry dock.

The final issue is whether plaintiff is entitled to reasonable attorney's fees pursuant to 26 U. S. C. §6323(e)(3). This section provides that: "If [a] lien imposed by [the government for taxes] is not valid as against a lien or security interest, the priority of such lien or security interest shall extend to-- . . . (3) the reasonable expenses, including reasonable compensation for attorneys, actually incurred in collecting or enforcing the obligation secured." Since §6323(e)(3) applies, National is entitled to recover some attorney's fees. National has incurred attorney's fees of $16,450 in connection with its various claims. Bearing in mind that National has established priority for about two-thirds of the total amount claimed, the court awards National the sum of $10,967 as reasonable attorney's fees which, together with plaintiff's costs, shall be paid from the certificate of deposit.

Pursuant to the stipulation of the parties, the court further rules that after National has been paid all sums it is entitled to receive from the certificate, the remainder of the certificate's principal and accrued interest shall be distributed to the United States .

This memorandum of decision shall serve as the court's findings of fact and conclusions of law pursuant to Fed R. Civ. P. 52.

Within 7 days, National shall submit to the court a proposed judgment to be approved as to form by the United States .

The Clerk of the Court shall serve copies of this Memorandum of Decision, by United States mail, upon the attorneys of record for the parties appearing herein.

 

 

[70-1 USTC ¶9294]Peerless Insurance Company v. United States of America ; Glickstein, Crenshaw, Glickstein, Hulsey & Fay; and Sidney J. Gefen

U. S. District Court, No. Dist. Ga. Atlanta Div., Civil Action No. 12321, 2/4/70

[Code Sec. 6323]

Lien for taxes: Priority: Federal lien: Claim for legal fees.--A lien for federal income taxes attached to a delinquent taxpayer's claim against a surety in 1960 when the surety, in satisfaction of the taxpayer's claim against it, promised to pay him a certain percentage of all money that the surety might recover for certain construction work performed for the Government. A subsequent assignment of the claim by the taxpayer to a law firm for services performed did not affect the prior tax lien. Furthermore, the Government, as garnishor, served the surety with notice of its claim to the funds involved before the law firm served its notice.

Harry S. McCowen, 310 Fulton Federal Bldg., Atlanta , Ga. , for plaintiff. Sidney J. Gefen, 333 Riverside Ave., Jacksonville, Fla., Glickstein, Crenshaw, Glickstein, Hulsey & Fay, 1205 Universal Marion Bldg., Jacksonville, Fla., for defendants.

Order

[Interpleader Action]

EDENFIELD, District Judge:

This civil action in interpleader is now before the court for consideration of motions for summary judgment which have been filed by the United States and by the above-named defendant law firm, Glickstein, Crenshaw, Glickstein, Hulsey & Fay (hereinafter referred to as Glickstein). The United States claims that it is entitled to the interpleaded fund by virtue of a 1956 tax lien against Defendant Gefen and also by virtue of a 1966 judgment against Gefen and a 1968 garnishment proceeding thereunder. Glickstein, on the other hand, claims the money by virtue of an oral assignment made to it by Defendant Gefen in May of 1968. It is evident from the record as a whole and from the arguments advanced by counsel at the hearing on January 8, 1970 , that the facts of the case are not in dispute and that the priority of the respective claims must be determined as a matter of law. For the reasons set forth below the Government's motion for summary judgment will be granted.

[Facts]

The interpleaded fund consists of $4,669.82 which Peerless Insurance Company, as surety on performance and payment bonds of Conn Structors (a general contractor), received from the United States Government in payment of a claim for certain construction work performed for the Government by Conn's subcontractor, a portion of which money Conn owed to its subcontractor, Defendant Gefen d/b/a Duval Marine Company.

In 1960 the subcontractor (Gefen) and the contractor's surety (Peerless) entered into an agreement which provided inter alia that the surety, in satisfaction of the subcontractor's claim against it, would pay to the subcontractor a certain percentage of all moneys the surety might subsequently recover as beneficial owner of the contractor's claim against the Government. On May 27, 1968, Gefen orally assigned and transferred to Glickstein, as payment for legal services rendered to Gefen by Glickstein on or about that same date, all of his "right, title, and interest" under the 1960 agreement with Peerless. Glickstein thereupon notified the attorney and agent for Peerless, by letter, that any payment due Gefen under the 1960 agreement should be made payable "to McCarthy Crenshaw as attorney for Duval Marine Co."

[Claims of Parties]

The Government's claim to the interpleaded fund is based primarily upon a notice of a federal tax lien on the property of taxpayer Gefen which was filed with the Clerk of the Circuit Court in the county of the taxpayer's residence, i.e., Duval County , Florida , in September 1956. In October 1961 a corrected notice of federal tax lien was filed in the same office, and in December 1967 a notice of refiling was entered. The validity of the tax lien was established in 1968 when a lien foreclosure action in the United States District Court for the Middle District of Florida, Jacksonville Division, resulted in entry of judgment against Gefen for taxes in the sum of $40,273.25 plus statutory interest. ¹ The judgment was filed in this court on November 12, 1968, and on the following day the United States served Peerless' attorney with a summons of garnishment. On December 2, 1968, Glickstein notified Peerless in writing that in May 1968 Gefen had assigned to that law firm all of his rights under the 1960 agreement with Peerless.

The Government contends that Gefen's interest under his 1960 agreement with Peerless constituted "property or rights to property" within the meaning of 26 U. S. C. §6321 and that his rights under that agreement came into being burdened with the federal tax lien which had arisen in 1956. Glickstein, on the other hand, while conceding that Gefen had a chose in action which was enforceable against Conn and his surety prior to the 1960 agreement, contends that when Gefen entered into the agreement with Peerless he exchanged a chose in action on which the Government had a tax lien for a mere contingency to which a federal tax lien could not attach.

[Prior Government Lien]

We reject that contention and find that a valid tax lien having attached to Gefen's claim against Conn and his surety, any rights Gefen had arising out of the agreement which satisfied that claim were burdened with the tax lien from the moment they arose. When Gefen assigned his rights to Glickstein he assigned them as they existed (i.e., subject to the tax lien), and the Government's claim is as a matter of law superior to Glickstein's.

Although in the court's view of the case Gefen's rights under the agreement cannot be viewed in isolation from the interest he had prior to the agreement, we note that even if the nature of Gefen's rights were required to be determined anew as of the time he entered into the agreement with Peerless (as Glickstein now contends), and assuming that Florida law is the law to be consulted in determining the nature of those rights, ² the court does not read the cases cited by Glickstein as establishing that under Florida law Gefen's right would be a mere contingency rather than a chose in action. In most of the cited cases the promisor's liability had not yet become fixed but was contingent upon further acts to be performed by the promisee, i.e., by the transferor of the alleged chose in action. ³ And in every case there was uncertainty as to either the existence or the extent of the debt. ⁴ In the instant case, on the other hand, there was uncertainty only as to whether the funds with which the debt was to be paid would become available; there was no uncertainty as to the existence or the amount of the obligation. In effect Gefen, in exchange for immediate part payment in 1960, had agreed to enforce his right to the remainder of the debt only if the funds from which payment should be made could be obtained from the Government. We do not view this as making Peerless' liability and Gefen's rights a mere contingency, even under Florida law.

[Second Ground]

Quite apart from the foregoing, there is yet another ground upon which the court finds that the Government's claim is superior to that of the defendant law firm. When Glickstein notified Peerless that any sums due Gefen under the 1960 agreement should be made payable "to McCarthy Crenshaw as attorney for Duval Marine Co.", it did not thereby notify Peerless that the law firm was claiming the funds as Gefen's assignee. Rather, the notice plainly said that the money was to be paid to Crenshaw as attorney for Gefen's company. Not until December 2, 1968, did the law firm notify Peerless of the assignment, and that was after the Government had served a summons of garnishment on Peerless and had thereby notified Peerless that the Government claimed the funds which Peerless at that time had in its possession, i.e., the funds to which the 1960 agreement between Gefen and Peerless referred. Since the United States, as garnishor, was the first to give Peerless notice of its claim to the interpleaded funds, the Government's rights in the fund are superior to those of the defendant law firm which later notified Peerless that it too laid claim to the money.

In summary, the court HOLDS that the tax lien which was perfected by the United States Government in 1956 attached to the debt owed to Gefen by Peerless (as surety for Conn) at the moment the debt arose, and when the original claim was satisfied by the 1960 agreement the lien attached to all rights arising under the agreement--including Gefen's right to a certain percentage of any moneys Peerless, as beneficial owner of the contractor's claim against the Government, might subsequently obtain from the Government. As a second ground for its decision the court HOLDS that the United States , as garnishor, was the first to serve Peerless with notice of a claim to the funds in question and therefore is entitled to prevail against the assignee, Glickstein, who subsequently served notice of its claim.

Accordingly, the Government's motion for summary judgment is GRANTED and the defendant law firm's cross-motion for summary judgment is denied.

IT IS SO ORDERED.

¹ See United States v. Gefen [68-2 USTC ¶9552], 400 F. 2d 476 (5th Cir. 1968).

² It is undisputed that in federal tax lien cases the nature of any rights which the taxpayer may have in the property sought to be reached by the lien must be determined by reference to the laws of the state in which the right was created, while priority of conflicting liens must be determined by federal law. Aquilino v. United States , 363 U. S. 509, 512-514 (1960). In the instant case it appears that the interpleaded fund represents money owed to Gefen, a resident of Florida , for work he performed in the State of South Carolina . It is not clear from the record where the 1960 agreement between Gefen and Peerless was entered into and where Gefen's rights under the agreement therefore arose. Although the agreement bears the heading "State of Florida , County of Duval ," and was signed by Gefen on August 23, 1960 , it was not accepted by Peerless until November 3, 1960 , and there is no indication as to where it was accepted. The parties' assumption that Florida law controls appears to be based upon the fact that Gefen's assignment of his rights under the 1960 agreement was made in Florida and the fact that both the assignor and assignee are residents of Florida . However, Gefen's rights under the 1960 agreement arose when the agreement was entered into, not when it was assigned, and the record is inconclusive as to where this occurred.

³ See e.g., West Florida Grocery Co. v. Teutonia Fire Ins. Co., 77 So. 209 ( Fla. 1918) (in which the insured had not submitted proof of loss).

⁴ In Williams v. T. R. Sweat & Co., 130 So. 698 ( Fla. 1931), for example, a mortgagor sought--before foreclosure sale--to assign his right to foreclosure-sale proceeds in excess of the amount required to satisfy the mortgagee. In that case of course there was no obligor at all at the time the mortgagor sought to assign his "right" to payment.

 

 

[80-1 USTC ¶9128]United States of America, Plaintiff v. Waite, Inc., f/k/a C. F. Waite, Inc., Otto F. Hunger, Atlantic Richfield Company, City of Pittsburgh--Department of City Treasurer, Commonwealth of Pennsylvania--Department of Revenue, Bureau of Liquid Fuels Tax, Bureau of Corporation Taxes, Bureau of Personal Income Tax, Bureau of County Collections and Bureau of Taxes for Education, and Commonwealth of Pennsylvania--Department of Labor and Industry, Defendants

U. S. District Court, West. Dist. Pa. , Civil Action No. 77-13, 480 FSupp 1235, 12/4/79

[Code Secs. 6321 and 6323]

Lien for taxes: Priority: Release.--The court held that the federal tax lien against the property on which other liens were attached had priority. The lien was filed prior to the time the other liens became choate. The fact that a tax credit had been mistakenly applied to the liability of the taxpayer did not release the lien on the property.

Opinion

SNYDER, District Judge:

This is an action on a case stated to reduce to judgment federal tax assessments against the Defendant Waite, Inc., formerly known as C. F. Waite, Inc., and to foreclose the federal tax lien in an amount in excess of $39,000 against the real property of Waite, Inc. located at Smallman Street and Haslett Way in Pittsburgh , Allegheny County , Pennsylvania . Other lien creditors of Waite, Inc. have been joined. The Court has now received the tax documents and affidavits of the taxpayer's attorney and the Internal Revenue case agent, and the matter is ripe for decision. We find the Government's lien proper and superior to those of the other Defendants.

Waite, Inc., under contract, sorted and hauled mail for the United States Government. It ceased doing business in February 1975, and its several tax liabilities included, inter alia, withholding and FICA taxes (employment taxes) for the third quarter of 1974. Demand (assessment) was made for this unpaid tax on December 2, 1974, which then became a lien on all Waite's personal and real property on that date, 26 U. S. C. §6321. ¹ The notice of federal tax lien was promptly filed in the Allegheny County Prothonotary's Office on December 10, 1974 . The Commonwealth of Pennsylvania filed liens against Waite, Inc. on March 14, 1975 ($499.62), on July 10, 1975 ($5,045.40), and on December 8, 1975 ($14,966.49). Atlantic Richfield obtained a judgment lien against Waite, Inc. on March 15, 1976 ($60,537.37).

In its Complaint, the United States seeks to reduce to judgment its several tax assessments against Waite, Inc. (the assessments are itemized later in this opinion). All of Waite's assets have been disposed of (through judicial sales) prior to this action with the exception of the Smallman Street property. While this action was pending, the property was sold on February 22, 1978 , by order of this Court at a Marshal's Sale for $37,000. The property was sold to Four States Realty Company free and clear of all encumbrances. The present action will determine the distribution of the proceeds of that sale of property formerly owned by Waite, Inc. ² The United States is competing with the Commonwealth of Pennsylvania and Atlantic Richfield Company for status as a superior lien creditor of Waite, Inc. on the Smallman Street property fund by asserting its lien based on the assessment for the employment taxes for the third quarter of 1974. ³

There is no dispute that notice of a tax lien in favor of the United States was filed on December 10, 1974 , and long prior to the liens of the Commonwealth and Atlantic Richfield. The question here is whether the United States properly applied subsequent payments and tax credits against the amounts owed by Waite, Inc. to the United States , and if the United States may have released its lien. To resolve this, we first must refer to an agreement reached between the taxpayer's attorney and the Internal Revenue Service.

Harry W. Schwab, Esquire represented Waite, Inc. when it ceased doing business (as well as the corporation's owner, Donald G. Waite), and handled the numerous Internal Revenue claims for unpaid taxes. Schwab stated that his primary concern was to eliminate the potential personal liability, under 26 U. C. C. §6672, ⁴ of Donald Waite, as an officer, for the failure of Waite, Inc. to collect taxes. Realizing that the withholding and FICA taxes due for the third quarter of 1974 were secured by a "first and best" lien on the real property on Smallman Street in Pittsburgh, Schwab orally agreed with Internal Revenue Agent Donald Newvahner that additional monies received by or on behalf of Waite, Inc. were to be applied to the Internal Revenue claims other than for the third quarter of 1974. In accordance with this agreement, Schwab made payments and these were credited to outstanding corporate liabilities other than the employment tax liability for the third quarter of 1974. Similarly, Newvahner credited involuntary payments (levies served on debtors of Waite, Inc.) to liabilities other than the third quarter of 1974.

During an Internal Revenue audit, it was determined that a credit of $21,712.83 was due Waite, Inc. on its 1972 corporate income tax. On August 19, 1976 , Newvahner, having recently learned of the credit, sent to the Internal Revenue Service's Cincinnati Service Center , "Payment Tracer Requests" ordering the funds from the credit to be applied to liabilities other than the employment tax for the third quarter of 1974. Specifically, the credit was to be applied to other tax assessments which are itemized below. ⁵

The credit was mistakenly applied to the third quarter of 1974 reducing the tax liability for that quarter to zero. Discovering the mistake, Newvahner, on March 7, 1977 , sent another set of Payment Tracer Requests again ordering the credit to be applied to tax liabilities other than the third quarter of 1974. The credit to the third quarter was removed and the credits were applied as Newvahner requested. Internal Revenue records show that as of June 30, 1979 , the balance due on the employment tax for the third quarter of 1974 was $39,745.62. ⁶ Interest and penalties continue to accrue, but the balance due well exceeds the purchase price of the property and therefore the exact amount is not material.

Although the Internal Revenue records temporarily reflected that the assessed balance for the third quarter of 1974 was zero, a certificate of release was not issued.

Discussion

As stated above, this is primarily an action to enforce the federal tax lien on the proceeds of the sale of the Smallman Street property. Under 26 U. S. C. §7403, the Court must first determine if the United States has established its claim on the underlying tax liability.

We start with the legal proposition that federal tax assessments are presumptively correct and establish a prima facie case of liability. Helvering v. Taylor [35-1 USTC ¶9044], 293 U. S. 507, 55 S. Ct. 287, 79 L. Ed. 623 (1935); United States v. Tinghino [75-2 USTC ¶9787], 396 F. Supp. 743 (E. D. N. Y. 1975); United States v. Duffy [74-1 USTC ¶9394], 378 F. Supp. 22 (M. D. Pa. 1974). Waite, Inc. was assessed for third quarter employment taxes on December 2, 1974 and the balance due as of June 30, 1979 was $39,745.62. The taxpayer was properly served with the complaint in this action and was given ample opportunity to contradict the assessment, but chose not to do so. The assessment, unimpeached, is therefore sufficient to establish the claim of the United States . See also United States v. Raleigh Restaurant [75-2 USTC ¶9741], 398 F. Supp. 496 (E. D. N. Y. 1975) (default judgment to the United States if taxpayer fails to appear to contest tax assessment).

Federal law determines the priority of competing liens on property on which there is a federal tax lien or levy. Aquilino v. United States , 363 U. S. 509, 80 S. Ct. 1277, 4 L. Ed. 2d 1365 (1960). Section 6321 of the Internal Revenue Code, 26 U. S. C. §6321, provides that upon assessment of a taxpayer for failing to pay any federal taxes owed, a lien in favor of the United States in the amount of the unpaid tax and any interest, penalty and additional tax which accrues immediately attaches to all property and rights to property, real or personal, belonging to such person.

A contest between the federally created tax lien and a competing lien is resolved by the first in time, first in right rule enunciated in United States v. City of New Britain, 347 U. S. 81, 74 S. Ct. 367, 98 L. Ed. 520 (1954). See also United States v. Beaver [58-1 USTC ¶9282], 252 F. 2d 486 (3rd Cir. 1958). Section 6323 of the Code, 26 U. S. C. §6323, provides that the federal lien is not valid as against judgment lien creditors until the filing of notice of the lien in accordance with 26 U. S. C. §6323(f). The state lien is prior in time if it becomes a choate lien against the property prior to the filing of the federal tax lien. See Bank of California v. United States [75-2 USTC ¶9614], 520 F. 2d 302 (9th Cir. 1975); Atlas, Inc. v. United States [79-1 USTC ¶9118], 459 F. Supp. 1000 (D. N. D. 1978); United States v. Pennsylvania Department of Highways, 349 F. Supp. 1370 (E. D. Pa. 1972). A state created lien is choate if the lienor has obtained judgment on the lien or if the lien is enforceable against the property by summary proceedings. United States v. Equitable Life Assurance Society [66-1 USTC ¶9444], 384 U. S. 323, 86 S. Ct. 1561, 16 L. Ed. 2d 593 (1966); New York Life Insurance Co. v. Central National Bank, 453 F. Supp. 37 (N. D. Ill. 1978).

The record indicates that notice of the federal tax lien was filed in Allegheny County on December 10, 1974, in accordance with 26 U. S. C. §6323. ⁷ Pennsylvania 's and Atlantic Richfield's liens were not choate as of that date, and thus the federal tax lien is superior to the state liens.

Finally, we must decide whether the federal lien was released. Subsequent to the filing of the federal lien, the Internal Revenue collected tax payments from or on behalf of Waite, Inc., and Waite, Inc. became entitled to a tax credit, all of which were applied to Waite's tax liabilities other than the third quarter of 1974. As we stated earlier, these payments were directed away from the third quarter of 1974 assessment pursuant to an agreement between the attorney for Waite, Inc. and an Internal Revenue Agent. Neither the Commonwealth nor Atlantic Richfield have challenged the propriety of this selective application of payments, and our review of the applicable provisions of the Internal Revenue Code reveals such latitude is afforded the taxpayer and the Internal Revenue Service. See, e.g., 26 U. S. C. §6402 (the Secretary may credit overpayments against any tax liability of the person who made the overpayment).

For a period of approximately seven months (August 1976 through March 1977), the Internal Revenue records mistakenly showed that a tax credit had been applied to Waite, Inc.'s third quarter tax liability. (The credit was subsequently applied to different tax liabilities.) However, the mistaken application of a payment or credit on Internal Revenue records to a tax liability secured by a tax lien does not per se release the lien.