Investment Financial, aka American Investment Bank, N.A., Plaintiff v.
United States of America, Defendant.
District Court, Dist.
, Cent. Div.; 2:03-CV-00844 PGC,
April 13, 2005
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 (
) 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
'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.
AIF is a
industrial loan corporation. Nightime is a
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
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.
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
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
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
. 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
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
The Act, however, also gives commercial liens priority over federal tax
liens in some situations. 6
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
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
Applying these rules to the case before it, the court must determine
whose security interest in the Disputed Cash has priority. As required
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
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
case which held that the changes made to the state's UCC were not
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
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
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
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.
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.
Fed. R. Civ. P. 56(c).
See Gaylor v. Does, 105 F.3d 572, 574 (10th Cir. 1997).
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
26 U.S.C. §6321.
Shawnee State Bank v. United States [ 84-1
USTC ¶9513], 735 F.2d 308, 310 (8th Cir. 1984).
See S. Rep. No. 1708, 89th Cong., 2nd Sess. 8 (1966-2 C.B. 876,
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.
See id; 26 C.F.R. 301.6323(c)-1(b).
Treas. Reg. (26 C.F.R.) §301.6323(c)-1(c).
26 U.S.C. §6323(c)(2)(C).
26 C.F.R. §301.6323(c)-1(c)(2)(i).
See Bremen Bank & Trust Co. v. United States [ 98-1
USTC ¶50,116], 131 F.3d 1259, 1263 (8th Cir. 1997).
26 C.F.R. §301.6323(c)-1(d).
Bremen [ 98-1
USTC ¶50,116], 131 F.3d at 1264.
Id. at 1264.
26 C.F.R. §301.6323(c)-1(d).
See Aquilino v. United States [ 60-2
USTC ¶9538], 363 U.S. 509, 513 (1960).
Commercial Nat'l Bank of Pa. v. Seubert & Assoc., Inc., 807
A.2d 297, 303 (Pa. Super. 2002).
(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).
Utah Code Ann. §70A-9a-702(1).
Id. §70A-9a-102(46) (emphasis added).
§70A-9a-102(46) (emphasis added).
National Bank, successor to the Merchants National Bank of Terre Haute,
Plaintiff v. RCH Electronics Systems, Inc.,
ert E. Rost II, and Mary Y. Rost a/k/a Mary V. Rost, Defendants, and
United States of America, Intervenor.
District Court, So. Dist.
January 11, 2005
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.
ON INTERVENOR'S MOTION FOR SUMMARY JUDGMENT
, Chief Judge: This cause is now before the Court on intervenor's, the
United States of America
"), 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.
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
' Motion for Summary Judgment.
For the reasons stated herein, the Court GRANTS the
' Motion for Summary Judgment.
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
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
, 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.
Exh. D, Notices of Fed'l Tax Lien. The NTFLs were filed after the
consensual security agreement was given.
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
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."
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).
contends that the tax liens take priority over a simultaneously
attaching state lien.
in Supp., at 5 (citing United States v. McDermott [ 93-1
USTC ¶50,164], 507 U.S. 447 (1993)). Here, the
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 Court finds the
' argument persuasive. There is no evidence to contradict the fact that
the accounts receivable at issue here came into existence after the
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
USTC ¶50,164], 507
at 453-55. Therefore, the
's tax liens take priority over Old National's perfected security
interest in the accounts receivable.
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
the $12,650.28, in accounts receivable collected on behalf of defendant,
R.H. Electronics Inc.
IT IS SO ORDERED.
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.,
ert E. Rost, II and Mary Y. Rost. Receiver shall pay to the
the $12,650.28, in accounts receivable collected on behalf of defendant,
R.H. Electronics Inc.
of America, N.A., Plaintiff v. Michael John Fletcher, Lori Fletcher,
United States of America, ex. re. Internal Revenue Service, et al.,
District Court, No.
August 16, 2004
Lien for taxes: Priority: Security interests: 45-day grace period. --
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
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.
of Undisputed Facts
July 28, 1988
, the defendants Michael and Lori Fletcher purchased a residence located
7415 East 77 th Street
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
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
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
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
15. On June 9, 2003, the Bank received actual notice of the tax liens
when Bank personnel spoke with Tanya White with the IRS.
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:
"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.
6323(d) of the tax code is controlling authority for the
determination of the issue presented to the Court. It provides:
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 --
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
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."
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.
Bonding Co., Plaintiff v.
Internal Revenue Service, Defendants.
District Court, East.
May 2, 2003
Tax liens: Validity and priority against third parties: Constructive
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 (
) 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.
Tax liens: Validity and priority against third parties: Indemnity
agreement: Surety's interest. --
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 (
) law to perfect its interest by recording its lien.
Tax liens: Validity and priority against third parties: Security
interest: Obligatory disbursement agreement. --
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.
AND ORDER OF THE COURT DENYING PLAINTIFF'S MOTION FOR SUMMARY JUDGMENT
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"),
("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
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
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
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)
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
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
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
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.,
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
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
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.
Here, then, since the parties agree that Smelser completed its work on
the WB and
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
Contract Fund Act,
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 (
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
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
, "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 (
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
Here, Plaintiff argues that the language of the payment bonds issued for
the WB and
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:
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
under the construction contracts. However, this language, by itself,
does not establish that Smelser, WB and
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
Found., 387 N.W.2d at 588. The Court finds that this is not
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
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
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
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 [
USTC ¶50,569], 2 F.3d at 676, n. 4. The
law applied by the Sixth Circuit was very similar to
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.
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."
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.
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
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.
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
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
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
, 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."
This is so because "the assignment does not create a security
interest" in the contract balances.
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
, 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;
Comp. Laws §19.9104. Thus, one could reasonably argue, as the IRS does
here, that the Sixth Circuit's interpretation and application of the
statute should carry over to
to require Plaintiff to file its Indemnity Agreement with the Secretary
The Court, however, declines to apply the holding in Construction
. 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
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
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..."
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
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
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
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,
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
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
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
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.
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:
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 --
Obligatory Disbursement Agreement, and
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
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
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
, law, and therefore, does not control this Court's analysis.
Notably, in Amwest, the court's decision was based on
'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
, however, has not adopted the relation back doctrine as it relates to a
surety's equitable subrogation rights. Rather, in
, "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..."
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."
at 719-20 (citing Dubey, 97
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
, 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
. Amwest [ 94-2
USTC ¶50,558], 870 F.Supp. at 435.
Here, as the Court is bound by
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.
Therefore, for the reasons stated above, Plaintiff's Motion for Summary
Judgment is hereby DENIED.
IT IS SO ORDERED.
Construction Alternatives involved the application of
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.
After the court issued its ruling in Amwest, the
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
at 1046. Upon reconsideration, however, the Amwest court adhered
to its original ruling, noting that Int'l Fid. Ins. Co. was based
Operation International Corporation, a Florida Corporation,
United States of America
Court of Appeals, 11th Circuit; 02-13544, 54 FedAppx 479,
January 13, 2003
Unpublished opinion affirming, per curiam, a DC Fla. decision, 2002-1
Secs. 6323, 6331
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).
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.
District Court, So.
September 6, 2002
Tax liens: Bankruptcy: Superiority over mortgage: Interpleader:
Attorneys' fees. --
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
) 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.
Tax liens: Bankruptcy: Homestead property exemption. --
property and the sale proceeds that came from it were subject to a
federal tax lien. The property was not exempt under state (
) law as homestead property. The federal tax lien preempted the state
exemption statute; thus, the
homestead exemption did not immunize the debtors' homestead property
from the lien.
GRANTING UNITED STATES'S MOTION FOR SUMMARY JUDGMENT
GOLD, District Judge: THIS CAUSE is before the court upon
") motion for summary judgment (D.E. #92). The plaintiff, Deborah
Menotte ("Trustee"), has filed an interpleader complaint
, 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
's motion, (DE #94) and (DE #95) respectively. The Trustee has also
filed a limited opposition to the
'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
's motion and the Trustee's cross-motion. After carefully considering
the motions, evidence, and arguments of counsel, the court grants the
's motion for summary judgment.
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. (
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
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
, which sent the borrowed funds directly to the Garcias. (Landron Depo.
at 9). Landron has not made any payments to the lender in the
. (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.
Ex. #1). This new mortgage was recorded on August 2, 1999. (
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). (
Mot. SJ at 3). The Trustee objected to the exemption because the
property was in a municipality and exceeded 1/2 acre. (
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. (
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
had served a Notice of Levy on the Trustee. (
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
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
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. (
This matter involves a dispute over funds originally assessed in the
bankruptcy court. The
, 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
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.
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
v. Liberty Lobby, Inc., 477
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
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
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
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
at 255, 106 S.Ct. at 2513.
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
. Finally, this court must decide if the Trustee is entitled to costs
and attorney's fees for bringing this interpleader action.
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
constitution, the property is homestead property. The
argues, citing United States v. Mitchell [ 71-1
USTC ¶9451], 403 U.S. 190 (1971) and Weitzner v. United States
USTC ¶9773], 309 F.2d 45 (5th Cir. 1962), that federal tax liens
preempt state exemption statutes. This court agrees with the
that the law is clear, as discussed below, that the
state exemption statute for homestead property does not avoid a federal
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.
Section 6331 indicates that 26 U.S.C. §6334 outlines the circumstances
under which certain property are exempt from a federal tax lien.
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
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
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
's homestead exemption does not immunize homestead property from federal
's Levy and Landron's Mortgage
Does Landron have a recognized interest?
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
law when it was recorded on August 2, 1999. See FLA. STAT. ch.
695.01; see also People's Bank of
v. Arbuckle, 82
479, 487, 90 So. 458, 460 (
1921) ("The due record of a mortgage is statutory notice of the
contract lien, binding all who deal with reference to liens upon the
does not dispute whether Landron's mortgage is valid under
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
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.
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
'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:
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
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
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
( 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
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
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
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
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.").
Does Landron's interest have a priority over the
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
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.
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
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
has admitted during oral argument that no notice has been filed in the
appropriate office in the state. The
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
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,
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.").
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
failed to properly record the federal tax lien is irrelevant; the
prevails by default since it is not competing against a valid security
interest and the federal tax lien is otherwise valid.
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
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
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.
, 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 "
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 (
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
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
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.
This court concludes that the
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.
In re Angel Mario Garcia & Margarita
Landron Garcia, Case No. 97-11159-BKC-RAM.
In support of its motion for summary judgment, the
has filed a statement of material facts pursuant to Southern District of
Florida Local Rule 7.5. In addition, the
has submitted several exhibits, including depositions and documentary
evidence. The co-defendants dispute and/or supplement some of the
allegations contained in the
'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
's Local Rule 7.5 statement, and any factual disputes between the
parties are noted.
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.
, 661 F.2d 1206, 1209 (11th Cir. 1981).
"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.
"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."
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).
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.
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,
Mid. Dist. La.
Secs. 6321 and 6323 ]
Tax liens: Annuities: Property transferred to third parties: Validity
and priority against third parties: Super-priority safe harbor: Filing
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.
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
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
BACKGROUND AND PROCEDURAL HISTORY
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.
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
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,
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
Cobbs filed bankruptcy, the
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
'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
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
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.
1(B) and 1(C), including subparts, essentially allege that the
'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
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:
refuses to pay the same after demand, the amount . . . shall be a lien
in favor of the
upon all property and rights to property, whether real or
personal, belonging to such person. 4
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
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.
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
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
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,
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
's tax lien attached.
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
law, and those rights became impressed with the tax lien at the time it
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
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.
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
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
"first in time, first in right" general rule is qualified,
however, by the "super-priority" provisions of 26 U.S.C. §6323.
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.
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
(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
of subsection (b) similarly do not apply to provide the banks with
"super-priority" above the government's tax liens. The
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
'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
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
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.
reasons, the Court will grant the
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.
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
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
either. Those principles form an equitable balancing test. While it may
be argued that pre-judgment interest would compensate the
for the time-value of the money, other factors militate against such an
award. First, as stated above, the
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).
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
's motion for such.
foregoing reasons, the Court will issue an order granting the
'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
The original defendant, Sunburst Bank changed its name to Union Planters
on June 15, 1995. On August 29, 1995 this Court allowed the substitution
of Union Planters Bank of
. Subsequently, Union Planters Bank of
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.
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
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.
26 U.S.C. §6321 (emphasis added).
United States v. National Bank of Commerce [85-2 USTC ¶9482],
472 U.S. 713, 719-720 (1985).
26 U.S.C. §6322.
See, Texas Commerce Bank-Fort Worth, N. A. v. United States [90-1
USTC ¶50,155], 896 F.2d 152, 161 (5th Cir. 1990).
See, United States v. Bess [58-2 USTC ¶9595], 357 U.S. 51, 55,
78 S.Ct. 1054, 1057 (1958).
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).
See, Medaris v.
[89-2 USTC ¶9565], 884 F.2d 832, 833 (5th Cir. 1989), quoting National
Bank of Commerce [85-2 USTC ¶9482], 472
at 722, 105 S.Ct. at 2925.
See, In re Wessel [93-2 USTC ¶50,549], 161 B.R. 155, 159 (Bankr.
D.S.C. 1993); c.f.,
v. Metropolitan Life Ins. [89-1 USTC ¶9362], 874 F.2d 1497 (11th
Accord, Randall v. H. Nakashima & Co., Ltd. [76-2 USTC ¶9770],
542 F.2d 270 (5th Cir. 1976) (contract rights are "right to
See generally, Phelps v.
[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
See, Aquilino [60-2 USTC ¶9538], 363
at 814, 80 S.Ct. at 1280.
See, Texas Commerce Bank [90-1 USTC ¶50,155], 896 F.2d at 161.
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.
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
See, Western National Bank v. United States [94-1 USTC ¶50,017],
8 F.3d 253, 255 (5th Cir. 1993).
"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.
See, n. 2, supra.
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.
The banks have objected to imposition of interest on the basis that they
were never put on notice of the
's claim for such prior to trial. While the
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
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).
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
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).
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).
Gore, 137 F.3d at 866.
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.
The Court finds that factors 4) and 5) above are neutral and do not sway
the Court either way.
USTC ¶50,657] Bank of
, Plaintiff v.
, Civ. 99-343-M,
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.
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 (
District court: Jurisdiction: Suits against the
: 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.
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
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.
Spinella, Jr., Hall Morse Anderson Miller & Spinella,
, for plaintiff. Paul M. Gagnon, U.S. Attorney's Office, Concord, N.H.,
Lydia D. Bottome, Dept. of Justice, Washington, D.C., for defendant.
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