Security Interest Page1

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American Investment Financial, aka American Investment Bank, N.A., Plaintiff v. United States of America, Defendant.

U.S. District Court, Dist. Utah , Cent. Div.; 2:03-CV-00844 PGC, April 13, 2005 .

[ Code Sec. 6323]

Collection: Liens: Priority over third parties. --

An IRS tax lien had priority over the interest of a secured creditor with respect to a taxpayer's health-care insurance receivables. The taxpayer, a medical service provider, had receivables that were paid more than 45 days after the IRS filed a federal tax lien. The secured creditor's argument that the account receivable was the result of a contract right that arose before the filing of the federal tax lien was rejected, since the accounts receivable did not exist until the performance of services occurred. Under state ( Utah ) commercial law, the receivables were not contract rights but, rather, part of the taxpayer's accounts. Furthermore, the taxpayer's right to receive payment did not arise until services were performed by the taxpayer, and any payment pursuant to the contract between the taxpayer and the insurance provider was dependent on the performance of those services. The disputed amount was properly categorized as an account receivable, not the proceeds from a contract right, and the secured creditor's interest was subordinate to that of the federal tax lien.

CASSELL, District Judge: This priority dispute arises out of an IRS tax lien and a security interest in certain collateral held by American Investment Financial ("AIF"). Both of the IRS and AIF liens extend to payments received by a medical care provider, Nightime Pediatrics ("Nightime") for medical services provided pursuant to agreements Nightime had entered into with various healthcare insurance companies (the "Provider Contracts"). The issue before the court is which lien has priority.

As part of its security agreement with AIF, Nightime pledged several types of collateral, including accounts receivable and general intangibles. AIF contends that its interest in Nightime's general intangibles includes any contract rights Nightime acquired when it formed the Provider Contracts. Because insurance companies made payments to Nightime for services it rendered to patients more than 45-days after the filing of the notice of federal tax lien, and because those payment were made pursuant to the Provider Contracts which were entered into well before the notice of tax lien was filed, AIF has brought this claim asserting that it holds priority to those funds.

The court finds that partial summary judgment in favor of the government is appropriate in light of Utah 's Uniform Commercial Code's definition of health-care-insurance receivables. That statute categorizes payments like those at issue here as a type of account receivable, which arise at the time a medical service is rendered --not (as AIF claims) at the time an insurance contract is entered into. As a result, the Disputed Cash is subject to the tax lien, save only funds Nightime acquired before the 45-day safe harbor period expired.

BACKGROUND

AIF is a Utah industrial loan corporation. Nightime is a Utah corporation that provided after-hours medical care to patients. In 2000, Nightime requested a loan from AIF for approximately $803,000, to be secured by all of Nightime's presently existing and after-acquired accounts, inventory, and general intangibles. Nightime was required to make monthly installment payments to AIF. When it defaulted on its obligation as of November 6, 2002, AIF demanded that Nightime cure its default.

Before it ran into difficulties repaying AIF, however, Nightime had incurred obligations to the Internal Revenue Service. Beginning in 1999, Nightime failed to pay employment taxes, penalties, interest and other statutory additions. On May 14, 2002, the IRS filed the first of four tax liens. As of October 11, 2003, Nightime owed a balance of $599,739.41 on the IRS assessments.

On August 31, 2003, Nightime ceased operations. On closure, Nightime's assets included inventory, accounts receivable, and general intangibles. The accounts receivable consisted of accounts owed to Nightime from various healthcare insurance companies (the Insurance Receivables). The Insurance Receivables were to have been paid pursuant to written contracts entered into between Nightime and such healthcare insurance companies (the Provider Contracts) before the first Notice of Federal Tax Lien filing on May 14, 2002.

As of July 31, 2004, there was at least $315,863.37 in cash receipts from the liquidation of the accounts receivable, and $28,761.92 from the liquidation of Nightime's inventory. A large part of the cash receipts from the liquidation of the accounts receivable is based on services Nightime rendered to patients after June 28, 2002 --the end of the 45 day "safe harbor" period after the tax liens were imposed. The Insurance Receivables Nightime received for services provided after June 28, 2002 (receivables based on the Provider Contracts) is the fund that is disputed in this matter (the "Disputed Cash"). AIF makes no claim to accounts receivable paid by persons or entities that did not have a Provider Contract with Nightime, unless the payment was for services Nightime rendered on or before June 28, 2002. Instead, AIF claims that its interest in the Disputed Cash takes priority over the tax lien regardless of the date Nightime provided services because the Disputed Cash stems from the contract rights Nightime acquired through the Provider Contracts.

STANDARD OF REVIEW

Pursuant to Rule 56 of the Federal Rules of Civil Procedure, summary judgment "shall be rendered ... if the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits ... show that there is no genuine issue as to any material fact and that the moving party is entitled to a judgment as a matter of law." ¹ In applying this standard, the court must examine the evidence and reasonable inferences therefrom in the light most favorable to the non-moving party. ² Because this case involves cross-motions for summary judgment, the court must "'construe all inferences in favor of the party against whom the motion under consideration is made.'" ³

DISCUSSION

The issues before the court are (1) whether AIF has a security interest in the Disputed Cash pursuant to the Provider Contracts with Nightime, and (2) if AIF's security interest does extend to these payments, whether AIF's interest takes priority over the interest of the United States . Because the court finds that the payments due to Nightime based on the Provider Contracts for services rendered after the safe harbor period had ended (June 28, 2002) were proceeds from accounts receivable, the court need not address the first issue.

The Federal Tax Lien Act (FTLA) grants the United States a lien on all property and rights to property belonging to taxpayer if that individual fails to pay taxes after a demand has been made. ⁴ The FTLA also provides that such tax lien arises automatically upon assessment and attaches to property subsequently acquired by the taxpayer. ⁵ The Act, however, also gives commercial liens priority over federal tax liens in some situations. ⁶

Section 6323 gives commercial lenders priority over the government's lien in certain kinds of property that might otherwise be inchoate --including accounts receivable --but only if the property is acquired by the taxpayer-debtor within 45-days after the tax lien notice is filed. "Before 1966, the requirement of choateness ... generally operated to prevent a nonfederal lien from gaining priority over a federal tax lien with respect to property acquired by the debtor after the tax lien had arisen, even though the nonfederal lien antedated the tax lien." ⁷ In an effort to mitigate the traditional doctrine of choateness, under which security interests would be inchoate either if the loan had not been disbursed or if the collateral had not come into existence by the time the tax lien was noticed, a 45-day safe harbor period was added to the tax code. The underlying purpose of the statute as relevant to this case is straightforward: protection is given the financier "only where the loan or purchase is made not later than 45-days after the tax lien filing ... and only where the inventory, accounts receivable, etc., are acquired before the 45-days have elapsed." ⁸

"To fall within §6323(c)'s safe harbor for after-acquired property, a security interest must be in 'qualified property covered by the terms of a written agreement entered into before tax lien filing,' including 'commercial transactions financing agreements.'" ⁹ As relevant here, a CTFA is a security agreement between a commercial lender and the debtor where the lender has advanced the money to the debtor within 45-days after the tax lien filing and without actual notice of the tax lien. ¹⁰ To be eligible for the CTFA protection --to be "qualified property" --the loan must be secured by "commercial financing security" acquired by the taxpayer before the lien priority date. ¹¹ The term "commercial financing security" is defined by statute as including four types of property: paper of a kind ordinarily arising in commercial transactions (including paper giving contract rights ¹² ); accounts receivable; real property mortgages; and inventory. ¹³ As relevant to that part of the Internal Revenue Code, a "contract right" is "any right to payment under a contract not yet earned by performance and not evidenced by an instrument or chattel paper." ¹⁴

Applying these rules to the case before it, the court must determine whose security interest in the Disputed Cash has priority. As required by §6323©, to have priority over the government's tax lien AIF must demonstrate that (1) the security agreements were entered into before the tax lien filing; (2) the loans to Nightime were extended before the tax lien or within 45-days afterwards, without AIF's actual knowledge of the tax lien; and (3) Nightime acquired the collateral within 45-days after the tax lien filing. ¹⁵ Points one and two are undisputed: AIF indisputably entered into and perfected its security interest prior to the tax lien filing, and it loaned its money to Nightime well before the 45-day safe harbor period expired, all without any knowledge of the tax lien. Therefore, the central issue remains whether Nightime acquired rights in the collateral within 45-days after the tax lien was filed.

In determining whether Nightime acquired rights in the collateral within the 45-days following the tax lien filing, the court must first properly define the collateral at issue in this case --the disputed cash. How collateral is defined is related to the determination of when a debtor acquires its collateral. Relevant to this case, a contract right is acquired by a taxpayer "when the contract is made." ¹⁶ Conversely, an account receivable (defined by the regulations as "any right to payment for goods sold or leased or for services rendered which is not evidenced by an instrument or chattel paper" ¹⁷ ) is not acquired until "the time, and to the extent, a right to payment is earned by performance." ¹⁸ The way in which the court ultimately defines the Disputed Cash will determine whether AIF or the government is entitled to it.

As in Bremen Bank & Trust Co. v. United States, the Eighth Circuit case heavily relied upon by the government, "[t]he difficulty in categorizing the collateral in this case arises because accounts receivable can also be the proceeds of contract rights." ¹⁹ If the Disputed Cash is accounts receivable that arise from contract rights held by Nightime (established by the Provider Contracts), then "the accounts receivable (as proceeds) are deemed to be acquired for purposes of determining priority when the original contract rights were acquired." ²⁰ If this is so, then AIF clearly has priority in the fight for the Disputed Cash because the Provider Contracts were signed long before June 28, 2002. "If, however, the accounts receivable cannot be correctly characterized as the proceeds of contract rights, the federal tax lien prevails over [AIF's] security interest." ²¹ Thus, the crucial issue the court must decide is whether Nightime acquired "contract rights" under its Provider Contracts, such that Nightime's later generated accounts receivable with its patients were the proceeds of those contract rights.

As stated in the IRS's regulations, "Identifiable proceeds, which arise from the collection or disposition of qualified property by the taxpayer, are considered to be acquired at the time such qualified property is acquired ...." ²² AIF has argued that the Disputed Cash is simply proceeds of the Provider Contracts, meaning it stems from its interest in "contract rights" and are not proceeds of accounts receivable. If so, argues AIF, it matters not when Nightime actually provided the medical services giving rise to the Disputed Cash. Rather, AIF contends that because the contractual relationships between Nightime and its providers existed before the filing of the tax lien, and because Nightime provided services to the insureds of the Providers under the terms of the Provider Contracts, AIF holds a superior lien upon all Insurance Receivables of Nightime. AIF argues this is so despite the critical fact that the actual health care services giving rise to the right of payment was rendered after June 28, 2002 (the last day of the safe harbor period).

The government's position is two-fold: first, the security agreement agreed to between AIF and Nightime did not include contract rights; and second, even if it did, the proceeds arise from accounts receivable and not contract rights. While the government may be correct in its argument that the security agreement did not include "contract rights," that issue need not be decided if the court finds that the Disputed Cash is composed of proceeds from accounts receivable and not from contract rights. On this issue, the government argues that even if contract rights are included in the agreement, it has priority over the Disputed Cash because Nightime had no choate right to payment, and therefore had no contract right as to the Disputed Cash. In short, the government argues, Nightime simply had a right to acquire an accounts receivable. And because an account receivable is acquired only at the time a right to payment is earned by performance, AIF's security interest extends only to accounts receivable that came into existence on or before the lien priority date of June 28, 2002.

In defining the collateral, the court looks to state law: "in the application of the federal revenue act, state law controls in determining the nature of the legal interest which the taxpayer had in the property." ²³ Under the current version of Utah's Uniform Commercial Code (UCC) AIF's security interest does not extend to "contract rights," but rather to "health-care-insurance receivables" (categorized by statute as "accounts") as defined by Utah law. AIF contends that the current version does not apply, but that the Utah UCC in place at the time the Provider Contracts were formed controls the transaction. This could be important, because the prior version (unlike the current version) did not specifically mention "health-care-insurance receivables." To support its position that the old Utah UCC applies, AIF cites a Pennsylvania case which held that the changes made to the state's UCC were not retroactive. ²⁴ That decision, like others throughout the country, rests on the premise that "in the absence of clear language to the contrary, statutes must be construed to operate prospectively only." ²⁵ The Pennsylvania Court found no "language to the contrary" in the new statute. In contrast, the Utah legislature clearly stated its intent that the new version be retroactively applied. The statute directs: "Except as otherwise provided in this part, this act applies to a transaction or lien within its scope, even if the transaction or lien was entered into or created before this act takes effect." ²⁶ Based on the unambiguous language in the statute, the court must retroactively apply the current version of the Utah UCC to this case, including its new provisions regarding health-care-insurance receivables.

In the current Utah UCC, health-care-insurance receivables are a type of collateral expressly included in the "accounts" category, and not in any other (including general intangibles). The Utah UCC defines health-care-insurance receivables as "an interest in or claim under a policy of insurance which is a right to payment of a monetary obligation for health-care goods or services provided." ²⁷ Based on that definition, the Insurance Receivables paid to Nightime would seem to be "health-care-insurance receivables" as defined by the statute.

The court finds unpersuasive AIF's argument that the Disputed Cash stems from "contract rights" (assumed by AIF to be included in "general intangibles") and not from "accounts" by way of health-care-insurance receivables. AIF asserts that the "health-care-insurance receivables" definition is inapplicable here because the Disputed Cash was not paid under a "policy of insurance." Instead, contends AIF, the Disputed Cash was paid pursuant to the Provider Contracts between Nightime (the provider) and the various health care insurers. This is in contrast to the separate contracts the patients being treated by Nightime had with the Providers, which AIF contends would constitute "policies of insurance" as defined in the Utah UCC. In short, AIF asserts that the use of the phrase "policy of insurance" refers only to those contracts between insurance companies and the patients they insure, and not to the contracts between a service provider and an insurer. While AIF's argument is creative and well-argued, it is ultimately unconvincing. As the definition plainly states, a "health-care-insurance receivable" is "an interest in or claim under a policy of insurance which is a right to payment of a monetary obligation for health-care goods or services provided." ²⁸ As the government's brief cogently explains, a patient would not be entitled to payment by providing "health-care goods or services" --of course, the patient would receive such services. Therefore, it is obvious from the definition recited in the Utah UCC that the Disputed Cash resulted not from contract rights, but from health-care-insurance receivables. Coupling that finding with the statute's categorization of health-care-insurance receivables as "accounts," the court's conclusion must be that AIF's interest in the Disputed Cash arises not from its interest in "general intangibles," but from its interest in "accounts." Consequently, the government has priority over the Disputed Cash so far as it includes payments for services rendered after June 28, 2002.

Even if the court were to rule contrary to the statute's direction that the new version of the Utah UCC be retroactively applied, the outcome would be the same. If the court were to find that AIF's security interest included "contract rights," and that the recently added category of "health-care-insurance receivables" is inapplicable, it still would find for the government because those contract rights did not extend to the proceeds resulting in the Disputed Cash. The Disputed Cash was the fruit of Nightime's performed services and did not result from the Provider Contracts. While the court does not dispute AIF's argument that Nightime had certain contract rights under the Provider Contracts, such rights were limited and did not extend to the funds resulting in the Disputed Cash. To clarify this conclusion, one need only remove the insurance provider from this case's set of facts. Once the Providers are removed, it leaves Nightime (the debtor) and AIF (the secured party). By ignoring the Providers and examining a transaction typical to those that generated the Disputed Cash, the picture becomes clearer: Assume Nightime is open for business and that it enters into a security agreement with AIF, granting to AIF a security interest in, among other things, after-acquired accounts. Patient John Doe falls and breaks his leg. John Doe is treated by Nightime. Nightime bills John Doe for services rendered. Because AIF has a valid security interest in all of Nightime's accounts receivable, AIF's security interest attaches to John Doe's account receivable as soon as Nightime renders its services. Furthermore, once John Doe pays his account with Nightime, AIF holds a continually perfected security interest in the proceeds generated by that account receivable. This is a very basic and seemingly uncontroversial example of an accounts receivable. There is no reason why inserting an insurance provider changes the picture; the material facts remain the same --a secured party, a debtor, and an account receivable. The insertion of a third-party in the form of an insurance provider does not change the character of the collateral --it remains an account receivable. Thus, the court agrees with the government's argument that the Provider Contracts simply guaranteed payment on Nightime's accounts receivable, but the accounts receivable themselves were wholly independent of the Provider Contracts.

Finally, the court agrees with the government's argument that Nightime, by performing services, created an account receivable and that the accounts receivable were not dependant on or a result of the Provider Contracts. Only when an account receivable is created between Nightime and a patient do the Provider Contracts become significant. Therefore, in essence, the Provider Contracts are dependent on the accounts receivable and not, as AIF argues, independent of the accounts receivable. To further illustrate that the accounts receivable were not dependant on the Provider Contracts, the court considered possible remedies Nightime or any of the insurance providers would have if the Provider Contracts were not enforced. At the oral argument, counsel for both parties referred to an example of a builder: A homeowner contracts with a builder to build a house. The homeowner promises to pay the builder $100,000 upon completion of the home. If the builder later refuses to build the home, the homeowner has a breach of contract claim against the builder. Likewise, if the homeowner refuses to pay the builder upon completion of the home, the builder has a legal action against the homeowner. In short, there was a right for payment that was immediately created once the agreement between the homeowner and the builder was reached. In contrast, no such right to payment was created when the Provider Contracts were formed. When Nightime signed the Provider Contracts, Nightime could not have brought a breach of contract claim against the insurance companies until it provided medical services. The same was true for the insurance companies --the insurance companies, at the time they entered into the agreement with Nightime, could not have brought a breach of contract claim against Nightime until it failed to provide services. In other words, unless and until an independent third party (a patient) became involved, there was no performance that either party could force the other to do. In order for a remedy to be possible, both parties were required to wait until Nightime performed services and through those services created an account receivable.

For all these reasons, the court finds that the Disputed Cash stems not from contract rights acquired through the Provider Contracts, but are proceeds from health-care-insurance receivables (a form of accounts receivable). Consequently, unless the receivables were for services Nightime rendered prior to June 28, 2002, the government's interest in the Disputed Cash has priority.

CONCLUSION

The court holds that because the Disputed Cash resulted from health-care-insurance receivables, which are categorized as accounts by the Utah UCC, and because such proceeds are subject to the government's tax lien (after the expiration of the safe harbor period), the court GRANTS the government's motion for partial summary judgment [38-1]. Consequently, the court DENIES AIF's motion for partial summary judgment [40-1]. In light of these rulings, as understood from counsels' representations during oral argument, all that remains is an accounting regarding the Disputed Cash. The court directs both parties to meet and confer to attempt to resolve this question. Should a mutually-agreed number not be reached within 45-days of this order, the government shall file its position with the court explaining its view as to the appropriate judgment. Thereafter, AIF shall have 21-days to respond to the government's position.

SO ORDERED.

¹ Fed. R. Civ. P. 56(c).

² See Gaylor v. Does, 105 F.3d 572, 574 (10th Cir. 1997).

³ Pirkheim v. First Unum Life Ins., 229 F.3d 1008, 1010 (10th Cir. 2000) (quoting Andersen v. Chrysler Corp., 99 F.3d 846, 856 (7th Cir. 1996)).

⁴ 26 U.S.C. §6321.

⁵ Id. §6322.

⁶ Id. §6323.

⁷ Shawnee State Bank v. United States [ 84-1 USTC ¶9513], 735 F.2d 308, 310 (8th Cir. 1984).

⁸ See S. Rep. No. 1708, 89th Cong., 2nd Sess. 8 (1966-2 C.B. 876, 881).

⁹ Plymouth Savings Bank v. United States I.R.S. [ 99-2 USTC ¶50,807], 187 F.3d 203, 206 (1st Cir. 1999) (quoting 26 U.S.C. §6323(c)(1)(A)(i)).

¹⁰ See id; 26 C.F.R. 301.6323(c)-1(b).

¹¹ Id. §6323(c)(2)(B).

¹² Treas. Reg. (26 C.F.R.) §301.6323(c)-1(c).

¹³ 26 U.S.C. §6323(c)(2)(C).

¹⁴ 26 C.F.R. §301.6323(c)-1(c)(2)(i).

¹⁵ See Bremen Bank & Trust Co. v. United States [ 98-1 USTC ¶50,116], 131 F.3d 1259, 1263 (8th Cir. 1997).

¹⁶ 26 C.F.R. §301.6323(c)-1(d).

¹⁷ Id. §301.6323(c)-1(c)(2)(ii).

¹⁸ Id. §301.6323(c)-1(d).

¹⁹ Bremen [ 98-1 USTC ¶50,116], 131 F.3d at 1264.

²⁰ Id. at 1264.

²¹ Id.

²² 26 C.F.R. §301.6323(c)-1(d).

²³ See Aquilino v. United States [ 60-2 USTC ¶9538], 363 U.S. 509, 513 (1960).

²⁴ Commercial Nat'l Bank of Pa. v. Seubert & Assoc., Inc., 807 A.2d 297, 303 (Pa. Super. 2002).

²⁵ Id. (emphasis added). See also, e.g., Gallant v. County Comm'n of Jefferson County, 575 S.E. 2d 222, 228 (W. Va. 2002); Carelli v. Hall, 926 P.2d 756, 761 (Mont. 1996).

²⁶ Utah Code Ann. §70A-9a-702(1).

²⁷ Id. §70A-9a-102(46) (emphasis added).

²⁸ Id. §70A-9a-102(46) (emphasis added).

 

 

Old National Bank, successor to the Merchants National Bank of Terre Haute, Plaintiff v. RCH Electronics Systems, Inc., Rob ert E. Rost II, and Mary Y. Rost a/k/a Mary V. Rost, Defendants, and United States of America, Intervenor.

U.S. District Court, So. Dist. Ind. , Terre Haute Div.; 2:03-cv-0288-LJM-WTL, January 11, 2005 .

[ Code Secs. 6321 and 6323]

Priority of tax lien: After-acquired property: Accounts receivable: Simultaneous liens. --

Two IRS tax liens on a corporate taxpayer's accounts receivable had priority over a security interest in the same accounts receivable held by the corporation's bank, even though the bank's security interest predated the IRS's liens. The funds at issue were received after a state court-appointed receiver issued invoices to the corporation's customers. The IRS's liens and the bank's security interest immediately attached to the funds. In that situation, the federal tax liens had priority, even though they were filed more than two years after the security interest arose. Accordingly, the IRS rather than the bank was entitled to the proceeds from the accounts receivable.

ORDER ON INTERVENOR'S MOTION FOR SUMMARY JUDGMENT

MCKINNEY , Chief Judge: This cause is now before the Court on intervenor's, the United States of America (" United States "), Motion for Summary Judgment. The United States contends that pursuant to 26 U.S.C. §6321, and according to the U.S. Supreme Court's opinion in United States v. McDermott [ 93-1 USTC ¶50,164], 507 U.S. 447 (1993), its tax lien on the accounts receivable of defendants, R.H. Electronic Systems, Inc. ("R.H."), Rob ert E. Rost, II, and Mary Y. Rost (collectively, "Defendants"), currently held by a receiver ("Receiver") take priority over plaintiff's, Old National Bank ("Old National"), simultaneously perfected security interest. Neither Old National nor Defendants have opposed the United States ' Motion for Summary Judgment.

For the reasons stated herein, the Court GRANTS the United States ' Motion for Summary Judgment.

I. BACKGROUND

The undisputed facts are: In June 1997, Old National lent R.H. $50,000.00. In exchange, R.H. and its owners gave Old National various forms of security, including a security interest in all of RCH's accounts receivable in 1997. Compl. Count 1, ¶¶1-5; Count II, ¶¶2-3. R.H. defaulted on its obligations under the promissory note, and Old National commenced a collection action against R.H. in state court. Id. Count 1, ¶7; Count II, ¶4. Eventually, the state court appointed a receiver ("Receiver") to gather and distribute RCH's assets. Oath of Receiver.

Receiver collected $12,650.28 in accounts receivable on behalf of R.H. Receiver's Pet. for Approval, ¶8. These accounts receivable came into existence beginning on August 16, 2000, and continued through November 9, 2000. U.S. Exh. 1, Invoices. Receiver submitted a plan to the Court for the distribution of these assets. Receiver's Pet. for Approval, ¶8. Receiver's plan does not provide for the amount that R.H. owes the United States .

The United States , acting through the IRS, filed two Notices of Federal Tax Liens ("NFTLs") against R.H.; one was filed on November 19, 1999, in the amount of $6,649.14, the other was filed on March 16, 2000, in the amount of $31,760.99. U.S. Exh. D, Notices of Fed'l Tax Lien. The NTFLs were filed after the consensual security agreement was given.

II. SUMMARY JUDGMENT STANDARD

Federal Rule of Civil Procedure 56(c) provides that summary judgment is appropriate "if the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to summary judgment as a matter of law." In determining whether a genuine issue of material fact exists, "a trial court must view the record and all reasonable inferences drawn therefrom in the light most favorable to the non-moving party." Rob in v. Espo Eng'g Corp., 200 F.3d 1081, 1088 (7th Cir. 2000). "The non-moving party, however, cannot rest on the pleadings alone, but instead must identify specific facts to establish that there is a genuine triable issue." Bilow v. Much Shelist Freed Denenberg Ament & Rubenstein, P.C., 277 F.3d 882, 893 (7th Cir. 2001). "[C]onclusory statements, not grounded in specific facts, are not sufficient to avoid summary judgment," Lucas v. Chi. Transit Auth., 367 F.3d 714, 726 (7 ^th Cir. 2004), rather, "[t]he party must supply evidence sufficient to allow a jury to render a verdict in his favor." Rob in, 200 F.3d at 1088. Finally, the non-moving party bears the burden of specifically identifying the relevant evidence of record, and "the court is not required to scour the record in search of evidence to defeat a motion for summary judgment." Ritchie v. Glidden Co., 242 F.3d 713, 723 (7 ^th Cir. 2001).

III. DISCUSSION

The United States contends that the tax liens take priority over a simultaneously attaching state lien. Br. in Supp., at 5 (citing United States v. McDermott [ 93-1 USTC ¶50,164], 507 U.S. 447 (1993)). Here, the United States avers, Old National's interest in the accounts receivable attached when R.H. gained rights in the accounts receivable. The facts brought before the Court indicate that date was August 16, 2000, through November 9, 2000, when Receiver issued invoices on behalf of R.H. U.S. Exh. 1, Invoices. See also Ind. Code §26-1-9.1-203(b)(2) (stating that a security interest is perfected when the debtor obtains rights in the collateral); Nat'l City Bank of Ind. v. All-Phase Elec. Supply Co., 790 N.E.2d 488, 490 (Ind. Ct. App. 2003) (stating that a debtor obtains rights in an accounts receivable when a debt is owed by a third party to the debtor).

The Court finds the United States ' argument persuasive. There is no evidence to contradict the fact that the accounts receivable at issue here came into existence after the United States issued the two NFTLs. According to law, the date at which the accounts receivable came into existence is the time at which Old National's security interest perfected. In other words, Old National's lien attached when Receiver issued invoices on August 16, 2000, through November 9, 2000. The latest of the two NFTL issued on March 16, 2000. The Supreme Court, in McDermott, held that a properly filed NFTL takes priority over a simultaneously attaching state lien. McDermott [ 93-1 USTC ¶50,164], 507 U.S. at 453-55. Therefore, the United State 's tax liens take priority over Old National's perfected security interest in the accounts receivable.

IV. CONCLUSION

For the foregoing reasons, intervenor's, the United States of America , Motion for Summary Judgment is GRANTED. Receiver is hereby ordered to pay to the United States the $12,650.28, in accounts receivable collected on behalf of defendant, R.H. Electronics Inc.

IT IS SO ORDERED.

ENTRY OF JUDGMENT

Through an order dated January 11, 2005, this Court entered summary judgment in favor of intervenor, the United States of America, and against both the plaintiff, Old National Bank, and defendants, RCH Electronics Systems, Inc., Rob ert E. Rost, II and Mary Y. Rost. Receiver shall pay to the United States the $12,650.28, in accounts receivable collected on behalf of defendant, R.H. Electronics Inc.

 

 

Bank of America, N.A., Plaintiff v. Michael John Fletcher, Lori Fletcher, United States of America, ex. re. Internal Revenue Service, et al., Defendants.

U.S. District Court, No. Dist. Okla. ; 03-CV-765-C, August 16, 2004 .

[ Code Sec. 6323]

Lien for taxes: Priority: Security interests: 45-day grace period. --

A properly filed federal tax lien had priority over a mortgagee's security interest in residential property. Although the mortgage was executed and recorded before the tax lien arose and the mortgagee had not received notice of the lien, mortgage funds were disbursed to the taxpayers after the expiration of the 45-day grace period under Code Sec. 6323(d).

.

ORDER

COOK, Senior District Judge: Before the Court are cross motions for summary judgment filed by the plaintiff Bank of America (Bank), and one of the party defendants, the United States of America ex.re. Internal Revenue Service (IRS). Both the Bank and the IRS are asserting liens against real property owned by defendants Michael and Lori Fletcher. The movants seek a determination, as a matter of law, as to the priority of lien claims. The facts are undisputed.

Statement of Undisputed Facts

1. On July 28, 1988 , the defendants Michael and Lori Fletcher purchased a residence located at 7415 East 77 ^th Street in Tulsa , Oklahoma .

2. On April 18, 1996 , the Fletchers executed a home equity line of credit agreement with Bank IV (now Bank of America). The Bank received an executed note and mortgage on the Fletcher's residential property. The mortgage was recorded with the Tulsa County Clerk on April 24, 1996 . Plaintiff Bank of America is the present holder of said note and mortgage.

3. The line of credit had a limit of $47,500 and was to terminate in ten years. The note required payment of $730.23 monthly installments. The Fletcher's nonpayment of a monthly installment would result in default and acceleration of the total amount due under the note. The Bank retained the option to foreclose on the property, in the event of default.

4. Under the terms of the credit agreement, the Fletchers could obtain a cash advance (or loan) by writing special "equity line" checks, or by writing an initial "equity line" draft located at any of the Bank's offices. The Bank had the right to dishonor any equity line check which would take the account over the $47,500 limit.

5. Between September 13, 1996 and October 21, 1997, the Bank advanced the Fletcher's $47,336. The Fletchers made at least the required monthly installment payments, and on October 21, 1997, paid the balance due under the loans.

6. Between June 16, 1999 and June 21, 1999, the Bank advanced $28,702 and the Fletchers continued to make at least the required monthly installments. On July 15, 1999, the Fletchers again paid the balance due under the loans.

7. On August 24, 1999, the Fletchers transferred title to the real property into a revocable trust.

8. On October 30, 2000, the IRS filed a notice of tax lien in the records office of Tulsa County with respect to a 1998 unpaid tax liability of $1,804,137. The Bank did not receive actual notice of the tax lien.

9. On January 5, 2001, the Bank advanced $25,000 to the Fletchers.

10. On January 5, 2001 the IRS filed notice of a tax lien for 1999 in the amount of $413,933. The Bank did not receive actual notice of the second tax lien filing.

11. On January 8, 2001, the Bank advanced the Fletchers $20,000.

12. On January 16, 2001, the Bank made the last advance to the Fletchers in the amount of $1,498, which sum exceeded the Fletcher's line of credit with the Bank.

13. Between February 20, 2001 and January 10, 2003, the Fletchers made monthly payments to the Bank on the loans.

14. On February 14, 2003 and thereafter the Fletchers defaulted on the note and mortgage. The Fletchers owe the Bank $48,450 under the terms of their agreement.

15. On June 9, 2003, the Bank received actual notice of the tax liens when Bank personnel spoke with Tanya White with the IRS.

Applicable Law

Under 26 U.S.C. §6322 of the Federal Tax Act of 1966, a tax lien created by §6321 arises at the time the assessment is made and continues until the liability either is paid or becomes unenforceable by reason of lapse of time. However, the lien is not valid against any holder of a "security interest" until notice is given as required by §6323(f) ( i.e. filing in the county records). Under 26 U.S.C. §6323(a) a "security interest" is defined as:

The term "security interest" means any interest in property acquired by contract for the purpose of securing payment or performance of an obligation or indemnifying against loss or liability. A security interest exists at any time (A) if, at such time the property is in existence and the interest has become protected under local law against a subsequent judgment lien arising out of any unsecured obligations, and (B) to the extent that, at such time, the holder has parted with money and money's worth.

Section 6323(d) of the tax code is controlling authority for the determination of the issue presented to the Court. It provides:

(d) 45-day period for making disbursements. --Even though notice of a lien imposed by section 6321 has been filed, such lien shall not be valid with respect to a security interest which came into existence after tax lien filing by reason of disbursements made before the 46 ^th day after the date of tax lien filing, or (if earlier) before the person making such disbursements had actual notice or knowledge of tax lien filing, but only if such security interest --

 

(1) is in property (A) subject, at the time of tax lien filing, to the lien imposed by section 6321, and (B) covered by the terms of a written agreement entered into before tax lien filing, and

 

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

In this case, a mortgage was given by the Fletchers in favor of the Bank to secure advances on a line of credit for a term of ten years. Pursuant to the terms of their note and mortgage, the Bank advanced monies to the Fletchers within the ten year term of the line of credit, both prior to and after, the IRS filed its tax lien in the records office. The only question before the Court is whether the federal tax lien or claim has priority over the loan payments received by the Fletchers after the expiration of the 45-day period for making disbursement under §6323(d).

The Court finds, under the language of §6323(d), the federal tax lien has priority over the mortgagee's security interest only as to the monies disbursed after the expiration of the 45-day grace period. In this instance, all the monies in dispute were disbursed after the 45 day grace period. This conclusion is supported by the legislative history of §6323(d). See, S.1708, 89 ^th Cong. (1966).

Prior to the 1966 amendment to the federal tax code, a lien for Federal taxes would arise when a taxpayer's liability was assessed. The lien attached to all of the property held by the taxpayer or subsequently acquired. The assessment was made when the unpaid tax liability was voluntarily entered on the tax forms filed by the taxpayer. Prior to the amendment, secured creditors were given priority over the tax lien only up to the time the IRS filed its tax lien in the county record's office. The amendment allowed for the 45-day grace period to provide an opportunity for a secured creditor to check the country records to determine whether a tax lien had been filed. Any advances made during the 45-day grace period were given priority over the tax lien. See, S. 1708 I. For priority to exist during the 45-day grace period, there must be a written agreement entered into before the tax lien filing and the security interest must be protected under local law against a judgment lien arising as of the time of the tax lien filing. See, S. 1708 II A.(4). The 45-day grace period was "designed to make it unnecessary for the holder of a security interest to search the records more often than once every 45 days where one or more disbursements are to be made by him." Id.

There is no dispute that the notices of tax lien filed by the IRS on October 30, 2000 and on January 5, 2001 complies with §6323(h)(1), and that the Bank made cash advances to the Fletcher on January 5, 2001 ($25,000), January 8, 2001 ($20,000) and on January 16, 2001 ($1,498). These advances were made after the grace period provided in §6323(h). Thus, the Bank lost its priority lien status on December 15, 2000 which is the 46 ^th day following the October 30, 2000, filing notice of the first tax lien on the real property here in question.

IT IS THEREFORE ORDERED that summary judgment be, and it is hereby, GRANTED in favor of defendant the United States of America ex. re. Internal Revenue Service and against the plaintiff, Bank of America on the parties' cross motions for summary judgment.

IT IS SO ORDERED.

 

 

Merchants Bonding Co., Plaintiff v. Utica Community Schools , West Bloomfield School District , and United States Internal Revenue Service, Defendants.

U.S. District Court, East. Dist. Mich. ; 01-60194, May 2, 2003 .

[ Code Sec. 6323]

Tax liens: Validity and priority against third parties: Constructive trust. --

A third-party subrogee was not entitled to summary judgment with respect to its claim of priority interest over an IRS tax lien for funds held by its subcontractor. The funds were property of the subcontractor and were not held in trust pursuant to a public construction contract under state ( Michigan ) law. A constructive trust had not been created to hold the funds because the subrogee failed to show that the parties intended to designate the funds as trust property, even though the bond identified the payment obligation to the subrogee under the construction contract. Finally, at the time the IRS filed its notices of tax liens, the subrogee's alleged equitable lien had not been perfected because the amounts in question were not certain.

[ Code Sec. 6323]

Tax liens: Validity and priority against third parties: Indemnity agreement: Surety's interest. --

A third-party subrogee was not entitled to summary judgment with respect to its claim of priority interest over an IRS tax lien for funds held by its subcontractor. The subrogee failed to show that an indemnity agreement with the subcontractor predated the IRS tax lien and, as a result, established its priority over the funds. The assignment of the contract balances under the indemnity agreement would not occur until the subrogee became obligated to perform under its surety agreement, the date of which had not been determined. Moreover, a genuine issue of material fact remained concerning whether the subrogee was required under state ( Michigan ) law to perfect its interest by recording its lien.

[ Code Sec. 6323]

Tax liens: Validity and priority against third parties: Security interest: Obligatory disbursement agreement. --

A third-party subrogee was not entitled to summary judgment with respect to its claim of priority interest over an IRS tax lien for funds held by its subcontractor. The court rejected the subrogee's argument that its security interest qualified as an obligatory disbursement agreement pursuant to Code Sec. 6323(c)(1)(B). Even though the bonds issued for the contract qualified as security interests, the subrogee failed to show that its security interest was protected under local law. Also, a genuine issue of material fact remained concerning when the subrogee's rights were triggered under the bonds, and if that date predated the IRS's tax lien.

OPINION AND ORDER OF THE COURT DENYING PLAINTIFF'S MOTION FOR SUMMARY JUDGMENT

I. INTRODUCTION

BATTANI, Judge: Before the Court is Plaintiff Merchants Bonding Co.'s Motion for Summary Judgment on its complaint against Defendants United States Internal Revenue Service ("IRS"), West Bloomfield School District ("WB") and Utica Community Schools. Plaintiff and the IRS both assert claims to the outstanding balances of two construction contracts ("contract balances" or "funds") between Smelser Roofing Co. ("Smelser"), a contractor, and Defendant school districts. Plaintiff claims that it is entitled to the funds since it made payments to various subcontractors and suppliers pursuant to the terms of its surety agreement with Smelser, while the IRS asserts the priority of its federal tax lien on Smelser's property.

As preliminary matter, Defendant WB has been dismissed as a party to this lawsuit, and has interpleaded into Court the amount due on its contract with Smelser, or $91,947.56, pursuant to Fed.R.Civ.P. 67, for disbursal to the proper party when this matter is resolved. Defendant Utica has filed an answer and partial concurrence in Plaintiff's motion for summary judgment, except to the extent to which Plaintiff's motion seeks interests, costs, expenses and attorneys fees against Utica . Utica still has in its possession the amount due on its contract with Smelser.

In its Motion for Summary Judgment, Plaintiff first argues that the contract balances are not Smelser's "property" subject to federal tax liens, since they have been held in trust for the benefit of the subcontractors and suppliers who performed work on the construction contracts. In connection with that argument, Plaintiff also asserts that its rights have been equitably subrogated to the rights of these subcontractors and suppliers, and therefore, that it can assert any claim to the trust corpus that they may have had. Second, Plaintiff argues that it received a superior interest in the funds pursuant to the Indemnity Agreement it entered into with Smelser, and that this interest became effective prior to the IRS' tax lien. Finally, Plaintiff asserts that 26 U.S.C. §6323(c) grants Plaintiff a lien superior to several of the liens held by the IRS.

In response, Defendant IRS argues that the Sixth Circuit's opinion in In re Constr. Alternatives, Inc. [ 93-2 USTC ¶50,569], 2 F.3d 670 (6th Cir. 1993) controls the Court's analysis here. In reliance upon this case, the IRS maintains that the contract balances are "property" subject to the tax lien, since Smelser completed the construction projects, and earned the right to final payment from Defendant school districts. Second, Defendant argues that no trust was created for the benefit of unpaid claimants because the Indemnity Agreement and Payment Bonds do not reflect the parties' intent to reserve a specific portion of the funds in trust for the benefit of any ascertained beneficiaries, Third, Defendant contends that Plaintiff's rights were not subrogated to the rights of the subcontractors and suppliers because at the time the IRS filed its tax liens, the amounts owed to those suppliers and subcontractors had not been determined to any meaningful degree of certainty. Fourth, Defendant contests Plaintiff's assertion that it had a "security interest" in the funds, but argues, that even if it did, it did not "perfect" that interest by filing a financing statement with the Michigan Secretary of State. Therefore, because the IRS did "perfect" its lien by filing notices of tax liens, its interest takes priority over that of Plaintiff. For these same reasons, Defendant maintains that Plaintiff's argument under §6323(c) also fails.



II. STANDARD OF REVIEW

F.R.C.P. 56 states that summary judgment "shall be rendered forthwith if the pleadings, [ etc.,] show that there is no genuine issue as to any material fact and that the moving party is entitled to a judgment as a matter of law." Fed.R.Civ.P. 56. There is no genuine issue of material fact if there is no factual dispute that could affect the legal outcome on the issue. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248-49 (1986). In other words, the movant must show that it would prevail on the issue even if all factual disputes are conceded to the non-movant. Additionally, for the purposes of deciding on a motion for summary judgment, a court must draw all inferences from those facts in the light most favorable to the non-movant. Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 587 (1986).

Accordingly, in the instant case, the Court evaluates this motion with the rule that it should defer to Defendant's factual account whenever that account clashes with Judgment, Plaintiff asserts three separate grounds for its claim to the funds, and each will be discussed accordingly.

1. Equitable Subrogation and the Trust Theory

Plaintiff begins its argument by claiming its status as an equitable subrogee. Equitable subrogation is a "legal fiction through which a person who pays a debt for which another is primarily responsible is substituted or subrogated to all the rights and remedies of the other." Commercial Union Ins. Co. v. Med. Protective Co., 426 Mich. 109, 117 (1986). Merchants, having paid the claim of its principal, asserts that it is subrogated to the rights of the principal, the claimant receiving the payment, and the owner's right to withhold contract balances. The Court agrees that Plaintiff is, by a fiction of law, subrogated to whatever rights the claimant, principal, or owner may have in the contract balances, Pearlman v. Reliance Ins. Co., 371 U.S. 132 (1962).

Plainitff seeks here to enforce its claim to the contract balances owed by WB and Utica as the subrogee of the Claimants. Those funds, according to Plaintiff, were the trust corpus held for the benefit of the unpaid subcontractors and suppliers --the Claimants. As trust fund money, Smelser did not have a property interest in it. Therefore, the IRS could not attach its lien.

In response, Defendant IRS asserts two grounds for its argument that Smelser had a property interest in the funds. First, the IRS argues that, according to Construction Alternatives, once a contractor completes work on a construction contract, as Smelser did here, it earns the right to receive payment. It is that right to receive payment that constitutes a property interest to which a tax lien may legally attach. Constr. Alternatives [ 93-2 USTC ¶50,569], 2 F.3d at 674-65. Second, the IRS asserts that the contract balances are not a separate trust fund, because the parties did not create such a trust for the benefit of any subcontractors or suppliers. In light of this, then, the IRS maintains that Plaintiff was not a subrogee of the rights of the so-called "trustees." Finally, the IRS argues that, in any event, a state law subrogation claim does not become perfected until the amounts owed to the claimants are determined with certainty. Here, the amounts owed to the claimants were uncertain at the time the IRS filed its federal tax liens, and, so, the claims were not perfected.

In determining whether or not Smelser had an interest in the funds, the Court's analysis is twofold. Setting aside Plaintiff's "trust" argument for the moment, the Court must first decide whether Smelser acquired an interest in the funds when it completed its work on the WB and Utica projects. The Court finds that it did. Construction Alternatives holds that once a contractor completes work on a construction contract, its "right to receive its final progress payment ..." is deemed "property" under §6321, and can be subject to a federal tax lien. Id. Here, then, since the parties agree that Smelser completed its work on the WB and Utica construction projects, its right to receive final payment from the school districts is property that can be subject to the IRS tax lien.

This does not end the Court's inquiry, however, for it must now decide whether the contract balances were held in trust for the benefit of unpaid subcontractors and suppliers, leaving Smelser with no property interest in the funds. To prove that the funds at issue here were held in trust, Plaintiff must show either that: "1) [state] law provides that a portion of the progress payments were subject to a constructive trust for the benefit of unpaid suppliers and subcontractors ¹ ; or, 2) the suretyship agreement created an express trust with the Fund as the trust corpus." Constr. Alternatives [ 93-2 USTC ¶50,569], 2 F.3d at 677.

First, when a public construction contract is involved, as is the case here, Michigan law does not provide that a portion of an owner's payments are to be held in trust for the benefit of unpaid suppliers and subcontractors. The Michigan Building Contract Fund Act, Mich. Comp. L. 570.151 et. seq.,("MBCFA"), cited by Plaintiff, applies only to private construction contracts, and provides that, when such contracts are involved, balances paid to a contractor are to be held in trust for the benefit of subcontractors and suppliers. See In re Certified Question from U.S. Dist. Court for Eastern Dist. of Michigan, 311 N.W.2d 731, 733 ( Mich. 1981) (holding "the [MBCFA] applies only to private construction contracts.") Here, however, the contracts were public, not private; therefore, the MBCFA does not apply.

Since the MBFCA does not apply to create a constructive trust, the Court must look to the agreements. Plaintiff argues that Smelser, WB and Utica created a trust, with the contract balances serving as the trust corpus. To determine whether a trust was created, the Court looks to state law. Constr. Alternatives [ 93-2 USTC ¶50,569], 2 F.3d at 675. In Michigan , "it is a general principle of trust law that a trust is created only if the settlor manifests an intention to create a trust, and it is essential that there be an explicit declaration of trust accompanied by a transfer of property to one for the benefit of another." Osius v. Dingell, 134 N.W.2d 657, 660 ( Mich. 1965). Further, "[t]o create a trust, there must be an assignment of designated property to a trustee with the intention of passing title thereto, to hold for the benefit of others. There must be a separation of the legal estate from the beneficial enjoyments..." In re Americana Found., 387 N.W.2d 586, 588 (Mich. App. 1985) (quotation omitted).

Here, Plaintiff argues that the language of the payment bonds issued for the WB and Utica projects created an express trust for the benefit of subcontractors and suppliers. Specifically, Plaintiff notes that paragraph 8 of the payment bonds states as follows:

[a]mounts owed by the owners to the contractor under the construction contract shall be used for the performance of the construction contract and to satisfy claims, in any, under any construction performance bond. By the contractor furnishing and the owner accepting this bond, they agree that all funds earned by the contractor in the performance of the construction contract are dedicated to satisfy obligations of the contractor and the surety under this bond ..." (emphasis added)

Clearly, the bond at issue here identified Smelser's payment obligations with respect to the monies received from WB and Utica under the construction contracts. However, this language, by itself, does not establish that Smelser, WB and Utica created a trust in favor of the subcontractors and suppliers. Rather, as discussed above, to establish that a trust existed, Plaintiff must show that the parties involved intended to create a trust, and that they designated certain funds as trust property. Osius, 134 N.W.2d at 660; In re Americana Found., 387 N.W.2d at 588. The Court finds that this is not established here.

To begin, it is arguable that the use of the word "dedicated" in the payment bond signifies an intention or declaration on the part of Smelser, WB and Utica to create a trust for the benefit of the subcontractors and suppliers. Nevertheless, regardless of whether this language manifested such intent, Plaintiff's argument fails because none of the parties involved delivered any funds into trust in accordance with Michigan law. That is, the facts do not establish that the parties involved intended to set aside a certain portion of the funds "in trust" for the subcontractors or suppliers, and, in fact, at no time did Smelser create a separate trust account for the contract balances. The mere fact that Smelser earned the right to receive payment for the school projects by completing its construction work does not, by itself, make the money owed by WB and Utica trust property.

The Court's analysis is guided, in part, by Construction Alternatives, where the Sixth Circuit held that the language of an Indemnity Agreement between a surety and a contractor did not create a trust under Ohio Law. There, the Indemnity Agreement stated that "all monies due .. are trust funds, for the benefit of and for payment of all such obligations in connection with any such contract ... for which the Surety would be liable under any of the ... bonds..." Constr. Alternatives [ 93-2 USTC ¶50,569], 2 F.3d at 676, n. 4. The Ohio law applied by the Sixth Circuit was very similar to Michigan law, and provided that "the manifested intention" of the parties governed whether or not the parties had created a trust.

In deciding whether a trust had been created in Construction Alternatives, the Sixth Circuit examined whether the parties intended that the money be kept or used as a separate fund for the benefit of third persons. Id. at 677 (quoting Guardian Trust Co. v. Kirby, 50 Ohio App. 539 (1935)). Ultimately, the Court concluded that despite the actual "trust" language contained in the Indemnity Agreement, no trust was created, because "no provision of [the indemnity agreement] required [the contractor] to keep any portion of the progress payments as a separate trust fund, and the record does not indicate that [the contractor] kept the progress payments in a separate account." Id. at 677. Similarly, here, because the language of the payment bond did not require Semlser to set aside a portion of the payments in a separate trust fund, no trust was created.

In light of this, Plaintiff's subrogation claim to a trust fund fails. This does not mean, however, that Plaintiff is not an equitable subrogee, for, as noted above, in paying Smelser's claims, Plaintiff became subrogated to whatever rights those claimants had in the contract balances, Pearlman v. Reliance Ins. Co., 371 U.S. 132 (1962). Consequently, as an equitable subrogee, Plaintiff must establish that its right to the funds takes priority over the IRS's tax lien.

Federal liens do not "automatically have priority over all other liens." Constr. Alternatives [ 93-2 USTC ¶50,569], 2 F.3d at 676 (quotations omitted). Rather, they are subject to the "first in time, first in right" rule. Id. For purposes of this rule, a federal tax lien is perfected at the time the notice of the lien is filed, Constr. Alternatives [ 93-2 USTC ¶50,569], 2 F.3d at 676 (citations omitted), while a state lien is 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. Dishman Indep. Oil Co. [ 99-2 USTC ¶50,992], 46 F.3d 523, 526 (6th Cir. 1995) (quoting United States v. McDermott [ 93-1 USTC ¶50,164], 507 U.S. 447, 449 (1993)). In the context of equitable subrogation, the Sixth Circuit held in Construction Alternatives that a surety's alleged equitable lien did not have priority because "[t]he amounts owed to the unpaid persons on the project were not yet certain" at the time the tax liens were filed. Constr. Alternatives [ 93-2 USTC ¶50,569], 2 F.3d at 676.

Here, the IRS filed its notices of tax lien on August 30, 2000, January 2, 2001, May 21, 2001 and June 27, 2001. Plaintiff, however, has not established that its alleged equitable lien was perfected as of those dates, because it has not shown that the amounts owed to the unpaid subcontractors and suppliers were certain at that time. In fact, the record does not contain any evidence as to the dates and amounts of Plaintiff's payments, or to whom those payments were made. As such, the Court finds that as an equitable subrogee, Plaintiff has not established the priority of its lien, because there is a genuine issue of material fact with respect to the payments Plaintiff made under its bond agreement with Smelser.

2. Indemnity Agreement Theory

Plaintiff next argues that the Indemnity Agreement it entered into with Smelser gave it a superior interest in the contract balances. In particular, Plaintiff points to the language of the Agreement in which Smelser agreed to assign and transfer its rights in the monies owed by WB and Utica to Plaintiff as "collateral security" for performance of the bond contract. According to Plaintiff, that assignment became effective as of the date of execution of any bond, or September 1, 1998. And, since this preceded the dates upon which the IRS filed its notice of tax lien, Plaintiff contends that it's interest takes priority over the IRS lien.

In making this argument, Plaintiff acknowledges that, in most circumstances, parties are required by Article 9 of Michigan's Uniform Commercial Code to perfect their interests by filing financing statements with the Michigan Secretary of State. However, in reliance upon In Re V. Pangori Sons, Inc., 53 B.R. 711, 717 (Bankr. E.D. Mich. 1985), Plaintiff asserts that, in Michigan , Article 9 does not apply to indemnity agreements. In particular, Plaintiff relies on the language in Pangori that states that a surety may assert "its rights deriving from the agreement of indemnity because even though it did not take the steps necessary to perfect an Article 9 security interest, it did not need to do so." Id. This is so because "the assignment does not create a security interest" in the contract balances. Id. Therefore, Plaintiff maintains that it did not have to perfect its interest with the Secretary of State.

In response, the IRS counters that Plaintiff's claim to the funds is not superior to the IRS lien because Plaintiff was, in fact, required to perfect its interest by filing with the Secretary of State. In so arguing, Defendant asserts that Pangori, a 1985 bankruptcy case, was called into doubt by the Sixth Circuit's 1993 holding in Construction Alternatives, where an Ohio U.C.C. provision, identical to the Michigan statute relied upon by the Pangori court, was interpreted to require a bond company to perfect its interest by filing a financing statement with the Secretary of State. The IRS now asks this Court to extend the Sixth Circuit's holding to Michigan , and hold that, here, Plaintiff was required to file its Indemnity Agreement with the Secretary of State.

Defendant's argument is quite compelling. For, as Defendant points out, the relevant portion of the Michigan statute at issue in Pangori is precisely the same as the Ohio statute analyzed in Construction Alternatives. Both provisions provide that the UCC does not apply to "a transfer of a right to payment under a contract to an assignee who is also to do the performance under the contract...." Ohio Rev. Code Ann. §1309.04; Mich. Comp. Laws §19.9104. Thus, one could reasonably argue, as the IRS does here, that the Sixth Circuit's interpretation and application of the Ohio statute should carry over to Michigan to require Plaintiff to file its Indemnity Agreement with the Secretary of State.

The Court, however, declines to apply the holding in Construction Alternatives to Michigan . The Sixth Circuit did not have the opportunity to consider the issues raised in Pangori, even though it may have been applying similar law. It simply held in one cursory sentence that a financing statement would have to be filed. Pangori, on the other hand, contained a more detailed analysis of Article 9 and its relationship to indemnity agreements. See Pangori, 53 B.R. at 717. Therefore, the Court will not disturb the Pangori decision, and what may have been the Michigan practice since 1985, unless it is clearly required to do so.

The Court's analysis does not end here, because it is still necessary to determine when Plaintiff's interest in the funds became effective. According to Plaintiff, the express language of the Indemnity Agreement provided that Smelser's assignment of the contract balances became immediately effective as of the date of any bond, or September 1, 1998, when the Fringe Benefit Bond was executed. In making this argument, Plaintiff relies on two Michigan cases, Pangori, discussed above, and Early Dubey & Sons v. Macomb Contracting, 97 Mich. App. 553 (1980). According to Plaintiff, the indemnity agreements at issue in those cases granted the plaintiffs assignment rights in construction funds. Unlike the Indemnity Agreement at issue here, however, those agreements provided that the operative date upon which the plaintiffs' assignment rights became effective was the date of the contractor's default. Here, according to Plaintiff, the Indemnity Agreement provided a different operative date, namely the date of the execution of any bond. Therefore, Plaintiff concludes that because the IRS did not have a lien on Smelser's property as of September 1, 1998, when the Fringe Benefit Bond was executed, the IRS does not have a superior claim to the funds.

The Court duly notes Plaintiff's argument, but finds that neither Pangori nor Dubey stand for the proposition advanced by Plaintiff that the language of the Indemnity Agreement governs the date upon which a surety's assignment rights become effective. First, in Pangori, the indemnity agreement contained language similar to the Indemnity Agreement here; in particular, it stated that the assignment was to "be effective as of the date of [a] bond or bonds..." Id. at 716. However, unlike the Indemnity Agreement in this case, the Pangori agreement contained additional language indicating that the surety's assignment rights did not become effective until "the event of default..." Id. Ultimately, the surety's claim was held to be inferior to the judgment lien creditor's competing claim, and the court did hold, as Plaintiff asserts, that the relevant date for analyzing the priority of the surety's claim was the date of the contractor's default.

Contrary to Plaintiff's assertion, however, the Pangori court did not seem to rest its decision on the language contained in the indemnity agreement. Rather, the court looked to Michigan law, which essentially dictated that a surety's claim did not become effective until the surety became obligated to pay under its bond agreement with the contractor. Specifically, the Pangori court held that:

Michigan law holds that a lien of a judicial lien creditor which attaches before a surety becomes obligated to perform under its bond is prior in right to the surety's claim. Thus, the rights of subrogation and indemnification are not permitted to relate back to the date of the initial suretyship agreement when a judicial lien intervenes. Accordingly, because [the surety's] claim to the proceeds by virtue of its contractual indemnity agreement is inferior to the rights of the [bankruptcy] trustee, it may thus be avoided.

Pangori, 53 B.R. at 721.

Similarly, in Dubey, the Michigan Court of Appeals found that the operative date upon which the surety's assignment rights became effective was the date of the contractor's default. Unlike Pangori, however, the Dubey court relied more heavily upon the language of the indemnity agreement, which also provided that the surety's assignment rights would "be effective as of the date of any such bond, but only in the event of a default..." Specifically, the Dubey court noted that "it is ... clear from the contractual language that default, requiring completion of the project at [the surety's] expense, triggers [the surety's] right to claim, by assignment, [the contractor's] rights to the [construction] funds..." Dubey, 97 Mich. App. at 558. Thus, according to Dubey, the surety's assignment rights were triggered as of the date of the contractor's default, and those rights related back to the date of execution of any payment and performance bonds. Id. at 559.

A careful review of the Dubey opinion reveals that, when rendering its decision, the Michigan Court of Appeals did not rely entirely on the language of the indemnity agreement, but rather, paid considerable attention to the same Michigan law that governed the court in the Pangori decision. In particular, the court noted that:

[a] number of cases ... impel the conclusion that [defendant surety], as performance bond surety, had no contractual rights to the funds ... because as of the date of plaintiff's writ of garnishment, [the surety] was not obligated to perform under its surety contract. [I]f in fact, [the surety] had become so obligated, then either under the terms of its indemnification agreement with [the contractor] or under equitable subrogation principles its rights would be superior to plaintiffs'.

Of particular importance to the Michigan Court of Appeals was the overarching principle that "[i]n order for a surety to prevail over competing creditors it is necessary that the contractor be in default as a matter of fact, and that the surety be obligated under its bond to perform..." Id. at 559-60.

Therefore, what appears to have guided the courts in Dubey and Pangori was not the language contained in the indemnity agreements itself, but rather, the well-founded principle that a surety's assignment rights are triggered upon the contractor's default. In fact, this is quite understandable given that a surety does not need to enforce its assignment rights unless and until it is obligated to perform under its agreement with the contractor; i.e., when the contractor defaults on its own payment responsibilities.

Here, the Indemnity Agreement stated that Smelser assigned the right to the contract balances to Plaintiff "as of the date of execution of any Bond..." The Court disagrees with Plaintiff's assertion that, for purposes of assessing priority, its claim to those funds became effective as of September 1, 1998, or the date it issued the Fringe Benefit Bond. Rather, in light of the rule of law stated in both Dubey and Pangori, Plaintiff's assignment rights were triggered when it became obligated to perform under its surety agreement. This is so despite the fact that the Indemnity Agreement did not contain any specific "default" language. For, the Court notes while not explicitly stated, it was implicit in the Indemnity Agreement that Smelser's assignment of the contract balances would occur only when Smelser defaulted. Therefore, the Court finds that Plaintiff's claim to the funds was not effective as of the date Plaintiff executed the Fringe Benefit Bond, but rather, as of date of Smelser's default. Since the facts are unclear as to when this occurred, the Court finds that Summary Judgment in Plaintiff's favor is inappropriate at this time.

3. Statutory Theory

Lastly, Plaintiff argues that in the event that the Court finds that Plaintiff is not entitled to all of the funds at issue here, it should still receive a portion of the contract balances pursuant to 26 U.S.C. §6323(c). This provision provides, in pertinent part, as follows:

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

 

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

 

...

 

(iii) an Obligatory Disbursement Agreement, and

 

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

According to Plaintiff, the fringe benefit bond issued on September 1, 1998 , and subsequent payment bonds issued in November and December, 2000, qualified as security interests within the meaning of the statute in that they were "obligatory disbursement agreements." Furthermore, with respect to 26 U.S.C. §6323(c)(1)(B), Plaintiff argues that "a surety's right of equitable subrogation defeats a judgment lien, and therefore satisfies the second prong of the ... statute." Thus, according to Plaintiff, it should be reimbursed, at the very least, for the amounts it paid on those bonds, or approximately $177,000.

In response, Defendant argues that Plaintiff did not have a "security interest" within the meaning of the statute, and therefore, cannot assert priority based on §6323(c). In particular, Defendant argues that the contract between Plaintiff and Smelser was not an "obligatory disbursement agreement," and more importantly, that Plaintiff's interest was not protected under local law, since Plaintiff did not file its Indemnity Agreement with the Secretary of State.

First, an "obligatory disbursement agreement" is "an agreement (entered into by a person in the course of his trade or business) to make disbursements, but such an agreement shall be treated as coming within the term only to the extent of disbursements which are required to be made by reason of the intervention of the rights of a person other than the taxpayer." 26 U.S.C. §6323(c)(4)(A). According to Amwest Sur. Ins. Co. v. United States [ 94-2 USTC ¶50,558], 870 F.Supp. 432, 434 (D. Conn. 1994), a surety bond constitutes an obligatory disbursement agreement within the meaning of the statute. Therefore, the Court agrees with Plaintiff that the bonds issued for the construction contracts are covered by the first prong of §6323(c).

With respect to the second prong, the Court finds that Plaintiff has failed to establish that its security interest was "protected under local law" as required by §6323(c)(1)(B). However, in so holding, the Court does not endorse Defendant's assertion that, in order to protect its interest under local law, Plaintiff was required to file its Indemnity Agreement with the Secretary of State. For the reasons discussed above, Plaintiff was not subject to the filing requirements of Article 9. Pangori, 53 B.R. at 717.

Plaintiff argues that it's interest was "protected under local law" because it became equitably subrogated to the rights of potential unpaid claimants on the dates it issued the bonds for the school projects. In so arguing, Plaintiff relies on Amwest, which provides that "[i]f the conditions of [ §6323(c)] are met, a surety's interest in contract proceeds pursuant to a bond executed before a tax lien is filed, will prevail over the lien even if the surety payments are made after liens are filed." Amwest [ 94-2 USTC ¶50,558], 870 F.Supp. at 434 (citations omitted). Accordingly, Plaintiff argues that regardless of when it was actually called upon to make surety payments on its bonds, its claim to the funds is superior to Defendant's because it executed some of those bonds prior to the IRS liens.

The Court agrees with Plaintiff that in Amwest the court held that the surety's interest accrued on the date it executed the bond, not the date upon which it paid the contractor's outstanding debts to the unpaid subcontractors and suppliers. With that said, however, the Court notes that the Amwest decision is based on Connecticut , not Michigan , law, and therefore, does not control this Court's analysis.

Notably, in Amwest, the court's decision was based on Connecticut 's endorsement of the relation back doctrine, which dictates that a surety's equitable subrogation rights relate back to the date of the bond. Amwest [ 94-2 USTC ¶50,558], 870 F.Supp. at 435. ² Michigan , however, has not adopted the relation back doctrine as it relates to a surety's equitable subrogation rights. Rather, in Michigan , "the right to subrogation accrues upon payment of the debt." Dubey, 296 N.W.2d at 585. Therefore, "[i]n order for the surety to prevail over competing creditors it is necessary that the contractor be in default as a matter of fact, and that the surety be obligated under its bond to perform..." Id.

In Pangori, which Plaintiff relied on in the previous issue, the Court, when analyzing the surety's equitable subrogation claim, applied the Michigan Court of Appeals' holding in Dubey and found that "[i]n Michigan, as long as the surety's liability is contingent and has not become an actual obligation triggered by its principal's default, its equitable rights may be subordinated to an intervening judicial lien creditor." Pangori, 53 B.R. at 719. Therefore, the Pangori court held, "[t]he court's conclusion in Dubey may be summarized as stating that two elements were necessary for the surety to prevail: first, it must show that there was an actual default prior to garnishment; second, it must show that it actually became obligated to pay." Id. at 719-20 (citing Dubey, 97 Mich. App. at 559-60).

Clearly, then, Michigan law differs from that of Connecticut with respect to a surety's right of equitable subrogation and the relation back doctrine. In Michigan , the relation back doctrine does not apply in the context of equitable subrogation to make the effective date of a surety's interest, for priority purposes, the date upon which it issued its bond. Rather, an equitable subrogee's rights are triggered when it actually becomes obligated to pay on the bonds; i.e., when the principal defaults. The opposite is true in Connecticut . Amwest [ 94-2 USTC ¶50,558], 870 F.Supp. at 435.

Here, as the Court is bound by Michigan law, it must follow the holdings set forth in Dubey and Pangori. As such, the Court finds that Plaintiff's equitable subrogation rights did not accrue until it was obligated to perform under its bond agreement with Smelser. The Court cannot determine when this actually occurred, however, since the details of Plaintiff's payments under the bonds are unknown. Accordingly, since there is a genuine issue of material fact with respect to these issues, the Court must deny Plaintiff's Motion for Summary Judgment.



V. CONCLUSION

Therefore, for the reasons stated above, Plaintiff's Motion for Summary Judgment is hereby DENIED.

IT IS SO ORDERED.

¹ Construction Alternatives involved the application of Ohio law, which Plaintiff claims renders it inapplicable to the facts at hand. The Court disagrees with Plaintiff, and finds that the Sixth Circuit's analysis in Construction Alternatives is applicable so long as appropriate allowances are made for Michigan law.

² After the court issued its ruling in Amwest, the United States moved for reconsideration, [ 95-2 USTC ¶50,340], 1995 WL 452992, No. Civ. 3:92CV221 (D.Conn. May 10, 1995), arguing that the court improperly relied upon several cases that had been repudiated by the Eighth Circuit's holding in Int'l Fid. Ins. Co. v. U.S. [ 92-1 USTC ¶50,004], 949 F.2d 1042 (8th Cir. 1991). Notably, the Eight Circuit in Int'l Fid. Ins. Co. rejected the relation back doctrine, and held that a surety's equitable subrogation claim to a contractor's progress payments did not accrue on the date the bonds were issued. Id. at 1046. Upon reconsideration, however, the Amwest court adhered to its original ruling, noting that Int'l Fid. Ins. Co. was based on Missouri , not Connecticut , law.

 

 

Air Operation International Corporation, a Florida Corporation, Plaintiff-Appellant v. United States of America , Defendant-Appellee.

U.S. Court of Appeals, 11th Circuit; 02-13544, 54 FedAppx 479, January 13, 2003 .

Unpublished opinion affirming, per curiam, a DC Fla. decision, 2002-1 USTC ¶50,423.

[ Code Secs. 6323, 6331 and 7426]

Civil actions by nontaxpayers: Wrongful levy: Judgment creditor: Priority of claims: Security interest: Date of levy. --

On the date when the IRS levied on funds owed by a delinquent airline company to a corporate creditor, the creditor had no security interest or lien with respect to those monies that was superior to the IRS's tax lien. By the time the creditor obtained a perfected security interest or a judgment lien, the levy had been consummated and the government had actual possession of the funds in dispute. Thus, the creditor's wrongful levy claim was properly denied.

Before: Tjoflat, Carnes and Wilson, Circuit Judges.

¬ Caution: The court has designated this opinion as NOT FOR PUBLICATION. Consult the Rules of the Court before citing this case.®

PER CURIAM: We agree with the district court, for the reasons the court gave in its dispositive order of April 26, 2002, that on the date the IRS levied on the funds Airline Reporting Corporation ("ARC") owed the taxpayer, appellant had no security interest or lien in such funds that was senior to the IRS's tax lien. By the time appellant obtained a perfected security interest or a judgment lien, the levy had been consummated and the Government had actual possession of the taxpayer's money (the funds due taxpayer from ARC).

AFFIRMED.

 

 

In re Angel Mario Garcia and Margarita Lourdes Landron Garcia. Deborah Menotte, as Chapter 7 Trustee for the Bankruptcy Estate of Angel Mario Garcia and Margarita Lourdes Landron Garcia, Plaintiff v. United States of America, Angel Mario Garcia, Margarita Lourdes Landron Garcia and Rafaela V. Landron, Defendants.

U.S. District Court, So. Dist. Fla. ; 01-945-CIV-GOLD, September 6, 2002 .

[ Code Sec. 6323]

Tax liens: Bankruptcy: Superiority over mortgage: Interpleader: Attorneys' fees. --

The government was entitled to the full amount of interpled funds calculated in debtors' bankruptcy proceeding. The federal tax lien was superior to a mortgage. Before reaching the federal inquiry regarding priority, the court determined that the mortgage was a valid property interest under state ( Florida ) law. However, it was not a security interest that could compete with a federal tax lien. The mortgagee did not have priority over the federal tax lien because it did not meet all four conditions of a security interest as defined by Code Sec. 6323, even though the government failed to properly record the tax lien. Moreover, the bankruptcy trustee was not entitled to attorney's fees and costs because the interpled funds were insufficient to cover the government's tax liens.

[ Code Sec. 6334]

Tax liens: Bankruptcy: Homestead property exemption. --

Debtors' property and the sale proceeds that came from it were subject to a federal tax lien. The property was not exempt under state ( Florida ) law as homestead property. The federal tax lien preempted the state exemption statute; thus, the Florida homestead exemption did not immunize the debtors' homestead property from the lien.

ORDER GRANTING UNITED STATES'S MOTION FOR SUMMARY JUDGMENT

GOLD, District Judge: THIS CAUSE is before the court upon defendant United States 's (" United States ") motion for summary judgment (D.E. #92). The plaintiff, Deborah Menotte ("Trustee"), has filed an interpleader complaint against the United States , Rafaela v. Landron ("Landron"), and Angel Mario Garcia and Margarita Lourdes Landron Garcia("Garcias") for Declaratory Relief. The Trustee, as stakeholder, seeks a declaratory judgment as to who is entitled to disputed funds in the amount of $83,000, calculated in a bankruptcy proceeding in the United States Bankruptcy Court for the Southern District of Florida. ¹ The Trustee also seeks an award of costs and attorney's fees. Co-defendants Landron and the Garcias have responded to the United States 's motion, (DE #94) and (DE #95) respectively. The Trustee has also filed a limited opposition to the United States 's motion with a cross-motion for summary judgment (DE #96). The court has subject matter jurisdiction pursuant to 28 U.S.C. §1335 because this is an interpleader action with two or more claimants of diverse citizenship. The court also has subject matter jurisdiction pursuant to 28 U.S.C. §1331, and 28 U.S.C. §1340 in so far as this matter involves claims that come under this court's federal question jurisdiction.

On August 30, 2002, the court heard oral argument on the United States 's motion and the Trustee's cross-motion. After carefully considering the motions, evidence, and arguments of counsel, the court grants the United States 's motion for summary judgment.

The Undisputed Facts ²

On February 18, 1997, the Garcias filed a petition for relief under Chapter 7 of the Bankruptcy Code in the United States Bankruptcy Court for the Southern District of Florida. ( U.S. Mot. SJ at 3). On April 17, 1997, the Garcias entered into a balloon mortgage agreement with Landron as mortgagee for one of the Garcias's real property at the time, a home at 2 Tahiti Beach Island Road , Coral Gables , Florida . ( U.S. Ex. #3). The Garcias, in accordance with the mortgage agreement with Landron, were to pay Landron $69,000 by April 17, 1998. Landron had borrowed the funds loaned to the Garcias from a company in the Dominican Republic , which sent the borrowed funds directly to the Garcias. (Landron Depo. at 9). Landron has not made any payments to the lender in the Dominican Republic . (Landron Depo. at 16). When the Garcias failed to make any payment on the April 17, 1997 loan, a new mortgage was executed on April 17, 1998. ( U.S. Ex. #1). This new mortgage was recorded on August 2, 1999. ( U.S. Mot. SJ at 4). Landron denies any knowledge of the bankruptcy proceeding when she entered the agreement with the Garcias. ( See Landron Resp. to Mot. SJ at 4).

On Schedule A of their bankruptcy schedules, the Garcias listed their interest in the property and on Schedule C of the bankruptcy schedules, claimed that the property was exempt from any tax liens under Article X, Section 4 of the Florida Constitution (homestead property). ( U.S. Mot. SJ at 3). The Trustee objected to the exemption because the property was in a municipality and exceeded 1/2 acre. ( U.S. Mot. SJ at 4). The bankruptcy court sustained the objection and calculated the monies owed to the Trustee and the Garcias and issued an order that the remaining funds ($83,000) from the proceeds of the sale of the property was due the Garcias. ( U.S. Ex. 6). The court further ordered, however, that the amount due was subject to the satisfaction of the recorded lien by Landron.

On September 8, 2000, before the bankruptcy court's Order Determining Debtors' Interest in Sale Proceeds, the Internal Revenue Service of the United States had served a Notice of Levy on the Trustee. ( U.S. Ex. 5). The Notice of Levy noticed the Trustee that the Garcias allegedly owed income taxes for the years 1992, 1994, 1995, and 1996, totaling over $200,000. The United States made a claim to the entire $83,000 allegedly due the Garcias based on the federal tax liabilities. Pursuant to the Notice of Levy, the Trustee requested that the bankruptcy court reconsider its September 26, 2000 Order. ( U.S. Mot. SJ at 5). The bankruptcy court denied the motion to reconsider and directed the Trustee to either follow its Order or to file an interpleader action in this court if she wished to resolve the dispute over the $83,000, because the bankruptcy court lacked jurisdiction over the funds derived from exempt property. ( U.S. Ex. 7).

Introduction

This matter involves a dispute over funds originally assessed in the bankruptcy court. The United States , citing In re Wesche, 178 B.R. 542 (Bankr. M.D. Fla. 1995) and In re Graziadei, 32 F.3d 1408 (9th Cir. 1994), argues that the bankruptcy court did not have jurisdiction to order the distribution of the disputed funds because the funds were exempt property no longer within the jurisdiction of the bankruptcy court. Based on a review of the applicable statutes and case law, this court concludes that the bankruptcy court did not have jurisdiction over the distribution of exempt property. See Novak v. O'Neal, 201 F.2d 227, 231 (5th Cir. 1953) ("As to assets of the bankrupt exempt by State laws, the court of bankruptcy exercises jurisdiction only to the extent necessary to segregate and set aside the property or money as so exempt by the bankrupt.... [The] adjudication of claims thereto by creditors or lienees therefore can not be properly be made by the court of bankruptcy."). ³

This court has jurisdiction over the matter because it involves a federal question, namely the priority of federal tax liens. The applicable provision is 28 U.S.C. §1340, which provides that "district courts shall have original jurisdiction of any civil action arising under any Act of Congress providing for internal revenue." The Eleventh Circuit has noted that once a federal tax lien arises, "federal law governs the priority of competing liens asserted against a taxpayer's property." Griswold v. United States [ 95-2 USTC ¶50,419], 59 F.3d 1571, 1575 (11th Cir. 1995). Accordingly, this court concludes that its subject matter jurisdiction over this matter has been established.

Summary Judgment Standard

Rule 56(c) of the Federal Rules of Civil Procedure authorizes summary judgment when the pleadings and supporting materials show that there is no genuine issue as to any material fact and that the moving party is entitled to judgment as a matter of law. See Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248, 106 S.Ct. 2505, 2510 (1986). The court's focus in reviewing a motion for summary judgment is "whether the evidence presents a sufficient disagreement to require submission to a jury or whether it is so one-sided that one party must prevail as a matter of law." Allen v. Tyson Foods, Inc., 121 F.3d 642, 646 (11th Cir. 1997). The moving party has the burden to establish the absence of a genuine issue as to any material fact. See Adickes v. S.H. Kress & Co., 398 U.S. 144, 157, 90 S.Ct. 1598, 1608 (1970); Tyson Foods, Inc., 121 F.3d at 646. Once the moving party has established the absence of a genuine issue of material fact, to which the nonmoving party bears the burden at trial, it is up to the nonmoving party to go beyond the pleadings and designate "specific facts showing that there is a genuine issue for trial." Celotex v. Catrett, 477 U.S. 317, 324, 106 S.Ct. 2548, 2553 (1986). Issues of fact are genuine only if a reasonable jury, considering the evidence presented could find for the nonmoving party. See Anderson, 477 U.S. at 247-51, 106 S.Ct. at 2510-11. In determining whether to grant summary judgment, the district court must remember that, "credibility determinations, the weighing of the evidence, and the drawing of legitimate inferences from the facts are jury functions, not those of a judge." Id. 477 U.S. at 255, 106 S.Ct. at 2513.

Analysis

Three issues must be resolved in this case. First, this court must determine if the Garcias' property is exempt from the federal tax lien because of its classification as homestead property. Second, if the property is not exempt from the federal tax lien, then this court must rule on who has priority over the disputed funds, Landron or the United States . Finally, this court must decide if the Trustee is entitled to costs and attorney's fees for bringing this interpleader action.

A. Homestead Exemption and Federal Tax Liens

The Garcias argue that their property and the sale proceeds that came from it should not be subject to a federal tax lien because, according to the Florida constitution, the property is homestead property. The United States argues, citing United States v. Mitchell [ 71-1 USTC ¶9451], 403 U.S. 190 (1971) and Weitzner v. United States [ 62-2 USTC ¶9773], 309 F.2d 45 (5th Cir. 1962), that federal tax liens preempt state exemption statutes. This court agrees with the United States that the law is clear, as discussed below, that the Florida state exemption statute for homestead property does not avoid a federal tax lien.

As noted in the United States's summary judgment motion, the applicable statute authorizing the United States to issue a levy is 26 U.S.C. §6331. ⁴ Section 6331 indicates that 26 U.S.C. §6334 outlines the circumstances under which certain property are exempt from a federal tax lien. Homestead state exempt property is not among the property listed as being exempt from levy. See 26 U.S.C. 6334. Additionally, in United States v. Rodgers [ 83-1 USTC ¶9374], 461 U.S. 677, 683, 103 S.Ct. 2132, 2137 (1982), the U.S. Supreme Court noted that "it has long been an axiom of our tax collection scheme that, although the definition of underlying property interests is left to state law, the consequences that attach to those interests is a matter left to federal law." (citations omitted). In Rodgers, the Court held that the Texas homestead exemption did not exempt the disputed property from the federal tax lien. See id. at 701, 2146.

Other cases have made clear that homestead property is not exempt from federal tax liens. See United States v. Estes [ 71-2 USTC ¶9677], 450 F.2d 62, 65 (5th Cir. 1971) ("Even though the homestead might be exempt under state law from the claims of private creditors, `no provisions of a state law may exempt property or rights to property from levy for the collection of federal taxes owed.") (citing Treas. Reg. on Proc. and Admin. §301.6334-1(c) and United States v. Bess [ 58-2 USTC ¶9595], 357 U.S. 51, 56-57, 78 S.Ct. 1054, 2 L.Ed.2d 1135 (1958)); Weitzner [ 62-2 USTC ¶9773], 309 F.2d at 48 ("It follows that the tax liens of the United States were and are valid and enforceable against the property claimed as homestead."). These cases in conjunction with the applicable statute compels this court's conclusion that Florida 's homestead exemption does not immunize homestead property from federal tax liens.

B. United States 's Levy and Landron's Mortgage

1. Does Landron have a recognized interest?

The United States claims that it is entitled to the disputed funds because of the superiority of the federal tax lien to the Landron mortgage. Before reaching the federal inquiry regarding priority, however, this court must determine if Landron's mortgage is a valid interest in "property or rights to property." Haas v. Internal Revenue Service [ 94-2 USTC ¶50,496], 31 F.3d 1081, 1084 (11th Cir. 1994) (citations omitted). This determination is essential to this court's analysis because the federal statutes involved in this action do not create property rights; they simply define federal consequences to those rights. See United States v. National Bank of Commerce [ 85-2 USTC ¶9482], 472 U.S. 713, 722, 105 S.Ct. 2919, 2925, 86 L.Ed.2d 565 (1985) (citing Bess [ 58-2 USTC ¶9595], 357 U.S. at 55, 78 S.Ct. at 1057, 2 L.Ed.2d 1135); see also Mitchell [ 71-1 USTC ¶9451], 403 U.S. at 197, 91 S.Ct. at 1768 ("In the determination of ownership, state law controls. `The state law creates legal interests but the federal statute determines when and how they shall be taxed."') (citations omitted). Technically, Landron's mortgage became presumptively protected by Florida law when it was recorded on August 2, 1999. See FLA. STAT. ch. 695.01; see also People's Bank of Jacksonville v. Arbuckle, 82 Fla. 479, 487, 90 So. 458, 460 ( Fla. 1921) ("The due record of a mortgage is statutory notice of the contract lien, binding all who deal with reference to liens upon the property."). The United States does not dispute whether Landron's mortgage is valid under Florida law; it questions the mortgage's validity as a security interest under federal law for tax lien purposes. Thus, this court concludes that Landron's mortgage is a valid property interest under Florida law, but as the cases cited above assert, federal law determines if it is a "security interest" for tax lien purposes.

A federal tax lien is created by operation of law pursuant to 26 U.S.C. §6321, ⁵ and 26 U.S.C. §6322 indicates that the lien is imposed at the date of assessment: "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." Despite the fact that the United States 's tax lien is assessed at the time liability is determined, Landron might have a protected security interest if she falls into a certain category and notice of the federal tax lien has not been filed.

26 U.S.C. §6323(a) outlines the four circumstances under which the federal tax lien would not be effective against Landron:

(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.

Based on the definition of each term in the above statute, Landron is not a purchaser, mechanic's lienor, or a judgment lien creditor. Thus, Landron's mortgage would most qualify as a holder of a security interest, which means "any interest in property acquired by contract for the purpose of securing payment or performance of an obligation or indemnifying against loss or liability. A security interest exists at any time (A) if, at such time, the property is in existence and the interest has become protected under local law against subsequent judgement lien arising out of an unsecured obligation, and (B) to the extent that, at such time, the holder has parted with money or money's worth." 26 U.S.C. 6323(h)(1). Landron must establish all conditions of Section 6323(h)(1) in order to be protected by Section 6323(a). See Haas [ 94-2 USTC ¶50,496], 31 F.3d at 1085. The United States argues that Landron's interest does not qualify under the statute because she has not parted with money or with money's worth. Landron has stated during oral argument as well as in her deposition that she did not pay the Garcias the $69,000 directly, nor has she paid back the loan received from the company in the Dominican Republic ( See Landron. Depo. at 16).

In holding that a bank had not parted with money or money's worth, the Fourth Circuit, quoting Treas. Reg §301.6323(h)-1(a)(3) (1989) [26 C.F.R.], defined money or money's worth as "money, a security ..., tangible or intangible property, services, and other consideration reducible to a money value. Money or money's worth also includes any consideration ... which was parted with before the security interest would otherwise exist if, under local law, past consideration is sufficient to support an agreement giving rise to a security interest .... [A]ny other consideration not reducible to a money value [is not] consideration in money or money's worth." United States v. 3809 Grain Ltd. P'ship [ 89-2 USTC ¶13,813], 884 F.2d 138, 142 (4th Cir. 1989). Based on the definition of money or money's worth, Landron has failed to provide any evidence that she has parted with money's worth and she has already admitted that she has not actually parted with money. In addition, she does not have any documentation of any agreement with the company in the Dominican Republic that sent the $69,000 to the Garcias.

Accordingly, this court concludes that Landron does not possess a security interest that may compete with the federal tax lien. The United States has filed a Declaration of Jacqueline Kelly, an employee of the Internal Revenue Service, which states that as of September 3, 2002, the Garcias owe over $200,000 in federal taxes. Therefore the United States is entitled to the full $83,000 of interpled funds pursuant to 26 U.S.C. §6331(a), unless Landron has a priority over the United States or the Trustee is entitled to attorney's fees. As indicated below, neither situation applies. See United States v. Ruff [ 97-1 USTC ¶50,130], 99 F.3d 1559, 1563 (11th Cir. 1996) ("The IRS is empowered to levy on the property or rights to property of a delinquent taxpayer in the hands of a third party.").

2. Does Landron's interest have a priority over the United States 's interest?

If Landron had provided evidence that she had parted with money or money's worth with reference to the mortgage, the priority of liens would not be so clear. The United States argues that Landron's claim to the disputed funds is inferior to its claims because, citing 26 U.S.C. §6321, Landron's interest in the property arose after the tax assessments because Landron's mortgage was not recorded until August, 2, 1999, while the Garcia tax liabilities date from November 1993 to September 1997. The United States is incorrect, however, with the dates it is using to determine the priority of interests in the Garcia property.

According to the Eleventh Circuit, in Litton Industrial Automation Systems, Inc. v. Nationwide Power Corp. [ 97-1 USTC ¶50,236], 106 F.3d 366, 368 (11th Cir. 1997), "any `security interest' which arises prior to the proper filing of a federal tax lien takes priority over the tax lien." (citing United States v. McDermott [ 93-1 USTC ¶50,164], 507 U.S. 447, 449, 113 S.Ct. 1526, 1528, 123 L.Ed.2d 128 (1993)). The Litton court also noted that federal law, as opposed to state law, governs a priority question between a security interest and a federal tax lien. Id. at 371 (citing Haas [ 94-2 USTC ¶50,496], 31 F.3d at 1084-85). Proper filing of notice of the federal tax lien is usually essential in the answer to a priority contest. Based on Litton and the applicable statute, the determining factor is the filing of notice, not the date that the federal tax liability was incurred or assessed, as the United States asserts, unless the dates coincide. The Haas court noted: "The filing requirement is critical: even a holder of a security interest who has actual knowledge of an unfiled tax lien will prevail over the government." Haas [ 94-2 USTC ¶50,496], 31 F.3d at 1084. The United States has admitted during oral argument that no notice has been filed in the appropriate office in the state. The United States stated that they are relying solely on the statutory lien that automatically applies when tax liability is assessed. See Texas Oil & Gas Corp. v. United States [ 72-2 USTC ¶9653], 466 F.2d 1040, 1052 (5th Cir. 1972) (citing 26 U.S.C.A. §6322). This statutory lien may alert the individuals who owe federal taxes, but it fails to alert others who may have a security interest in property owned by the delinquent taxpayers. ⁶

The relevant statue that outlines how the United States is supposed to file a proper notice is 26 U.S.C. §6323(f). Section 6323(f)(1)(A)(i) indicates that the notice shall be filed according to state law an in "the case of real property, in one office within the State (or the county, or other governmental subdivision), as designated by the laws of such State, in which the property subject to the lien is situated; and" section 6323(f)(1)(B), in "the office of the clerk of the United States district court for the judicial district in which the property subject to the lien is situated, whenever the State has not by law designated one office which meets the requirements of subparagraph (A)." Thus, according to the statute, the United States must make another step to protect itself against other security interest holders. See Haas [ 94-2 USTC ¶50,496], 31 F.3d at 1084 ("Thus, section 6323 mandates that notice of the taxing authority's lien `shall be filed' in the public records before it operates as notice effective against any holder of a security interest as that term is defined by section 6323.").

Because the United States has admitted to failing to file the proper notice as required by the applicable statute, the Landron's mortgage should prevail over the federal tax lien. The mortgage falls short of priority, however, because, as discussed above, it does not meet all four conditions of a security interest as defined by section 6323. All four conditions must be met before a security interest can be valid and therefore compete with a federal tax lien. See Litton [ 97-1 USTC ¶50,236], 106 F.3d at 368; Haas [ 94-2 USTC ¶50,496], 31 F.3d at 1085. This court therefore concludes that since Landron failed to meet all four requirements, the fact that the United States failed to properly record the federal tax lien is irrelevant; the United States prevails by default since it is not competing against a valid security interest and the federal tax lien is otherwise valid.

C. Trustee's Entitlement to Attorney's Fees

The United States argues that the trustee is not entitled to attorney's fees, citing Cable Atlanta, Inc. v. Project, Inc. et al. [ 85-1 USTC ¶9268], 749 F.2d 626 (11th Cir. 1984) and Spinks v. Jones [ 74-2 USTC ¶9657], 499 F.2d 339 (5th Cir. 1974), because the interpled funds are insufficient to cover the government's tax liens. The Trustee responds that she is entitled to attorney's fees because the interpled funds exceed the federal tax obligations by more than $20,000. In its reply, the United States points out that the federal tax liens actually total over $200,000. Based on Eleventh Circuit case law discussed below, this court concludes that the trustee is not entitled to attorney's fees in this case.

The Eleventh Circuit has noted that "[n]ormally a stakeholder who brings an interpleader action to determine which of two claimants is entitled to a fund which it holds, but does not claim, is entitled to have attorneys fees it incurs in bringing the action paid out of the fund. No such fees can be paid from the fund, however, when it goes to satisfy a tax lien." Cable Atlanta [ 85-1 USTC ¶9268], 749 F.2d at 626. ⁷ Additionally, in Katsaris v. United States , 684 F.2d 758 (11th Cir. 1982), a sheriff brought an interpleader action as a disinterested stakeholder regarding seized money. The Eleventh Circuit in that case pointed out that " Florida courts have found proper the award of reasonable attorney's fees and costs in an interpleader action where the party brin[g]ing the action is disinterested in the stake held and has not acted to cause the conflicting claims." Katsaris, 684 F.2d at 763 (citing Drummond Title Company v. Weinroth, 77 So.2d 606 ( Fla. 1955); Ellison v. Riddle, 166 So.2d 840 (Fla. App. 1964)). But the Eleventh Circuit further held that "once the government is successful in establishing a federal tax lien upon the funds in question, the judicial prerogative to award fees must give way to the supremacy of the federal tax lien whenever a fee award would encroach upon the fund subject to the tax lien." Katsaris, 684 F.2d at 763 (citing Spinks).

The Trustee contended during oral argument that relevant Eleventh Circuit case law regarding attorney's fees for a plaintiff bringing an interpleader action always applied to debtors and not disinterested stakeholders, but Kutsaris involves a sheriff who as in fact a disinterested stakeholder, and the court still held that attorney's fees could not be awarded if it would encroach on the amount of the federal tax lien. The United States has submitted documentation that the Garcias still owe more than $200,000 in federal taxes. Because an award of attorney's fees to the Trustee would encroach on the funds subject the tax lien (as only $83,000 are in dispute in this case), this court concludes that the Trustee is not entitled to attorney's fees.

Conclusion

This court concludes that the United States is entitled to the $83,000 of disputed funds because the Garcias' homestead property is not immune to a federal tax lien. In addition, Landron's mortgage, although a valid interest under Florida law, does not prevail over the federal tax lien because it fails to meet one of the requirements of a security interest (parting with money or money's worth) according to the applicable federal statute. Finally, the Trustee is not entitled to attorney's fees because the $83,000 of interpled funds do not satisfy fully the Garcias' federal tax liabilities.

It is hereby:

ORDERED AND ADJUDGED THAT:

1. The United States's motion for summary judgment [DE #92] is GRANTED.

2. The Trustee's cross-motion for summary judgment [DE #96] is DENIED.

3. All pending motions are DENIED AS MOOT.

4. This case is hereby DISMISSED WITH PREJUDICE and CLOSED.

DONE AND ORDERED.

¹ In re Angel Mario Garcia & Margarita Lourdes Landron Garcia, Case No. 97-11159-BKC-RAM.

² In support of its motion for summary judgment, the United States has filed a statement of material facts pursuant to Southern District of Florida Local Rule 7.5. In addition, the United States has submitted several exhibits, including depositions and documentary evidence. The co-defendants dispute and/or supplement some of the allegations contained in the United States 's statement with its own Local Rule 7.5, along with depositions and documentary evidence, including several pleadings and orders issued by the bankruptcy court in the Chapter 7 Proceedings. The following facts are derived from the United States 's Local Rule 7.5 statement, and any factual disputes between the parties are noted.

³ The Eleventh Circuit adopted as binding precedent all cases decided by the former Fifth Circuit prior to the close of business on September 30, 1981. See Bonner v. Prichard , 661 F.2d 1206, 1209 (11th Cir. 1981).

⁴ "If any person liable to pay any tax neglects or refuses to pay the same within 10 days after notice and demand, it shall be lawful for the Secretary to collect such tax (and such further sum as shall be sufficient to cover the expenses o[f] the levy) by levy upon all property and rights to property (except such property as is exempt under section 6334) belonging to such person or on which there is a lien provided in this chapter for the payment of such tax." 26 U.S.C. 6331(a).

⁵ "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."

⁶ The Litton court further provided: "Under the Internal Revenue Code, a tax lien arises at the time of assessment, 26 U.S.C. §6322, on `all property and rights of property, whether real or personal, belonging to' a delinquent taxpayer, [26 U.S.C.] §6321. The FTLA provides, however, that the tax lien `shall not be valid as against any... holder of a security interest ... until notice thereof which meets the requirements of subsection (f) has been filed." (citing 26 U.S.C. §6323(a).

⁷ The court went on to note: "The rationale of this decision is that the provisions of the Internal Revenue Code which establishes the lien, 26 U.S.C.A. §§6321, 6322, prohibit an award of attorney's fees when the effect of such award would diminish the amount recovered by the United States under its prior tax lien." Cable Atlanta [ 85-1 USTC ¶9268], 749 F.2d at 627.

 

[2002-1 USTC ¶50,446] In re Arthur J. Cobb, Paula K. Cobb, Debtors. Arthur J. Cobb and Paula K. Cobb, Plaintiffs v. Samera L. Abide, as Chapter 7 Trustee for the bankruptcy estate of Arthur J. Cobb and Paula K. Cobb, Defendant United States of America, Plaintiff v. Arthur J. Cobb, Paula K. Cobb, Samera L. Abide, Citicorp Mortgage, Inc., and Sunburst Bank, Defendants

U.S. Bankruptcy Court, Mid. Dist. La. , 93-11077, 5/1/2002

[Code Secs. 6321 and 6323 ]

Tax liens: Annuities: Property transferred to third parties: Validity and priority against third parties: Super-priority safe harbor: Filing of notice.--

The IRS was entitled to recover funds subject to tax liens that debtors had transferred to third party creditors. The debtors had transferred cash and assigned rights under annuity contracts to their mortgage holder banks after the IRS perfected the tax liens. That the banks had a perfected security interest in real property secured by a mortgage did not give them priority as to the government with respect to the encumbered funds. Moreover, the creditors' were not entitled to the super-priority safe harbor relief under Code Sec. 6323 . The banks were not includible in the classes of interest holders addressed by the statute; moreover, even if they were, the banks took the funds from the annuities after notice had been filed.

[Code Sec. 6332 ]

Surrender of property subject to levy: Post-judgment interest: Pre-judgment interest: Congressional intent.--

The IRS was entitled to post-judgment interest on debtors' funds that were erroneously transferred to other creditors after the imposition of a tax lien. Pre-judgment interest, however, was denied as unsupported by statute or equity. Because pre-judgment interest is intended to encourage payment of taxes, it was inapplicable in the present case where third-party creditors held the funds.

REASONS FOR JUDGMENT

PHILLIPS, Bankruptcy Judge:

BEFORE THE COURT are the motions by the United States of America ("US") to reopen this matter, substitute party, and for the addition of pre and post-judgment interest. For the reasons that follow, the Court will grant the motion to reopen and will render judgment therein; will grant the motion to substitute party to reflect the proper party Defendant as Union Planters Bank, National Association ("Union Planters"); ¹ will deny the US's motion for pre-judgment interest, but grant the US post-judgment interest.

I. BACKGROUND AND PROCEDURAL HISTORY

Prior to filing bankruptcy, Arthur and Paula Cobb were practicing attorneys with a substantial practice. As compensation for attorney's fees in a case in which the Cobbs were counsel for the plaintiff, the Cobbs agreed to accept annuity payments. As part of the structured settlement of that case, the Cobbs became the beneficiaries of four annuity policies issued by Manufacturers Life Insurance Co. The annuity policies entitle the Cobbs to receive (without the right of acceleration) monthly payments, semi-annual payments, and certain lump sum payments over the course of the life of the annuity.

Beside being relatively successful attorneys, the Cobb's were also serially delinquent taxpayers who failed to either file returns and/or pay taxes, both for personal income and for that of Mr. Cobb's business, for an extended period of time beginning in 1978. The Internal Revenue Service ("IRS") finally began assessments against Mr. Cobb, and on November 22, 1991, the IRS filed a notice of federal tax lien for the tax periods, 1987, 1988, 1989, and 1990. On July 15, 1992, the IRS filed an additional notice of federal tax lien for the 1991 tax period. ²

In addition to being abundantly indebted to the IRS for unpaid taxes, Mr. Cobb and his wife were obligors on two different loans secured by two mortgages placed on their personal residence. Citicorp Mortgage, Inc. ("Citicorp") held a first priority mortgage on the residence, while Union Planters occupied a second priority position with respect to its mortgage.

Sometime prior to bankruptcy, the Cobbs began experiencing financial difficulty and defaulted on the mortgage obligations owed to Citicorp and Union Planters. In an attempt to stave off foreclosure, the Cobbs made several lump sum payments to Citicorp and Union Planters to try and bring their loan obligations current. The payments made by the Cobbs totaled $91,578.87 and were made in the following amounts: $55,614.21 to Citicorp on November 25, 1992; $4,638.51 to Citicorp on January 26, 1993; $4,544.52 to Citicorp on March 11, 1993; $19,527.58 to Union Planters in January, 1993; and $7,254.05 to Union Planters in April, 1993.

In addition, the Cobbs assigned their rights as annuitants to the proceeds from the annuity policies to Union Planters. The purported assignment was confected on January 29, 1993. Under the assignment, payments due under the policies were remitted directly to Union Planters by the policy issuer. ³

After the Cobbs filed bankruptcy, the US filed adversary proceeding no. 95-1022. This adversary proceeding was consolidated with another pending adversary proceeding involving claims made by the Cobbs against the trustee, no. 94-1103. The matter was tried on August 29, 1995. Thereafter, a consent judgment was entered in the consolidated adversary proceeding and the consolidated adversary proceeding was closed by order of dismissal. On January 27, 1997, this Court entered an order dismissing the Cobb's bankruptcy case. In its order of dismissal, the Court reserved jurisdiction over Paragraphs 1(B) and 1(C) of the US 's complaint filed in the instant adversary proceeding, no. 95-1022. A similar reservation of jurisdiction was included within the consent judgment entered in the consolidated adversary proceeding. Despite this reservation of jurisdiction, the Court issued an order admin istratively closing the instant adversary proceeding on September 28, 2001. The Court does not know exactly how, but it seems that this matter has fallen through the proverbial cracks, so to speak, perhaps because of a minute entry that incorrectly referred to this proceeding as being settled and to be made the subject of a dismissal by consent order (the admin istrative close was done as a ministerial act, upon the Court not having received the consent dismissal erroneously referred to in the minute entry). At any rate, the Court has been made aware of the pending claims and will issue and order reopening the adversary proceeding and will now rule on the merits. Apologies are extended for the delay.

II. ANALYSIS

Paragraphs 1(B) and 1(C), including subparts, essentially allege that the US 's lien claims were properly and validly perfected. More specifically, the paragraphs allege that such liens attached to the annuity payments received by the banks and to the lump sum payments to the banks made by the Cobbs, and therefore such payments must be returned to the US .

The voluminous compendium of laws on the subject of federal taxes, commonly referred to as the Internal Revenue Code, 26 U.S.C., et seq., provides that if any person required to pay taxes:

neglects or refuses to pay the same after demand, the amount . . . shall be a lien in favor of the United States upon all property and rights to property, whether real or personal, belonging to such person. ⁴

The Supreme Court, examining the lien created by 26 U.S.C. §6321, has expounded that the scope, "is broad and reveals on its face that Congress meant to reach every interest in property that a taxpayer might have." ⁵ In addition to being extraordinarily broad, the lien imposed by 26 U.S.C. §6321 arises at the time the IRS assessment is made and continues until the liability for the amount of such assessment is made. ⁶

In this case, the IRS made assessments of the Cobbs federal tax liability at various times between 1991 and 1992. The assessments totaled approximately 2.5 million dollars. Pursuant to the statutes cited above, a tax lien arose at that time on all the Cobbs' property (and rights to property), whether immediately in their possession or which was acquired by them after the date of the assessment. According to the statutes, the lien continued in effect until the Cobbs satisfied the debt. ⁷

The next question, is to what did the tax liens attach? The foremost inquiry required under the tax lien statute is whether there is "property" or "right to property" to which the tax lien could encumber. The federal tax lien statutes do not create property rights, but rather attach consequences, federally defined, to rights which are created under state law. ⁸ Resort must first be made to underlying state law to determine the existence and nature of an interest to which the federal tax lien could be asserted. ⁹ If the taxpayers interest under state law is considered "property" or a "right to property," the tax lien attaches to that interest, and "the tax consequences thenceforth are dictated by federal law." ¹⁰

In this instance, the Cobbs' interests at issue are several lump sum payments of cash to the banks to cure a default in the mortgage notes, and the rights to payments due under the various annuity policies. Clearly, without the need for citation, Louisiana state law recognizes that money, i.e., the money used as payments on the mortgage notes, is a form of property, moveable (or personal) property, but property nonetheless. The money was the Cobbs to have, hold, and use, and therefore, was property to which the US 's tax lien attached.

In addition, the rights held by the Cobbs to payments due under the annuity policies was property. Though the Cobbs did not have a present interest in the actual monies due for future payments, what the Cobbs possessed was the right, under the annuity contract, to receive those payments when they became due. ¹¹ Contract rights are a form of property under Louisiana law, and those rights became impressed with the tax lien at the time it arose. ¹² Furthermore, any payments actually made to the Cobbs under the annuity policies would immediately succumb to attachment by the tax lien as well, being both "property" of the Cobbs in the parlance of 26 U.S.C. §6321, and as a consequential transformation of the right to receive that payment, which right was encumbered by the tax lien. ¹³

Once it has been determined that a particular interest a taxpayer holds constitutes "property" or a "right to property," federal law determines the relative priority of competing claims in and to that particular interest. ¹⁴ Priority of competing claimants is generally determined by the "rule of first in time, first in right," meaning that whichever entity perfects a lien on the subject property first is entitled to priority to the property or proceeds of the property. ¹⁵

In this case, the IRS assessed the Cobbs for delinquencies in taxes in November 1991 and July 1992. The liens at issue arose on these dates. The liens covered all property interests presently held by the Cobbs at that time and all property interests thereafter acquired. At the time the liens arose, the Cobbs possessed present interests in the rights to future payments under the annuity contracts. The lien attached to those rights to the extent of the Cobbs' tax liability exigent within the assessments. Additionally, the liens attached to any property interests, including sums of money, to which the Cobbs acquired after the tax lien arose.

At the time the Cobbs transferred lump sums of money to the banks, those sums of money were impressed with the federal tax liens. Moreover, at the time the Cobbs purportedly assigned their rights under the annuities, those rights were encumbered by the tax liens as well. ¹⁶ Both sets of transfers occurred after the IRS had assessed tax deficiencies and the liens arose under 26 U.S.C. §6322.

Furthermore, in no instance did the banks have a prior perfected security interest in the property transferred to them. The banks did have a perfected security interest in the real property secured by a mortgage. However, the "first in time, first in right" rule refers to competing interests on the particular property at issue. The US does not contest that the banks prior perfected mortgages would prime their tax liens regarding the subject matter of the mortgages, i.e., the Cobbs' residence. However, the tax lien is broader than the security interest held by the banks. The tax liens attached to all property to the extent not otherwise validly encumbered. That the Cobbs paid the banks money that the banks used to satisfy an underlying obligation for which they had distinct security for does not mean that the banks had a security interest in those funds used to pay such obligations. The funds themselves (and the rights allegedly transferred by the assignment of the annuity payments) were previously encumbered by the governments tax liens, and passed to the banks subject to that encumbrance. ¹⁷

The "first in time, first in right" general rule is qualified, however, by the "super-priority" provisions of 26 U.S.C. §6323. ¹⁸ According to this statute, a tax lien may be primed by other competing interests under certain limited circumstances, which the banks claim are present in this case.

The provisions of 26 U.S.C. §6323 pertinent to this case provide:

(a) . . .--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.

(b) . . .--Even though notice of a lien imposed by section 6321 has been filed, such lien shall not be valid--

(1) . . .--With respect to a security (as defined in subsection (h)(4))--

(A) as against a purchaser of such security who at the time of purchase did not have actual notice or knowledge of the existence of such lien; and

(B) as against a holder of a security interest in such security who, at the time such interest came into existence, did not have actual notice or knowledge of the existence of such lien. ¹⁹

Subsection (a) of the statute does not apply in this instance. The provisions of subsection (a) extend priority to certain classes of interest holders if notice has not been properly filed at the time the interest holder accepted or took such interest. In this case, the IRS properly filed its notice as required by 26 U.S.C. §6323(f). ²⁰ Additionally, the transfers from the Cobbs to the banks took place after the IRS had properly filed its notice. Even if the banks fit within the categories described within subsection (a) (which the Court is not convinced they would), the banks took the money and payments from the annuities after notice had been filed. Therefore, the provisions of subsection (a) afford the banks no safe harbor from the government's tax lien.

The provisions of subsection (b) similarly do not apply to provide the banks with "super-priority" above the government's tax liens. The US sets forth a litany of reasons why the banks fail to fall within the purview of the provisions of subsection (b). While the Court believes that the US 's arguments are well founded, it is unnecessary to discuss in detail most of them because the Court finds that the banks had notice of the tax liens at the time the banks accepted the lump sum and annuity payments.

Subsection (b) affords "super-priority" to certain classes of persons involved in specifically listed categories of transactions. For the purposes of the instant case, only the provisions of 26 U.S.C. §6323(b)(1) could conceivably apply. However, both classes of persons for whom "super-priority" could be available requires that the entities take a security, whether by purchase or by taking a security interest therein, without notice of the existence of the tax lien.

In this case, the record and evidence adduced at trial indicate that both banks were aware of the tax liens at the time the lump sum and annuity payments were made. The Court finds that Citicorp was aware of tax liens on October 29, 1992--a month before their acceptance of the first lump sum payment. ²¹ Additionally, the Court finds that Union Planters was aware of tax liens, at the latest, by March 26, 1992--again, prior to acceptance of lump sum and annuity payments. As both banks were aware of the government's tax liens the relevant provisions of 26 U.S.C. §2623(b)(1) do not confer "super-priority" status sufficient to avoid the government's tax lien on the lump sum and annuity payments.

For these reasons, the Court will grant the US a judgment against Citicorp in an amount equal to the total of the lump sum payments received by it from the Cobbs. The Court will also enter a judgment against Union Planters in an amount equal to the amount received by it in lump sum payments from the Cobbs as well as for the total amount of all payments made under the annuity policies until such time as the annuity became the subject of the interpleader action referenced in footnote 2, supra, without prejudice to any right Union Planters has or may have against Citicorp for contribution, etc., due to the payment arrangement made between the two banks regarding the disposition of annuity payments.

III. INTEREST

The US urges this Court to grant pre-and post-judgment interest on the amounts incorporated into this Court's judgment. ²² Regarding post-judgment interest, 28 U.S.C. §1961 provides, "Interest shall be allowed on any money judgment in a civil case recovered in a district court." according to the statute, such interest shall be calculated from the date of the entry of the judgment. Accordingly, the Court will grant the motion of the US to award post-judgment interest to be calculated in accordance with 28 U.S.C. 1961(a). ²³

A right to pre-judgment interest is not specifically conferred by statute. However, the United States Supreme Court has stated that awards of pre-judgment interest be governed by traditional judge-made principles. ²⁴ Among the principles to be considered are: 1) the relative equities between the beneficiaries of the obligation and those on whom it is imposed; 2) fairness; 3) ensuring full compensation; 4) expeditious settlement; 5) the need to conform to historical legislative and judicial precedent. ²⁵ The Fifth Circuit also requires that the Court inquire whether the federal act that creates the cause of action precludes an award of interest, and whether the award furthers the congressional policy behind the act creating the cause of action.

In this case, the Court does not know of any statutory prohibition on recovery of pre-judgment interest in a case such as this. However, the Court does not believe that an award of pre-judgment interest in this specific case and based on the specific facts underlying it would further congressional policy. Congressional policy creates a lien on the taxpayer's property. The policy behind the act is to facilitate payment of tax liability by the taxpayer. In this case, an award of pre-judgment interest would be against a third party not liable for the underlying tax obligation, but rather because the third party possesses former property of the taxpayer (but not as a result of a fraudulent transfer by the taxpayer). The Court sees no reason how congressional policy would be furthered by shouldering a third party should bear an enormous pre-judgment interest award.

The Court does not believe that the traditional principles outlined above help the US either. Those principles form an equitable balancing test. While it may be argued that pre-judgment interest would compensate the US for the time-value of the money, other factors militate against such an award. First, as stated above, the US is requesting interest not from the taxpayer-obligor, but from a third party who accepted property (albeit burdened with the tax lien) from the taxpayer and gave value to the taxpayer in return (in the form of a credit on the balance due under the notes it held).

Secondly, the evidence in the record and introduced throughout the pendency of this proceeding indicates the IRS knew of the annuities well prior to the purported assignment. The IRS also knew that the Cobbs had not paid proper taxes for years. The IRS had ample time to protect its interest in property of the Cobbs to which the lien attached. ²⁶ While the Court finds today that the banks must disgorge the proceeds received from the Cobbs upon which the tax liens were impressed, the banks nonetheless took such proceeds without malice towards the government and with a good faith belief that they had a right to the proceeds. The banks are not the ones who owed the underlying tax debt.

It would be extremely unfair, considering the circumstances surrounding this case, to award pre-judgment interest against the third-party banks in the face of the governments knowledge of the Cobbs property and dilatory actions involving protection of its rights thereto. ²⁷ In sum, the Court finds that an award of pre-judgment interest is not appropriate in this instance and will deny the US 's motion for such.

IV. CONCLUSION

For the foregoing reasons, the Court will issue an order granting the US 's motion to reopen the case, and will allow substitution of Union Planters Bank, National Association as the proper party defendant. Further the Court will enter a judgment against Citicorp equal to the amount it received from the Cobbs in the lump sum payments discussed above. In addition, the Court will enter a judgment against Union Planters equal to the amount it received from the Cobbs in the lump sum payments described above, as well as equal to the amount of all annuity payments dispersed under the annuity that it received pursuant to the purported assignment of the Cobbs rights thereto, without prejudice to Union Planter's right to contribution or other legal and equitable rights against Citicorp for recoupment of sums Union Planters paid to Citicorp under its agreement with Citicorp. The Judgments will include an award of post-petition interest to be calculated in accordance with 28 U.S.C. 1961(a). The Judgments will not include an award of pre-judgment interest.

¹ The original defendant, Sunburst Bank changed its name to Union Planters Bank of Louisiana on June 15, 1995. On August 29, 1995 this Court allowed the substitution of Union Planters Bank of Louisiana . Subsequently, Union Planters Bank of Louisiana merged with Union Planters Bank, National Association. Pursuant to 12 U.S.C. §215(e), the Court will allow the substitution of Union Planters Bank, National Association as proper party defendant.

² In a collateral proceeding entitled, "Manufacturers Life Insurance Co. v. Arthur J. Cobb, et al.," U.S.D.C., E.D.La., No. 93-3325, the district court specifically determined that the November 1991 and July 1992 notice of federal tax liens were properly filed. This Court believes that the District Court's determination on that issue is entitled to issue preclusive effect in this proceeding as it involved the same parties, the issue is identical to one at issue in this proceeding, the issue was litigated and decided by the district court, and the district court's determination was integral to its ultimate conclusion. See, Stripling v. Jordan Production Co., LLC, 234 F.3d 863, 868 (5th Cir. 2000). Therefore, the Court will consider the notices of tax liens filed November 1991 and July 1992 to have been properly filed.

³ Union Planters apparently acted as a receiving agent for Citicorp with regard to the annuity payments, and upon receipt of such would remit a portion of the annuity payment to Citicorp to satisfy a portion of its first priority mortgage.

⁴ 26 U.S.C. §6321 (emphasis added).

⁵ United States v. National Bank of Commerce [85-2 USTC ¶9482], 472 U.S. 713, 719-720 (1985).

⁶ 26 U.S.C. §6322.

⁷ See, Texas Commerce Bank-Fort Worth, N. A. v. United States [90-1 USTC ¶50,155], 896 F.2d 152, 161 (5th Cir. 1990).

⁸ See, United States v. Bess [58-2 USTC ¶9595], 357 U.S. 51, 55, 78 S.Ct. 1054, 1057 (1958).

⁹ See, United States v. Craft [2002-1 USTC ¶50,361], 122 S.Ct. 1414, 1420 (2002); Aquilino v. United States [60-2 USTC ¶9538], 363 U.S. 509, 512-514, 80 S.Ct. 1277, 1280-1281 (1960).

¹⁰ See, Medaris v. United States [89-2 USTC ¶9565], 884 F.2d 832, 833 (5th Cir. 1989), quoting National Bank of Commerce [85-2 USTC ¶9482], 472 U.S. at 722, 105 S.Ct. at 2925.

¹¹ See, In re Wessel [93-2 USTC ¶50,549], 161 B.R. 155, 159 (Bankr. D.S.C. 1993); c.f., United States v. Metropolitan Life Ins. [89-1 USTC ¶9362], 874 F.2d 1497 (11th Cir. 1989).

¹² Accord, Randall v. H. Nakashima & Co., Ltd. [76-2 USTC ¶9770], 542 F.2d 270 (5th Cir. 1976) (contract rights are "right to property").

¹³ See generally, Phelps v. United States [75-1 USTC ¶9467], 421 U.S. 330, 334-335, 95 S.Ct. 1728, 1731 (1975) (the lien attaches to the thing and to whatever is substituted for it).

¹⁴ See, Aquilino [60-2 USTC ¶9538], 363 U.S. at 814, 80 S.Ct. at 1280.

¹⁵ See, Texas Commerce Bank [90-1 USTC ¶50,155], 896 F.2d at 161.

¹⁶ Union Planters has previously argued that it took a security interest in the annuities by virtue of the assignment. While the Court does address the question of whether Union Planters received a security interest by virtue of the assignment, the Court notes that even if it had, the assignment occurred after the tax liens had already attached to the Cobbs' rights under such annuities. Therefore, regardless of whether a security interest was created, the governments' lien would have primed Union Planters' rights to the payments under the assignments.

¹⁷ See, Bess [58-2 USTC ¶9595], 357 U.S. at 57, 78 S.Ct. at 1058 ("The transfer of the property subsequent to the attachment of the lien does not affect the lien, for 'it is of the very nature and essence of a lien, that no matter into whose hands the property goes, it passes cum onere.' ").

¹⁸ See, Western National Bank v. United States [94-1 USTC ¶50,017], 8 F.3d 253, 255 (5th Cir. 1993).

¹⁹ "Security" is defined by 26 U.S.C. §6323(h)(4) as "any bond, debenture, note, or certificate or other evidence of indebtedness, issued by a corporation or a government or political subdivision thereof, with interest coupons or in registered form, share of stock, voting trust certificate, or any certificate of interest or participation in, certificate of deposit or receipt for, temporary or interim certificate for, or warrant or right to subscribe or to purchase any of the foregoing; negotiable instrument; or money.

²⁰ See, n. 2, supra.

²¹ As part of a discovery sanction against Citicorp during the conduct of this proceeding, the Court prevented Citicorp from producing any evidence that it did not have knowledge of the government's tax liens. See, Order dated August 11, 1995, Doc. No. 111.

²² The banks have objected to imposition of interest on the basis that they were never put on notice of the US 's claim for such prior to trial. While the US never explicitly stated in its complaint, "We want interest," the Fifth Circuit has upheld interest awards based on very relaxed pleading standards. In this case, the US prayed for such other relief deemed equitable and just under the circumstances, and the Fifth Circuit has previously upheld an award of interest premised upon similar language. See, Federal Savings and Loan Ins. Corp. v. Texas Real Estate Counselors, Inc., 955 F.2d 261, 270 (5th Cir. 1992).

²³ The US urges the court to award post-judgment interest pursuant to 28 U.S.C. §1961(c)(1). Although this matter originally stems from tax liability, the Court does not believe that this action qualifies as a tax case, but rather is an exercise upon a lien. This interpretation is bolstered by the fact that the US is not proceeding against the taxpayer, but rather against third-parties to enforce its lien. Therefore, interest is appropriate under subsection (a) of the statute, not subsection (c)(1).

²⁴ See, City of Milwaukee v. Cement Div. Nat'l Gypsum Co., 515 U.S. 189, 194, 115 S.Ct. 2091, 2095 (1995); see also, Gore, Inc. v. Glickman, 137 F.3d 863, 868 (5th Cir. 1998).

²⁵ Gore, 137 F.3d at 866.

²⁶ In fact, the Court finds that the annuities could have been seized even before this adversary proceeding, and even before the bankruptcy case, was filed. Why the government failed to act has never been explained. While such failure on the part of the government does not offer help to the defendants regarding the main demand, if provides the Court guidance to refuse to issue post-judgment interest.

²⁷ The Court finds that factors 4) and 5) above are neutral and do not sway the Court either way.

 

 

[2000-2 USTC ¶50,657] Bank of New Hampshire , Plaintiff v. United States , Defendant

U.S. District Court, Dist. N.H. , Civ. 99-343-M, 7/25/2000 , 2000 U.S. Dist. LEXIS 10921.

[Code Sec. 1 ]

Constitutional claims: Due process: Sovereign immunity: Tax liens.--A bank's claim that payment of proceeds from a third-party's accounts receivable, in which the bank had a perfected security interest, to the IRS in satisfaction of the third-party's tax liability unconstitutionally deprived it of due process was barred absent a waiver of the government's sovereign immunity. A waiver of sovereign immunity was not implicit within the Constitution.

[Code Sec. 1 ]

Constitutional claims: Takings: Tucker Act: Sovereign immunity.--A bank's claim that payment of proceeds from a third-party's accounts receivable, in which the bank had a perfected security interest, to the IRS in satisfaction of the third-party's tax liability constituted a taking and, thus, entitled it to just compensation was barred absent a waiver of the government's sovereign immunity. A waiver of sovereign immunity was not implicit within the Constitution and, although the Tucker Act authorized the district court to grant declaratory judgment in a takings claim, it did not constitute a waiver of immunity.

[Code Sec. 6323 ]

Tax liens: Priority: Claims of creditors: Security interest: Perfection: Accounts receivable: Cash proceeds: State law: Fraud.--A bank did not have a security interest in the proceeds of a third-party's accounts receivable that were voluntarily paid to the IRS in satisfaction of the third-party's tax liability. Although the bank perfected its security interest in the accounts receivable prior to an IRS notice of lien, it did not perfect its security interest in the proceeds by taking possession. Moreover, the bank did not allege that the third-party's payments to the IRS were from identifiable proceeds of the accounts receivable or that they were fraudulent. Thus, the bank did not have a viable claim to the proceeds under state ( New Hampshire ) law.

[Code Sec. 7402 ]

District court: Jurisdiction: Suits against the U.S. : Conversion: Federal Tort Claims Act: Collection of tax.--A bank's claim that the IRS improperly converted cash proceeds from a third-party's accounts receivable, in which the bank had a perfected security interest, was barred by the Federal Tort Claims Act (FTCA). The proceeds were voluntarily paid to the IRS by the third-party in satisfaction of its tax liability and the FTCA expressly exempts from its waiver of the government's sovereign immunity claims arising from the assessment or collection of any tax.

[Code Sec. 7402 ]

District court: Jurisdiction: Suits against the U.S.: Sovereign immunity: Waiver: Equitable claims v. specific performance: Administrative Procedures Act.--Jurisdiction was lacking over a bank's equitable claim to the proceeds from a third-party's accounts receivable, in which the bank had a perfected security interest, that were paid to the IRS in satisfaction of the third-party's tax liability. The Administrative Procedures Act did not constitute a waiver of the government's sovereign immunity with respect to claims seeking money damages and the claim was not a request for specific relief because the bank was not seeking the specific performance of any statutory or contractual obligation.

[Code Sec. 7426 ]

Collection of tax: Wrongful levy: Voluntary payment of tax liability: Claims of creditors.--The payment by a taxpayer of the cash proceeds of accounts receivable, in which a bank had a perfected security interest, to the IRS in satisfaction of the taxpayer's tax liability did not constitute a wrongful levy; thus, the bank was not entitled to the proceeds. The payments were made voluntarily, rather than in response to an IRS tax levy. The IRS released its tax levies against the assets of the taxpayer prior to the taxpayer's payment of its tax liability.

Frank P. Spinella, Jr., Hall Morse Anderson Miller & Spinella, Concord , N.H. , for plaintiff. Paul M. Gagnon, U.S. Attorney's Office, Concord, N.H., Lydia D. Bottome, Dept. of Justice, Washington, D.C., for defendant.

ORDER

MCAULIFFE, District Judge:

Bank of New Hampshire (the "Bank") brings this action seeking a declaratory judgment as to the priority of its lien on the accounts receivable of a third party. It also seeks the return of the cash proceeds of those accounts receivable, which were collected by the Internal Review Service to satisfy that third party's tax liabilities. The United States moves to dismiss on grounds that the Bank's amended complaint fails to set forth viable claims and, even assuming some of those claims are cognizable, that this court lacks subject matter jurisdiction. See Fed.R.Civ.P. 12(b)(1) and (6). The Bank objects.