Priority over Attachment Lien Page1

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[99-2 USTC ¶50,992] United States of America , Plaintiff-Appellant v. Dishman Independent Oil, Inc., Penny Oil Corporation, Ronnie Messer, Kings Construction Company, Corbin Chemical Company, Defendants-Appellees

(CA-6), U.S. Court of Appeals, 6th Circuit, 93-6246, 1/31/95, 46 F3d 523, Reversing an unreported District Court decision

[Code Sec. 6323 ]

IRS liens: Validity and priority against third parties: Priority over attachment lien: Relation back.--A corporation's prejudgment attachment lien against a bankrupt oil company for amounts due on the sale of petroleum products did not have priority over an IRS lien filed against the same company even though the corporation's lien was filed first. Regardless of when the corporation's lien was considered perfected for purposes of state (Kentucky) law, it was considered inchoate under federal law until the corporation obtained a judgment that identified both the property subject to the attachment lien and its amount. Thus, although the taxpayer was in actual possession of the company's property before the IRS lien arose, M.P. Acri (SCt), 55-1 USTC ¶9138 , mandated that the tax lien was entitled to priority. The relation back doctrine did not prevent a federal tax lien from preempting an inchoate lien that attaches prior to judgment.

David Middleton, Assistant United States Attorney, Lexington, Ky., Stuart M. Fischbein, William S. Estabrook, Rob ert L. Baker, Gary R. Allen, Department of Justice, Washington, D.C. 20530, for plaintiff-appellant. L. Lee Tobbe, Monticello, Ky., for Dishman Independent Oil, Inc., Julius Rathner, Lexington, Ky., for Penny Oil Corp., Ronnie Messer, Kings Construction Co., Corbin Chemical Co.

Before: RYAN and BATCHELDER, Circuit Judges, and EDGAR, District Judge ^*

BATCHELDER, Circuit Judge:

Plaintiff-Appellant , United States of America , appeals the ruling by the bankruptcy court, as affirmed by the United States District Court for the Eastern District of Kentucky, granting Defendant-Appellee, Dishman Independent Oil, Inc., its motion for summary judgment. The bankruptcy court order held that appellee Dishman's prejudgment attachment lien was entitled to priority over the federal tax lien filed by the Internal Revenue Service (IRS). For the reasons stated below, we reverse the decision of the bankruptcy court, as affirmed by the district court.

I.

The facts in this case are not in dispute. Defendant-Appellee Dishman Independent Oil, Inc. (Dishman) initiated suit in Kentucky state court by suing Penny Oil Corporation, Ron Messer, Edna Messer, Corbin Chemical Company, and Kings Construction Company (hereafter the "debtors") in the sum of $365,522.25 for amounts allegedly due on the sale of petroleum products from Dishman to the debtors. In pursuit of its suit against the debtors, Dishman secured a prejudgment attachment against the property of Penny Oil Corporation and Ron and Edna Messer on January 11, 1991 . On January 14, 1991 , the prejudgment attachments were served and personal property of the debtors was seized by Dishman. Since January 14, 1991 , Dishman has been in possession of the debtors' property which consists of diesel fuel, gasoline, cash, checks, semi-tractors and trailers, bulk petroleum storage tanks, and fuel blending pumps.

As a result of its own indebtedness to its creditors, Dishman subsequently filed a petition for relief under Chapter 11 of the Bankruptcy Code. Dishman's suit against the debtors was therefore moved to the bankruptcy court as an adversary hearing. A trial was held on February 27, 1992 , which resulted in an April 27, 1992 judgment in favor of Dishman for $365,522.25 with service charges.

During the time period between Dishman's attachment and seizure of the debtors' property (January 14, 1991) and the judgment in favor of Dishman (April 27, 1992), a series of events took place which gave rise to the issue in this appeal. The first significant event during that period was the postponement of the trial in Dishman's case against the debtors, which was originally scheduled to go to trial on November 22, 1991 . ¹ However, immediately prior to that date, the defendants Ron and Edna Messer assigned all of their right, title, and interest in the attached property to the IRS. As a result, the IRS was granted a continuance, over the objection of Dishman, specifically to prepare for trial in its new role as defendant and owner of the attached property.

The second significant event occurred on January 1, 1992 , nearly one year after Dishman's attachment of the debtors' property, at which time the IRS assessed the debtors for unpaid excise taxes, interest, and penalties. The IRS consequently filed a tax lien against the debtors on January 29, 1992 , approximately three months before Dishman was granted judgment by the bankruptcy court on April 27, 1992 . The IRS tax lien seeks to collect $2,851,910.09 which is owed to the United States by the debtors for unpaid taxes from the third quarter of 1987 through the third quarter of 1988.

On May 29, 1992 , the IRS was permitted to intervene in the proceeding to seek a determination by the court that its federal tax lien was valid and prior to any interest held by Dishman in the debtors' property. The IRS eventually filed a motion for summary judgment which the bankruptcy court denied.

Dishman then filed its own motion for summary judgment against the IRS. The bankruptcy court granted Dishman's motion for summary judgment, after finding that Dishman's attachment lien was perfected by the judgment entered in its favor on April 27, 1992, and was therefore prior to the federal tax lien against the debtors. In re Dishman Indep. Oil Corp., Nos. 91-00057, Adv. No. 91-0078, 1993 WL 110032 (Bankr. E.D. Ky. Jan. 8, 1993 ). The district court affirmed the bankruptcy court's order granting Dishman's motion for summary judgment.

This timely appeal followed.

II.

Under the Internal Revenue Code ("Code"), the IRS obtains a lien on the property of a taxpayer ² when that taxpayer fails or refuses to pay his taxes after assessment, notice, and demand. I.R.C. §§6321 & 6322. The lien attaches to all property and rights to a taxpayer's property, including property subsequently acquired by the taxpayer. See Glass City Bank v. United States [45-2 USTC ¶9449], 326 U.S. 265, 267 (1945); United States v. Safeco Ins. Co. [89-1 USTC ¶9227], 870 F.2d 338, 340 (6th Cir. 1989). The broad language of the Code "reveals on its face that Congress meant to reach every interest in property that a taxpayer might have." United States v. National Bank of Commerce [85-2 USTC ¶9482], 472 U.S. 713, 720 (1985). In turn, §6323(a) of the Code gives priority to these federal tax liens over most other creditors of the taxpayer-debtor. The priority allotted to IRS tax liens by §6323(a) only allows such federal tax liens to be defeated by a narrow category of creditors:

(a) Purchasers, holders of security interests, mechanic's lienors, and judgment lien creditors.--The lien imposed by section 6321 shall not be valid as against any purchaser, holder of a security interest, mechanic's lienor, or judgment lien creditor until notice thereof which meets the requirements of subsection (f) has been filed by the Secretary.

I.R.C. §6323(a) (emphasis added).

The IRS asserts that its tax lien against the debtors has priority over Dishman's attachment lien on debtors' property because Dishman does not fall within the category of creditors protected by §6323(a). According to the IRS, its tax lien was filed before Dishman obtained a final judgment, therefore, Dishman was not a judgment lien creditor until after the tax lien was filed. The IRS further argues that Dishman did not hold a perfected security interest in the attached property because a prejudgment attachment lien is merely an unperfected, inchoate interest in the property.

A.

The issue before this court is whether a state attachment lien has priority over a federal tax lien if the property subject to the liens was attached prior to the time the federal tax lien was filed, although final judgment on the attachment lien was not handed down until after the federal tax lien was filed. It is undisputed that when a federal lien is involved, the relative priority between competing liens is a question of federal law determined by the principle "the first in time is the first in right." United States v. City of New Britain [54-1 USTC ¶9191], 347 U.S. 81, 85 (1954); State Bank of Fraser v. United States [88-2 USTC ¶9592], 861 F.2d 954, 963 (6th Cir. 1988). Nonetheless, the task of determining what constitutes a perfected lien is usually governed by state law. United States v. Bess [58-2 USTC ¶9595], 357 U.S. 51, 55-56 (1958); see also United States v. Brosnan [60-2 USTC ¶9516], 363 U.S. 237, 240 (1960); United States v. Waddil, Holland & Flinn, Inc. [45-1 USTC ¶9126], 323 U.S. 353, 356 (1945). This usual rule is altered, however, when one of the competing liens is a federal tax lien. National Bank of Commerce [85-2 USTC ¶9482], 472 U.S. at 727; see also In re Construction Alternatives, Inc. [93-2 USTC ¶50,569], 2 F.3d 670, 674 (6th Cir. 1993); In re Terwilliger's Catering Plus, Inc. [90-2 USTC ¶50,460], 911 F.2d 1168, 1176 (6th Cir. 1990), cert. denied sub nom., Ohio , Dep't of Taxation v. IRS, 501 U.S. 1212 (1991). According to the Supreme Court, "it is a matter of federal law when such a [state] lien has acquired sufficient substance and has become so perfected as to defeat a later-arising or later-filed federal tax lien." United States v. Pioneer Am. Ins. Co. [63-2 USTC ¶9532], 374 U.S. 84, 88 (1963) (footnote omitted). "Consequently, state-law limitations upon the ability of general creditors to reach a taxpayer's property do not affect the attachment of federal tax liens because the state-law consequences flowing from a property interest properly defined under state law 'are of no concern to the operation of the federal tax law.' " Safeco Ins. Co. [89-1 USTC ¶9227], 870 F.2d at 340-41 (quoting National Bank of Commerce [85-2 USTC ¶9482], 472 U.S. at 723).

Accordingly, the Supreme Court has determined a state lien to be "perfected" only when "'the identity of the lienor, the property subject to the lien, and the amount of the lien are established.' " United States v. McDermott [93-1 USTC ¶50,164], 113 S. Ct. 1526, 1528 (1993) (quoting City of New Britain [54-1 USTC ¶9191], 347 U.S. at 84); see also Treas. Reg. §301.6323(h)-1(g) (1976). The IRS contends, therefore, that Dishman's lien was not perfected until April 27, 1992 , when the bankruptcy court judgment determined the amount of the lien and the property subject to the lien--nearly three months after the federal tax lien was filed. Consequently, the IRS argues that regardless of whether Dishman's attachment lien is considered to be perfected under Kentucky law, ³ Dishman's lien was inchoate for purposes of federal law and the federal tax lien therefore retains its priority.

We believe this issue is controlled by the holding of United States v. Acri [55-1 USTC ¶9138], 348 U.S. 211 (1955), which supports the IRS's position. In Acri, the Supreme Court unequivocally held that a federal tax lien filed after an attachment lien was executed had priority over the attachment lien because judgment on the attachment lien did not occur until after the filing of the tax lien. Id. at 214. In Acri, the Court was not persuaded by the recognition of the attachment lien as perfected under Ohio law. Id. at 213. Rather, for "federal tax purposes" the lien was "inchoate . . . because, at the time the attachment issued, the fact and the amount of the lien were contingent upon the outcome of the suit for damages." Id. at 214.

In this case, Dishman had not yet been granted judgment at the time the federal tax lien was filed. According to federal law, therefore, at the time the federal tax lien was filed, both the property subject to Dishman's attachment lien and its amount remained uncertain. Thus, despite the fact that Dishman was in actual possession of the debtors' property before the tax lien was filed, the tax lien has a higher priority based on the holding in Acri.

Based in part on In re Coston, 65 B.R. 224 (Bankr. D. N.M. 1986), the bankruptcy court found that Dishman's attachment lien had priority over the federal tax lien. It appears, however, that the bankruptcy court's reliance on In re Coston was misplaced. In that case, the bankruptcy court held that a judgment obtained by a creditor after a bankruptcy filing avoided the preference period of §547 because it related back to the date of prejudgment attachment. However, neither of the competing liens in In re Coston was a federal tax lien, and that decision is, therefore, inapposite to the case at hand.

In light of United States v. Acri, the concept 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 . . . ," United States v. Security Trust & Savings Bank [50-2 USTC ¶9492], 340 U.S. 47, 50 (1950), would not change the outcome of this case. Pursuant to the holding in Acri, a state lien that is dependent upon the outcome of a suit for damages, is inchoate until final judgment. Consequently, the doctrine of relation back cannot save such an inchoate lien from being preempted by a federal tax lien which attaches before judgment is final.

B.

Dishman makes an additional argument, on equitable grounds, that allowing a federal tax lien to obtain priority over the claim of a Chapter 11 debtor defeats the goal of Congress to help "struggling businesses to reorganize." In support of this contention, Dishman cites United States v. Whiting Pools, Inc. [83-1 USTC ¶9394], 462 U.S. 198 (1983), establishing that Congress intended to protect the property of a bankrupt debtor from being levied upon by the IRS.

In its order, the bankruptcy court declined to address this or Dishman's additional equitable arguments because the court had concluded that Dishman's attachment lien had priority. On remand the court should, therefore, address Dishman's equitable arguments including the assertion that delaying the prosecution of Dishman's case allowed the IRS to intervene and thereby insured that the filing of the federal tax lien predated judgment in favor of Dishman. Cf. In re Mansfield Tire & Rubber Co. [91-2 USTC ¶50,419], 942 F.2d 1055, 1062 (6th Cir. 1991) ("We continue to recognize that equitable subordination in bankruptcy may be appropriate if the claimholder is guilty of inequitable conduct or if the claim itself is of a status susceptible to subordination."), cert. denied sub nom., Krugliak v. United States, 112 S. Ct. 1165 (1992).

We note in that regard that the IRS apparently became the owner of the property in question before the IRS filed its tax lien against the property. On November 1, 1991 , the Secretary of State of Kentucky dissolved Penny Oil Corporation, rendering Ron Messer the owner and title holder of the defunct corporation's assets. On November 22, 1991 , all of the Messer rights, title, and interest in the attached property were then transferred to the IRS. In this manner, the IRS became the new owner of the property, established standing, and won the continuance on November 22, 1991 , the date on which trial was originally scheduled to begin. Finally, on January 29, 1992 , the IRS filed its tax lien. On remand, the court must, therefore, also consider whether the actions of the IRS, purporting to file a tax lien on its own property in January, 1992, constituted additional inequitable conduct.

III.

For the foregoing reasons, we REVERSE the order of the district court granting appellee Dishman's motion for summary judgment. This case is REMANDED for proceedings not inconsistent with this opinion.

^* The Honorable R. Allan Edgar, United States District Court for the Eastern District of Tennessee, sitting by designation.

¹ Plaintiff Dishman was prepared for trial on November 22, 1991 , and had five witnesses present to testify that day.

² As §6321 states: 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. I.R.C. §6321.

³ The Kentucky Revised Statute reads:

A lien shall be created on the property of the defendant by the levy of the attachment; or by service of the summons, with the object of the action indorsed thereon, on the person holding or controlling his property. Ky. Rev. Stat. Ann. §426.383 ( Baldwin 1991). The Kentucky courts have further determined that a lien on a specific piece of property acquired by attachment does not become effective merely by issuance of the writ of attachment or by placing the writ in the hands of an officer, . . . nor does a lien become effective merely upon delivery of a copy of the attachment to the debtor. . . . There must be an actual levy on the property itself. Thacker v. Commonwealth, 284 S.W.2d 325, 326 (Ky. Ct. App. 1955) (citations omitted). Upon examining the record in the case at hand, the bankruptcy court found that Dishman had executed an actual levy on the debtors' property and that Dishman had reported the proceeds of the attachment to the Wayne Circuit Court. In re Dishman Indep. Oil Corp., 1993 WL 110032, at * 2. The IRS did not dispute that the property actually had been levied upon. Consequently, the bankruptcy court found, pursuant to state law, that Dishman secured a perfected lien on the property as of the date of attachment and that Dishman was therefore a judgment lien creditor as defined by 11 U.S.C. §101(36) (defining a judicial lien as one "obtained by judgment, levy, sequestration, or other legal or equitable process or proceeding").

 

 

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

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

[Code Secs. 6321 and 6323 ]

Tax liens: Priority against third parties: Attachment of: After-acquired property: Trust assets: Beneficial interest: Personal v. real property interests: Equitable conversion: When conversion occurs.--A lender's security interest in a delinquent taxpayer's residual interest in trust property was accorded priority over earlier IRS tax liens. Under state ( California ) law, the tax liens, which were filed in the county where the taxpayer resided, attached only to his personal property and to any real property located in that county. Although the trust's remaining asset was real property, the IRS did not file its liens in the county where the property was located. The taxpayer's interest in the trust was equitably converted to a personal property interest, however, since the trust had to sell the real estate to distribute the residue to the beneficiaries. However, such conversion did not occur until the closing date of the property's sale. As a result, the tax lien did not attach to the taxpayer's interest until after it was assigned to the lender.

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

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

ORTEGA, Acting P.J.: In June 1990, Nellie Whitaker Beasley created a revocable trust into which she transferred both her real and personal property. Beasley, the trust's sole income beneficiary during her lifetime, used the trust as a will substitute to pass her assets to her beneficiaries upon her death, when the trust was to terminate. Beasley died on January 27, 1994 . This appeal concerns two competing claims to the interest of Beasley's grandnephew, Marvin Stone, a residual beneficiary of 30 percent of the trust residue. The two claimants are the United States of America (on behalf of the Internal Revenue Service), ¹ which had assessed $2.8 million in tax liens against Stone for delinquent federal taxes, penalties, and interest, and Professional Technical Representatives Money Purchase Plan (Plan), to whom Stone had assigned his interest in the trust residue as additional security for a loan.

For the reasons that follow, we affirm the trial court order awarding Stone's remaining residual interest of $83,985.72 to the Plan. We direct the Los Angeles County Treasurer, who is holding Stone's interpleaded share of the residue, to transfer the funds to the Plan.

BACKGROUND

Before Beasley's death, a conservatorship was established over Beasley and her estate. (Conservatorship of the Person and Estate of Nellie Whitaker Beasley (Super. Ct. L.A. County, 1991, No. BP000175).) The trust instrument was amended to require the trustee to obtain court approval before selling, distributing, or transferring any trust assets. Following Beasley's death, the court exercised its continuing jurisdiction and supervision over the trustee's disposition of the trust assets in accordance with Beasley's testamentary intent as expressed in the trust instrument.

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

In December 1994, the trustee made an initial distribution to the residual beneficiaries, including Stone. Assets remaining to be distributed to the residual beneficiaries included the anticipated proceeds from the sale of the real property (which was in escrow) and about $100,000 in personal property.

Stone anticipated that following the close of escrow, he would receive a second distribution of about $90,000. On August 4, 1995 , Stone assigned to the Plan his interest in the remaining residue. ³ The assignment served as additional security for a $140,000 loan to third parties, John and Heather Bomarito. In return for his assignment, Stone received a portion of the Bomaritos' loan proceeds. With Stone's approval, the Plan's attorney instructed the trustee to send the attorney Stone's second distribution check.

Unbeknownst to the Plan, the IRS had assessed $2.8 million in tax liens against Stone. In 1993 and 1994, the IRS had filed notices of federal tax lien in Monterey County , where Stone resides. ⁴ The bulk of the tax liens were filed before Beasley's death and well before Stone assigned his interest to the Plan in August 1995. In 1996, the IRS served the trustee with a notice of levy against Stone's interest in the trust. ⁵

Escrow closed on the real property sale on March 21, 1996 . After receiving the proceeds from that sale, the trustee filed a final report asking the court to approve her final distributions to the residual beneficiaries, except for Stone. Faced with the two competing claims to Stone's interest, the trustee interpleaded Stone's share of $83,985.72 by depositing that sum with the Los Angeles County Treasurer.

The IRS (through the United States of America ) petitioned for an order establishing its right to the interpleaded funds. (In re The Nellie W. Beasley Revocable Trust (Super. Ct. L.A. County, 1997, BP014805).) The IRS contended it was entitled to priority over the Plan, having recorded its tax liens in 1993 and 1994, well before the Plan received Stone's assignment as additional security for the loan. The Plan, on the other hand, contended the notices of lien were recorded in the wrong county with regard to the trust's real property in Los Angeles . The Plan asserted the notices of lien filed in Monterey County did not establish the IRS' priority as to Stone's interest in the Los Angeles property.

The trial court ruled in favor of the Plan. It concluded that the notices of tax lien filed in Monterey County were "of no force and effect inasmuch as the Claimant, UNITED STATES OF AMERICA, failed to record the lien in the County of Los Angeles, where the principal assets were located, pursuant to the provisions of 26 U.S.C. Section 6323(f)." The trial court awarded the Plan all of the deposited funds. This appeal followed.

CONTENTIONS ON APPEAL

(I) The IRS contends its notices of tax lien attached to Stone's interest in the trust's real property before the Plan's security interest arose. The IRS asserts it is thus entitled to the whole of the interpleaded funds.

(II) Alternatively, the IRS contends its notices of tax lien attached to Stone's interest in the trust's personal property before the Plan's security interest arose. The IRS asserts it is thus entitled to a portion of the interpleaded funds.

DISCUSSION

I

Stone resided in Monterey County , but the trust's real property was located in Los Angeles County . As a general rule, filing the notice of tax lien in Monterey County would have had no effect with regard to the trust's property in Los Angeles County . Both parties agree that, as a general rule in California , a tax lien notice recorded in one county has no effect with regard to real property located in another county. The IRS states in its opening brief. "Under I[nternal ]R[evenue ]C[ode] section 6323(f) and applicable California law, the liens must be filed with the office of the recorder for the county in which the real property is located (where the [trust] assets involved are real property) or in which the Trust beneficiary resides (where the [trust] assets involved are personal property)."

The IRS contends, however, that under the doctrine of equitable conversion, Stone's interest in the trust's real property was converted, upon entry of the order confirming sale, from a real property interest to a personal property interest. Under the IRS' theory, the tax liens attached to Stone's personal property interest in the Los Angeles property as of the date of the order confirming sale.

We will first ascertain the nature of Stone's interest in the trust assets on the date of Beasley's death. We begin by noting that in federal tax lien cases, " 'Property' is a concept which draws its definition from state, not federal, law. Aquilino v. United States [60-2 USTC ¶9538], 363 U.S. 509, 512-13 . . . (1960)." (Cavanaugh v. Cavanaugh (B.R. Ct., N.D. Ill., E.D. 1993) 153 B.R. 224, 228.) Accordingly, we took to California law to determine the nature of Stone's property interest in the trust assets.

Under California law, when Beasley transferred her real property to the revocable trust, she transferred legal title to the trustee. Beasley still retained, however, her beneficial ownership of the real property as sole beneficiary of the trust during her lifetime. This conclusion is consistent with California real property tax law. When Beasley transferred her real property to the revocable trust, that transfer did not constitute a change of ownership to trigger a reassessment because the rights conferred to the residual beneficiaries were entirely contingent during Beasley's lifetime. " 'If the trust is revocable it is excluded [from reassessment] because the rights conferred are contingent. If the trustor is the sole beneficiary during his lifetime, his retained interest is considered to be "substantially equivalent in value" to the fee interest in any real property covered by the trust. He is therefore the true owner and the change in ownership does not occur until the property passes to the remaindermen on the trustor's death.' " (Empire Properties v. County of Los Angeles (1996) 44 Cal.App.4th 781, 788, quoting January 1979 Report of the Task Force on Property Tax Administration commissioned by the Legislature after passage of Proposition 13.)

When Beasley died on January 27, 1994 , the revocable trust became irrevocable and was terminated under the express provisions of the trust instrument. (Empire Properties v. County of Los Angeles, supra, 44 Cal.App.4th at pp. 786-787.) At that time, Stone acquired a present beneficial interest in the trust's residual assets, including the trust's real property. The question we face is whether Stone's beneficial interest in the trust's real property is properly classified as a personal or a real property interest.

Ordinarily, because the asset at issue is real property, Stone's beneficial interest would be classified under California law as a real property interest. The IRS contends that upon entry of the order confirming sale, however, Stone's beneficial interest in the real property was equitably converted into a personal property interest. Under the doctrine of equitable conversion, "Where real property is conveyed to a trustee with directions to sell in any event it will be treated in equity as personal property. But where the property in kind is, or may be, conveyed to the beneficiary no such equitable conversion results." (Lynch v. Cunningham (1933) 131 Cal.App. 164, 173.)

Although the trustee theoretically possessed discretion either to sell the real property or convey it in kind, Beasley's gifts to the residual beneficiaries were not so large as to afford the trustee the option of giving any single beneficiary the real property in whole. Stone, with a 30-percent share of the residuary, received the largest gift of all. By the time the real property was in escrow, Stone knew he was to receive only an additional $90.000, less than half the value of the Los Angeles property. When Stone assigned his interest in the trust's remaining assets, both he and the lender knew the real property was going to be sold and Stone was to receive only a portion of the sale proceeds.

We agree with the IRS that the trustee, by entering into a contract for sale and obtaining an order confirming sale, had legally bound the trust to sell the property. "[W]hen a binding agreement of sale is entered into by the parties, an equitable conversion is worked; the purchaser becomes the equitable owner of the land and the seller the owner of the purchase price." (Vigli v. Davis (1947) 79 Cal.App.2d 237, 254; Lynch v. Cunningham, supra, 131 Cal.App. at p. 173.)

That is not to say, however, that the conversion occurred upon the date of the order confirming sale. Prior decisions have held that the conversion occurs on the closing date, whether or not the sale takes place. " 'The rule of equitable conversion merely amounts to this, that where there is a mandate to sell at a future time, equity, upon the principle of regarding that done which ought to be done, will for certain purposes and in aid of justice consider the conversion as effected at the time when the sale ought to take place, whether the land be then really sold or not.' " (Vigli v. Davis, supra, 79 Cal.App.2d at p. 255.)

The IRS would have us advance the date of sale in this case to the date of the order confirming sale. We see no reason to depart from the existing rule. If a buyer defaults before the closing date, the court may vacate its order confirming sale and direct the trustee to find another buyer. Although a defaulting buyer would remain subject to liability for losses, including consequential damages, caused by the default (Prob. Code. §§10350, 10351), the buyer would not be obligated to purchase the property. We conclude, applying the usual rule, that the IRS' preexisting tax liens immediately attached to Stone's personal property interest upon the date escrow closed, March 21, 1996 . ⁶

Before the IRS liens could attach, however, Stone had assigned his interest to the Plan on August 4, 1995 . Accordingly, the IRS' liens are not entitled to priority. "Under federal tax law, a contest between the federally created tax lien and a competing lien is resolved by the first-in-time, first-in-right rule. United States v. City of New Britain [54-1 USTC ¶9191], 347 U.S. 81, 85 . . . (1954)." (Cavanaugh v. Cavanaugh, supra, 153 B.R. at p. 228.) This priority rule applies "unless Congress has created a different priority rule to govern the particular situation." (Petro Source Partners, Ltd. v. 3-B Rattlesnake Refining (1990) Ltd., supra [93-1 USTC ¶70.029; 94-1 USTC ¶50,053], 827 F.Supp. at p. 1269.) There is no contention that a special priority applies here.

We hold that the federal tax liens are inferior to the Plan's previously acquired assignment of Stone's interest in August 1995. Accordingly, the trial court correctly awarded the interpleaded funds to the Plan.

II

The IRS alternatively contends that it "is entitled to an award of $55,010.65, or 65.5 percent, of the funds deposited with the Los Angeles County Treasurer. This is because at the time of Beasley's death $380,704.90, or 65.5 percent of the total Trust assets worth $580,996.57, consisted of cash, stocks, and bonds, i.e., personal property. This fact is reflected in the Trustee's Final Report--to which no party filed an objection and which the Superior Court approved--and nothing in the record contradicts it."

The trustee's final report, however, was not filed until July 31, 1996 , several months after the escrow on the sale of real property had closed on March 21, 1996 . The final report indicated that "a significant portion of the residue of the Trust was distributed to the residuary beneficiaries" pursuant to a court order entered on December 29, 1994 . That order and the resulting initial distribution were made while the real property transaction was still in escrow. Accordingly, the initial distribution could not have been made with proceeds traceable to the sale of the real property, and must necessarily have been made with personal property assets. It thus follows that the IRS' reliance upon the final report to show the ratio of real and personal property held by the trust at the time of Beasley's death is misplaced. Even assuming there was once a 65.5 to 34.5 percent ratio of real to personal property assets when Beasley died, that ratio no longer existed when the trustee's final report was filed, due to the initial distribution made by the trustee while the real property transaction was in escrow.

The IRS has failed to demonstrate that the trial court's award of the whole of the interpleaded funds to the Plan was erroneous. We rely on the familiar rule that, " 'A judgment or order of the lower court is presumed correct. All intendments and presumptions are indulged to support it on matters as to which the record is silent, and error must be affirmatively shown. . . .' [Citations.]" (Denham v. Superior Court (1970) 2 Cal.3d 557, 564.)

DISPOSITION

We affirm the order awarding the interpleaded funds to the Plan. We direct the county treasurer to release the funds accordingly. The Plan is entitled to costs on appeal.

We concur:

VOGEL (Miriam A.), J.

DUNN, J. ^*

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

² This initial $400,000 valuation was only an estimate by the trustee of the property's value. According to the trustee's final report, the $400,000 valuation was "arbitrarily placed on the property for purposes of this Trust by [the trustee], without benefit of any appraisal, at the time of the creation of this Trust in 1990." Ultimately, the property was sold in 1996 for about $200,000. The trustee's final report explained that the property value "declined substantially because of the effects of both the general real estate depression in Southern California as well as the civil unrest which occurred in the area of Los Angeles County in which the property was located." In her final report, the trustee reported a loss (for accounting purposes) on the sale of $199,708.33.

³ The trust instrument contained a spendthrift clause that prohibited the beneficiaries from selling, assigning, pledging, mortgaging, encumbering, alienating, or impairing all or any part of their interest in the trust or in the trust's principal or income. The Plan argued successfully below that the spendthrift clause was extinguished upon Beasley's death, when the trust terminated. The IRS does not challenge on appeal the trial court's ruling on this point. Accordingly, we will not address it.

⁴ When a federal tax liability is assessed, a lien automatically attaches as of the date of the assessment unless the liability is paid within the allotted time. (26 U.S.C. §6321.) When a notice of federal tax lien is filed, it gives "notice to the rest of the world that the IRS has a tax lien against the taxpayer." (Petro Source Partners, Ltd. v. 3-B Rattlesnake Refining (1990) Ltd. (W.D. Tex. 1993) [93-1 USTC ¶70,029; 94-1 USTC ¶50,053], 827 F.Supp. 1265, 1268.) The notice of tax lien does not affect the validity of the lien itself. It does, however, affect the priority of the lien as against the claim of a third party against the taxpayer's property. (Id. at pp. 1268-1269.)

⁵ The IRS does not, as a general rule, have to levy against the taxpayer's property in order to perfect its liens. In most cases a tax lien is perfected when the notice of federal tax lien is filed. (Petro Source Partners, Ltd. v. 3-B Rattlesnake Refining (1990) Ltd., supra [93-1 USTC ¶70,029; 94-1 USTC ¶50,053], 827 F.Supp. at p. 1269.)

⁶ When notices of tax lien are filed, they attach and " 'continue[to exist] until the taxpayer satisfies the debt, or the statute of limitations runs.' Texas Commerce Bank[- Fort Worth , N.A. v. United States (5th Cir. 1990)] [90-1 USTC ¶50,155], 896 F.2d[ 152.] 161; 26 U.S.C. §6322." (Petro Source Partners, Ltd. v. 3-B Rattlesnake Refining (1990) Ltd., supra [93-1 USTC ¶70,029; 94-1 USTC ¶50,053], 827 F.Supp. at p. 1268.)

^* Judge of the Municipal Court for the Long Beach Judicial District assigned by the Chief Justice pursuant to article VI, section 6 of the California Constitution.

 

 

[93-2 USTC ¶50,398] Gulf Coast Galvanizing, Inc., Plaintiff v. Steel Sales Co., Inc., Defendant v. Trustmark National Bank, Garnishee-Defendant v. Internal Revenue Service, Defendant

U.S. District Court, So. Dist. Miss. , Jackson Div., Civ. J92-0301 (L) (C), 5/10/93 , 826 FSupp 197, 826 FSupp 197

[Code Secs. 6321 , 6322 and 6323 ]

Liens for taxes: Priority: Garnishment.--The IRS was entitled to funds held by a garnishee-bank to satisfy a taxpayer's outstanding tax liabilities. The IRS's tax lien had priority over that of the creditor who had served the writ of garnishment seeking to collect its judgment against the taxpayer because notice of the tax lien was given before the creditor filed its suit and secured its judgment against the taxpayer. The creditor's argument that it was entitled to the funds because of the IRS's failure to assert any claim to the funds was rejected. The fact that the IRS did not timely file an answer to the garnishment-interpleader complaint and assert a claim did not cause the IRS to forfeit any claim of entitlement. An interpleader claimant cannot obtain a default judgment against the United States . Further, the creditor's argument that it was entitled to the funds because the circuit court entered a judgment to that effect was without merit because the garnishee notified the court of the IRS's claim. Finally, the creditor's argument that the filing of its writ of garnishment relieved the taxpayer of a property interest in the account, thereby rendering the subsequently served notice of levy ineffective, was rejected.

MEMORANDUM OPINION AND ORDER

LEE, District Judge:

This case originated as a garnishment action brought by Gulf Coast Galvanizing, Inc. (Gulf Coast) in the Chancery Court for the First Judicial District of Hinds County, Mississippi to collect on a judgment against Steel Sales Co., Inc. from funds in Steel Sales' checking account with Trustmark National Bank (Trustmark or the Bank). The Internal Revenue Service (IRS), claiming an interest in the funds held by Trustmark in Steel Sales account due to an assessment against Steel Sales for outstanding federal tax liability, removed the action to this court pursuant to 28 U.S.C. §§2410 and 1444 . Thereafter, the United States of America was substituted as a party in place of the IRS. This cause is now before the court on cross-motions of Gulf Coast and the United States by which each seeks to establish that it is entitled to recover the sum of $9,140.18 being held by the garnishee-defendant Trustmark. ¹ Having reviewed the parties' submissions together with the applicable law, the court concludes that the United States ' motion should be granted and Gulf Coast 's motion denied.

FACTUAL BACKGROUND

On June 24, 1991 and September 2, 1991 , respectively, the United States assessed Steel Sales for unpaid federal taxes due for the first and second quarters of 1991 in the collective amount of $133,301.60, including interest and statutory additions. The government recorded a notice of the federal tax liens with the office of the Chancery Clerk of Hinds County, Mississippi on September 30, 1991 .

Thereafter, on November 21, 1991 , Gulf Coast filed suit against Steel Sales in the Circuit Court of the First Judicial District of Hinds County seeking to recover the unpaid balance of a promissory note executed by Steel Sales. Gulf Coast obtained a default judgment against Steel Sales in the amount of $21,771.81 on January 8, 1992 . On March 2, 1992 , after securing its judgment, Gulf Coast served a writ of garnishment on Trustmark seeking to collect its judgment from any funds which Steel Sales had in its checking account with Trustmark. On March 30, 1992 , the Bank mailed its answer to the writ of garnishment to the court and to counsel for Gulf Coast , advising that Steel Sales had $9,028.82 in its account with the Bank. ² But no sooner than that answer was mailed, the IRS served on the Bank a notice of levy to collect Steel Sales' tax liability from any property of Steel Sales which was in the Bank's possession.

The Bank's original answer to Gulf Coast 's writ of garnishment was received and stamped "filed" by the Hinds County Circuit Clerk on April 1, 1992 . On that same day, though, the Bank, having been served with the IRS's notice of levy, prepared and mailed to the clerk for filing an amended answer to the writ of garnishment, requesting that summons be issued against the IRS for an interpleader action. ³ The amended answer was filed with the court on April 6, 1992 . Though the Bank moved quickly to notify the court of the court [sic] of the IRS's claim to the fund, Gulf Coast was quicker. On the same day the Bank's original answer was filed, Gulf Coast filed with the Circuit Clerk a motion for judgment on answer of garnishee-defendant and secured from the circuit judge an order authorizing and directing the Bank to release the funds to Gulf Coast .

ANALYSIS

The question of priority of a judgment lien in competition with a federal tax lien presents a question of federal law. Under federal law,

"[f]ederal tax liens do not automatically have priority over all other liens. Absent provision to the contrary, priority for purposes of federal law is governed by the common-law principle that " 'the first in time is the first in right.' " United States v. New Britain [54-1 USTC ¶9191 ], 347 U.S. 81, 85 (1954).

United States v. McDermott [93-1 USTC ¶50,164 ], 113 S.Ct. 1526 (1993); see also United States v. National Bank of Commerce [85-2 USTC ¶9482 ], 472 U.S. 713, 722-23 (1985). In determining the issue of the which of the two competing liens at issue in the case sub judice--the federal tax lien or Gulf Coast's judgment lien--was "first in time," the court looks to 26 U.S.C. §§6321 , 6322 and 6323. These statutes establish that a lien is created in favor of the United States at the time of the assessment by the government for unpaid federal taxes. ⁴ That lien attaches to all property or property rights the taxpayer then holds or subsequently acquires, and continues until the underlying tax liability is satisfied or the statute of limitations expires. ⁵ The lien, however, is not valid against a judgment lien creditor "until notice thereof." ⁶

In this case, the government's tax lien arose on the date of June 24, 1991 , the date of the initial assessment. ⁷ And notice was given of the government's lien on September 30, 1991 by the IRS's recording of such notice in the records of the Hinds County Chancery Clerk. Gulf Coast 's suit against Steel Sales was not commenced until November 21, 1991 , almost two months later, and Gulf Coast did not secure its judgment against Steel Sales until January 8, 1992 . "[A] competing state lien [is deemed] to be in existence for 'first in time' purposes only when it has been 'perfected' in the sense that 'the identity of the lienor, the property subject to the lien, and the amount of the lien are established.' " McDermott [93-1 USTC ¶50,164 ], 113 S.Ct. at 1528 (quoting New Britain [54-1 USTC ¶9191 ], 347 U.S. at 84). As Gulf Coast 's lien had not even arisen at the time the IRS acquired and gave notice of its lien, manifestly, the government's lien was "first in time." The question presented by the parties' motions, though, is whether it should be "first in right." Plaintiff advances three arguments in support of its claim that it should not. First, plaintiff contends that the United States failed in this proceeding to timely assert a claim to the funds and that consequently, the court must conclude that plaintiff, in the absence of a competing claim, is entitled to receive the funds. Plaintiff next argues that because a judgment was entered in the Circuit Court of Hinds County authorizing Trustmark to relinquish the funds in the Steel Sales account to Gulf Coast , Gulf Coast is entitled to the funds in the account. Finally, according to plaintiff, because Steel Sales lost any interest in the funds in the account upon Gulf Coast 's filing of the March 2, 1992 writ of garnishment, the notice of levy thereafter served upon Trustmark by the United States on March 30, 1992 was ineffective since Steel Sales had no property interest to which the government's lien could attach. These positions will be considered seriatim.

A.

Mississippi law provides by statute for interpleader by a garnishee which has notice that there is a competing claim to the debt or property that is the subject of a garnishment action. Specifically, Miss. Code. Ann. §11 -35-41 (1972) provides if a garnishee,

at any time before final judgment against him, or after such judgment if he had no such notice before the judgment was rendered, shall show that he has been notified that another person claims title to or an interest in the debt or property, which has been admitted by him, or found on trial to be due or to be in his possession, the court shall suspend all further proceedings, and cause a summons to issue or publication to be made for the person so claiming to appear and contest with the plaintiff the right to such money, debt, or property. In such case, if the answer admit[s] an indebtedness, and the garnishee pay[s] the money into court, he shall thereupon be discharged from further liability to either party for the sum so paid. And whenever such garnishee shall by said answer or affidavit show that he has been notified that another person claims title to or interest in such debt or property, it shall be lawful for such third person of his own motion to come in and claim the debt or property, and the claim shall be tried as other claimant's issues are tried whether summons or publication has been made to bring him in or not.

Further, Miss. Code Ann. §11 -35-43 provides that where this interpleader procedure is utilized,

If the claimant, being duly summoned, fail[s] to appear, the court shall adjudge the money, debt, or property to the plaintiff. If he appear[s], he shall propound his claim to the money, debt, or property in writing under oath; and the plaintiff may take issue thereon, and the same shall be tried and determined as other issues. If the issue be found in favor of the plaintiff, judgment shall be rendered for him against the garnishee, and also for the costs of the interpleader against the claimant; but if the issue be found for the claimant, judgment shall be rendered in his favor against the garnishee, and against the plaintiff for costs. Where the garnishee has paid money into court, the judgment shall direct its payment to the party entitled thereto, and a judgment therefore shall not go against the garnishee.

Under federal law, and in particular 28 U.S.C. §2410, the United States may be named as a party in a civil action, in state or federal court, "of interpleader or in the nature of interpleader with respect to, real or personal property on which the United States has or claims a mortgage or other lien." This statute, which operates as a waiver of sovereign immunity for the types of actions identified therein, prescribes the procedure for bringing the United States into the action:

(b) The complaint or pleading shall set forth with particularity the nature of the interest or lien of the United States . In actions or suits involving liens arising under the internal revenue laws, the complaint or pleading shall include the name and address of the taxpayer whose liability created the lien and, if a notice of the tax lien was filed, the identity of the internal revenue office which filed the notice, and the date and place such notice of lien was filed. In actions in the State courts service upon the United States shall be made by serving the process of the court with a copy of the complaint upon the United States attorney for the district in which the action is brought or upon an assistant United States attorney or clerical employee designated by the United States in writing filed with the clerk of the court in which the action is brought and by sending copies of the process and complaint, by registered mail, or by certified mail, to the Attorney General of the United States at Washington, District of Columbia. In such actions, the United States may appear and answer, plead or demur within sixty days after such service or such further time as the court may allow.

28 U.S.C. §1444 operates in conjunction with §2410, and provides a right of removal in suits brought against the United States under §2410:

Any action brought under section 2410 of this title against the United States in any State court may be removed by the United States to the district court of the United States for the district and division in which the action is pending.

Trustmark's amended answer to the writ of garnishment, in which it acknowledged the competing claim of the IRS to the funds in Steel Sales' account and sought to interplead the funds under Miss. Code Ann. §11 -35-41, was filed with the Hinds County Circuit Clerk on April 6, 1992. A copy of that pleading, along with a summons, was mailed to the United States Attorney for the Southern District of Mississippi on May 19, 1992, and on May 28, 1992, the IRS removed the action to this court under 26 U.S.C. §§2410 and 1444 . On July 13, 1992, after the action was removed, Gulf Coast filed a response to the Bank's garnishment-interpleader alleging that it was entitled to the interpled funds and that the claim and interest of the IRS in the funds was secondary to the its claim. On November 19, 1992 , plaintiff filed its motion for summary judgment, citing as the basis for its entitlement to the fund the government's failure to have asserted any claim to the funds.

On December 1, 1992, after Gulf Coast had moved for summary judgment, a copy of a summons and Trustmark's garnishment-interpleader complaint was personally served on the United States Attorney for this district and copies of those documents were mailed to the United States Attorney General, as provided for in §2410. The IRS immediately moved to substitute the United States as a party for the IRS and, within a few days thereafter, on December 7, 1992 , filed its answer to Trustmark's garnishment-interpleader, asserting a claim to the funds at issue. The IRS was dismissed from the suit and the United States substituted in its place by order of the court dated December 8, 1992 . Gulf Coast asserts that it was entitled to judgment as a matter of law since the IRS did not timely assert a claim to the Bank's garnishment-interpleader pleading. More specifically, Gulf Coast argues that the government was served with a summons and interpleader-complaint on May 19, 1992, and therefore, under the terms of §2410, was required to file a responsive pleading within sixty days, or within such further time as allowed by the court. Since it failed within this time frame to file a response or to request additional time within which to do so, it has not properly asserted a claim to these funds and judgment should be rendered for plaintiff. Further plaintiff argues, the court must enter judgment in its favor since Mississippi law provides that the court "shall adjudge the money . . . to the plaintiff" if a party who has been duly summoned in a statutory garnishment-interpleader action fails to appear.

The arguments advanced by plaintiff in support of its position implicate a host of thorny procedural issues. The method for serving the United States in interpleader actions of this sort is prescribed by §2410:

In actions in the State courts service upon the United States shall be made by serving the process of the court with a copy of the complaint upon the United States attorney for the district in which the action is brought or upon an assistant United States attorney or clerical employee designated by the United States in writing filed with the clerk of the court in which the action is brought and by sending copies of the process and complaint, by registered mail, or by certified mail, to the Attorney General of the United States at Washington, District of Columbia.

The mere mailing of copies of the summons and garnishment-interpleader pleading in May 1992 to the United States Attorney for this district was, therefore, defective, and service was not properly made upon the United States, as provided under §2410, until December 1, 1992, when personal service of the Bank's amended answer was first made upon the United States Attorney for the Southern District of Mississippi. Cf. United States v. Dansby, 509 F.Supp. 188, 197 (N.D. Ohio 1981) ("By consenting to be sued, . . . the United States has required neither that it be named a party in all suits allowable under 28 U.S.C. §2410(a) nor that service be effectuated in the manner described in 29 U.S.C. §2410(b)[.] . . . At most the service provision directs the appropriate fashion to effectuate service upon the United States when it is named as a party in a suit allowable under 28 U.S.C. §2410.").

While the government argues that it was not required to file an answer to the Bank's interpleader-garnishment action prior to December 1, 1992, the date when it was properly made a party to this suit, plaintiff urges that the government waived any defect in service of process by responding to the May 19, 1992 "service" by removing the action to this court and thereafter participating in these proceedings ⁸ without raising any objection based on insufficiency of service of process. ⁹ The government takes the position, though, that as a matter of law, the lack of proper service upon the United States cannot be waived, even though the United States removes a state court action to federal court.

The court has discovered no consensus on the question of whether the government may waive objections to technical defects in service of process. The manner for effecting service of process upon the government under Rule 4(d)(4) of the Federal Rules of Civil Procedure is identical to the manner of service prescribed by §2410. The effect of straying from strict compliance with these service provisions is the subject of some disagreement. As one court has observed,

The provisions of Rule 4(d)(4) effectuate a waiver of the government's sovereign immunity. City of New York v. McAllister Brothers, Inc., 278 F.2d 708, 710 (2d Cir. 1960). Several courts have therefore concluded that strict compliance with Rule 4(d)(4) is mandatory. Messenger v. United States , 231 F.2d 328, 330 (2d Cir. 1956); Wallach v. Cannon, 357 F.2d 557, 559 (8th Cir. 1966); Lemmon v. Social Security Administration, 20 F.R.D. 215, 217 (D.S.C. 1957). See Hodge v. Rostker, 501 F.Supp. 332, 333 (D.D.C. 1980). Other courts have held that where the necessary parties in the government have actual notice of a suit, suffer no prejudice from a technical defect in service, and where there exists a justifiable excuse for the failure to serve properly, Rule 4(d)(4) should not be so rigidly construed. Jordan v. United States , 694 F.2d 833, 836 (D.C. Cir. 1982); Rollins v. United States , 286 F.2d 761, 765 (9th Cir. 1961); Piendak v. Local Board No. 5, 318 F.Supp. 1393, 1396 (W.D. Pa. 1970); Fugle v. United States , 157 F.Supp. 81, 84 (D. Mont. 1957).

Williams v. United States , 558 F.Supp. 66, 67 (E.D.N.C. 1983). See also Zankel v. United States, 921 F.2d 432, 436-38 (2d Cir. 1990) (though Rule 4(d)(4) is "mandatory," and not merely "directory," reasons for adopting Jordan exception are persuasive); Petrie v. Commissioner of Internal Revenue [88-1 USTC ¶9350 ], 686 F.Supp. 1407, 1411 (D. Nev. 1988) (applying exception to suit against government agency). This issue has arisen most often in cases in which the government, either after the time has passed for serving process or after the expiration of an applicable limitations period, has sought dismissal of a complaint against it on the basis of a defect in service, and the courts, it appears, have devised this "exception" as a means of protecting the claims of diligent and unsuspecting plaintiffs. This case, however, presents a far different scenario. The government here does not request dismissal of the case based on a defect in process but rather by asserting the defect in process seeks to be protect its ability to assert its claim to the funds in this action.

One court has explicitly held that the government, like any other party, waives defects in service of process by an appearance. See Lowndes Bank v. MLM Corp., 395 S.E.2d 762 ( W.Va. 1990). But as the court observed in Rogue v. United States, 857 F.2d 20, 22 (1st Cir. 1988), the view of those courts which have indicated that compliance with provisions relating to service on the United States functions as a condition upon which the government's consent to be sued depends, is "a view which would complicate [a] waiver analysis." The Rogue court found it unnecessary to decide whether it would take that view. This court, likewise, finds it unnecessary to resolve the issue of whether the government's removal of this case amounted to a waiver of objections relating to defects in service of process. Pretermitting consideration of the parties' arguments on this question, the court rejects the plaintiff's position for a more fundamental reason. That is, even assuming arguendo, as plaintiff contends, that the United States waived any objection to the failure of service of process by removing the case to this court, judgment for the plaintiff cannot be predicated on the government's failure to timely assert a claim to the funds since, in the court's opinion, that would be tantamount to awarding plaintiff a judgment against the United States by default.

It has been repeatedly held that "[t]he failure of a named interpleader defendant to answer the interpleader complaint and assert a claim to the res can be viewed as forfeiting any claim of entitlement that might have been asserted." General Accident Group v. Gagliardi, 593 F.Supp. 1080, 1089 (D. Conn. 1984); Nationwide Mut. Fire Ins. Co. v. Eason, 716 F.2d 130, 133 n.4 (4th Cir. 1984) ("if all but one named interpleader defendants defaulted, the remaining defendant would be entitled to the fund."); New York Life Ins. Co. v. Connecticut Dev. Auth., 700 F.2d 91, 95 & n. 6 (2d Cir. 1983) (default of interpleader defendants expedited conclusion of interpleader action by obviating need for judicial determination of answering defendant's entitlement to stake). Thus, an interpleader claimant may obtain judgment when the remaining claimants have defaulted unless, however, the competing claimant is the United States . That is because Rule 55 of the Federal Rules of Civil Procedure, which governs default judgments, provides that "[n]o judgment by default shall be entered against the United States or an officer or agency thereof unless the claimant establishes a claim or right to relief by evidence satisfactory to the court."

Plaintiff, of course, acknowledges that it cannot secure a default judgment against the United States and denies that this is what it is attempting to do. Though perhaps not so in form, the substance of plaintiff's motion strikes the court as a request for judgment by default. What the plaintiff seeks by its motion is a judgment in its favor based on the government's failure to plead entitlement to or to defend a previously asserted claim to the disputed funds. This result will not be permitted. See Carroll v. Secretary of Health, Educ. & Welfare, 470 F.2d 252 (5th Cir. 1972) (reversing district court's entry of default judgment due to Secretary's failure to file transcript; "Rule 55(e) is designed to prevent a judgment from being entered against the government because of a procedural default. . . ."). ¹⁰

B.

Plaintiff next argues that it is entitled to receive the funds on deposit in Steel Sales' account with Trustmark because the Hinds County Circuit Court entered a judgment to that effect on April 1, 1992 . Plaintiff's position on this point is refuted by Miss. Code Ann. §§11 -35-41 and 11-35-43 which, when read together, establish that a judgment entered against the garnishee becomes, in effect, a nullity when the garnishee, after entry of the judgment, notifies the court of the claim of another person and interpleads the subject property. If the other claimant appears and asserts a claim to the property, then its claim "shall be tried and determined as other issues," even if a judgment has already been entered for the original claimant. Plaintiff's position is, therefore, without merit. ¹¹

C.

Plaintiff maintains, finally, that the issue here is not one of priorities but rather is whether Steel Sales had any interest in the funds in the Trustmark account at the time the IRS attempted to execute on its lien by filing its notice of levy. Plaintiff takes the position that the notice of levy was ineffective since, at the time the IRS filed the notice of levy on Trustmark, the funds in the Steel Sales account had been bound by plaintiff's writ of garnishment and consequently, Steel Sales had no property interest in the funds. And, since the IRS acquires only such rights as the taxpayer possesses, it acquired no interest in the account by virtue of the notice of levy.

Though federal law is applied to determine the ultimate question of the priority of federal tax liens as against competing liens, the court looks to state law to determine the legal interest of the taxpayer in the property.

It has long been the rule that "in the application of a federal revenue act, state law controls in determining the nature of the legal interest which the taxpayer had in the property . . . sought to be reached by the statute." Morgan v. Commissioner [40-1 USTC ¶9210 ], 309 U.S. 78, 82, 60 S.Ct. 424, 426, 84 L.Ed.585, 589. . . . However, once the tax lien has attached to the taxpayer's state-created interests, we enter the province of federal law, which we have consistently held determines the priority of competing liens asserted against the taxpayer's "property" or "rights to property."

Aquilino v. United States [60-2 USTC ¶9538 ], 363 U.S. 509, 513-14 (1960). The question, therefore, is whether the plaintiff's filing of its writ of garnishment deprived Steel Sales of a "property interest" in the account and thereby, rendered the subsequently served notice of levy by the IRS ineffective. The answer to this question is provided by United States v. Mississippi State Tax Commission, 574 So.2d 613 (Miss. 1990), in which the Mississippi Supreme Court addressed and rejected an argument substantially identical to that presented by the plaintiff in the case at bar.

In that case, Gamco, Inc. was assessed at various times throughout 1984 by the IRS and the Mississippi State Tax Commission for failure to pay taxes. On May 21, 1984 , the United States enrolled its federal tax liens with the Clarke County Chancery Clerk's office. Thereafter, on September 7, 1984 , the State of Mississippi requested that writs of garnishment be issued on the State Highway Commission, with which Gamco had entered into a construction contract. On February 4, 1985 , the lower state court ordered the Highway Commission to withhold Gamco's earnings under the contract until it accumulated sufficient funds to cover the state tax assessments and court costs. Approximately two weeks after that judgment was entered, the United States served a notice of levy on the Highway Commission seeking to collect Gamco's delinquent federal taxes. The Highway Commission sought and was granted leave to interplead the funds.

The lower court concluded that at the time the notice of levy was filed, Gamco did not have an interest in the funds that had been garnished since the State Tax Commission already had a judgment ordering the Highway Commission to pay the garnished funds into the registry of the court. The court, therefore, found the federal tax levy ineffective. The Mississippi Supreme Court reversed, and awarded the funds to the United States . The court found that the federal tax liens were entitled to priority over the state tax liens because the federal tax liens were perfected before the State Tax Commission served its writ of garnishment on the Highway Commission. The court explicitly rejected the State's assertion that Gamco no longer had any interest in the funds due to the judgment of the lower court, stating that "[s]uch a ruling would go against the clear language of §6323(a) which only gives priority to judgment lien creditors when they are not subject to notice of the federal tax lien." 574 So.2d at 617. The court further rejected the argument that service of a notice of levy by the United States was necessary to establish the priority of its claim:

The fact that the levy was ineffective, however, does not necessarily mean that the federal tax lien should not be given priority as to the competing state lien. A levy is admin istrative and the fact that the Highway Commission was not required by §6332(a) to surrender the funds does not have any effect on the rights of competing liens.

Id. ¹² In accordance with United States v. Mississippi State Tax Commission, this court concludes that under Mississippi law, the government's lien attached to Steel Sales' property interest in the subject funds and that the government's tax lien has priority over the competing claim asserted by plaintiff. Therefore, the court concludes that the government's motion for summary judgment should be granted and that plaintiff's motion for summary judgment must be denied.

For the foregoing reasons, it is ordered that the motion of the United States for summary judgment is granted and the motion of Gulf Coast for summary judgment is denied.

A separate judgment will be entered in accordance with Rule 58 of the Federal Rules of Civil Procedure.

ORDERED.

¹ To be more precise, though the fund at issue consists of $9,140.18, Gulf Coast seeks to establish entitlement to $9,028.82 of the fund, whereas the government claims entitlement to the entire fund.

² At the time the writ of garnishment was filed on March 2, 1992 , Steel Sales had $28.28 in its account. On March 6, 1992 , Steel Sales made a deposit to the account of $9,000. Deposits or adjustments to the account totaling $110.36 were made in May and June 1992, thus increasing the balance to $9,140.18.

³ Counsel for Gulf Coast has represented to the court that he advised counsel for Trustmark in an April 1, 1992 telephone conversation that Gulf Coast would not object to Trustmark's filing of this amended answer.

⁴ 28 U.S.C. §6321 provides:

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.

⁵ 28 U.S.C. §6322 provides:

Unless another date is specifically fixed by law, the lien imposed by section 6321 shall arise at the time the assessment is made and shall continue until the liability for the amount so assessed (or a judgment against the taxpayer arising out of such liability), is satisfied or becomes unenforceable by reason of lapse of time.

⁶ 28 U.S.C. §6323(a) provides:

The lien imposed by section 6321 shall not be valid as against any purchaser, holder of a security interest, mechanic's lienor, or judgment lien creditor until notice thereof which meets the requirements of subsection (f) has been filed by the Secretary.

⁷ "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." United States v. Celina [83-2 USTC ¶9688 ], 721 F.2d 163, 166 (6th Cir. 1983).

⁸ Prior to the December 1, 1992 service of process, the government participated in the entry of a scheduling order in the case.

⁹ The court notes that no explanation has been provided as to why the government was served with process in December 1992, months after it had removed the case to federal court.

¹⁰ Even were the court to find Rule 55(e) inapplicable and to further find that defects in the initial service of process were waived by the government, the court would nevertheless conclude that the government should be permitted to assert its claim to the funds. The situation presented is at least analogous to that presented in the context of default judgments, and it has been repeatedly held that default judgments are not favored by the law in view of the "strong policies favoring the resolution of genuine disputes on their merits." Rather, it is the policy of judicial admin istration to favor disposition of cases on their merits. Jackson v. Beech, 636 F.2d 831, 835 (D.C. Cir. 1980) ("Default judgments are not favored by modern courts, perhaps because it seems inherently unfair to use the court's power to enter and enforce judgments as a penalty for delays in filing). See also United States , ex. rel. Time Equip. Rental & Sales, Inc. v. Harre, 983 F.2d 128 (8th Cir. 1993); Bieganek v. Taylor, 801 F.2d 879 (7th Cir. 1986). The government here, by serving its notice of levy and thereafter removing the case to this court, evinced a definite intent to assert a claim to the fund. At worst, it failed to properly pursue its intent by a mere procedural default. Under the circumstances, a resolution of the dispute on the merits is certainly warranted.

¹¹ The court would also note that if the United States is not joined as a party "in any civil action or suit described in" 28 U.S.C. §2410, then any judgment in such an action "shall be made subject to and without disturbing the lien of the United States, if notice of such lien has been filed in the place provided by law for such filing at the time such action or suit is commenced. . . ." 26 U.S.C. §2475.

¹² 26 U.S.C. §6332(a) provides:

[A]ny person in possession of (or obligated with respect to) property or rights to property subject to levy or upon which a levy has been made shall, upon demand of the Secretary, surrender such property or rights (or discharge such obligation) to the Secretary, except such part of the property or rights as is, at the time of such demand, subject to an attachment or execution under any judicial process.

The lower court in United States v. Mississippi State Tax Commission had concluded that "the service of garnishment writs, answer, and judgment . . . [was] execution under the judicial process," and that consequently, under §6332(a) , the notice of levy was ineffective and the federal government's lien, therefore, could not have priority. 574 So.2d at 616. The Supreme Court, however, explained:

Without the exception language in §6332(a) , the Commission would be subject to suit for failure to honor the levy if it went ahead and paid the funds to the Circuit Court. The exception language prevents such suit, but it does not determine the priority of the tax liens.

Id. (emphasis supplied).

 

 

[88-2 USTC ¶9576] Thomas Funding Corp., Plaintiff v. The United States , Defendant

U.S. Claims Court, 370-85C, 9/12/88

[Code Sec. 6321 ]

Lien for taxes: Estoppel.--IRS tax liens and levy on a government contractor's property had priority over the claim of an assignee of the proceeds under the government contract because the assignee's secured financing statement was filed some two months after the federal tax liens. Furthermore, had the assignee utilized reasonable diligence prior to executing the assignment agreement by checking the recorder of deeds or other public records where federal tax liens are required to be filed, it would have had actual knowledge of the existing liens inasmuch as they were filed over six months prior to the time the assignment was executed. Accordingly, the assignee was properly charged with constructive notice of the pre-existing federal tax liens, and, in effect, it had actual knowledge of the pre-existing federal tax liens. As a consequence, the assignee's argument was rejected that an issue of material fact existed regarding the IRS's alleged fraudulent failure to warn the assignee of the worthlessness of its security interest.

Mark Bradley Roth, Westbury , N.Y. , for plaintiff. John R. Bolton, Assistant Attorney General, Sharon Y. Eubanks, Department of Justice, Washington, D.C. 20530, for defendant.

OPINION

Introduction

GIBSON, Judge:

Thomas Funding Corp. (hereinafter plaintiff or Thomas Funding), a New York corporation, filed a complaint in this court on June 21, 1985, alleging, in essence, that the United States (defendant herein) wrongfully withheld payments due the plaintiff. Such payments, allegedly due, were the result of an assignment contract between plaintiff and a government contractor, i.e., Ferguson-Bryan & Associates, Inc. (FBA). The plaintiff's complaint seeks damages and a judgment in the amount of $287,865.61, plus interest and costs etc., "and for such other and further relief as the [c]ourt may deem just and proper."

In opposition, the defendant filed a motion for summary judgment maintaining that the court lacks jurisdiction under the Contract Disputes Act, 41 U.S.C. §§601 et seq., and the Tucker Act, 28 U.S.C. §1491 ; that the plaintiff's complaint is barred by the doctrine of res judicata; and, furthermore, that, should the plaintiff prevail on those issues, a tax lien duly filed by the Internal Revenue Service has priority over the plaintiff's rights under the assignment contract. Thus, concludes defendant, the plaintiff is not entitled to recover the amount prayed for in its complaint under any hypothesis.

Inasmuch as we find no genuine issues of material fact, as discussed infra, the court grants the defendant's motion for summary judgment.

Facts

On December 10, 1982 , the United States Agency for International Development (USAID or defendant herein) entered into contract #NEB-0042-C-00-3006-00 with the Small Business Administration (SBA) for the purpose of assisting the Egyptian Ministry of Social Insurance in implementing a more efficient system of data processing. Shortly thereafter, SBA subcontracted said work to Ferguson-Bryan & Associates, Inc. on or about December 14, 1982 . FBA is a corporation headquartered in Washington , D.C. Under this subcontract, FBA was to deal directly with USAID, and assume the status thereunder of "contractor." Payment was to be made in installments upon the completion of specific portions of the job by FBA, which would then submit a voucher to USAID representing completion of such portion of the work and a demand for payment thereon.

On February 11, 1983 , FBA assigned all of its rights to the proceeds under the contract with USAID to Thomas Funding Corp., a financial institution in the business of providing funds to government contractors. ¹ Notice of this assignment was received by USAID on February 17, 1983 .

Subsequent to said assignment, and the submission and payment of certain invoices, USAID began an investigation into the validity and accuracy of various labor charges on vouchers #12 and #13, which allegedly indicated that FBA had purposely overcharged USAID. Payment on these two vouchers and on voucher #14 was suspended and a stop work order was issued, which stood in effect for 90 days.

During the time the stop work order was in effect, FBA performed additional work under the contract and submitted voucher #15 requesting payment for that work. USAID refused to make payment on that voucher as well.

Upon a further investigation into the alleged overcharges on the part of FBA, USAID determined that there had in fact been an intentional overcharge and terminated for default the prime contract in issue on March 5, 1984. Approximately one week after the termination of said contract, i.e., March 13, 1984, the Internal Revenue Service served upon USAID a Notice of Levy on all property, rights to property, money, credits, and bank deposits in USAID's possession and belonging to FBA, who purportedly owed the IRS $527,878.62 in back taxes. On or after March 14, 1984 , plaintiff was advised of the service of the foregoing Notice of Levy. With respect to the delinquent taxes of FBA, the IRS had previously duly filed four tax liens with the District of Columbia Recorder of Deeds between April 20, 1982 and December 19, 1983 . Three of these liens, totalling $578,740.55, were filed in early 1982, long before FBA's assignment (February 11, 1983) of the contract proceeds to the plaintiff, Thomas Funding. Also two of those liens were filed prior to plaintiff's filing its Form UCC-1 financing statement on or about July 23, 1982 . Given the foregoing liens filed by the IRS, USAID made no further payments to plaintiff who, on or about March 20, 1984, by telegram, claimed that its Form UCC-1 perfected the first lien on all proceeds due FBA by USAID under the contract. On said basis, plaintiff demanded that no payments be made to any party other than plaintiff.

Following a review of FBA's requests for payment on vouchers 12, 13, 14, and 15, USAID authorized payment on April 29, 1984 , to the IRS in the amount of $77,545.54, i.e., an amount representing the sum of payments due on vouchers 12, 13, and 14 minus an "outstanding local currency advance." By a prior letter to USAID dated April 2, 1984 , Thomas Funding demanded payment of the balance due under the contract and therein threatened legal action. However, the contracting officer did not respond to this demand.

On May 9, 1984 , FBA through counsel filed an appeal with the Armed Services Board of Contract Appeals (ASBCA) of the contracting officer's March 5, 1984 decision to terminate the contract. After filing its appeal with said board, FBA motioned for voluntary dismissal due to an alleged lack of funds. Consequently, the claim for wrongful termination was dismissed with prejudice by the board. Thomas Funding made no effort to take part in the case before the ASBCA.

By letter dated October 5, 1984 , Thomas Funding filed a claim with USAID, pursuant to 41 U.S.C. §605, demanding $287,865.61, which it claimed to be the balance of proceeds due under the contract. This claim was not certified. The letter contained a provision characterizing the document as a "contract claim" in compliance with the Contract Disputes Act, 41 U.S.C. §605. USAID responded to this demand by letter dated December 19, 1984, and advised that Thomas Funding was not a party to the government contract in question, thus not a contractor, and, therefore, could not bring a claim under the Contract Disputes Act. Thomas Funding then filed a complaint in this court on June 21, 1985 , alleging that FBA, the assignor, has performed work under the contract worth $287,865.61, and that USAID has wrongfully withheld payments due to Thomas Funding. The United States has now moved for summary judgment.

Contentions of the Parties

 

A. Defendant

The defendant has moved for summary judgment claiming, first, that the plaintiff lacks privity of contract necessary to bring an action under the Tucker Act. Privity is lacking, argues defendant, because plaintiff did not enter into a contract with the United States , but instead received an assignment of proceeds under a government contract in which the defendant was not a party. As a corollary argument, defendant also claims that the plaintiff, because it was not a party to a government contract, cannot assume the status of "contractor" as that term is statutorily defined under the Contract Disputes Act, 41 U.S.C. §601 et seq.

Secondly, the defendant asserts that the doctrine of res judicata bars plaintiff's breach claim because the contractor (FBA) has already brought an action against defendant for wrongful termination of the contract and that action was later voluntarily dismissed by FBA with prejudice. Therefore, defendant maintains, plaintiff cannot show that the defendant has wrongfully withheld money due to either FBA or Thomas Funding as a result of work performed by the contractor.

Lastly, defendant includes three 1982 Notices of Federal Tax Liens and a 1984 Notice of Levy from the IRS in its supporting submissions, and points out that a portion of the money claimed by the plaintiff under the Assignment of Claims Act has already been properly paid to the IRS, which has priority over plaintiff's proceeds assignment, and that the remaining balance legally due IRS under such levy substantially exceeds the amount claimed by the plaintiff. The defendant concludes that, given the foregoing circumstances, the plaintiff, under any legal theory, is not entitled to any recovery in this action.

B. Plaintiff

Thomas Funding, Inc., the assignee of the government's contract with FBA and plaintiff herein, in response to defendant's motion for summary judgment, avers a plethora of bases allegedly justifying the action herein. First, plaintiff claims that the defendant is precluded from raising any objections to this court's jurisdiction. The plaintiff rests its argument on a previous U.S. Claims Court denial of the government's motion for summary judgment in a separate case involving a different contract and assignor.

Plaintiff further argues that here privity of contract is not necessary, to the extent that assignees have in the past been allowed to bring actions both in this court and its predecessor, the Court of Claims, against the United States to collect monies due.

In furtherance of the foregoing, plaintiff also makes two alternative arguments. First, it argues that privity of contract is unnecessary in this case because it (plaintiff) is an intended third-party beneficiary of the government's contract with FBA. Secondly, says plaintiff, privity exists between itself and the United States through an implied-in-fact contract in which the latter's acceptance of the assignment was in consideration of plaintiff's offer to provide funds for the contractor. For all of these reasons, the plaintiff asserts jurisdiction under the Tucker Act. In addition, plaintiff argues that as a party to a government contract by virtue of a valid assignment, this court also has jurisdiction under the Contract Disputes Act of 1978, 41 U.S.C. §§601 et seq.

In response to the defendant's argument that plaintiff's claim is barred by res judicata, plaintiff, in its opposition brief, states that the doctrine is not applicable because the case by FBA against the United States was not "on the merits," did not involve litigation of an identical issue, and was not between these same parties or their privies.

Lastly, as to the priority of the federal tax liens, the plaintiff argues that because the assignor did not have an interest in the proceeds from the contract at the time the federal tax liens were filed, i.e., the work had not yet been performed, plaintiff's assignment has priority over said tax liens. Additionally, plaintiff avers that defendant knew of the prior filed federal tax lien and, thus, had a duty to immediately advise plaintiff of the worthlessness of the collateral. By failing to so inform, plaintiff argues, defendant breached its duty and is liable to it notwithstanding the priority of the federal tax liens. Consequently, according to the plaintiff, the defendant is liable to it for the money paid to the IRS on the levy ($77,545.54).

Scope of the Court's Opinion

 

In deciding this motion for summary judgment, the court must, therefore, determine three broad issues: (i) whether the plaintiff, as an assignee to a government contract under the Assignment of Claims Act, 31 U.S.C. §3727, 41 U.S.C. §15 , has privity of contract with the United States for purposes of asserting a claim under the Tucker Act, 28 U.S.C. §1491 ; (ii) whether such assignee to a government contract is a "contractor" as that term is defined under the Contract Disputes Act of 1978, 41 U.S.C. §§601 et seq., and, as such, entitled to bring a breach claim under that statute; and (iii) whether a federal tax lien on the assignor's property has priority over the plaintiff's assignment of the proceeds under the government contract and bars it from recovering under this claim where the IRS filed three tax liens, which far exceed the amount of damages claimed by plaintiff, prior to the assignment by the prime contractor to the plaintiff and the filing of Form UCC-1.

Discussion

I. Jurisdiction

We now address plaintiff's contention that jurisdiction is conferred upon this court by the Tucker Act, 28 U.S.C. §1491 , and the Contract Disputes Act (CDA), 41 U.S.C. §§601 et seq. With respect to the foregoing, defendant avers that--(i) there is a want of privity; (ii) plaintiff is not a contractor under the CDA; and (iii) moreover, its letter filed with the contracting officer is not a claim within the contemplation of that statute.

A. The Tucker Act, 28 U.S.C. §1491

Notwithstanding plaintiff's nebulous averment that in a breach action, as it curiously asserts here, privity of contract is not required to be shown with the United States in order to recover, we hold that plaintiff may not maintain a breach action on these facts under 28 U.S.C. §1491 . ² As has long been recognized in government contract law, privity of contract is an indispensable prerequisite to the maintenance of a suit in this court against the government under the Tucker Act. See Erickson Air Crane Co. v. United States , 731 F.2d 810 (Fed. Cir. 1984) (citing United States v. Johnson Controls, Inc., 713 F.2d 1541, 1550-52 (Fed. Cir. 1983)). "The government consents to be sued only by those with whom it has privity of contract . . . ." Erickson, 731 F.2d at 813. In both Erickson and Johnson Controls, a subcontractor was precluded from suing the government because it could not establish privity of contract, which the courts found to be dispositive.

Although these cases both involve the issue of whether a subcontractor, as opposed to an assignee, has privity of contract with the government, the holding in each applies to the present situation equally well because the distinction is without a significant difference. See Produce Factors Corp. v. United States , 199 Ct.Cl. 572, 467 F.2d 1343 (1972). In Produce Factors, as in the present case, an assignee attempted to establish privity of contract, against the United States , through a valid assignment of proceeds arising from a government contract. The court rejected this argument, stating that an assignment "[cannot], and did not, create any contractual relationship between [the assignee] and the United States ." Id. at 581, 467 F.2d at 1348.

As an assignee under the Assignment of Claims Act, the plaintiff herein simply does not acquire privity of contract with the government in a separate contract with its assignor, which is necessary in order for it to maintain a breach action in this court under the Tucker Act. The plaintiff tortuously attempts to circumvent this fundamental requirement by arguing that privity of contract between it and the government was established through an implied-in-fact contract that was formed when the government acknowledged, or, as plaintiff would have it, "accepted" plaintiff's "offer" to lend the prime contractor funds in exchange for the assignment of the proceeds. Yet, as Produce Factors makes clear:

[T]he plaintiff, whose relationship with the United States arose only because of its status as an assignee under the Assignment of Claims Act, as amended, did not have privity of contract or any contractual relationship [even implied] with the Government. Therefore, its breach of contract action cannot be maintained. Plaintiff had only the rights of an assignee of Government contract proceeds under the assignment statute.

Produce Factors, 199 Ct.Cl. at 578, 467 F.2d at 1347 (emphasis added).

It is hornbook law that all the elements of an expressed contract must exist in order to create an implied-in-fact contract. For example, including but not limited to the requisite privity, a meeting of the minds and adequate consideration are the fundamental linchpins to such a contract. It is sufficient to say that plaintiff's implied-in-fact contract argument is entitled to short-shrift inasmuch as it totally fails to carry its burden in that regard. See Algonac Manufacturing Co. v. United States , 192 Ct.Cl. 649, 763, 428 F.2d 1241, 1255 (1970); and Diamond Manufacturing Co. v. United States , 3 Cl.Ct. 426 (1983).

Plaintiff also makes an alternative argument, seeking to invoke Tucker Act jurisdiction, to the effect that it was an intended third-party beneficiary of the prime contract (NEB-0042-C-3006-00) between the government and plaintiff's assignor (FBA), and it therefore has the right to bring an action against the government thereunder, which, it claims, is the promisor. The plaintiff rests this conclusion on the fact that the defendant knew of the valid assignment to plaintiff in that it was served with a copy thereof on or about February 11, 1983, and also knew that the prime contractor (FBA), according to plaintiff, would not have been able to fulfill its obligations under the contract with the government absent the financing-assignment arrangement.

The foregoing averments hardly make the plaintiff an intended third-party beneficiary with enforceable breach rights against the United States . In order for one to have the recognized status of a third-party beneficiary of a government contract to which it is not a party, the contract with the government must evidence not only a clear intention to confer a benefit to that third party, but also an intention to give that third party the right to maintain an action against the government in order to protect the resulting benefit. See Baudier Marine Electronics v. United States, 6 Cl. Ct. 246 (1984) (citing German Alliance Insurance Co. v. Home Water Supply Co., 226 U.S. 220 (1912); Rob o Wash, Inc. v. United States, 223 Ct. Cl. 693, 697-98 (1980); Orchards v. United States, 4 Cl. Ct. 601, 609-12 (1984), aff'd, 765 F.2d 163 (Fed. Cir. 1985).

In the case at bar, the plaintiff has not even alleged that the government knew of its existence at the time the prime contract was executed. The assignment occurred nearly three months after the execution of the prime contract, which contained no reference to the plaintiff whatsoever. While notice to the defendant of the assignment itself requires the defendant to make payments to the assignee, see 31 U.S.C. §3727, 41 U.S.C. §15 , this obligation arose from a statute coupled with an entirely separate contract to which the defendant was not a party in any sense. Simply stated, the plaintiff has neither alleged nor established the elements necessary to show that it is a third-party beneficiary, and we so find.

Pertinent to the overall privity issue, underlying plaintiff's alternative implied-in-fact and third-party beneficiary contract contentions, the court in Produce Factors, 199 Ct. Cl. at 580, 467 F.2d at 1348, further states that:

While the assignee lending institution indirectly benefits the Government through financing the contractor's performance, such indirect benefits do not serve to create privity of contract with the United States .

B. The Contract Disputes Act, 41 U.S.C. §§601 et seq.

Plaintiff also, in addition to the foregoing, asserts jurisdiction under the Contract Disputes Act, 41 U.S.C. §§601 et seq. We hold, however, that because the plaintiff is not a "contractor," as discussed infra, it cannot maintain its action in this court under that statute.

Section 609 of Title 41 U.S.C. states that claims against the government can only be brought by a "contractor." See 41 U.S.C. §609. A "contractor" is defined in section 601 as "a party to a government contract other than the government." 41 U.S.C. §601(4) . The defendant urges that because the plaintiff was not a "party" to the contract in question, and that only the prime contractor and the government were, the plaintiff is clearly not a "contractor" for purposes of the CDA. Thus, defendant argues no breach claim for damages, on these facts, may be maintained in this court.

While this view somewhat oversimplifies the issue, it is essentially correct, for again the requirement of privity of contract must be shown for all parties attempting to maintain a suit as a contractor against the government under the Contract Disputes Act of 1978. See Erickson, 731 F.2d at 813; Johnson Controls, 713 F.2d at 1548-52. In short, the basic tenet of government contract law that the government consents to be sued only by those (i.e., a contractor) with whom it has privity of contract, although exceptions exist within very limited circumstances, is emphatically embodied in the Contract Disputes Act. See Erickson, 731 F.2d at 813. As discussed in the previous section, neither the prime contract nor the contract of assignment was a tripartite agreement. To the contrary, both were separate and distinct subject matter contracts. That is to say, plaintiff was not a party to the former contract, and the government was not a party to the latter. Thus, under no hypothesis can it be said that plaintiff herein was in privity with the United States under either contract.

To allow plaintiff, against this background, to maintain an action against the government under the CDA would disserve the policy considerations behind said Act: to provide a comprehensive, efficient system for adjudicating contract claims against the government, and to provide a single point of contact between the contracting officer and the contractor. See S. Rep. No. 1118, 95th Cong., 2d Sess. 16, reprinted in 1978 U.S. Code Cong. & Ad. News 5235, 5250. In subject case, the prime contractor (FBA) has already brought an action for breach against the government before the ASBCA, which, at the assignor's motion, was dismissed by the board with prejudice on or about May 16, 1985 . One can plainly see, on this record, that the policy of providing a single point of contact between the contractor and the government would be lost if the government, after successfully litigating a suit brought against it by a contractor, then had to face various breach claims brought by the contractor's assignee. ³ Therefore, because the plaintiff does not have the necessary privity of contract relationship with the defendant, i.e., as a "contractor," and because allowing it to proceed in place of the prime contractor would undermine the purpose of the Contract Disputes Act, we hold that this court does not have jurisdiction under that Act to entertain plaintiff's complaint.

C. The Assignment of Claims Act, 31 U.S.C. §3727, 41 U.S.C. §15

As has long been recognized by this court and its predecessor, the Court of Claims, an assignee to the proceeds of a government contract under the Assignment of Claims Act is entitled to sue the government in order to recover payment for work performed by the contractor. See Merchants National Bank v. United States, 231 Ct. Cl. 563, 689 F.2d 181 (1982); Tuftco Corp. v. United States, 222 Ct. Cl. 277, 614 F.2d 740 (1980); First National City Bank v. United States, 210 Ct. Cl. 375, 537 F.2d 426, vacated, 212 Ct. Cl. 357, 548 F.2d 928 (1976); Florida National Bank v. United States, 4 Cl. Ct. 396 (1984); Maryland Small Business Development Financial Authority v. United States, 4 Cl. Ct. 76 (1983); Produce Factors, Inc. v. United States, 199 Ct. Cl. 572, 467 F.2d 1343 (1972); Wyoming National Bank v. United States, 154 Ct. Cl. 590, 292 F.2d 511 (1961); Chelsea Factors, Inc. v. United States, 149 Ct.Cl. 202, 181 F.Supp. 685 (1960); Arlington Trust Co. v. United States , 121 Ct.Cl. 32, 100 F.Supp. 817 (1951). This is not to say, however, that the assignee may bring an action for breach of contract against the government when there is no privity of contract between the two parties. See Produce Factors, 199 Ct.Cl. at 580, 467 F.2d at 1348. Rather, an assignee under such circumstances may only bring a suit against the government for wrongful payment to a third party, and may not maintain an action for breach of contract in this court.

Under the Assignment of Claims Act, once notice of the assignment is duly given to the government, it has a duty to make payments directly to the assignee for work performed by the assignor. In this case, the government received notice of the assignment to Thomas Funding from FBA on February 17, 1983 , from time it owed a duty to Thomas Funding to make payments directly thereto. As any failure to fulfill this duty is an actionable offense on the part of the government, this court has jurisdiction under the Assignment of Claims Act, 31 U.S.C. §3727, 41 U.S.C. §15 , only for plaintiff's claim for wrongful payment. The Act did not give this court jurisdiction to entertain actions in breach of contract brought against the government by assignees.

In the instant case, Thomas Funding has in fact brought two different claims against the government: the first alleging non-payment of $210,330.07, and the second alleging wrongful payment of $77,545.54 to the Internal Revenue Service. We hold, therefore, that this court has jurisdiction under the Assignment of Claims Act, 31 U.S.C. §3727, 41 U.S.C. §15 , only to the extent that Thomas Funding alleges wrongful payment to the IRS, i.e., $77,545.54; and this court does not have jurisdiction over the remaining claim of $210,330.07, as that claim would necessarily involve the determination of whether the government's termination of the prime contract was legally permissible--what the court in Produce Factors termed "performance aspects" of the contract and refused to hear. See Produce Factors, 199 Ct.Cl. at 580-81, 467 F.2d at 1348.

II. Priority of the IRS Tax Liens

Notwithstanding the existence of jurisdiction in this court, supra, we are compelled, nevertheless, to grant defendant's motion for summary judgment. This is so because the IRS has filed with the Recorder of Deeds for the District of Columbia four Notices of Federal Tax Liens, two of which (aggregating $465,464.36) were filed prior in point of time to plaintiff's filing its Form UCC-1 financing statement. The following evidences are the foregoing:

Stamped

 Filing                                                   Defendant's

  Date                   Document              Amount      Appendix

 
4/21/82
  Notice of Federal Tax Lien ....... $377,989.43      88

 
4/27/82
  Notice of Federal Tax Lien .......   87,474.93      89

 
7/23/82
  Notice of Federal Tax Lien .......  113,276.19      90

 12/?/83  Notice of Federal Tax Lien ....... $ 13,497.55      91

(Pltf's Ex. E, p. 54). Form UCC-1 contains a circled stamp thereon which is illegible and a scripted writing indicating--"Recorder of Deeds 7/23/82 ," apparently denoting that it was filed thereat on said date. Given that date to be accurate, it means that plaintiff filed its UCC-1 financing statement approximately six and one-half (61/2) months prior to the date it entered into the assignment with FBA on February 11, 1983 (Pltf's Ex. A2, p. 31). Moreover, on or about March 13, 1984 , defendant (USAID) received an IRS Notice of Levy (Deft's App. 87) executing on any and all monies in its possession due to FBA. As a result of the duly filed liens and levy, supra, USAID released $77,545.54 to the IRS on or about March 29, 1984 , which was the total amount then held and due to FBA under the contract, assigned to plaintiff on February 11, 1983 (Deft's App. 97). In short, the foregoing establishes that the IRS liens and levy have priority over plaintiff's subsequent Form UCC-1 financing statement and, as a consequence, plaintiff cannot prevail on this issue.

The 1954 Internal Revenue Code, section 6321 , is clear on this point. Therein it provides that upon a taxpayer's refusal to pay its taxes, a lien arises in favor of the United States "upon all property and rights to property, whether real or personal, belonging to such person." I.R.C. §6321 . Thus, upon the filing of such a lien and levy, as here, with the proper county or, as in this case, the Recorder of Deeds in Washington, D.C., all creditors are put on constructive notice of the lien's existence; and all subsequent creditors (as plaintiff herein) of the delinquent taxpayer take an interest in plaintiff's property subject to the tax lien. See, e.g., Atlantic National Bank v. United States [76-2 USTC ¶9483 ], 210 Ct.Cl. 340, 536 F.2d 1354 (1976).

Plaintiff does not dispute the broad general rule of first-in-time, first-in-right, but instead postures two arguments seeking to defeat defendant's motion for summary judgment by averring that: (i) there are two genuine issues of material fact; and (ii) the plaintiff's perfected security interest (i.e., the UCC-1) has priority over the federal tax liens notwithstanding the fact that the latter were filed prior in time to the former.

With respect to the existence of genuine issues of material fact, plaintiff argues first that there is a factual issue as to the total amount due by USAID, under the FBA contract, as assigned to plaintiff and such issue cannot be resolved by summary judgment. Presumably, plaintiff is attempting to subtlely raise breach issues, which it cannot; and further it is tacitly arguing that perhaps it is entitled to show that amounts are due by USAID under the assigned contract which exceeds the aggregate amounts of the perfected liens and levy.

It is hornbook law that in order for the non-movant to defeat a motion for summary judgment, it must show that there exists one or more "genuine issues of material fact." Curtis v. United States , 144 Ct.Cl. 194, 199, 168 F.Supp. 213, 216 (1958), cert. denied, 361 U.S. 843 (1959). The postured issue must not only be material but also genuine. That is to say, both criteria must be met. A "material" fact, in this context, is customarily defined as one that will make a difference, or contribute to the collective evidence making that difference, in the results of the case.

The incontrovertible evidence regarding the amount due under the prime contract is as follows: (i) plaintiff's contract of assignment shows that it advanced $115,865.40 to FBA, its assignor, and that $193,109.00 is the anticipated aggregate amount due or to become due under the prime contract (Deft's App. 60); (ii) IRS liens perfected prior in time to plaintiff's security interest aggregate $465,464.36 (Deft's App. 88, 89, 90); (iii) the IRS levy served on USAID demanded all money etc., owing to FBA by USAID in the total amount of $527,878.62 (Deft's App. 87); and (iv) plaintiff's complaint prayed for only $287,865.61. The foregoing establishes, unequivocally, that the IRS liens, prior in time, exceed by at least $177,598.75 ($465,464.36 - $287,865.61) any amount that plaintiff might arguably be entitled to from USAID under the assignment of proceeds of the prime contract. Against this background, we simply say that any fact regarding the amount due stemming from the prime contract is neither a genuine issue nor a material fact, for purposes of defendant's motion for summary judgment, because the IRS liens and levy totally absorbed any amount otherwise due plaintiff pursuant to the assignment.

Next, and finally, plaintiff argues, in its effort to posture a genuine issue of material fact, that USAID visited a fraud on it when it failed to warn it (plaintiff), upon receipt of notice of the assignment of the proceeds on or about February 17, 1983, that plaintiff's security interest was worthless inasmuch as USAID was then aware of the existing federal tax liens previously perfected in April 1982. Plaintiff argues that in view of defendant's superior knowledge of the existence of said federal tax liens, it should have immediately advised plaintiff so as to permit it to protect itself by electing not to advance any additional funds under the assignment. In support of this position, plaintiff relies on certain dicta in Produce Factors, 199 Ct. Cl. at 582, 467 F.2d at 1349, cited in Atlantic National Bank v. United States [76-2 USTC ¶9483 ], 210 Ct. Cl. 340, 348, 536 F.2d 1354, 1359 (1976), wherein the court states that:

If at the time it (Government) receives notification of an assignment, the Government knows that the assignee's collateral is worthless, the Government must convey that information to the assignee so that he will not advance funds on the strength of proceeds that will never come due.

Atlantic National Bank, 210 Ct. Cl. at 348, 536 F.2d at 1359, further teaches that to estop and hold the government liable on the foregoing rule, each of four separate elements must be present. One of these elements is that the party asserting estoppel must be ignorant of the true facts. See id. (citing Emeco Industries, Inc. v. United States, 202 Ct. Cl. 1006, 1015, 485 F.2d 652, 657 (1973); United States v. Georgia-Pacific Co., 421 F.2d 92, 96 (9th Cir. 1970)). Here, it is clear beyond cavil that plaintiff, as a matter of law, cannot set itself up as being ignorant of the IRS tax liens, when filed, for the simple reason that the cited authorities provide that it had constructive notice of each lien:

The purpose of the filing of a notice of Federal tax lien is to give constructive notice. A purchaser is charged with constructive notice of all a person of ordinary intelligence and diligence would have discovered by an examination of the index of Federal tax liens in the appropriate local office. [citation omitted.]

* * *

Once it is established that plaintiff was chargeable with constructive notice, that notice has the same legal significance as actual notice.

* * *

. . . and either constructive notice or actual notice is binding independently of the other.

Atlantic National Bank, 210 Ct. Cl. at 348-49, 536 F.2d at 1359.

Plaintiff herein is in the business of advancing finances for government contractors experiencing cash-flow problems to enable them to timely meet their contractual obligations. A person in such business exercising ordinary intelligence and diligence, and recognizing the substantial risks attending the conduct of business with such contractors, would certainly proceed with caution and check public records to notate any and all pre-existing viable liens. Had plaintiff utilized reasonable diligence (prior to executing the assignment agreement on or about February 11, 1983, by checking the recorder of deeds and/or other public records where federal tax liens are required to be filed), it would have had actual knowledge of the existing liens inasmuch as they were filed many months (i.e., April and July 1982) prior to the time the assignment was executed. Plaintiff utilized uncanny diligence by filing its Form UCC-1 financing statement on or about July 23, 1982 . Said filing occurred a little over six months prior to executing the assignment. Thus, we hasten to observe that it strains credulity that plaintiff failed to exercise equal diligence and checked for existing federal tax liens for the same reason it filed the Form UCC-1, i.e., to protect its interest.

We are compelled, therefore, to charge plaintiff with constructive notice of the pre-existing federal tax liens. So charged, we hold that plaintiff in effect had actual knowledge of the pre-existing federal tax liens, which, as a consequence, obviates any genuine issue of material fact regarding defendant's alleged fraudulent failure to warn plaintiff of the worthlessness of its security interest.

Plaintiff's last contention, which is apparently an afterthought, urges the position upon this court that its security interest (Form UCC-1 filed July 23, 1982) has priority over the two previously filed federal tax liens (i.e., April 21 and 27, 1982). The tortuous scenario of plaintiff reasons as follows: (i) at the filing of the federal tax liens in April 1982, neither the primary contract between FBA and USAID (December 10, 1982) nor the assignment agreement (February 11, 1983) of the proceeds between Thomas Funding Corp. and FBA had been entered into; (ii) FBA had no interest in any monies under said contract or property interest therein in April 1982, thus in April 1982 there was no property in USAID's possession belonging to FBA to which said lien could attach; (iii) since Thomas Funding filed its security financing statement, Form UCC-1, on July 23, 1982, a point prior in time to the execution of the prime contract (December 10, 1982), the in-place security interest gave Thomas Funding a preferred position over the federal tax lien although the latter was filed prior in time; and (iv) thus, when monies were earned, and due and payable by USAID under the assigned contract, they were instantaneously encumbered by plaintiff's previously perfected security interest. Not surprisingly, no pointed authorities were cited to by plaintiff for this specious position.

Atlantic National Bank, 210 Ct. Cl. at 343, 536 F.2d at 1356 (citing Texas Oil and Gas Corp. v. United States [72-2 USTC ¶9653 ], 466 F.2d 1040, 1052 (5th Cir. 1972), cert. denied, 410 U.S. 929 (1973)), teaches that "a federal tax lien attaches immediately to after-acquired property [of the taxpayer] without any further action required by the Government." A case on all fours with the case at bar is Seaboard Surety Co. v. United States [62-2 USTC ¶9653 ], 306 F.2d 855 (9th Cir. 1962), cited in Atlantic National Bank, 210 Ct. Cl. at 344-45, 536 F.2d at 1357, which holds as follows:

[T]he taxpayer was awarded a Government contract on December 31, 1956 . On March 2, 1957 , a trust agreement was executed assigning the proceeds of the contract to a bank. Prior to the date of the [assignment] . . . the Government had a fully perfected tax lien on all property and rights to property of the taxpayer. The [Seaboard] court stated at 859:

* * * These tax liens attached immediately to all rights of taxpayer under the government contract awarded December 31, 1956 , including payments whenever earned. * * * [T]he [assignment] . . . of March 2, 1957 could not displace the tax liens, which had already attached to taxpayer's property rights in the contract.

The fact that taxpayer's rights under the contract were dependent upon its performance did not affect the tax liens. * * *

Given the foregoing, we hold that because plaintiff's secured financing statement, Form UCC-1, was filed (July 23, 1982) after the federal tax liens (April 21 and 27, 1982), by some two months (one day after would be equally fatal), plaintiff cannot prevail on the priority issue.

Conclusion

If the contractor/assignor (FBA) was entitled to monies from USAID under the contract, then Thomas Funding Corp., the assignee, would succeed to those rights. However, our situation at bar mirrors Wyoming National Bank v. United States, 154 Ct. Cl. 590, 594-95, 292 F.2d 511, 514 (1961), wherein our predecessor court held:

[I]nasmuch as the contractor owed the government in this respect much more than it had coming, clearly the contractor was entitled to nothing. Consequently, the assignee would also be entitled to nothing.

A fortiori, IT IS HEREBY ORDERED that--the plaintiff here at bar shall take nothing; the Clerk shall dismiss the complaint; and the plaintiff shall be assessed costs.

¹ "Sales and Assignment of Moneys Due or To Become Due.

I. The undersigned (hereinafter called the 'Assignor'), in consideration of the sum of $115,865.40 paid by Thomas Funding Corp., a financing institution (hereinafter called the 'Purchaser') to the Assignor, hereby sells, assigns and transfers to Purchaser . . . any and all amounts now and/or hereafter due or owing to the Assignor by the UNITED STATES OF AMERICA, or from any agency or department thereof . . . under or pursuant to (i) the terms of that certain Contract . . . [NEB-]0042-C-00-3006 heretofore entered into by the Assignor with the Government under date of 12/10/82. . . ."

The assignment of contract proceeds was made pursuant to the Assignment of Claims Act, 31 U.S.C. §3727, 41 U.S.C. §15 .

² The plaintiff, in its opposition brief, also argues that defendant is collaterally estopped from denying jurisdiction. A court, however, always has--"jurisdiction to determine its jurisdiction." See Vecchione v. Wohlgemoth, 426 F.Supp. 1297, 1309, aff'd, 558 F.2d 150, cert. denied, Beal v. Vecchione, 434 U.S. 943 (1977); RUSCC 12(h)(3) (holding that a court shall dismiss an action whenever it appears by suggestion of the parties that the court lacks jurisdiction). Furthermore, when the first court to decide the issue lacked subject matter jurisdiction, collateral estoppel will bar a plea of want of jurisdiction. See Cullen v. Margiotta, 811 F.2d 698, 732 (2d Cir. 1987). See generally Restatement (Second) of Judgments §26(1)(c) (1982); United States v. Mendoza, 464 U.S. 154 (1983) (prohibiting the use of non-mutual, offensive collateral estoppel against the government).

This court, therefore, cannot, and will not, permit plaintiff to use collateral estoppel as a free pass into a court that does not have subject matter jurisdiction over its claim. As stated in Vecchione, "a judgment that issues without subject matter jurisdiction is void, and the principle of [collateral estoppel] does not of its own force breathe vitality into the judgment." 426 F.Supp. at 1309 n.26.

³ The defendant, as an additional ground for summary judgment, urges this court to bar the plaintiff's suit under the doctrine of res judicata. We choose not to do so on that ground because the defendant had notice of the assignment to the plaintiff, and could therefore have joined or interpleaded it in the first action. When the obligor (defendant in this case) has notice of an assignment by the assignor, and the assignee is not joined in a suit by the assignor against the obligor, a judgment for or against the obligor will not bar a later suit by the assignee. See In Re Fine Paper Litigation State of Washington , 632 F.2d 1081 (3d Cir. 1980); Restatement (Second) of Judgments §55 , Comment A (1980).

In this case, the defendant knew as of February 17, 1983 , of FBA's assignment of the proceeds to the plaintiff. When faced with the suit by FBA on May 9, 1984 , it could have required that the present plaintiff, Thomas Funding, be made a party to the action through joinder or interpleader. In any event, it is unnecessary to address this issue inasmuch as this case may be appropriately resolved on another basis.

 

 

[87-2 USTC ¶9534] United States of America , Appellant/Defendant v. Federal Deposit Insurance Corporation, Appellee/Plaintiff

U.S. District Court, No. Dist. Tex., Dallas Div., CA 3-87-0448-R, 7/20/87

[Code Sec. 6323 --Result unchanged by the Tax Reform Act of 1986]

Lien for taxes: Priority: Property subject to lien.--A federal tax lien was superior to the FDIC's interest in a tract of land, for which a deed of trust had been recorded but was mistakenly released at the time the tax lien was filed. Although the FDIC had an equitable right to reform the mistaken release, the right did not protect the FDIC's interest against subsequent purchasers and creditors under state law. Because the security interest originally flowed from a deed of trust, it had to be properly recorded. Therefore, because the IRS was without notice of the right to reform the release, it was protected by the state's recording statute.

Steven A. Maurer, Department of Justice, Dallas , Tex. 75242-0599 , for appellant/defendant. Karl G. Dial, T. Ray Guy, Jenkens & Gilchrist, 1445 Ross Ave. , Dallas , Tex. 75202-2711 , for appellee/plaintiff.

MEMORANDUM OPINION AND ORDER

BUCHMEYER, District Judge:

This is an appeal from a final judgment entered July 24, 1985 after trial in an adversary proceeding in the Bankruptcy Court for the Northern District of Texas. The bankruptcy court filed findings of fact and conclusions of law the same day. It amended those conclusions on August 26, 1986 when it also overruled the appellant's motion for a new trial.

The issue presented is: Does a federal tax lien take priority over a bank's security interest which, at the time the tax lien was filed, had been mistakenly released and was believed by the Debtor and the bank to be in full force?

I. Facts

The facts are not in dispute. On July 22, 1980 the debtor executed a deed of trust covering three tracts of land in Ector County to First National Bank of Midland . One of those tracts was the Clark lot which is the subject of this lawsuit. The deed of trust was properly recorded. On December 8, 1981 the Bank released its deed of trust on all three tracts. However, at the time of the release's execution and at all relevant times following, both the Debtor and the Bank believed that the release only applied to two of the lots and that the Deed of Trust on the Clark lot continued in full force and effect. Thus, the release respecting the Clark Lot was a mistake.