Security
Interest Page15
FACTS
A. The Purchase Agreement
On March 27,
1984, plaintiffs Crystal Bar, Inc., Reese M. Williams, individually, and
Reese Williams Trust sold 200 shares of capital stock (minority
interest), liquor license number RL-5877, business assets, inventory and
stock in trade of Crystal Bar, Inc. to Cosmic, Inc. (buyer) under a
written contract entitled "Purchase Agreement." The total
purchase price was $225,000 payable $50,000 down with the balance of
$205,000 to be paid by the assumption of $40,468.58 of the sellers'
debts and the balance of $164,531.42 amortized monthly at 12 percent per
annum for ten years. 1
The purchase agreement was characterized by the parties as an option to
purchase.
The title
paragraph provided in part as follows:
IV.
TITLE:
Seller
hereby agrees to and does hereby sell to Buyer, and Buyer does hereby
agree to and does hereby purchase from Seller the described personal
property, on the terms and conditions hereinafter set forth. It is
agreed that if Buyer shall make payments and fulfill the covenants
hereinafter mentioned on its part to be made and performed, Seller
hereby covenants and agrees to convey and assure to Buyer, clear of all
liens, encumbrances, and taxes whatsoever, except that as are to be paid
by Buyer as hereinafter set forth in this Agreement, by good and
sufficient Bill of Sale, properly executed, and by executing all
documents required to effect such transfer by the Articles of
Incorporation and By-Laws of Crystal Bar, Inc. and as required by the
Laws of the State of South Dakota, personal property presently located
in the County of Pennington, State of South Dakota, as hereinbefore
described. Seller hereby covenants and warrants that there are or will
be no undisclosed creditors within the purview of the South Dakota Bulk
Sales Act at the time of Transfer of Possession and the Seller shall
furnish a Bulk Sales Affidavit to such effect. The parties hereto
expressly agree that this sale shall not be deemed complete until the
final payment as provided for in Article Six (VI) hereof shall have been
made and, prior to such final payment, this Agreement, in part, shall be
construed as an Option to Purchase, the downpayment herein being
designated by the parties as partial payment for said Option; that all
payments of principal and interest hereunder are agreed between the
parties to constitute the fair rental value for such property during the
period of this Agreement; and, that all other payments, including but
not limited to taxes, special assessments, and insurance, shall be
deemed payments for such exclusive and irrevocable right and option to
purchase.
The
default provisions provided in part as follows:
X.
ESCROW:
.
. .
(d) In the
event of a default by Buyer in the terms or conditions of this Agreement
and the cancellation and termination of this Agreement by Seller as
hereafter provided, said Agent [escrow agent] shall return the Stock
Certificates, Bill of Sale and all other documents to Seller.
XXIV.
DEFAULT:
Payment
of all monies, whether principal or interest, taxes, assessments of
impositions, Insurance Premiums, or any part thereof coming due
hereunder by Buyer, and the performance of all covenants and conditions
of this Agreement to be kept and performed by Buyer are conditions
precedent to the performance by Seller, and this sale shall not be
deemed complete until all such payments have been paid in full. . . .
(d)
Payments theretofore made by Buyer pursuant to this Agreement shall be
credited by Seller to the reasonable rental value of the property during
the period Buyer has the use, enjoyment, and occupation of said property
and to reimburse Seller for any alteration or damage to the property
which may affect its merchantability or diminish its value, and any
excess of such payments over such reasonable rental value, after payment
of any and all costs and expenses incurred regaining possession of said
property upon the Buyer's default, including attorney's fees and
reimbursement to the Seller for alteration or damage which affects its
merchantability or diminishes its value, shall be retained by Seller as
liquidated damages for the breach of this Agreement and as payment for
the exclusive and irrevocable right and option to purchase during the
time this Agreement is in effect.
The purchase
agreement was not perfected as a security agreement under South Dakota
Codified Laws (SDCL), Chapter 57A-9 (secured transactions).
B.
The Assignment Agreement
On
December 18, 1984
, purchaser Cosmic, as assignor, entered into an assignment with
co-defendant Virgil Hauff (Hauff) as assignee, covering the property
which was the subject to the prior purchase agreement. It was titled
simply "Agreement."
The assignment
price was $284,877.75 with certain specified obligations to be paid or
incurred 2
and the balance of $171,031.32 to be paid by Hauff agreeing to assume
all obligations of Cosmic under the March 27, 1984 purchase agreement
(agreed to be $159,174.41).
The stated
purpose of the assignment agreement was as follows:
II
PURPOSE
The
purpose of this agreement is to set forth the terms and conditions under
which the assignor agrees to assign all of its right, title, interest,
and obligation in a Purchase Agreement between Crystal Bar, Inc., and
Cosmic, Inc., dated the 27th day of March, 1984, which said Purchase
Agreement is attached hereto and incorporated herein as Exhibit A as if
fully set out, and assignee agrees to accept the right, title, interest,
and obligation under said Purchase Agreement. By virtue of this
agreement, assignee agrees to purchase the
Crystal
Bar
under the terms of Exhibit A and the terms of this Agreement.
In a similar
manner to the original purchase agreement, the agreement (assignment)
reserved title pending final payment. The provision as to title provided
as follows:
IV
TITLE
Assignor
hereby agrees to and does hereby assign to assignee and assignee does
hereby agree to and does hereby accept from assignor all of the
assignor's interest in said property as existing under Exhibit A on the
terms and conditions hereinafter set forth. Assignor represents that
there currently is $159,174.42 owed on said contract and assignee
assumes that amount under the terms of Exhibit A. It is agreed that if
assignee shall make payments and fulfill the covenants hereinafter on
its part to be made and performed, assignor hereby covenants and agrees
to convey and assure to assignee, by good and sufficient Bill of Sale,
properly executed, and by executing all documents required to effect
such transfer all of assignor's interest in personal property presently
located in the County of Pennington, State of South Dakota, as
hereinbefore described. Assignor hereby covenants and warrants that
there are or will be no undisclosed creditors within the purview of the
South Dakota Bulk Sales Act at the time of Transfer of Possession and
the Seller shall furnish a Bulk Sales Affidavit to such effect. The
parties hereto expressly agree that this sale shall not be deemed
complete until the final payment as provided for in this Agreement and,
prior to such final payment, this Agreement, in part, shall be construed
as an Option to Purchase, the downpayment herein being designated by the
parties as partial payment for said Option, that all payments of
principal and interest hereunder are agreed between the parties to
constitute the fair rental value for such property during the period of
this Agreement; and, that all other payments, concluding but not limited
to taxes, special assessments, and insurance, shall be deemed payments
for such exclusive and irrevocable right and option payments for such
exclusive and irrevocable right and option to purchase.
The default
provision provided as follows:
XXI
DEFAULT
Payment
of all monies, whether principal or interest, taxes, assessments or
impositions, Insurance Premiums, or any part thereof coming due
hereunder by assignee, and the performance of all covenants and
conditions of this Agreement to be kept and performed by assignee are
conditions precedent to the performance by assignor, and this assignment
shall not be deemed complete until all such payments have been paid in
full. . . .
(c) Payments
theretofore made by assignee pursuant to this Agreement shall be
credited by assignor to the reasonable rental value of the property
during the period assignee has the use, enjoyment, and occupation of
said property and to reimburse assignor for any alteration or damage to
the property which may affect its merchantability or diminish its value,
and any excess of such payments over such reasonable rental value, after
payment of any and all costs and expenses incurred regaining possession
of said property upon the assignee's default, including attorney's fees
and reimbursement to the assignor for alteration or damage which affects
its merchantability or diminish its value, shall be retained by assignor
as liquidated damages for the breach of this Agreement and as payment
for the exclusive and irrevocable right and option to purchase during
the time this Agreement and Exhibit A is in effect.
The assignment
also was not perfected as a security agreement under SDCL 57A-9.
C.
The Default
Hauff
defaulted by failing to make the payments of $2,388.54 due on the first
day of August and September 1989. He was charged with other contractual
violations as well. 3
Notice of
default was mailed to Hauff and received on
September 6, 1989
. The last payment of
July 7, 1989
, left a contract balance of $104,734.78 as shown by the amortization
schedule. As of
December 5, 1989
, the total principal due was $105,444.26 plus accrued interest of
$5,100.89 for a total delinquency of $110,545.15. 4
D.
The IRS Tax Liens
Defendant IRS
claims a lien upon the property described in the two agreements for
personal income taxes due under Form 1040 of Virgil D. Hauff and Karen
M. Hauff and for withholding and social security taxes due under Forms
940, 941 as follows:
Date of Type of Date of Date Recorded
Tax Lien Taxpayer Amount Tax Assessm? Document No.
8-5-88 Virgil D. 67,238.59 1040 (1986) 6-27-88 8-8-88 (41449)
Karen M.
Hauff
4-27-89
Virgil D. 23,601.34 1040 (1984)
12-26-88
5-1-89
(51627)
Karen M.
Hauff
10-13-89
Virgil D. 23,711.34 1040 (1987)
10-13-89
10-13-89
(58212)
Karen M.
Hauff
10-13-89
Virgil D. Hauff 16,330.14 940, 941
10-13-89
10-13-89
(58213)
Lawyer (from
9-30-88
Crystal
Bar & to
9-30-89
)
Lounge
E. Property Remaining After Default
By reason of
various isolated disposals of certain of the assets, there remains
personal property of the estimated value of $10,000 to $20,000 and the
South Dakota
liquor on-sale license number RL-5877. The value represented by the
license, estimated to be $75,000 to $100,000, is the major value
remaining. IRS seeks to satisfy a portion or all of its lien amounts by
its levy upon all of this property, but particularly upon the liquor
license. The license must be the subject of renewal application each
year and has been kept alive by successive applications. 5
DISCUSSION
In the
application of the Federal Tax Lien Act, state law controls in
determining the nature of the legal interest which the taxpayer had in
the property. Aquilino v. United States [60-2
USTC ¶9538 ], 363 U.S. 509, 513, 80 S. Ct. 1277, 1280, 4 L. Ed. 2d
1365 (1960); United States v. National Bank of Commerce [85-2
USTC ¶9482 ], 472 U.S. 713, 105 S. Ct. 2919, 86 L. Ed. 2d 565
(1985); United States v. Trigg [72-2
USTC ¶9642 ], 465 F.2d 1264, 1267 (8th Cir. 1972).
The Federal
Tax Lien Act provides that a federal tax lien attaches to all property
and rights to property, whether real or personal, belonging to a
taxpayer:
If any person
liable to pay any tax neglects or refuses to pay the same after demand,
the amount . . . shall be a lien in favor of the United States upon all
property and rights to property, whether real or personal, belonging to
such person.
26
U.S.C. §6321 .
It is further
provided as follows:
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.
26
U.S.C. §6322 .
Accordingly,
the IRS tax liens filed against Virgil D. Hauff and Karen M. Hauff arose
at the time of their assessment (June 27, 1988; December 26, 1988;
October 13, 1989).
South Dakota
adopted the Uniform Commercial Code (UCC) by Chapter 150 of Session Laws
of 1966, codified at SDCL 57A-101 et seq.
SDCL 57A-9-301
pertains to the priority of a lien creditor over an unperfected security
interest, by providing in part as follows:
(1) Except as
provided in subsection (2), an unperfected security interest is
subordinate to the rights of:
.
. .
(b)
A person who becomes a lien creditor before the security interest is
perfected; . . .
(3) A
"lien creditor" means a creditor who has acquired a lien on
the property involved by attachment, levy, or the like and includes an
assignee for benefit of creditors from the time of assignment, and a
trustee in bankruptcy from the date of the filing of the petition or a
receiver in equity from the time of appointment.
SDCL 57A-9-302
provides that a financing statement must be filed to perfect all
security interests (with certain named exceptions, none of which apply
to this case).
(1) A
financing statement must be filed to perfect all security interests
except the following:
(a)
A security interest in collateral in possession of the secured party
under §57A-9-305;
(b)
A security interest temporarily perfected in instruments or documents
without proper delivery under §57A-9-304 or in proceeds for a
twenty-day period under §57A-9-306;
(c)
A security interest created by an assignment of a beneficial interest in
a trust or a decedent's estate;
(d)
A purchase money security interest in consumer goods; but filing is
required for a motor vehicle required to be registered; and fixture
filing is required for priority over conflicting interests in fixtures
to the extent provided in §57A-9-313;
(e)
An assignment of accounts which does not alone or in conjunction with
other assignments to the same assignee transfer a significant part of
the outstanding accounts of the assignor;
(f)
A security interest of a collecting bank (§57A-4-208) or in securities
(§57A-8-321) or arising under the chapter on sales (see §57A-9-113) or
covered in subsection (3) of this section;
(g)
An assignment for the benefit of all the creditors of the transferor,
and subsequent transfers by the assignee thereunder.
(2) If a
secured party assigns a perfected security interest, no filing under
this chapter is required in order to continue the perfected status of
the security interest against creditors of and transferees from the
original debtor.
SDCL
57A-1-201(37) defines a security interest as follows:
"Security
interest" means an interest in personal property or fixtures which
secures payment or performance of an obligation. The retention or
reservation of title by a seller of goods notwithstanding shipment or
delivery to the buyer . . . is limited in effect to a reservation of a
"security interest."
In
South Dakota
, a liquor license is considered "property." Rushmore State
Bank v. Kurylas, Inc., 424 N.W.2d 649 (S.D. 1988). Under the UCC it
can become a general intangible subject to a security interest in favor
of a creditor.
Id.
at 424. SDCL 57A-9-106 provides that, " 'General intangibles' 6
means any personal property . . . other than goods, accounts, chattel
paper, documents, instruments and money." See also In re
O'Neill's Shannon Village, 750 F.2d 679, 682 (8th Cir. 1984).
Under SDCL
57A-9-302, a security interest in a general intangible must be filed in
order to protect it from the claims of third parties. Accordingly, since
plaintiff Crystal Bar, Inc. failed to properly file the security
interest created by the purchase agreement of
March 27, 1984
, it had only an unperfected interest in the license. Since an
unperfected security interest is subordinate to the rights of a third
party (in this case the IRS), which became a lien creditor before the
security interest was perfected, the IRS liens are entitled to first
priority.
This Court is
of the opinion that Trigg is dispositive of this case. Plaintiffs
attempt to distinguish Trigg by pointing to its language
requiring the
United States
to not have knowledge of the security interest. They assert that if such
knowledge exists, the IRS lien is subordinate. At the time the Trigg
case was decided, knowledge was an important factor to be considered.
However, in 1972, section 9-301 7
of the UCC was amended to withdraw the requirement that the lien
creditor not have knowledge of the security interest in order to take
priority over the security interest.
South Dakota
followed suit in SDCL §57A-9-301(1)(b). In the Draftsmen's Statement of
Reasons for 1972 Changes in Official Text it states that
"[k]nowledge of the security interest will no longer subordinate
the lien creditor to the unfiled security interest." U.C.C. Rep.
Serv. Code Index (Callaghan) §9301 (1977).
Plaintiffs
urge the Court to ignore Trigg, stating simply, "This case
is not a UCC case." Plaintiffs' objection to the
United States
cross motion for summary judgment, p. 4. This Court finds, however, that
the UCC is indeed exactly what this case is all about.
The Seventh
Circuit in Dragstrem v. Obermeyer [77-1
USTC ¶9301 ], 549 F.2d 20 (7th Cir. 1977), held that a security
interest need not be perfected under the UCC in order to be protected
against a subsequent judgment lien under section
6323(h)(1) of the Federal Tax Lien Act. Dragstrem reviews the
Federal Tax Lien Act and provides somewhat of an historical perspective
to this problem. Dragstrem notwithstanding, it is this Court's
opinion that Trigg controls. The "bottom line" is that
plaintiffs needed only to perfect their security interest to have been
protected. For perhaps their own reasons the plaintiffs chose not to do
so.
A teaching
underpinning of the UCC is that the responsibility to establish the
priority of a security interest is placed upon the lender. The following
is an observation: "Interests in property rise and fall according
to perfection or nonperfection. The penalties for failure to perfect
make for lenders' nightmares and the gleam in lien creditors' eyes. When
properly accomplished, however, perfection is the source of great
confidence: comfort in absolutism." Sanford, Debtor's Rights in
Collateral as a Requirement for Attachment of a Security Interest Under
the Uniform Commercial Code, 26 S.D.L. Rev. 163, 164 (1981).
Plaintiffs'
position is that since the purchase agreement was labeled an option
(paragraph IV), it did not thereby give rise to a "security
interest." Calling a security interest an option does not make it
an option. The location of the title is immaterial. SDCL 57A-9-202
provides: "Each provision of this chapter with regard to rights,
obligations and remedies applies whether title to collateral is in the
secured party or in the debtor."
The clear
intent of the law of
South Dakota
as set forth in chapter 57A-9 is to bring contracts, such as is here
under consideration, under the umbrella of a "security
interest."
Plaintiffs
cite and rely upon the case of Gauvey v. United States [61-1
USTC ¶9478 ], 291 F.2d 42 (8th Cir. 1961), which upheld the
priority of a prior unfiled conditional sales contract over a subsequent
file tax lien. In view of the enactment of the UCC by
South Dakota
legislature in 1966, the Court deems Gauvey as not controlling.
UNITED
STATES' MOTION FOR SUMMARY JUDGMENT AGAINST REMAINING DEFENDANTS
The
United States
has before this Court its motion of
January 2, 1991
, against the remaining defendants Mary K. Williams, Ann R. Williams,
William D. Fish, Norwest Capital Management & Trust Co., Sam Marras,
and Joe Crawford for summary judgment. It asserts the priority of its
lien as against the remaining defendants.
The only
remaining defendants responding to the government's motion are Sam
Marras and Ann R. Williams.
Sam Marras
asserts a landlord's lien under SDCL 44-11-1. 8
Ann R.
Williams asserts an interest in the stock of the plaintiff Crystal Bar,
Inc., by virtue of an order issued out of the Circuit Court, Seventh
Judicial Circuit,
Pennington
County
, dated
August 22, 1984
.
Neither Sam
Marras nor Ann R. Williams have responded with a memorandum brief as
required by Rule 4, Section
8 , of the Rules of Practice of the United States District Court of
the District of South Dakota.
Accordingly,
all of the remaining defendants are in default under the government's
motion for summary judgment.
ORDER
IT IS ORDERED
that plaintiff's motion for summary judgment be and the same is hereby
denied.
IT IS FURTHER
ORDERED that defendant
United States
' cross motion for summary judgment against the plaintiffs is granted.
The
United States
is entitled to priority under its IRS liens to all of the assets
remaining, including the
South Dakota
liquor license.
IT IS FURTHER
ORDERED that the
United States
shall be granted summary judgment against the defendants Ann R.
Williams, Mary K. Williams, William D. Fish, Norwest Capital Management
& Trust Co., Sam Marras, and Joe Crawford.
1
The amortization schedule dated
3/21/84
provided for a total principal of $166,482.80 with payments of $2,388.54
payable monthly commencing
June 1, 1984
.
2
January 1, 1955--$13,623.39 to pay named creditors; January 1,
1985--$28,501.62 to pay current accounts payable; promissory note plus
interest due July 1, 1985, to Lamro, Inc., $15,300; promissory note plus
interest due July 1, 1985, to Charlie Colombe--$46,303.00; January 30,
1985--$10,118.42 for payroll taxes.
3
Violation of the insurance clause and a sale of certain fixtures and
furniture without the consent of the seller-assignee plaintiffs. (A
previous default had been waived by the plaintiffs.)
4
Letter from First Bank Systems to Bob Martin (attorney for plaintiffs)
dated
December 5, 1989
.
5
The plaintiff Reese M. Williams protected the license value by renewal
for the years 1990 and 1991 at a cost of $3,000. The Court understands
that an agreement between Williams and the IRS protects his renewal fees
in the event the IRS is successful.
6
The Court is not unmindful of the case of In re
Rob
erts [73-1
USTC ¶9300 ], 358 F. Supp. 392 (D.S.D. 1973); however,
Rob
erts was not decided in the context of the South Dakota UCC. See Kurylas,
424 N.W.2d at 655 n.8.
7
Section 9-301. Persons Who Take Priority Over Unperfected Security
Interests; Rights of "Lien Creditor".
(1) Except as
otherwise provided in subsection (2), an unperfected security interest
is subordinate to the rights of
.
. .
(b) a person
who becomes a lien creditor [without knowledge of the security interest
and] before [it] the security interest is perfected; (Bracketed
portions deleted; underlined portions added.)
8
SDCL 44-11-1. Mechanics', laborers' and materialmen's liens on personal
property--Extent of lien--Agreed price. Any person who, at the request
or consent of the owner or person lawfully in possession, shall furnish
any services, skill, labor, materials, parts, accessories, supplies, or
facilities for the alteration, repair, replacement of parts, storage,
keeping, maintenance, and preservation of any personal property shall
have a lien thereon, dependent on possession, or notice as hereinafter
provided for his reasonable charge for any or all of the same furnished
for said personal property, or if the same be furnished pursuant to an
agreed price with the owner for the amount of said agreed price.
[89-2 USTC
¶9546] Rocky Mountain F.S.B., Plaintiff v. Richard H. Stanley, Donna L.
Stanley, and The United States of America, acting as the Internal
Revenue Service, Defendants
U.S.
District Court, Dist.
Wyo.
, C88-0193J,
8/24/89
[Code
Sec. 6323 ]
Liens: Security-interest holders.--IRS liens against real estate
were not discharged by the forfeiture of the possessor's interest to a
bank/security holder. The IRS properly filed several of its liens before
the land sales contract. Also, the required notice of sale was not given
to the
U.S.
by the security holder. The proper attachment of IRS liens to the
possessors' equitable interest in the property entitled the IRS to
perform the possessors' real estate contract.
ORDER RULING ON SUMMARY JUDGMENT MOTIONS
Background
JOHNSON,
District Judge:
On
28 February 1986
Richard H. Stanley and Donna L. Stanley, husband and wife, entered into
a Real Estate Sale Contract with the plaintiff, Rocky Mountain Federal
Savings and Loan Association. 1
Plaintiff's Motion for Summary Judgment, Exhibit C. In this contract,
the
Stanleys
agreed to buy the following described property:
Lot 20, Block
11, Manor Heights, Blocks 1 through 14, a Subdivision in the City of
Casper, Natrona County, Wyoming.
In
exchange for graduated monthly installment payments against the purchase
price, the
Stanleys
were entitled to possession. They were to receive a warranty deed only
after the purchase price and interest had been paid. The contract
provided that the
Stanleys
would have 31 days from the certified mailing of a notice of default in
which to correct the default. If default extended past this time, the
bank reserved the right to terminate the Contract and forfeit all
payments made by the
Stanleys
under the Contract. Although the Contract provided for a contemporaneous
filing of a memorandum of sale, this apparently was not done until
17 March 1986
. Defendant's Motion for Summary Judgment, Exhibit E.
On
2 September 1987
Rocky Mountain Federal provided written notice of default to Richard
Stanley. Defendant's Motion for Summary Judgment, Exhibit B. On
30 September 1987
Rocky Mountain Federal received a Report of Title from First American
Title Guaranty of Wyoming, which listed the following encumbrances of
record against the property:
1. Notice of
Federal Tax Lien against Richard H. & Donna L. Stanley, dated
January 31, 1983
in the amount of $4,823.80 recorded
February 1, 1983
as Instrument No. 345641, Records of Natrona County, Wyoming.
2. Notice of
Federal Tax Lien against Richard H. Stanley d/b/a Stanley Construction,
dated
February 2, 1983
in the amount of $5,732.41, recorded
February 8, 1983
as Instrument No. 346196, Records of Natrona County, Wyoming.
3. Notice of
Federal Tax Lien against Richard R. [sic]
Stanley
d/b/a Stanley Construction, dated
February 23, 1983
in the amount of $5,732.41, recorded
February 25, 1983
as Instrument No. 347116, Records of Natrona County, Wyoming.
4. Memorandum
of
Sale
executed by and between Rocky Mountain Federal Savings and Loan
Association and Richard H. Stanley and Donna L. Stanley, husband and
wife dated
February 28, 1986
, recorded
March 17, 1986
as Instrument No. 403602, Records of Natrona County, Wyoming.
5. Notice of
Federal Tax Lien against Richard H. Stanley d/b/a Stanley Construction,
dated
May 1, 1987
in the amount of $4,991.21, recorded
May 4, 1987
as Instrument No. 425071, Records of Natrona County, Wyoming.
6. Notice of
Federal Tax Lien against Richard H. & Donna L. Stanley, dated
January 15, 1987
in the amount of $14,878.40, recorded
January 16, 1987
as Instrument No. 420212, Records of Natrona County, Wyoming.
7. Judgment
and Decree Civil Action No. 61886, in the District Court Seventh
Judicial District, in and for the
County
of
Natrona
, State of
Wyoming
, filed
May 15, 1987
, wherein Donna Louise Stanley is the Plaintiff, and Richard Hamilton
Stanley is the Defendant.
Plaintiff's
Motion for Summary Judgment, Exhibit B. On or about 2 October 1987 Rocky
Mountain Federal took possession of the property.
On
10 June 1988
Rocky Mountain Federal filed a Complaint to Quiet Title in the District
Court for the Seventh Judicial District of Wyoming. In the following
language, it contested the validity of the IRS liens:
5. The tax
liens of the
United States of America
are not liens against the subject property because the
Stanleys
were never record owners of the propety [sic] pursuant to the Real
Estate Sale Contract. Further, the
Stanleys
no longer have any equitable interest in the property and therefore no
equitable interest to which the tax [will] attach.
Complaint,
¶5. On
5 July 1988
the
United States of America
, acting through the Internal Revenue Service, filed a Petition for
Removal. On that same day, the court entered an Order Granting Removal.
On
11 July 1988
the court filed an Entry of Default against Donna L. Stanley, and on
20 October 1988
the court entered an Entry of Default against Richard H. Stanley. On
16 August 1988
the
United States of America
filed its Answer.
On
9 February 1989
the
United States
filed a Brief in Support of Motion to Dismiss or, in the Alternative,
for Summary Judgment. On
10 February 1989
Rocky Mountain F.S.B. filed a Brief in Support of Its Motion for Summary
Judgment. On
16 February 1989
the court entered a Default Judgment against Richard H. Stanley and
Donna L. Stanley. On
17 February 1989
Rocky Mountain F.S.B. filed a Brief in Opposition to the
United States
' Motion to Dismiss, or in the Alternative, for Summary Judgment. On
2 March 1989
oral arguments were held before the court.
Analysis
The
United States
contests the appropriateness of Rocky Mountain F.S.B.'s quiet title
action, contending that the IRS has valid liens. The lien for unpaid
federal taxes arises in the following circumstances:
If any person
liable to pay any tax neglects or refuses to pay the same after demand,
the amount . . . shall be a lien in favor of the United States upon all
property and rights to property, whether real or personal, belonging to
such person.
26
U.S.C. §6321 . The
United States Supreme Court recently stated that "[t]he statutory
language 'all property rights and rights to property,' . . . is broad
and reveals on its face that Congress meant to reach every interest in
property that a taxpayer might have." United States v. National
Bank of Commerce [85-2
USTC ¶9482 ], 472 U.S. 713, 719-20 (1985).
The role of
state and federal law in the federal tax lien situation is well spelled
out by the following quotation:
" '[I]n
the application of a federal revenue act, state law controls in
determining the nature of the legal interest which the taxpayer had in
the property.' " Aquilino v. United States [60-2
USTC ¶9538 ], 363 U.S. 509, 513, 80 S.Ct. 1277, 1280, 4 L.Ed.2d
1365 (1960), quoting Morgan v. Commissioner [40-1
USTC ¶9210 ], 309 U.S. 78, 82, 60 S.Ct. 424, 426, 84 L.Ed. 585
(1940). Sterling National Bank, 494 F.2d, at 921. This follows
from the fact that the federal statute "creates no property rights
but merely attaches consequences, federally defined, to rights created
under state law." United States v. Bess [58-2
USTC ¶9595 ], 357 U.S. 51, 55, 78 S.Ct. 1054, 1057, 2 L.Ed.2d 1135
(1958). And those consequences are "a matter left to federal
law."
United States
v. Rodgers, 461
U.S.
, at 683, 103 S.Ct., at 2137. "[O]nce it has been determined that
state law creates sufficient interests in the [taxpayer] to satisfy the
requirements of [the statute], state law is inoperative," and the
tax consequences thenceforth are dictated by federal law.
United States
v. Bess, 357
U.S.
, at 56-57, 78 S.Ct., at 1057-1058. See also Fidelity & Deposit
Co. of
Maryland
v. New York City Housing Authority [57-1
USTC ¶9410 ], 241 F.2d 142, 144 (CA-2 1957); Note, Property Subject
to the Federal Tax Lien, 77 Harv. L.Rev. 1485, 1486-1487 (1964).
United States
v. National Bank of Commerce,
472
U.S.
at 722. See also Prewitt v. United States [86-2
USTC ¶9513 ], 792 F.2d 1353, 1355 (5th Cir. 1986) ("Whether
such a taxpayer has any rights to property is a question determined by
state law."); Runkel v. United States [76-1
USTC ¶9152 ], 527 F.2d 914, 916 (9th Cir. 1975) ("The rights
and property to which the liens may attach are created under state
law.")
Under
Wyoming
law, the purchaser in a land sale contract obtains equitable title. Hollabaugh
v. Kolbet, 604 P.2d 1359, 1363 (
Wyo.
1980); Olds v. Little Horse Creek Cattle Company, 140 P. 1004,
1008 (
Wyo.
1949). Equitable title remains in the purchaser until forfeiture. Davis
v. Schiess, 417 P.2d l9, 23 (
Wyo.
1966). This equitable interest is included within "all property and
rights to property" and is therefore subject to being attached.
See, e.g., Runkel, 527 F.2d at 916; United States v. Henline
[66-2 USTC
¶9678 ], 18 A.F.T.R. 2d 5626, 5628 (D. Wyo. 1966); United States
v. Evanston-Kemmerer Broadcasters, Inc. [66-2
USTC ¶9677 ], 18 A.F.T.R. 2d 5628, 5629 (D. Wyo. 1966).
In this case,
notice of three IRS liens was filed before the land sales contract and
notice of an additional two IRS liens was filed after then. The law
governing effective dates of such liens provides as follows:
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.
26
U.S.C. §6322 . Under
this language, an IRS lien attaches to after-acquired property. Glass
City Bank v. United States [45-2
USTC ¶9449 ], 326 U.S. 265, 267 (1945).
Under the
circumstances of this case, the IRS liens were not discharged by the
forfeiture of the
Stanley
's interest. The relevant portions of the law on discharge of liens
provide as follows:
(b) Other
sales. Notwithstanding subsection (a) a sale of property [which includes
any forfeiture of a land sales contract, 26 U.S.C. §7425(d)
] on which the
United States
has or claims a lien . . .
(1)
Shall, except as otherwise provided, be made subject to and without
disturbing such lien or title, if notice of such lien was filed or such
title recorded in the place provided by law for such filing or recording
more than 30 days before such sale and the United States is not given
notice of such sale in the manner prescribed in subsection (c)(1);
*
* *
(c) Special
rules. (1) Notice of sale. Notice of a sale to which subsection (b)
applies shall be given (in accordance with regulations prescribed by the
Secretary) in writing, by registered or certified mail or by personal
service, not less than 25 days prior to such sale, to the Secretary.
26
U.S.C. §7425(b)(1) and
(c)(1) . It
appears undisputed that the IRS properly filed its lien and that the
required notice was not given to the
United States
. Therefore, all liens survive the forfeiture of the land sales
contract.
The relevant
law concerning validity and priority of IRS liens provides as follows:
(a)
Purchasers, holders of security interests, mechanic's lienors, and
judgment lien creditors. The lien imposed by §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.
26
U.S.C. §6323(a) .
The interest of Rocky Mountain FSB did not become perfected until the
memorandum of sale was filed on
17 March 1986
. The
Stanleys
obtained their equitable interest on
28 February 1986
, the date the land sales contract was executed. Therefore, the first
three IRS liens attached before
Rocky
Mountain
perfected a security interest in real property.
Rocky Mountain
FSB contends that property is not subject to all taxes assessed. Under
Wyoming
law, a conveyance to a husband and wife, without saying more, creates a
tenancy by the entireties. Witzel v. Witzel, 286 P.2d 103 (
Wyo.
1963). It further contends that three tax liens solely against Mr.
Stanley cannot reach property held in this fashion. This may be a
correct view of the law. See, e.g., Tony Thornton Auction Service,
791 F.2d at 637; cf. United States National Bank of Commerce, 472
U.S. at 728 n.11 (discussing a husband and wife's joint bank account
that was held by them together as tenants by the entireties); United
States v. Rodgers [83-1
USTC ¶9374 ], 461 U.S. 677, 702 n.31 (1983) (discussing tax lien
cases involving tenancy by the entirety and contrasting them to the
homestead exemption situation). Even so, Rocky Mountain FSB overlooks
two important points. First, the
1 February 1983
tax lien is against both
Stanleys
. Therefore, the tax lien attaches to the property held as tenants by
the entirety. See Tony Thornton Auction Service, 791 F.2d at
637-38. Second, the
Stanleys
were divorced on
15 May 1987
. Upon the divorce, property formerly held by the entirety reverts to a
tenancy in common. Choman v. Epperley, 592 P.2d 714, 718 (
Wyo.
1979).
Having decided
that the IRS liens properly attached to the
Stanleys
' equitable interest in the property, the court must determine what the
lien entitles the IRS to. "The IRS acquires whatever rights the
taxpayer himself possesses." National Bank of
Commerce
,
U.S.
at 725. The Government's interest in the land cannot be greater than
the taxpayer's. United States v. Miller Brothers Construction
Company [74-2
USTC ¶9817 ], 505 F.2d 1031, 1036 (10th Cir. 1974); In re
Buchert, 69 Bankr. 816, 821 (Bankr. N.D.
Ill.
1987). The court has located state decisions that announce the rights of
an equitable mortgagee upon abandonment by the vendee. In such
circumstances, "the equitable mortgagee is entitled, if need be, to
step into his [the vendee's] shoes and, therefore, is entitled,
generally, to the vendee's rights under the contract if he is willing to
perform the vendee's obligations thereunder." Estate of Brewer
v. Iota Delta Chapter, 69 Or. App. 82, 686 P.2d 393, 398 (1984).
Otherwise stated,
Because the
vendee cannot create an interest in the realty greater than his own, Campos
v. Warner, 90 N.M. 63, 559 P.2d 1190 (1977), the interest acquired
by the mortgagee is necessarily limited by that of the vendee. See
Gavin v. Johnson, [131
Conn.
489, 418 2d 113 (1945) ]; Kendrick v.
Davis
, 75 Wash.2d 456, 452 P.2d 222 (1969).
*
* *
By virtue of
his mortgage, the mortgagee obtains the original purchasor's right to
purchase the property for the consideration stated in the purchase
contract. In other words, the mortgagee assumes the rights of the vendee
under the real estate contract.
Shindledecker
v. Savage, 96 N.M. 42, 627 P.2d
1241, 1242-43 (1981). Under this rule, the
United States
is entitled to perform the
Stanleys
' real estate contract.
Congress has
also provided a right of redemption by the
United States
:
(d) Redemption
by
United States
. (1) Right to redeem. In the case of a sale of real property to which
subsection (b) applies to satisfy a lien prior to that of the
United States
, the Secretary may redeem such property within the period of 120 days
from the date of such sale or the period allowable for redemption under
local law, whichever is longer.
26
U.S.C. §7425(d)(1) .
See, e.g., Olympic Federal Savings & Loan Association v. Regan
[81-2 USTC
¶9507 ], 648 F.2d 1218 (9th Cir. 1981). Nothing has been shown that
would lead the court to believe that the right of redemption possessed
by the
United States
has been lost.
Rocky Mountain
Federal filed this suit to quiet title in the property pursuant to Wyo.
Stat. §§1 -32-201 et
seq. In view of the court's above findings, Rocky Mountain Federal
FSB is not entitled to quiet title against the
United States
.
IT IS ORDERED
that the Motion for Summary Judgment filed by the
United States
is GRANTED;
IT IS FURTHER
ORDERED that the Motion for Summary Judgment filed by Rocky Mountain FSB
is DENIED.
1
On
2 February 1989
the court entered an Order Authorizing Caption Change, reflecting the
change of plaintiff's name to Rocky Mountain F.S.B.
[88-1 USTC
¶9135]
United States of America
, Plaintiff-Appellee v. Patrick D. Rotherham, Defendant-Appellant
(CA-7),
U.S. Court of Appeals, 7th Circuit, 87-1796, 1/11/88, 836 F2d 359,
Affirming an unreported District Court decision
[Code Secs. 6321 and
6323 --Result unchanged
by the Tax Reform Act of 1986 ]
Assessment: Collection: Property subject to tax liens: After-acquired
property: Security interest: Automobile.--A security interest held
in an Excalibur automobile did not have priority over IRS tax liens for
estate and income taxes, since the creditor failed to perfect his
security interest prior to the IRS's seizure of the car. Moreover, the
income tax lien was superior to the creditor's purported security
interest because the tax lien was properly filed before the interest
attached.
Kenneth W.
Rosenberg, Department of Justice,
Washington
,
D.C.
20530
, for plaintiff-appellee. Mariann Pogge-Strubing,
5240 S. Sixth St.
,
Springfield
,
Ill.
62705
, for defendant-appellant.
Before
CUMMINGS,
CUDAHY
and MANION, Circuit Judges.
CUDAHY
, Circuit Judge:
This appeal
involves competing claims to a 1979 Excalibur automobile. Appellant
Patrick Rotherham claims he has a security interest in the car that
should have priority over the government's tax liens. The Internal
Revenue Service (the "IRS"), not surprisingly, disagrees. The
district court found for the government. We affirm.
I.
The factual
setting is rather complex. We will only discuss those facts relevant to
this appeal. The central character is
Rob
ert Edwards. In 1973, Edwards' mother conveyed some farmland to her son,
retaining a life estate. In 1977, Mrs. Edwards passed away;
Rob
ert thereafter owned the land in fee simple. In 1980, the land was sold
for $375,000. In December 1980, Edwards used $38,353 of the proceeds to
buy a 1979 silver and black Excalibur automobile, the heart of this
litigation. He placed title in the name of Bryan Briggs as trustee.
Unfortunately
for Edwards, his mother's estate owed federal estate taxes of over
$70,000. The estate failed to pay the tax when due. Under 26 U.S.C. §6324(a)(2)
(1982), 1
the tax was owed by Edwards and a lien automatically attached to the
land. When the land was sold, a "like lien" attached to all
Edwards' remaining property; so, he could not avoid the estate tax
simply by transferring the land.
Id.
Meanwhile,
Edwards was running into more tax trouble on another front. In June
1981, the IRS assessed federal income tax, interest and penalties
against Edwards. The IRS alleged an unpaid balance of almost $8,000 in
1978, 1979 and 1980 income taxes. On
January 12, 1982
, the government mailed Edwards notice of a federal income tax lien
under 26 U.S.C. §6321 (1982).
2
On January 24, the IRS filed notice of the lien with the Coles County
Recorder of Deeds, pursuant to 26 U.S.C. §6323
(1982). 3
On February
12, Edwards, realizing his precious automobile was threatened by these
liens, had Briggs transfer title to Edith Henry, Edwards' companion and
roommate. Henry paid nothing for the vehicle; in fact, she did not
consider herself owner of the car. Edwards retained possession and held
the only set of keys. Edwards remained the principal user of the
vehicle. He also continued to insure the car. The only incident
of ownership not in Edwards was the title.
At this point
Rotherham
, the appellant, entered the picture. Some time prior to
May 12, 1982
,
Rotherham
was contacted by Mervin Beal, an attorney who had represented Edwards in
obtaining several loans in the past. Beal was a longtime acquaintance of
Rotherham
. On May 12,
Rotherham
met with Edwards, Henry and Beal, and
Rotherham
made an $8,000 loan. Although Henry initially received the cash, she
apparently passed it on to Edwards and never knew the amount of the
loan.
Rotherham
believed he was making a loan to both Edwards and Henry.
In exchange
for the money,
Rotherham
attempted to take a security interest in the Excalibur. Henry signed a
blank piece of paper, which was later filled in to resemble a promissory
note. 4
She also assigned title to Rotherham to secure the debt. Rotherham did
not immediately file any record of this assignment with the Illinois
Secretary of State.
On August 12,
1982, the IRS seized the car from Edwards. On August 13, Rotherham
contacted the government and demanded release of the car to him. The IRS
declined his request because he presented no evidence that he owned the
car. Only at that point, the day after the seizure, did
Rotherham
file notice of his interest in the Excalibur with the Secretary of
State. He applied for transfer of title to him as "owner" of
the vehicle. The transfer was approved on August 24, twelve days after
the seizure.
In 1984, the
government brought this action asking the court to order foreclosure of
the tax liens.
Rotherham
, still claiming an interest in the car, was named a defendant. After
hearing testimony from the principal players, the district court found
for the IRS, holding that notice of the income tax lien was adequate to
bind
Rotherham
and that, in any event, the government prevailed with respect to both
liens because
Rotherham
perfected his security interest, if at all, only after the IRS seized
the car. We agree on both points and therefore affirm.
II.
The mechanics
of the statutes governing income tax liens and estate tax "like
liens" differ slightly. For clarity's sake, we discuss each item in
turn, even though much of the income tax lien analysis applies equally
to the estate tax lien.
The priority
system of the federal income tax lien provisions is fairly simple. Section
6321 gives the government a lien against "all property and
rights to property . . . belonging to" the taxpayer. 26 U.S.C. §6321
; see supra p. 3 n.2. The lien attaches to "every
interest in property that a taxpayer might have." United States
v. National Bank of Commerce [85-2
USTC ¶9482 ], 472 U.S. 713, 720 (1985). We look to state law to
determine the extent of the taxpayer's property interest. See United
States v. Rodgers [83-1
USTC ¶9374 ], 461 U.S. 677, 683 (1983); United States v. Bess
[58-2 USTC
¶9595 ], 357 U.S. 51, 55 (1958); see also Avco Delta Corp.
Canada Ltd. v.
United States
[72-1
USTC ¶9359 ], 459 F.2d 436, 440 (7th Cir. 1972).
Once state law
determines the taxpayer's property interest, federal law governs the
consequences of that determination. Specifically, under section
6323(a) , the IRS must file notice of the tax lien or its interest
may be defeated by the "holder of a security interest." 26
U.S.C. §6323(a) ; see
supra p. 3 n.3. For purposes of both income tax liens and estate tax
liens, the "holder of a security interest" is defined as one
who has a prior choate security interest protected under local law
against a subsequent judgment lien. 26 U.S.C. §6323(h)(1)
(1982). 5
It is worth noting that where the taxpayer has an interest in the
property and the government files notice that complies, in form and
content, with section
6323 's requirements, that notice "shall be valid
notwithstanding any other provision of law regarding form or content of
a notice of lien." 26 U.S.C. §6323(f)(3)
(1982).
The IRS filed
its notice of tax lien on
January 23, 1982
.
Rotherham
's security interest attached, if at all, on
May 12, 1982
, almost four months later. Assuming the security interest attached, 6
and accepting for the moment appellant's argument that under Illinois
law only attachment is necessary to prevail over a subsequent judgment
lienholder, 7
appellant still loses if the car belonged to Edwards and the form and
content of the notice met the statutory requirements.
Understanding
this, appellant argues that the car belonged to Henry. The district
court disagreed, and we will only reverse its factual findings if they
are clearly erroneous. Fed. R. Civ. P. 52(a); see
Anderson
v. City of
Bessemer City
, 470
U.S.
564, 573 (1985); Bartsh v. Northwest Airlines, Inc., 831 F.2d
1297, 1306 (7th Cir. 1987). Under
Illinois
law, title is prima facie evidence of ownership. Ill. Rev. Stat. ch.
951/2, para. 3-107(c) (1985). The district court found that there was
sufficient evidence to override that presumption.
United States
v. Edwards, No. 84-2055, slip op. at 6 (C.D. Ill. Apr. 9, 1987).
Edwards paid for the car, insured the car, had the only keys to the car,
retained possession of the car at all relevant times and transferred
title to Henry for no consideration shortly after receiving notice of
the tax lien. Edwards testified that he transferred title to Henry
because "there was tax problems; and Brian Briggs said I should
kick this title around at the time." Record at 21. In fact, Henry
specifically disclaimed any ownership interest in the car. Record at
53-54. These facts are uncontroverted. They more than amply support the
court's finding that Edwards owned the car.
Rotherham
, however, argues that he never had notice that Edwards was the car's
true owner. There are two answers to this contention. First, under section
6323(f)(3) , where notice is properly filed it is valid
"notwithstanding any other provision of law" governing the
adequacy of notice. In other words, a filing that meets the tax lien
statute's requirements is sufficient constructive notice regardless of
any actual notice problems. Whether the filing gave actual notice to
Rotherham
is irrelevant; he is still bound by the tax lien.
Further, the
district court found that "
Rotherham
had enough information to tie Edwards to the car." Edwards,
slip op. at 7. This conclusion is based on weighing the credibility of
conflicting testimony. We will not reject the finding unless clearly
erroneous. "Where there are two permissible views of the evidence,
the factfinder's choice between them cannot be clearly erroneous." Anderson,
470
U.S.
at 574. The district court's conclusion finds support in the record.
Rotherham
entered into this transaction after being contacted by Edwards'
attorney, Mervin Beal.
Rotherham
knew that Edwards, as well as Henry, wanted the money. Presumably
Rotherham
and Edwards set the amount of the loan, since Henry never knew the exact
terms of the deal.
Rotherham
was present when Henry signed blank pieces of paper to be filled in by
Edwards' attorney. He may have known Edwards insured the car. See Record
at 92. Finally, he testified that when payment was overdue, he attempted
to contact Edwards. Record at 107. These facts adequately support
Magistrate Kauffman's factual finding that
Rotherham
had sufficient information to know Edwards owned the Excalibur. That
fact reduces any "secret lien" concerns raised by filing in
Edwards' name alone. Even if the statute were to allow such an inquiry,
the facts do not support
Rotherham
's contention that he lacked notice.
Moreover, even
if we were to find the notice deficient in some respect, the government
would still prevail if
Rotherham
failed to perfect his security interest in the Excalibur prior to the
car's seizure on
August 12, 1982
. Under 26 U.S.C. §6331(a)
(1982), the IRS has the power, after notice of deficiency, to levy
upon the taxpayer's property. 8
If
Rotherham
's security interest was unperfected prior to August 12, and if seizure
foreclosed his opportunity to perfect that interest after August 12,
then he loses regardless of his other arguments. Because this issue is
the centerpiece of our estate tax "like lien" analysis, we
turn now to that discussion.
III.
The mechanics
of the estate tax lien provisions differ somewhat from those governing
the income tax lien. When a person dies and estate tax is not paid by
the estate, a lien attaches to the decedent's gross estate. 26 U.S.C. §6324(a)(1)
(1982). To the extent the tax remains unpaid, the recipient of
property included in the gross estate becomes personally liable for the
tax, up the value of the property received. 26 U.S.C. §6324(a)(2)
; see supra p. 2 n.1. The lien remains attached to that
property in the hands of the recipient.
Id.
If the property is again transferred, a "like lien" attaches
to all property belonging to the transferor.
Id.
That is precisely what occurred in this case. See supra p. 2.
Once the
estate tax "like lien" attaches, the priority system differs
from that governing income tax liens. The IRS cannot "perfect"
its estate tax lien by filing notice or by notifying the taxpayer of the
lien. To protect its interest, the government must levy upon the
property. Until the IRS makes such a levy under 26 U.S.C. §6331
, the taxpayer is free to sell or encumber the property. 26 U.S.C. §6324(a)(2)
. The "like lien" attaches to the taxpayer's property
"except any part transferred to a purchaser or a holder of a
security interest."
Id.
As with the income tax lien, "security interest" is defined as
a choate interest that "has become protected under local law
against a subsequent judgment lien arising out of an unsecured
obligation." 26 U.S.C. §6323(h)(1)
; see supra p. 5 n.5.
On
August 12, 1982
, the IRS exercised its levy power by seizing the Excalibur. See
26 U.S.C. §6331(b) (1982)
("The term 'levy' . . . includes the power of distraint and seizure
by any means.") Seizure, in effect, perfected the estate tax
"like lien" and froze the rights of the parties as of that
time. We must therefore examine the facts as of August 12, to determine
whether
Rotherham
's interest was "protected under local law against a subsequent
judgment lien arising out of an unsecured obligation." 26 U.S.C. §6323(h)(1)
.
Rotherham
did not attempt to file notice of his purported security interest with
the Illinois Secretary of State until after the seizure. His claim,
therefore, is based on the proposition that he was not required by
Illinois
law to file such notice in order to prevail over a subsequent judgment
lien. We find that, even accepting all of appellant's factual
contentions,
Illinois
law required him to file in order to perfect his interest as against a
subsequent judgment lienholder.
We begin with
the
Illinois
statutes, specifically the
Illinois
version of the Uniform Commercial Code (U.C.C.), Ill. Rev. Stat. ch. 26,
para. 1-100 et seq. (1985). In general, the U.C.C. governs
perfection and priority of security interests. Cf. Ill. Rev.
Stat. ch. 26, para. 9-102 (1985) (scope of Article 9). Under section
9-301, "an unperfected security interest is subordinate to the
rights of . . . (b) a person who becomes a lien creditor before the
security interest is perfected." Ill. Rev. Stat. ch. 26, para.
9-301(1)(b) (1985). As discussed above, under 26 U.S.C. §§6323
and 6324 , a
security interest that is subordinate to a judgment lien is subordinate
to a tax lien. Thus, if
Rotherham
's security interest was "unperfected" within the meaning of
the U.C.C., his interest was subordinate to the tax liens.
The U.C.C.
perfection provision states that the Illinois Vehicle Code governs
requirements for perfection of security interests in motor vehicles. See
Ill. Rev. Stat. ch. 26, para. 9-302(3)(b) (1985); see also Ill.
Ann. Stat. ch. 26, para. 9-302 (Smith-Hurd 1974) (Illinois Code Comment)
("A security interest in an automobile . . . must therefore be
perfected in accordance with [the Illinois Vehicle Code].") The
Vehicle Code, in turn, provides:
A security
interest is perfected by the delivery to the Secretary of State of the
existing certificate of title, if any, an application for a certificate
of title containing the name and address of the lienholder and the
required fee.
Ill.
Rev. Stat. ch. 951/2, para. 3-202(b) (1985). If, as occurred in this
instance, the application is not delivered within 21 days of the
creation of the security interest, it is effective only upon delivery.
Id.
Rotherham
's security interest was only perfected upon delivery, after August 12
(the date the IRS seized the car).
Having
determined that his interest was unperfected as of August 12, we now
look to the U.C.C. for the priority of that interest. See Finance
America Commercial Corp. v. Econo Coach, Inc., 95 Ill. App. 3d 185,
190, 419 N.E.2d 935, 940 (2d Dist. 1981) ("Although the perfection
of security interests in [motor vehicles] is controlled by [the Vehicle
Code], priority of competing security interests is governed
generally by the Uniform Commercial Code provisions.") (emphasis
supplied) (citations omitted); see also Peterson v. Ziegler, 39
Ill.
App. 3d 379, 382-83, 350 N.E.2d 356, 360 (5th dist. 1976); Ill. Ann.
Stat. ch. 26, para. 9-302 (Illinois Code Comment) (Smith-Hurd Supp.
1987) ("The exemption of motor vehicles subject to the Illinios
Vehicle Code from the filing requirements of the Uniform Commercial Code
does not extend to other matters covered by the latter."). U.C.C.
section 9-302 states that an unperfected security interest is
subordinate to a judgment lien.
Rotherham
failed to perfect prior to
August 12, 1982
; therefore, his interest is subordinate to an August 12 judgment lien.
In opposition
to this construction of the statutes,
Rotherham
makes a novel argument. In essence, his contention is that, because the
U.C.C. refers to the Vehicle Code for perfection requirements for motor
vehicle security interests, the Vehicle Code also governs priority
battles among competing creditors with respect to motor vehicles. The
Vehicle Code states that: "A security interest in a vehicle . . .
is not valid against subsequent transferees or lienholders of the
vehicle unless perfected as required in this Act." Ill. Rev. Stat.
ch. 951/2, para. 3-202(a) (1985). In the Act's general definitional
section, "lienholder" is defined as "[a] person holding a
security interest in a vehicle." Ill. Rev. Stat. ch. 951/2, para.
1-139 (1985). By negative implication from these provisions,
Rotherham
asks us to hold that he was not required to perfect his security
interest in order to prevail over a judgment lien, because a judgment
lienholder is not a "lienholder" under the Vehicle Code.
There are
several answers to this argument. First, as noted above, the
Illinois
cases and the commentary to the Illinois U.C.C. make clear that the
Vehicle Code only governs perfection of security interests in
motor vehicles; the U.C.C. governs priority of those interests. See
Finance
America
, 95
Ill.
App. 3d at 190, 419 N.E.2d at 940; Peterson, 39
Ill.
App. 3d at 382-83, 350 N.E.2d at 360; Ill. Ann. Stat. ch. 26, para.
9-302 (
Illinois
Code Comment) (Smith-Hurd Supp. 1987). Second, this court has held that
a bankruptcy trustee who, like the IRS under the tax lien statutes, has
the priority of judgment lienholder, prevails over a security interest
unperfected under the Vehicle Code. In re Keidel, 613 F.2d 172,
173 (7th Cir. 1980); see also Community Bank v. Meister Bros., Inc.,
12 Ill. App. 3d 1004, 1007, 299 N.E.2d 589, 592 (3d Dist. 1973). The Keidel
court did not address the argument
Rotherham
makes here, but its holding is consistent with the
Illinois
case law and our resolution of this case.
Third,
Rotherham
's argument is based on the notion that Vehicle Code section
3 -202(a) is inconsistent with U.C.C. section 9-301(1)(b), which
states that a judgment lienholder prevails over an unperfected secured
creditor. This apparent inconsistency is illusory. The provisions do not
necessarily conflict; instead, it is possible that they are cumulative.
The Vehicle Code section only says that one must perfect to prevail over
transferees or "lienholders." Accepting
Rotherham
's contention that "lienholder" does not include judgment
lienholders, that means the section is silent as to the rights of
judgment lienholders. Given that silence, it is natural to refer back to
the U.C.C., which is not silent on the question. See Finance
America
, 95
Ill.
App. 3d at 190, 419 N.E.2d at 940.
Finally, even
if we were to accept that section
3 -202(a) governs this priority battle, and that the definition of
"lienholder" must exclude the IRS,
Rotherham
would probably still not prevail. If the IRS is not a
"lienholder," it is most likely still a
"transferee," of the car. The statute does not define
"transferee," but there is no evidence that the legislature
sought to exclude involuntary transfers from the section's scope.
Indeed, a broad definition of "transferee" removes any
potential inconsistency between Vehicle Code section
3 -202(a) and U.C.C. section 9-302. Under this construction, there
was no need to include judgment lienholders in the definition of
"lienholder," since a lienholder who levies on the property is
a "transferee" of the property. Cf. Black's Law Dictionary
1342 (5th ed. 1979) ("transfer" includes involuntary
conveyance of property). We need not rely upon this argument; the other
reasons we have noted are more than sufficient to justify our rejection
of appellant's statutory interpretation.
IV.
We agree with
the district court that Rotherham's security interest, to the extent it
attached at all, was subordinate to the government's estate tax and
income tax liens on the Excalibur, because Rotherham failed to perfect
his security interest prior to the IRS's seizure of the car. Further,
the income tax lien prevails over
Rotherham
's alleged security interest for the additional reason that the lien was
properly filed before
Rotherham
's interest attached. We therefore affirm the district court's order in
all respects.
AFFIRMED.
1
Section 6324(a) reads, in pertinent part:
(2) Liability
of transferees and others.--If the estate tax . . . is not paid when
due, then the . . . transferee . . . who receives, or has on the date of
the decedent's death, property included in the gross estate under sections
2034 to 2042 ,
inclusive, to the extent of the value at the time of the decedent's
death, of such property, shall be personally liable for such tax. Any
part of such property transferred by (or transferred by a transferee of)
such . . . transferee . . . to a purchaser or holder of a security
interest shall be divested of the lien [upon the gross estate] and a
like lien shall then attach to all the property of such . . .
transferee, . . . except any part transferred to a purchaser or a holder
of a security interest.
26
U.S.C. §6324(a)(2) (1982).
2
Section 6321 reads:
If any person
liable to pay any tax neglects or refuses to pay the same after demand,
the amount (including any interest, additional amount, addition to tax,
or assessable penalty, together with any costs that may accrue in
addition thereto) shall be a lien in favor of the United States upon all
property and rights to property, whether real or personal, belonging to
such person.
26
U.S.C. §6321 (1982).
3
Section 6323(a) reads, in relevant part:
The lien
imposed by Section
6321 shall not be valid as against any purchaser, holder of a
security interest, mechanic's lien, or judgment lien creditor until
notice thereof . . . has been filed by the Secretary or his delegate.
26
U.S.C. §6323(a) (1982).
4
Because of our disposition of the case, we need not determine whether
the "promissory note" is a valid security agreement under the
Uniform Commercial Code. See U.C.C. §9-203(1), Ill. Rev. Stat.
ch. 26, para. 9-203(1) (1985).
5
Section 6323(h)(1) reads:
(h) Definitions--For
purposes of this section and section
6324 [the estate tax lien]--
(1) Security
interest.--The term "security interest" means any interest in
property acquired by contract for the purpose of securing payment or
performance of an obligation or indemnifying against loss or liability.
A security interest exists at any time (A) if, at such time, the
property is in existence and the interest has become protected under
local law against a subsequent judgment lien arising out of 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) (1982).
6
See supra p. 4 n.4.
7
This argument, based on a strained reading of
Illinois
law, is discussed and rejected infra pp. 11-13.
8
Section 6331(a) reads, in relevant part:
(a) Authority
of Secretary or delegate--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 or his delegate to collect
such tax . . . by levy upon all property and rights to property . . .
belonging to such person or on which there is a lien provided in this
chapter for the payment of such tax.
26 U.S.C. §6331(a)
(1982).
[85-2 USTC
¶9764]In re Michael L. Schons and Bonnie Schons, husband and wife,
d/b/a Eagle Springs Dairy, Schons Dairy and Schons Farms, Debtors
U. S.
Bankruptcy Court, West. Dist. Wash.,
Seattle, No. 83-03316-Y7, 54 BR 665, 7/25/85
[Code Sec. 6323]
Lien for taxes: Priority: After-acquired property: Milk Diversion
Program payments.--
Tax liens for unpaid taxes on the assets of a bankrupt dairy had
priority over a creditor's pre-existing security interest in
after-acquired property (in the debtor's post-bankruptcy petition right
to receive Milk Diversion Program payments from the U. S. Department of
Agriculture) to the extent such payments came into existence more than
45 days after the tax liens were filed.
Philip H.
Brandt,
P. O. Box 5226
,
Bellingham
,
Wash.
98227
, for debtors. David A. Slacter, Department of Justice,
Washington
, D. C. 20530, for
United States
.
Findings
of Fact
STEINER,
Bankruptcy Judge:
1. This is a
Chapter 7 instituted by debtors, Michael L. and Bonnie Schons, who
formerly did business as a dairy. Discharge was granted on
February 17, 1984
.
2. On or about
November 3, 1981
debtors granted a security interest in all of their equipment and cattle
to Rainier National Bank.
3. The
Internal Revenue Service filed tax liens against debtors on
June 21, 1983
in the amount of $13,543.31 and
October 18, 1984
in the amount of $28,474.86. These liens were filed in the
Skagit
County
auditor's office, the county wherein the debtors resided and did
business.
4. The
United States
Department of Agriculture through its Agriculture Stabilization and
Conservation Service funded a Milk Diversion Program through which dairy
farmers received compensation by withdrawing all or a portion of their
herd from production.
5. Under the
Milk Diversion Program, producers were paid $10 for each one hundred
pounds of milk by which production is reduced. The payments were
intended to compensate producers for diminution in production and to
discourage the over-production of milk.
6. The Milk
Diversion Program began on
January 1, 1984
and continued through
March 31, 1985
. Payments were made quarterly as soon as the producer, at the end of a
quarter, verified his production and compliance with the program.
7. Debtors'
cattle have been sold and slaughtered with the proceeds remitted to
Rainier National Bank pursuant to its security interest. Because the
herd is out of production, debtor was eligible to participate in the
Milk Diversion Program.
8. By letter
dated
January 11, 1985
, the Internal Revenue Service wrote the ASCS requesting that any funds
due to debtors under the Milk Support Program be offset against debtors'
outstanding tax liability.
9. Rainier
National Bank then instituted this proceeding by filing its motion to
determine priorities.
Conclusions
of Law
1. This Court
has jurisdiction to resolve priorities in assets belonging to the
debtors. Bankruptcy Code, Section 105.
2. The general
rule is that pre-petition debts cannot be offset against post-petition
liabilities where mutuality is lacking. 15 Colliers on Bankruptcy,
Section 533.10; In re Braniff Airways, Inc., 42 B. R. 443, 449
(Bkr. Ct. N. D. Tex. 1984).
3. Mutuality
is present only if the claims and debts are mutual; they must subsist or
be owing between the same parties, in the same right or capacity, and
must be of the same kind or quality. In re Braniff Airways, supra
at 449; In re Whitman, 38 B. R. 395, 397 (Bkr. Ct. N. D. 1984).
4. Mutuality
is lacking where a post-petition liability is owed to a
debtor-in-possession or a trustee because these entities differ from the
pre-petition debtor. In re Braniff Airways, supra at 449, 450.
5. This is not
the case here, however, because debtors' petition was filed under
Chapter 7. Upon the filing of a Chapter 7 petition, an estate comes into
existence which contains all of the debtor's property and rights to
property. Section 541 of the Bankruptcy Code. The property is then to be
collected, liquidated and distributed to the creditors. Section 704(1)
of the Bankruptcy Code.
6. The
post-petition liability of the ASCS is to debtors, not to a trustee nor
to debtors as debtors-in-possession. Accordingly, because the estate is
not involved, mutuality of parties is present; the debtors incurred the
pre-petition tax liability to the United States and the United States
incurred a post-petition liability to the debtors. Setoff is therefore
proper.
7. An
independent basis for finding in favor of the United States is found in
26 U. S. C., Section 6323(c)(2)(B) (Internal Revenue Code). This section
provides that a pre-existing security interest in property acquired by a
debtor after the date such interest arises takes precedence over a
subsequently filed federal tax lien only to the extent the property came
into existence within 45 days of the date the tax lien was filed.
8. To the
extent that the Milk Diversion Program payments came into existence more
than 45 days after the tax liens were filed, the Internal Revenue
Service's interest is superior to Rainier's interest. Rice Inv. Co.
v. United States [80-2 USTC ¶9654], 625 F. 2d 565, 571 (5th Cir.
1980); Donald v. Madison Industries, Inc. [73-2 USTC ¶9623], 483
F. 2d 837, 841 (10th Cir. 1973).
9. Because the
tax liens were filed on
June 21, 1983
and
October 18, 1984
, they enjoy priority over the bank's security interest as to property
acquired after
August 5, 1983
(lien 1) and
December 12, 1984
(lien 2). The second tax lien has priority only insofar as the support
payments became due after
December 12, 1984
. Since the ASCS makes quarterly payments to farmers at the end of each
calendar quarter, the second tax lien would take priority over the
bank's security interest in program proceeds relating to the fourth
quarter of 1984 and the first quarter of 1985.
10. The
parties presented no evidence as to what effect, if any, the above
analysis has on recovery by
Rainier
of a portion of the proceeds. However, given the Court's disposition of
the setoff issue, any effect would be irrelevant.
11. The
Internal Revenue Code provides that tax liens encumbering real property
shall be filed in an office designated by the state in which the
property is situated or, if no office is designated, with the clerk of
the United States District Court. 26 U. S. C., Section 6323(f).
12.
Rainier
argues that the tax liens were filed in the wrong place because
Washington
has failed to designate an office for filing tax liens encumbering
personal property. The Court does not accept this argument.
13. In 1925,
the Washington Legislature designated the place for filing tax liens in
RCW Chapter 60.68. RCW 60.68.010 provides that tax liens shall be filed
in the county within which the property is located.
14. Chapter
60.68 was passed for the purpose of authorizing liens in accordance with
Section 3186 of the Revised Statutes of the
United States
, as amended on
March 14, 1913
. RCW 60.68.050. The Act of
March 14, 1913
provided that a tax lien attaches to "all property and rights to
property" belonging to a taxpayer. In 1928, the tax lien statute
was amended in several respects and, among other changes, now provided
that a tax lien attaches to "all property or rights to property,
whether real or personal, belonging to" a taxpayer. From this
background,
Rainier
argues that the federal tax liens in this case were filed in the wrong
place because the 1913 Act, referred to by the Washington Legislature,
did not refer to personal property.
15.
Rainier
's argument is correct, both the 1913 Act and the
Washington
State
law are meaningless because the 1913 Act refers to neither real nor
personal property. Instead the Act refers to "property." As
recognized by the Courts at the time, "property" meant both
realty and personalty. United States v. Western Union Telegraph Co.
[2 USTC ¶754], 50 F. 2d 102, 103 (2d Cir. 1931).
16. This
interpretation was accepted by Congress as well. Neither the House nor
Senate Reports relating to the 1928 amendments to Section 3186 refer to
the addition of the phrase "whether real or personal."
Although both reports discuss other changes in the tax lien statute,
neither comments on the modification of the term "property."
That neither report makes any mention of the phrase indicates that this
additional language effected no substantive change in law. See H. Rep.
No. 2, 70th Cong., 1st Sess. (1928) at 35; S. Rep. No. 960, 70th Cong.,
1st Sess. (1928) at 43.
17. For at
least 30 years both state and federal courts have interpreted RCW
60.68.010 as requiring that federal tax liens in Washington be filed in
the county recorder's office for both real and personal property. United
States v. Winterburn, 749 F. 2d 1283, 1286 (9th Cir. 1984); Hoare
v. United States [61-2 USTC ¶9681], 294 F. 2d 823, 825 (9th Cir.
1961); West Coast Credit Co. v. Renfro [58-2 USTC ¶9866], 167 F.
Supp. 480, 481 (W. D. Wash. 1958); Weir v. Corbett [58-1 USTC ¶9208],
158 F. Supp. 198, 200 (W. D. Wash. 1957); Johnson Service Co. v.
Roush [59-1 USTC ¶9239], 57 Wash. 2d 80, 355 P. 2d 815 (1960). See
also Comment, Federal Tax Liens, 32 Wash. L. Rev. 226 (1957).
18. The
Internal Revenue Service filed its tax liens in the county within which
debtors' property was located. This is precisely what Washington and
federal law provide.
19. Both the
lien and offset claims of the Internal Revenue Service have priority
over
Rainier
's security interest.
20. The ASCS
may pay whatever funds it holds for the benefit of debtors directly to
the Internal Revenue Service.
Rainier
's request for any other or contrary relief is denied.
Order
Based on the
files and records herein, a review of the evidence, the memoranda and
arguments of counsel and being fully advised, the Court orders and
adjudges as follows:
1. Rainier
National Bank's motion for an order granting it first priority in Milk
Diversion Program proceeds is denied;
2. The tax
liens of the Internal Revenue Service are entitled to priority over
Rainier National Bank's security interest;
3. The offset
claim of the Internal Revenue Service has priority over Rainier National
Bank's security interest;
4. The
Agricultural Stabilization and Conservation Service may pay the Internal
Revenue Service any funds due to debtors;
5. The
Internal Revenue Service tax liens were properly filed in accordance
with law; and
6. Each side
is to bear its own costs, fees and attorney's fees.
[86-1 USTC
¶9423] Hunter's Supply Company, Inc., Plaintiff v.
United States of America
, Defendant
U.S.
District Court, So.
Dist.
Ind.
, Indianapolis Div., IP 84-1554-C,
3/25/86
[Code Secs. 6323 and
7426 ]
Suits by nontaxpayers: Creditors: Tax liens: Priority: Security
interest.--IRS tax liens were entitled to priority over a creditor's
unperfected security interest in the assets of a delinquent taxpayer.
Thus, a wrongful levy action brought by the creditor was dismissed.
MEMORANDUM ENTRY
NOLAND,
District Judge:
This is an
action brought pursuant to Section
7426(a)(1) of the Internal Revenue Code, 26 U.S.C. §7426(a)(1)
. Plaintiff, Hunter's Supply Company, Inc. ("Hunter's
Supply"), contends the Internal Revenue Service wrongfully levied a
lien on assets belonging to Laut Sheet Metal, Inc. The United States has
moved for a dismissal or for a summary judgment. For the following
reasons, the Court dismisses the complaint.
I.
On
May 14, 1981
Hunter's Supply filed a financing statement with the Recorder of Marion
County, Indiana. This financing statement purported to give Hunter's
Supply a security interest in equipment owned by Laut Sheet Metal. The
security interest was not perfected, however, because the financing
statement should have been filed with the Secretary of State rather than
with the county recorder's office. Ind. Code §26
-1-9-401. On July 12, 1983 the IRS filed a Notice of Federal Tax
Lien with the Recorder of Marion County. This lien was for unpaid
employment tax liabilities of Laut Sheet Metal. The IRS subsequently
filed two more notices covering other unpaid employment tax liabilities
of Laut.
On January 6,
1984 the IRS served a Notice of Levy on Midwest Liquidators. Midwest
conducted a sale of Laut's assets on January 24. A day later Hunter's
Suppply's attorney contacted the IRS and informed it of the financing
statement. On February 27, 1984, Midwest Liquidators complied with the
Notice of Levy and distributed the net proceeds of the sale to the IRS.
The amount distributed was $11,128.10.
II.
At issue is
who is entitled to the proceeds from the sale of Laut Sheet Metal's
assets. Hunter's Supply argues that, even if its security interest was
not perfected, the IRS had actual knowledge of the financing statement.
Plaintiff, relying on Ind. Code §26
-1-9-401(2) 1,
contends that because of the IRS's actual knowledge Hunter's Supply had
a superior interest in the collateral.
The Court
agrees with the
United States
that, actual knowledge or not, Hunter's Supply was not the holder of
security interested entitled to priority over the federal tax liens.
Federal law governs the question of whether a security interest under
state law has priority over a federal tax lien. Aquilino v. United
States [60-2
USTC ¶9538 ], 363 U.S. 509 (1960). 26 U.S.C. §6321
creates a federal tax lien in favor of the government reaching all
of a delinquent taxpayer's property. The lien is "not valid as
against any purchaser, holder of a security interest, mechanic's lienor,
or judgment lien creditor" until proper notice is filed. 26 U.S.C. §6323(a)
. Under 26 U.S.C. §6323(h)(1)
a security interest exists when "the interest has become
protected under local law against a subsequent judgment lien arising out
of an unsecured obligation."
Id.
The Seventh Circuit has concluded that "protected . . . against a
subsequent judgment lien" is equivalent to being protected against
the "lien creditor" described in Section 9-301(3) of the UCC, Dragstrem
v. Obermeyer [77-1
USTC ¶9301 ], 549 F.2d 20 (7th Cir. 1977). The court in Dragstrem
then went on to hold that, to determine priority between a security
interest and a federal tax lien, a court should apply the
"hypothetical judgment lien creditor test." This test
"focuses on the state law protection afforded the security interest
against other hypothetical creditors. . . . [A] security interest primes
an unfiled federal tax lien only if the security interest is
protected under local law against any hypothetical judgment lien
creditor that might arise, whether or not the government has actual
knowledge of the security interest." Id. at 25-26
(citation omitted) (emphasis added).
In this case a
hypothetical lien creditor could have attached a judgment lien to the
property sold by Midwest Liquidators without actual knowledge of
plaintiff's improperly filed financing statement. Upon delivery of a
writ of execution to the sheriff a judgment creditor becomes a lien
creditor under Ind. Code §26
-1-9-301(3). Under Ind. Code §26
-1-9-301(1)(b), plaintiff's unperfected security interest would be
subordinate to the lien creditor. Thus, plaintiff's security interest
was not protected against a hypothetical judgment lien creditor, and
plaintiff was not a holder of a security interest under 26 U.S.C. §6323(a)
.
Accordingly,
the IRS tax liens were entitled to priority over plaintiff's unperfected
security interest. Hunter Supply has failed to state a claim upon which
relief can be granted, so this action is DISMISSED.
ORDER
This matter is
before the Court on the
United States of America
's "Motion to Dismiss or, Alternatively, for Summary Judgment in
Favor of Defendant," pursuant to Rules 12(b)(6) and 56 of the
Federal Rules of Civil Procedure. Plaintiff has also filed a motion for
summary judgment.
Whereupon the
Court, having considered the motion and the memoranda in support thereof
and in opposition thereto, and being duly advised in the premises,
hereby DISMISSES the case for failure to state a claim upon which relief
may be granted. Plaintiff's motion for summary judgment is DENIED.
IT IS SO
ORDERED.
1
This section states:
A filing which
is made in good faith in an improper place or not in all of the places
required by this section is nevertheless effective with regard to any
collateral as to which the filing complied with the requirements of IC
26-1-9 and is also effective with regard to collateral covered by the
financing statement against any person who has knowledge of the contents
of such financing statement.
[83-2 USTC
¶9487]First National Bank of
Valdosta
, a national banking corporation, Plaintiff v. J. Tom Elgin and The
United States of America
, Defendants
U.
S. District Court, No.
Dist.
Fla.
,
Tallahassee
Div., Case No. TCA 81-0919, 570 FSupp 849, 6/20/83
[Code Sec. 6323]
Lien for taxes: Priority: Security interest.--A bank's prior
security interest in an individual's limited partnership interest did
not take priority over a federal tax lien for which proper notice was
filed. Under
Florida
law, the bank was required to file a financing statement in order to
protect its interest against the conflicting claims of third parties.
The bank failed to take this step.
J. Marshall
Conrad, Ausley, McMullen, McGehee, Carothers, & Proctor, P. O. Box
391, Tallahassee, Fla. 32302, for plaintiff. Lyndia P. Kent, Assistant
United States Attorney, Tallahassee, Fla., Jane Juliano, Department of
Justice, Washington, D. C. 20530, for defendants.
Order
PAUL, District
Judge:
In June of
1981, the First National Bank of
Valdosta
filed suit in the Circuit Court of Leon County, Florida, against J. Tom
Elgin for collection a "consumer collateral" note executed by
Elgin
in favor of the bank. The Bank sought foreclosure on
Elgin
's interest in a
Florida
limited partnership which was offered as security for the note. The Bank
joined the
United States of
America
as a co-defendant because the Government had previously declared a tax
lien on
Elgin
's property, including the partnership interest. The United States was
successful in removing the suit from state court to this forum and filed
a cross-claim against Elgin and counterclaim against the Bank. Elgin
failed to plead, answer or defend the allegations contained in the
plaintiff's complaint or in the defendant's cross-claim. Consequently,
upon application by both parties, a default was entered against J. Tom
Elgin by the Clerk. (Docs 12-16)
The Bank and
the United States have stipulated to the material facts involved, filed
cross-motions for summary judgment and agree that the issues in this
litigation should be disposed of on the basis of summary judgment. The
salient legal question presented in this case is whether the Bank's
security interest in Elgin's limited partnership interest or the
Government's federal tax lien takes priority under the provisions of the
Internal Revenue Code, 26 U. S. C. A. §6323(a) (1967).
A resolution
of this issue requires a brief recitation of the pertinent facts. On
March 16, 1977, Elgin executed a "consumer collateral" note in
favor of the Bank in exchange for a $25,000 loan to finance Elgin's
purchase of a one-sixth interest in Commercial Industrial Development,
Ltd., a Florida limited partnership. As security for the loan,
Elgin
assigned to the Bank his interest in the partnership. The Bank, however,
did not perfect its security interest by filing a financing statement
with the Secretary of State of the State of Florida according to Fla.
Stat. Ann. §679.401 (West Supp. 1982)
On May 7,
1979, Elgin was assessed a penalty of $26,244.99 by the United States,
pursuant to 27 U. S. C. A. §6672 (1966), for the willful failure to
collect, account for and pay over to the United States certain
withholding and FICA taxes due on wages paid to the employees of Elgin
Construction Company, Inc., during the first two quarters of 1977. A
Notice of Federal Tax Lien was filed with the Clerk of the Circuit Court
in and for Leon County, Florida, on
September 5, 1979
. Later in October of that year, an officer of the Internal Revenue
Service served a Notice of Levy upon the general partner of Commerce
Industrial Development, Ltd.
On
September 10, 1979
,
Elgin
renewed his note in favor of the Bank and the security interest
thereunder. Yet despite this fact,
Elgin
is in default on the note with a remaining balance of $21,535.85, plus
interest accruing since
March 16, 1977
. In addition,
Elgin
has not paid his federal tax liabilities which total $26,244.99, plus
interest, statutory additions and costs. Both parties wish to satisfy
Elgin
's unpaid obligations from the debtor's limited partnership interest.
The question is which creditor has priority.
It is clear
that state law governs the nature of the taxpayer's interest in the
property subject to the lien, but the priority of competing liens is
determined by federal law. Aquilino v. United States [60-2 USTC
¶9538], 363
U. S.
509, 512 (1960). The taxpayer's one-sixth interest in the
Florida
limited partnership is personal property.
Fla.
Stat. Ann. §620.685 (West 1977). The Bank holds an unperfected security
interest in the partnership which attached as to the debtor in 1977.
Fla.
Stat. Ann. §679.204, 679.401(1)(c) (West 1977). The
United States
has a tax lien on all of
Elgin
's property, including the partnership interest, which arose at the time
of assessment in 1979, 26
U. S.
C. A. §6321 (1967), and was perfected upon proper notice. 26
U. S.
C. A. §6323(f)(2)(B) (1967).
Section 6321
of the Internal Revenue Code creates a federal tax lien in favor of the
Government reaching all of a delinquent taxpayer's property. However,
this lien is "not valid as against any purchaser, holder of a
security interest, mechanic's lienor, or judgment lien creditor"
until proper notice is filed. 26
U. S.
C. A. §6323(a). If proper notice is filed, as it was in this case, then
the resolution of the conflicting claims is controlled by the
traditional "first in time, first in right" principle. Urban
Indus., Inc. v. Thevis [82-1 USTC ¶9268], 670 F. 2d 981, 984 (11th
Cir. 1982). See United States v. City of New Britan [54-1 USTC ¶9191],
347
U. S.
81, 85 (1984).
Section
6323(h)(1) states that "[a] security interest exists at any time
(A) if at such time, the property is in existence and the interest
has become protected under local law against a subsequent judgment lien
arising out of an unsecured obligation, and (B) to the extent that,
at such time, the holder has parted with money or money's worth".
26
U. S.
C. A. §6323(h)(1) (1967) (emphasis added). The plaintiff interprets the
above underscored language to merely refer to a simple judgment creditor
who has not taken further steps to perfect his interest in specific
property. On the other hand, the defendant
United States
, contends that the emphasized language is equivalent to requiring the
holder of a security interest to have perfected that security interest
against a subsequent lien creditor.
Under the
Bank's theory, the Bank's security interest primes the Government's tax
lien because an unperfected security interest in a partnership has
priority over a subsequent judgment lien unless the judgment creditor
obtains a charging order.
Fla.
Stat. Ann. §679.301 (1966). See Krauth v. First Continental Dev-Con,
Inc., 351 So. 2d 1106, 1108 (Fla. 4th DCA 1977) ("statutory
charging order [is] the only means by which a judgment creditor can
legally command payment from the debtor's partnership interest"). Myrick
v. Second Nat'l Bank of
Clearwater
, 335 So. 2d 343 (Fla. 2d DCA 1976). Yet the Government's analysis
would subordinate the Bank's security interest to the federal tax lien
because an unperfected security is primed by a lien creditor without
knowledge of the security interest and before it is perfected.
Fla.
Stat. Ann. 679.301(1) (1966).
Florida
's version of the Uniform Commercial Code defines a lien creditor as
"a creditor who has acquired a lien on the property involved by
attachment, levy or the like."
Fla.
Stat. Ann. 679.301(2) (1966). Therefore, the Government's position
assumes that the "subsequent judgment lien" referred to in
section 6323(h)(1) was created by virtue of a charging order.
Recently, the
Fifth Circuit Court of Appeals noted that one of the primary
Congressional objectives of the Federal Tax Lien Act of 1966 was
"to conform the lien provisions of the Internal Revenue Code to the
concepts developed in the Uniform Commercial Code". Rice
Investment Co. v. United States [80-2 USTC ¶9654], 625 F. 2d 565,
569 (5th Cir. 1980). See S. Rep. No. 1708, 89th Cong., 2d Sess. 2
(1966). But despite this attempt the term "judgment lien",
which was added to section 6323 in 1966, is not found in the U. C. C.
"Notwithstanding this incongruity, Courts and commentators have
universally concluded that 'protected against a subsequent judgment
lien' is equivalent to being protected against the 'lien creditor'
described in Section 9-301(3) of the U. C. C. Dragstrem v. Obermeyer
[77-1 USTC ¶9301], 549 F. 2d 20, 25 (7th Cir. 1977). See also Asher
v. United States [78-1 USTC ¶9281], 570 F. 2d 682, 685 n. 6 (7th
Cir. 1978); Texas Oil & Gas Corp. v. United States [72-2 USTC
¶9653], 466 F. 2d 1040, 1048 n. 8, (5th Cir. 1972) cert. denied, 410 U.
S. 929 (1973); George W. Ultch Lumber Co. v. Hall Plastering, Inc.
[80-1 USTC ¶9396], 477 F. Supp. 1060, 1070 (D. Mo. 1979). But see Major
Electrical Supplies, Inc. v. J. W. Pettit Co. [77-1 USTC ¶9280],
427 F. Supp. 752 (M. D. Fla. 1977).
The Courts
which have concluded that "subsequent judgment lien" is
equivalent to a "lien creditor" have divided on determining
what the appropriate test is for establishing the relative priority of a
security interest and a federal tax lien. This schism stems from the
Code's requirement that the lien creditor be without knowledge of the
unperfected security at the time the lien arises. Some courts have
placed the Government in the shoes of a lien creditor. E.g., United
States v. Hunt [75-1 USTC ¶9327], 513 F. 2d 129 (10th Cir. 1975); United
States v. Ed Lusk Constr. Co. [74-2 USTC ¶9773], 504 F. 2d 328
(10th Cir. 1974); United States v. Trigg [72-2 USTC ¶9642], 465
F. 2d 1264 (8th Cir. 1972). Other courts, however, have developed the
"hypothetical judgment lien creditor test" to determine
priority. E.g., Dragstrem v. Obermeyer [77-1 USTC ¶9301], 549 F.
2d 20 (7th Cir. 1977). This test does not put the Government in the
shoes of a lien creditor, but creates a hypothetical one to avoid the
knowledge exception of section 9-301.
Knowledge, of
course, is not a material fact in this case. Therefore, under either
test the Government's federal tax lien has priority over the unperfected
security interest held by the Bank. "The better view is that a
protected security interest under §6323(h)(1) means a perfected
security interest under Article 9." George W. Ultch Lumber Co.
v. Hall Plastering, Inc., 477 F. Supp. at 1070. Under
Florida
law, the Bank was required to file a financing statement with the
Secretary of State to protect its interest against the conflicting
claims of third parties, including the
United States
. This the Bank failed to do.
Accordingly it
is ORDERED:
1. Plaintiff,
First National Bank's motion for default judgment against defendant J.
Tom Elgin is GRANTED.
2. Plaintiff,
First National Bank's motion for summary judgment against defendant
United States
is DENIED.
3.
Defendant
,
United States
' motion for default judgment on its cross claim against J. Tom Elgin is
GRANTED.
4.
Defendant
,
United States
' motion for summary judgment against plaintiff, First National Bank of
Valdosta
, is GRANTED.
5. Plaintiff,
First National Bank, is directed to prepare and present to the Court a
final judgment on its claim against defendant, J. Tom Elgin, reserving
jurisdiction to hear and determine costs.
6.
Defendant
,
United States
, is directed to prepare and present to the Court a final judgment on
its counterclaim against First National Bank and a judgment on its
cross-claim against J. Tom Elgin, reserving jurisdiction to hear and
determine costs.
[84-1 USTC
¶9112]New York City Transit Authority, Plaintiff v. Paradise Guard
Dogs, Inc.; Neil Pisane and Patricia Pisane; Public Improvements, Inc.,
Harvey Wessler, and Theresa Stucki; and Hastings Pavement Co., Inc.; and
the United States of America, Defendants
U.
S. District Court, East. Dist. N. Y., 82 C 2094, 565 FSupp 388,
4/28/83
[Code Secs. 6321 and 6323]
Lien for taxes: Priority: Other liens: State law.--A federal tax
lien had priority against other liens that, under state law, were
inchoate or had expired.
Rob
in Stevens, Richard Bernard,
370 Jay St.
,
Brooklyn
, N. Y., for plaintiff. Judith Levy, Levy and Levy, 160 Broadway, New
York, N. Y. 10038, for Pisane, Alan Levy, McDonough, Marcus, Cohn &
Tretter, 355 Lexington Ave., New York, N. Y. 10017, for Public
Improvements, Inc., Harvey Wessler and Theresa Stucki, Nicholas Miglino,
Stanley Possess, 217 Broadway, New York, N. Y. 10007, for Hastings
Pavement Co., Raymond J. Dearie, United States Attorney, Michael
Cavanagh, Assistant United States Attorney, Brooklyn, New York, for U.
S.
Memorandum
and Order
NICKERSON,
District Judge:
Plaintiff New
York City Transit Authority brought this interpleader action against
Paradise Guard Dogs, Inc. and various other parties in the state court.
The
United States
, which claimed a tax lien, was joined as a party defendant. The
United States
then removed the case to this court.
Thereafter the
parties stipulated that the New York City Transit Authority would pay
$10,875 to the Clerk of the Court to be held until disposition was
directed by this court. That sum represents the proceeds due to Paradise
Guard Dogs, Inc. under the terms of its contract with the New York City
Transit Authority. The
United States
now moves for judgment.
Paradise
owes numerous tax liabilities to the Internal Revenue Service, including
those set forth in a notice of tax lien under the Internal Revenue laws
amounting to $16,498.05. The notice was filed on
October 27, 1981
pursuant to 26
U. S.
C. §6323 and New York Lien Law §240. As as
January 11, 1983
the balance due on the assessments referred to in the notice, including
interest and penalties, was $15,159.19.
It is clear
that the United States has a "lien" for taxes within the
meaning of 26 U. S. C. §6321. Under 26
U. S.
C. §6323 the lien imposed by section 6321 is not valid against any
"judgment lien creditor until notice thereof" had been filed
meeting the requirements of subsection (f). The notice here met those
requirements.
Judgment
creditors Neil and Patricia Pisane claim priority against the
United States
based on the following facts. They obtained a judgment in
Supreme
Court
Kings
County
filed in the
Kings
County
clerk's office on
May 11, 1981
. The first execution was issued to the sheriff of
Westchester
County
on or about
May 19, 1981
. The sheriff made execution, but no money or property was found.
Thereafter on
September 28, 1981
an execution was mailed to the sheriff of
Bronx
County
. Again the execution failed to locate property.
The Pisanes
assert that since they served two executions, on
May 19, 1981
and
September 28, 1981
, both prior to the Internal Revenue Service filing of notice in October
of 1981, they are entitled to priority. It is true that under
New York
law the "lien" attaches by delivery of an execution to the
sheriff to all personal property then in the county or thereafter
acquired in the county by the judgment debtor during the life time of
the execution--here sixty days. However, the "lien" does not
extend beyond the return day of the execution unless a levy is made on
the personal property. 9 Carmody-Wait 2d §64:140 & n. 18. The
attorney for the judgment creditor may extend the life of the execution
for additional sixty-day periods. N. Y. C. P. L. R. §5230(c). To
prevail over a succeeding federal tax lien, a lien must be
"choate"; that is, the identity of the lienor, the property
subject to the lien, and the amount of the lien must be established.
See, e.g.,
United States
v. State of
Vermont
, 377
U. S.
351 (1964); Hartford Provision Co. v. United States [78-1 USTC ¶9392],
579 F. 2d 7, 9 & n. 1 (2d Cir. 1978).
The first
execution served by the Pisanes plainly could not create a lien against
the debt owed by plaintiff, since it was served on the sheriff of
Westchester
County
and was directed against a Barclays Bank account. Nor did the second
execution give notice sufficient to make plaintiff's debt subject to a
judgment lien. In any event, no judgment lien survives since no levy was
made before the return date of the execution.
Judgment
creditors Public Improvements, Inc., Harvey Wessler, and Theresa Stucki
also claim priority against the
United States
. Their attorney issued an execution dated
August 26, 1981
. It failed to identify the debt in question and it appears that no levy
was made during its life. These creditors also rely on a restraining
notice dated
September 9, 1981
, but such a notice creates no lien. Aspen Industries, Inc. v. Marine
Midland Bank, 52 N. Y. 2d 575, 439 N. Y. S. 2d 316, 421 N. E. 2d 808
(1981).
The Pisanes
argue that it is unfair to allow the
United States
to file once but require an individual creditor to take steps every
sixty days to keep alive his lien, even when the creditor knows of no
property of the debtor in existence. In the first instance, however, it
is state law that determines whether a judgment lien exists. See, e.g.,
Hartford Provision Co. v.
United States
, supra. And the law of
New York
requires the repetitive procedure to which the Pisanes object.
The money
deposited with the clerk is directed to be paid to the Internal Revenue
Service. So ordered.
[83-1 USTC
¶9126]Juan Sanchez and Maria Sanchez, Plaintiffs-Appellees v. The
United States of America
, Department of Treasury, Internal Revenue Service,
Defendants-Appellants and Sapperstein, Hochberg & Haberman Inc.,
Arismendy Carrero, Consolidated Insurance Companies, Jack Solomon, Ende
Refrigerator & Store Fixture Co., Inc., Joseph Victoria & Co.,
Assignee for the Benefit of Creditors, Condal Distributors, Inc.,
Vitarroz Corp., Angelo L. Ortiz, Goya Foods, Inc., and William G.
Emanuel & Sons, Inc., Defendants
(CA-2),
U. S. Court of Appeals, 2nd Circuit, Docket No. 82-6108, 696 F2d 213,
12/13/82
[Code Sec. 6323]
Tax lien: Priority: Security interest.--According to New York law
in effect in 1975, a Federal tax lien would take priority over a
security interest in the proceeds of a store with regard to an insurance
check paid for fire damage to store and its contents, since, under the
pre-1978 New York Uniform Commercial Code, casualty insurance payments
were not "proceeds" to which a security interest could attach.
Stanley R.
Reckler,
259 W. 14th St.
New York
, N. Y., for plaintiffs-appellees. John S. Martin, Jr., United States
Attorney, Susan Millington Compbell, Richard N. Papper, David M. Jones,
Assistant United States Attorneys,
New York
, N. Y. 10007, for defendants-appellees.
Before:
LUMBARD, MESKILL and CARDAMONE, Circuit Judges.
CARDAMONE,
Circuit Judge:
This appeal
presents a single issue: which party is entitled to $16,400 in fire
insurance proceeds--the sellers of real property damaged by fire who
took a security interest in the "proceeds" of the property
under the contract of sale, or the
United States
as tax lienor of the buyers? The law of
New York
clearly provides the government with a priority that, leaving sympathy
aside, we are obliged to effectuate.
I
The facts
giving rise to this action are undisputed. In 1975 Juan and Maria
Sanchez contracted to sell their
Manhattan
grocery store to Arismendy Carrero. At the closing the unpaid balance of
the purchase price was secured by an agreement giving the Sanchezes a
security interest in the store and "all proceeds thereof." The
security agreement obligated Carrero to maintain fire insurance on the
collateral and name the Sanchezes as mortgagees in Carrero's insurance
policy. In addition, the security agreement provided that "all sums
which may become payable under such insurance" were assigned to the
Sanchezes as additional security for indebtedness. In April 1975 the
Sanchezes filed a UCC-1 Financing Statement and a copy of the security
agreement with the New York County Register but failed to file a copy
with the New York Secretary of State. The Financing Statement recited
that the collateral was all the "personal property in and upon the
grocery store premises at 415
Amsterdam
Ave., N. Y. C." The "proceeds" box on the statement was
not checked.
On
December 12, 1975
a fire damaged the grocery store. Carrero hired the insurance adjustment
firm of Sapperstein, Hochberg & Haberman, Inc. (Sapperstein) to
negotiate a settlement with Consolidated Insurance Companies
(Consolidated), which had insured the store against fire. Carrero
ultimately accepted a settlement from Consolidated for $16,400. A check
in that amount, payable to Juan Sanchez, Sapperstein, Carrero and
various judgment creditors, was issued by Consolidated and delivered to
Sapperstein in September 1976. This check, held in escrow by Sapperatein
prior to commencement of the instant case constitutes the fund over
which the government and the Sanchezes both claim ownership.
The
government's claim against the fund is based upon federal income tax
deficiencies assessed against Arismendy and Yolanda Carrero on
January 5, 1976
for the 1974 taxable year. The government filed a Notice of Tax Lien
with the New York City Register on
May 13, 1976
and served on Sapperstein a Notice of Levy in the amount of $13,210.90
on
December 5, 1976
. The Sanchezes' claim to the check is based upon their purported
security interest in the fund as "proceeds" of the store.
In February
1979 Juan and Maria Sanchez commenced this action against the
United States
and other claimants to determine the respective parties' rights to the
$16,400. The government moved for partial summary judgment on the ground
that the Sanchezes' claim to the fund was not based on a perfected
security interest and that, therefore, the government's after-acquired
tax lien had priority. Specifically, the government argued that under
New York
law the insurance funds were not "proceeds" in which the
Sanchezes had a security interest. The government further contended that
the Sanchezes' failure to file the UCC-1 Financing Statement with
New York
's Secretary of State limited their perfected security interest to the
store fixtures.
Following a
brief hearing, Magistrate Sinclair rejected the government's principal
argument and concluded that the Sanchezes held a perfected security
interest in the insurance fund as "proceeds" of the store.
With respect to the scope of this security interest, however, the
Magistrate agreed with the government's secondary contention that the
Sanchezes' security interest was limited to the amount attributable to
lost store fixtures. Further, the Magistrate upheld Sapperstein's
undisputed right to be paid its adjuster's fee out of the fund. Thus, he
recommended that summary judgment be entered first in favor of
Sapperstein for its fees and second in favor of the Sanchezes for $7,769
attributable to the loss of store fixtures. The Magistrate then
recommended that the balance of the fund--$6,992--be awarded to the
United States on its tax lien, which he held was subordinate to the
Sanchezes' security interest in the fixtures. By order of January 21,
1982 the United States District Court for the Southern District of New
York, Broderick, J., adopted the Magistrate's Report and Recommendation
and entered judgment accordingly.
II
On appeal the
Untied States and the Sanchezes both agree that the sole issue before
us--whether or not the insurance fund was "proceeds"--must be
determined under the law of New York, where the purported security
interest arose. See PPG Industries, Inc. v. Hartford Fire Insurance
Co. [76-1 USTC ¶9257], 531 F. 2d 58, 60-61 (2d Cir. 1976); I. R. C.
§6323(h)(1) (1976). The insurance fund here in dispute was created in
1976. In 1977 the State Legislature of New York amended New York Uniform
Commercial Code (N. Y. U. C. C.) section 9-306 to provide explicitly
that payments of insurance benefits are "proceeds" to which a
security interest may attach. The effective date of this amendment,
however, was postponed until July 2, 1978. Before any
New York
court addressed the issue of whether insurance funds which came into
being prior to the 1978 effective date of the amendment could be
considered "proceeds", the
PPG Court
predicted that the state courts would find such payments to be
"proceeds" under pre-1978
New York
law. See 531 F. 2d at 61. The Magistrate relied upon PPG in
holding that the 1976 insurance payment by Continental was
"proceeds" in which the Sanchezes had a valid security
interest. In relying upon PPG the Magistrate obviously did not
consider himself bound by the contrary decision of the New York Court of
Appeals in First National Bank of Highland v. Merchant's Mutual
Insurance Co., 49 N. Y. 2d 725 (1980).
In First
National the plaintiff bank held a perfected security interest in
the debtors' automobile. See First National Bank of Highland v.
Merchants Mutual Insurance Co., 65 A. D. 2d 59, 60 (3d Dep't 1978), rev'd,
49 N. Y. 2d 725 (1980). After the automobile was destoryed in a
collision, the defendant insurance company sent to the debtors a check
in satisfaction of their claim under an automobile insurance policy
issued in their names. Because the debtors had failed to name the bank
as loss payee as required by their contract with the bank, the bank sued
the insurance company for conversion of the proceeds arising from the
loss of the automobile. Expressly relying upon our decision in PPG,
the Appellate Division, Third Department, of the New York State Supreme
Court held that the pre-1978 payment under the casualty insurance policy
constituted Article 9 "proceeds". This gave the bank a
perfected security interest in the insurance check.
Two justices
dissented. In concluding that pre-1978 insurance payments were not
"proceeds" they first reasoned that such funds were in fact
statutorily excluded from Article 9 coverage by N. Y. U. C. C. §9-104(g),
which provides that the Article does not apply "to a transfer of an
interest or claim in or under any policy of insurance."
Id.
at 61-62. The dissenter's [sic] [dissenters] further concluded that the
1977 amendment of N. Y. U. C. C. §9-306 to include insurance payments
within the definition of "proceeds" did not apply
retroactively to funds paid prior to
July 2, 1978
.
Id.
at 62. The dissenting justices also stated that inclusion of pre-1978
insurance payments within the definition of "proceeds" would
burden insurance companies with the task of discovering--prior to
settling a casualty claim--whether there were any outstanding security
interests in the damaged property.
Id.
This burden, they stated, was not mandated by the Legislature.
Id.
On appeal to
the New York Court of Appeals, that court reversed the Appellate
Division majority "for the reasons stated in the dissenting
opinion." First National, 49 N. Y. 2d at 726. Thus, the
Court of Appeals effectually held that pre-1978 casualty insurance
payments were not "proceeds" subject to a security interest in
the damaged collateral. See Donnelly & Donnelly, 1980 Survey of
New York
Law--Commercial Law, 32
Syracuse
L. Rev. 156, (1981).
To comply with
the principle of comity which undergirds our federal system, we are
obligated to give full effect to decisions of
New York
's highest court on issues involving the application of
New York
law. See Erie Railroad Co. v. Tompkins, 304
U. S.
64, 78 (1938). Since First National held that pre-1978 insurance
payments are not "proceeds" under Article 9 of the N. Y. U. C.
C., the Magistrate and district court erred in adopting a contrary view
of New York Law.
The Sanchezes
argue that First National is distinguishable from the present
case and therefore not controlling. They assert that the New York Court
of Appeal's decision in First National was based entirely upon
that portion of the dissent which urged that
New York
's legislature did not intend to require insurers, at the risk of paying
double claims, to check for security interest filings on damaged
collateral. Since the insurer in the present case, Consolidated, was
notified of the Sanchezes' security interest and not exposed to any
potential double liability, plaintiffs assert that the single rationale
underlying First National is inapposite here. They contend that First
National should be confirmed to cases involving disputes between
secured parties and insurance companies.
This argument
is unpersuasive for two reasons. First, the New York Court of Appeals in
First National held that pre-1978 insurance payments were not
Article 9 "proceeds" for the "reasons" (plural)
stated in the dissenting opinion. 49 N. Y. 2d at 726. We have no basis
upon which to conclude that the court adopted only one of the
dissenters' reasons, and did not adopt their first conclusion that N. Y.
U. C. C. §9-104 excluded insurance payments from Article 9 coverage.
Had
New York
's highest court desired to limit its adoption of the dissenting view in
the Appellate Division simply to one of the rationales there expressed,
it could readily have done so. Second, plaintiffs interpretation of First
National would result in the curious rule that under
New York
law pre-1978 insurance payments are Article 9 "proceeds" in
disputes between two secured parties, but not "proceeds" in
similar disputes involving an insurance company and a secured party.
This unsupportable distinction finds no basis in the Uniform Commercial
Code and we see nothing in either the New York Court of Appeal's
decision or the Appellate Division dissent to suggest that
New York
's highest court intended to adopt any such anomalous rule.
The order of
priority among competing liens "depend[s] on the time [they]
attached to the property in question and became choate." See United
States v. City of New Britain [54-1 USTC ¶9191], 347
U. S.
81, 86 (1954). Given the fact that the 1976 fire insurance check is not
Article 9 "proceeds" to which a security interest may attach
under New York law, the government's tax lien clearly takes priority
over the Sanchezes' inchoate interest in the check. Thus the government
is entitled to the full amount of the check, less the amount which the
court below properly awarded to Sapperstein.
The district
court's order granting summary judgment in favor of the Sanchezes
against the government is reversed and the case is remanded to the
district court with instructions to enter summary judgment in favor of
the
United States
in accordance with this opinion.
[81-1 USTC
¶9336]James S. Minges, Debtor, Harold P. Missal, Trustee v.
United States of America
, et al.
U.
S. District Court,
Dist.
Conn.
, Civil No. H-75-186, 3/30/81
[Code Secs. 6321 and 7426]
Suits by non-taxpayers: Wrongful levy: Lien for taxes: Validity and
priority against third parties: Property owner.--Goods seized to
satisfy a tax lien belonged to the taxpayer, a construction company, and
not the plaintiff and were not wrongfully seized even though they had
been paid for with funds provided by the plaintiff. In an action for
wrongful levy in which property in the possession of a taxpayer has been
seized by the government, a person claiming ownership must prove his
interest in the property. In this case, goods were purchased by the
taxpayer pursuant to a contract between it and the plaintiff and the
intent of the parties was that they would belong to the taxpayer. The
bank which provided the plaintiff with funds he used to pay for the
property failed to obtain a security interest in the goods and the fact
that the plaintiff provided the funds for their purchase was not proof
of his ownership. No resulting trust arose in favor of the plaintiff
because the contract between him and the taxpayer was supported by
consideration since it required the taxpayer to perform numerous duties
in exchange for a pre-determined price. The contract contemplated that
the taxpayer would have the authority of an independent contractor and
it did not act merely as an agent since the plaintiff did not supervise
the purchases or even attempt to interfere with the taxpayer's
authority.
David J.
Markowitz, Nathan & Clayman, 57 Wintonbury Mall, Bloomfield, Conn.
06002, for James Minges, Martin Gould, Gould, Killian & Wynne, 37
Lewis St., Hartford, Conn. 06103, for Harold Missal, John Nolan, Day,
Berry, and Howard, One Constitutional Plaza, Hartford, Conn., 06103, for
Wachovia Mortgage Co. Vincent James Ferraro, Department of Justice,
Washington, D. C. 20530, for U. S.
Memorandum
of Decision
BLUMENFELD,
Senior Judge:
This case
arises from the bankruptcy of James Minges, an enterpreneur who became
financially overextended during his attempt to construct a residential
project in
Farmington
,
Connecticut
. The action was brought by Minges' Trustee in Bankruptcy to determine
the validity of two competing liens on personalty destined for
incorporation into the buildings under construction. One, a tax lien, is
held by the United States Government. The other is held by the Wachovia
Mortgage Co. Wachovia has filed a counterclaim against the Trustee and a
cross-claim against the Government. The case originated in Bankruptcy
Court but was transferred to this court pursuant to Bankruptcy Rule
915(b) because district courts have exclusive jurisdiction to hear
third-party challenges against a levy made under a tax lien. I. R. C. §7426.
The property in dispute has been sold and the proceeds deposited in the
Clerk's Registry.
I.
Factual Overview
Minges, doing
business as the Talcott Village Co., undertook the construction of a
residential project. He conducted the project in a not uncommon manner.
He first acquired a suitable piece of land and entered into a
construction loan agreement with Wachovia in the amount of $4,250,000.
The loan agreement provided that Minges would enter into a contract with
a general contractor that would be acceptable to Wachovia and approved
by it. The mortgage provided for the usual stage payments to be made on
requisitions supported by an architect's certification. In addition to
the land as security, the agreement provided that in the event of
default, Wachovia may "at its option, take possession of the
premises and all materials, tools, machinery and other equipment on the
premises, or in possession of the Borrower, or being used in connection
with and in the construction of the Improvements . . .."
Minges entered
into an agreement with a general contractor as his mortgage required.
The general contractor was Talcott Village Construction Co., a company
that Minges organized to do the actual construction of his project.
Unfortunately, the Talcott Village Construction Co. failed to meet its
tax obligations, and the Internal Revenue Service filed a tax lien
against it. On
November 1, 1974
the Internal Revenue Service seized appliances, fixtures and other
materials to be installed during the last stages of construction. The
goods were seized from a storage area ("the Mill"),
apartments, and a warehouse to which some had been moved by Wachovia in
an effort to protect its security interest.
The Trustee
claims that the property covered by the Government's tax lien belonged
to Minges, doing business as the Talcott Village Co., and not to the
taxpayer construction company. He thereby attacks the validity of the
Government's lien. Wachovia also claims that the property belonged to
Minges and that its security interest covers the property. The dispute
between Minges and Wachovia is being handled before the Bankruptcy
Court. This court conducted a hearing to resolve the dispute of Minges
and Wachovia with the Government.
II.
Tax Liens
A. Third-Party
Attacks. Section 6321 of the Internal Revenue Code provides that
when a taxpayer "neglects or refuses" to pay taxes due,
"the amount . . . shall be a lien in favor of the United States
upon all property and rights to property, whether real or personal,
belonging to such persons." Section 7426 of the Internal Revenue
Code allows persons other than the taxpayer who claim an interest in
property that has been levied on pursuant to a tax lien to sue the
United States
for recovery. Whether the taxpayer had a property interest in the goods
seized is determined by state law. Aquilino v.
United States
, 363
U. S.
509, 512-13 (1960).
Wachovia does
not claim to have a security interest in the taxpayer construction
company's property, and no possible security interest could attach to
any property not acquired by Minges. See Conn. Gen. Stat. Ann. §42a-9-203
(1980 Cum. Supp.). If Minges never acquired rights to the property
seized, Wachovia's interest would not be protected under section 203 and
therefore not valid against a tax lien. I. R. C. §6323(c)(1)(B); see In
re Rosenberg's Will, 62 Misc. 2d 12, --, 308 N. Y. S. 2d 51, 59-60 (
Sur. Ct.
1970). Neither the Trustee nor Wachovia, therefore, can prevail against
the Government unless Talcott Village Construction Co. did not have a
property interest recognized by
Connecticut
law in the goods that were seized.
B. Burden
of Proof. Before turning to the merits, the court will consider the
burden of proof. Several courts have stated that a section 7426
plaintiff must prove that he owns the property that was seized, e.g.,
Richardson v. United States, 79-2 USTC ¶9693, 45 A. F. T. R. 2d
80-310, Lexis p. 4 (N. D. Ga. 1979); Rabinof v. United States
[71-2 USTC ¶9601], 329 F. Supp. 830, 843 (S. D. N. Y. 1971), while
others have stated that the Government must prove the taxpayer's
ownership, e.g., Flores v. United States [77-2 USTC ¶9380], 551
F. 2d 1169, 1175 (9th Cir. 1977); United States v. Stock Yards Bank
[56-1 USTC ¶9418], 231 F. 2d 628, 630-31 (6th Cir. 1956) (Stewart, J.,
as Circuit Judge); United States v. Herzfeld, 271 F. Supp. 185,
189 (S. D. N. Y. 1976). In most situations, the plaintiff has the burden
of proving his case, so it is not exceptional to expect a plaintiff
attacking a tax levy to prove that the property was his own. In the
wrongful levy cases cited above that placed the burden of proof on the
Government, the property seized was not in the taxpayer's possession.
Flores
, 551 F. 2d at 1171 (bail bondsman); Stock Yards Bank, 231
F. 2d at 629 (bank); Herzfeld [67-2 USTC ¶9574], 271 F. Supp. at
186 (police property clerk). This factual element is essential to the
rationale justifying placing the burden on the Government:
Were
[the burden not on the Government], the taxes of a California resident
could be collected from a totally unrelated person in New York, and the
New Yorker would be forced to prove a negative fact about which he has
absolutely no information, i. e., that the Californian has no
interest in his [the New Yorker's] property.
Flores
at 1175 (footnote omitted). However, the
court took pains to note a distinction:
We
are not here faced with a situation in which the Government demonstrates
a nexus between the taxpayer and the property by a preponderance of the
evidence, but the plaintiff makes a claim to the property derivatively
from the taxpayer, through gift or otherwise. Obviously, that situation
is different from the present case, and our holding is limited to a
requirement that the Government trace the property to the
taxpayer.
Id.
at 1176 n. 8.
This
distinction was noted by a district court faced with a situation like
the present case, in which the property in question was seized from the
taxpayer itself while a third party claimed ownership.
Richardson
v. United States, 79-2 USTC ¶9693, 45 A. F. T. R. 2d 80-310,
Lexis pp. 4-5 (N. D. Ga. 1979). In
Richardson
, property was seized from a safe in the taxpayer's home but was
claimed by the taxpayer's daughter in a section 7426 action.
Id.
, Lexis p. 2. The court applied the general rule that the
plaintiff bears the burden of proof and that "[o]wnership must be
shown by the preponderance of the evidence."
Id.
, Lexis p. 4. Cf. United States v. Clinton [66-2 USTC ¶9625],
260 F. Supp. 84, 88 (S. D. N. Y. 1966) (government benefits from
presumption that property in possession of taxpayer belongs to
taxpayer). But see Church of Hakeem, Inc. v. United States, 79-2
USTC ¶9651, 44 A. F. T. R. 2d 79-5834 (N. D. Cal. 1979) (
Flores
rule applied in wrongful levy suit brought by third party who was not in
possession of the property seized). In the present case, since the
property was seized from the taxpayer and not from a third party, the
plaintiffs must prove their ownership, since the
Flores
rule is inapplicable because the required nexus between the property and
the taxpayer is evident from the taxpayer's possession.
III.
Ownership of the Seized Goods
I turn then to
the issue of whether the goods seized were the property of the taxpayer
Talcott Village Construction Co. The non-government parties concede that
the goods were in the possession of the construction company, 1
but claim that they belonged to Minges, doing business as Talcott
Village Co., because Minges had paid for them. They rely on the theories
of resulting and agency trusts. The Government contends that the
construction company paid for the goods and that even if some of the
goods were paid for directly by Minges or Wachovia for delivery to the
construction company, they were still the property of the construction
company.
A. The
Parties' Intentions. The responsibilities of the construction
company, including the furnishing of materials, were specified in a
contract between the construction company (Contractor) and Talcott
Village Co. (Owner). The contract provides in pertinent part that:
THE
CONTRACTOR AGREES to perform all construction, site work and
landscaping work of the PROJECT . . ..
THE
CONTRACTOR AGREES to furnish all the necessary labor, material,
equipment, tools, sub-contracts necessary to perform and complete in a
workmanlike manner all work required for the construction of The Project
in strict compliance with the Contract Documents herein mentioned, which
are hereby made a part of the Contract.
The
responsibilities of the Owner--Minges, doing business as Talcott Village
Co.--for paying the construction company were also outlined in the
contract:
THE OWNER
AGREES to pay, and the Contractor agrees to accept, in full payment for
the performance of this Contract, the Contract amount of: Three
Million forty-six thousand one hundred Dollars ($3,046,100)
in accordance with the provisions of the Contract Documents.
a.
Progress Payments will be made in accordance with the Information for
Bidders.
The
Information for Bidders was incorporated into the contract. It provided:
PAYMENTS:
On or about the fifth day of each calendar month the Sub Contractor
shall render to the Talcott Village Construction Co. an invoice in
duplicate for the value of Work completed to date, ten per cent (10%) to
be retained until the project is complete, such invoices shall be in
form and detail satisfactory to Owner, and shall be subject to Owner's
approval as to the amount and per cent of work completed to the date of
such invoices. Within ten (10) days after receipt of such invoices,
Owner shall pay the approved amounts stated on such invoices to the Sub
Contractor, provided, however, that the total of such monthly payments
shall not exceed ninety per cent (90%) of the total contract price.
The contract
between Minges and the construction company did not specify how the
construction company itself would be paid or reimbursed for the cost of
supplies. The testimony and documents introduced at trial, however,
demonstrate the procedure that was followed during the course of the
project. The taxpayer--Talcott Village Construction Co.--ordered and was
billed for supplies in its own name. See e.g., exhibit 17. The
construction company, through its President, Ernest Johnson, dealt
directly with suppliers to negotiate purchase terms. The construction
company's funds, however, were obtained from Minges through his
financing arrangement with Wachovia. The construction company submitted
Applications for Payment to Minges, listing work performed to date.
Minges then submitted appropriate "Development Cost Disbursement
Applications" to Wachovia. According to James Minges' trial and
deposition testimony, the funds obtained from Wachovia were, at the
start of the project, disbursed to the construction company for payment
to suppliers. Later, when the project encountered financial
difficulties, Wachovia paid suppliers directly because it feared that
unpaid vendors would file mechanics liens that would threaten Wachovia's
own security interest. Although the transactions with suppliers were not
documented at trial by checks, it is evident that purchasing in the
sense of ordering and receiving supplies was done by the construction
company while the transactions were financed by Minges through Wachovia.
Direct payment to vendors was made, apparently, by all these parties at
various stages of the project.
The Government
describes the above procedure as purchase of supplies by the taxpayer
construction company and payment by Minges of requisitions for progress
payments, as contemplated by the section of the contract quoted
previously relating to payment of sub-contractors. Wachovia and the
Trustee describe the procedure as payment by Minges for supplies that
were delivered to the construction company. 2
These differences are immaterial; it is evident that the taxpayer
construction company's purchases were paid out of stage payments
received from Minges, pursuant to the construction company's contractual
duty to "furnish all the necessary labor, material . . . required
for the construction of The Project . . .."
The Third
Circuit was faced with an analogous situation in Fine Fashions, Inc.
v. Gross [61-1 USTC ¶9479], 290 F. 2d 871 (3d Cir.), cert.
denied, 368
U. S.
896 (1961). In that case, the government seized cloth in the possession
of the taxpayer, Penn Garment Co., that had been paid for by Fine
Fashions, another clothing manufacturer which did business with the
taxpayer.
Id.
at 872-73. Fine Fashions challenged the seizure claiming that the cloth
belonged to itself.
Id.
at 872. The genesis of the transaction between Fine and Penn was Penn's
procurement of a contract to supply nurses' uniforms to the government.
Penn was unable to obtain the necessary cloth on its own credit.
Id.
Fine agreed to obtain the cloth for Penn, as an accommodation in order
to maintain its good will in business.
Id.
Fine was to pay for the cloth with money paid by the government when the
uniforms were received.
Id.
at 873. This was to be accomplished by Penn turning its government
account over to a factor, which in turn was to forward money received
from the government to Fine, for payment to the cloth manufacturer.
Id.
As it turned out, Fine was forced to pay for the cloth, in part, with
its own funds.
Id.
at 876 (dissenting opinion). The court upheld the trial court's finding
that `[t]he true intent of the parties was that Fine Fashions, Inc.
would pledge its credit rating to guarantee payment for the cloth and
that title would vest in Penn Garment Company,'" and thus held that
the property was Penn's. A dissenting judge, interpreting the
relationship between the parties differently, would have held that Penn
was only a consignee with no property interest in the cloth.
Id.
at 878-79 (dissenting opinion).
Fine
Fashions is of interest not for its interpretation of the business
relationship between the parties, but as an example of a court looking
to the substance of a transaction to determine the issue of property
ownership for tax purposes. Neither the majority nor the dissent
considered Fine's payment for the cloth determinative. Both opinions
recognized that the issue of who owned the property could be determined
only by looking to all indicia of the parties' intent.
In the present
case, the intent of the parties is clear. Talcott Village Construction
Co. was established as a separate company for the purpose of
constructing Minges' project. The company's affairs were conducted
separately from the affairs of Minges, doing business as Talcott Village
Co.; the construction company hired its own employees, issued its own
stock and paid (or failed to pay) its own taxes. Mr. Minges testified at
his deposition that during the course of construction, all involved
considered the supplies purchased by the construction company to be the
construction company's property. This was corroborated by the testimony
of the Internal Revenue agent who seized the property that both Mr. and
Mrs. Minges told him the goods belonged to the construction company.
Not having a
security interest in the property of the construction company, even
though funds provided by Wachovia paid for its purchases, the Trustee
and Wachovia now argue that those payments presumptively prove
ownership. They rely on the doctrines of resulting and agency trusts to
establish the ownership of the property seized in Minges. 3
To succeed under either theory, however, the court would have to
disregard the parties' original intent to maintain the taxpayer as a
separate legal entity with full rights as such.
B. Resulting
Trusts. Briefly, the resulting trust doctrine provides "that
normally the payor of the purchase price of property is entitled to be
deemed the beneficiary of a trust when the conveyance was absolute and
was made to another with the consent of the payor." G. G. Bogert
& Bogert, The Law of Trusts and Trustees §454 at 626 (1977)
(footnote omitted). The inference that the payor intended to retain
title is rebuttable.
Id.
at 634-38. The doctrine is recognized in
Connecticut
. See Walter v. Home National Bank & Trust Co., 148 Conn.
635, 638, 173 A. 2d 503, 505-05 (1961).
The primary
function of the resulting trust doctrine is to support an inference of
intent by a payor to retain title rather than to make a gift. See G. G.
Bogert & G. T. Bogert, The Law of Trusts and Trustees §454
at 625-29 (1977). The Trustee and Wachovia have not cited any cases in
which the doctrine was applied when payments were made pursuant to an
ordinary contract providing for rights and obligations of both parties.
Unlike the typical resulting trust case, in which a party appears to
have received goods paid for by another consideration, the payment of
Talcott Village Construction Co. by Minges through Wachovia was pursuant
to a contract requiring the construction company to perform numerous
duties including, but not limited to, furnishing supplies and requiring
Minges to pay a predetermined contract price. Whether the resulting
trust doctrine is simply inapplicable to such a situation or whether the
intentions of the parties rebut an inference of ownership that arises
from the payments is immaterial. The contract clearly defines the
relationship between Minges and the construction company, and there was
no evidence that the parties' actual practice departed from what was
contemplated.
C. Agency.
The court's finding that Talcott Village Construction Co. was
established and acted as a separate company to perform construction work
pursuant to contract is also dispositive of a second argument advanced
by the Trustee and Wachovia, that the construction company was Minges'
agent so that property acquired by the construction company was held in
trust for Minges. The principal support for this position is a provision
of the contract:
All work shall
be done under the general supervision of the Owner. The Owner shall
decide any and all questions which may arise as to the quality and
acceptability of materials furnished, work performed, rate of progress
of work, interpretation of Drawings and Specifications and all questions
as to the acceptable fulfillment of the Contract on the part of the
Contractor for The Project.
The
distinction between employment and independent contract is based on a
principal's "right to direct what should be done and when and how
it should be done--the right to the general control." Bieluczyk
v. Crown Petroleum Corp., 134
Conn.
461, 465, 58 A. 2d 380, 383 (1948). The right to control, not the actual
exercise of control, is determinative. Kaliszewski v. Weathermaster
ALSCO Corp., 148
Conn.
624, 629, 173 A. 2d 497, 500 (1961). A principal's or employer's right
to control is distinguished from a prime contractor's right to approve
or reject the final result. See
S. Williston
, 9 A Treatise on the Law of Contracts §1012A at 22-23 (3d ed.
1967). Two parties may maintain both an agency relationship and an
independent contract relationship with respect to different aspects of a
job. Spring v. Constantino, 168
Conn.
563, 574, 362 A. 2d 871, 878 (1975). Whether or not an agency
relationship has been established depends, ultimately, on the intent of
the parties. See Wilbur Smith & Assoc., Inc. v. F & J, Inc.,
34
Conn.
Supp. 638, --, 382 A. 2d 541, 543 (Super.
Ct.
1977).
Despite the
contract language quoted above, it is clear that the construction
company was not merely a purchasing agent for Minges. The contract price
did not depend on the actual amount expended for materials, etc., but
was fixed in advance. Minges retained authority to reject materials but
did not retain authority to supervise purchases. The contract
contemplated that the construction company would have the authority of
an independent contractor with respect to purchases, and there is no
evidence that this authority was not exercised or that Minges even
attempted to interfere with its exercise.
The Trustee
and Wachovia argue that equitable considerations require treating the
construction company as an agent because third parties such as Wachovia
would have believed that it was acting for Minges. There is nothing in
the record to suggest, however, that the relationship between Minges and
the construction company was not fully known to Wachovia. In fact, a
condition of Wachovia's loan was approval by Wachovia of any contract
between Minges and a general contractor. Ex. 11, Building Loan Agreement
¶16(C).
IV.
Conclusion
Wachovia and
the Trustee have not met their burden of proving that the taxpayer,
Talcott Village Construction Co., did not have an ownership interest in
the property covered by the tax lien. The relief requested by the
Trustee and Wachovia against the
United States
is therefore denied. Judgment shall enter in favor of the
United States
on both the original claim by the Trustee of James Minges and on the
crossclaim by Wachovia Mortgage Co.
So Ordered.
1
Wachovia and the Trustee have not argued that the property was in the
possession of Minges. They have only argued that the construction
company had no ownership interest because it held the property in trust
for Minges. At trial, the Internal Revenue agent who executed the tax
lien testified that the goods were seized from a storage site ("the
Mill"), apartments and a warehouse to which some had been moved by
Wachovia in an effort to protect its security interest. The goods seized
from apartments had not been affixed. There is no indication, therefore,
that all the goods seized were not still in the possession of the
construction company. That Wachovia seized goods in the possession of
the construction company did not, of course, give Minges any property
interest in the goods that the Trustee or Wachovia can rely on now.
2
Whatever merit there may be in this argument is torpedoed by the fact
that the evidence showed that checks issued were made payable jointly to
the supplier and the taxpayer.
3
The Trustee and Wachovia have not argued that the construction company
was merely an alter ego of Minges. Minges testified that he
"organized" the construction company, and his wife was the
sole shareholder. A corporate entity is not disregarded except in cases
of fraud or subterfuge. See generally W. Fletcher, Cyclopedia of the
Law of Private Corporations §§ 41, 41.1 (1974 & 1980 Cum.
Supp.).
[81-1 USTC
¶9163]
Rob
ert E. Dever, Trustee, Plaintiff v. United States of America, and The
Portsmouth Banking Company, Defendants
U.
S. District Court, So. Dist.
Ohio
, West. Div., No. C-1-79-711, 12/31/80
[Code Secs. 6321, 6322, and 6323]
Assessments: Lien for taxes: Period of lien: Validity and priority
against third party: Unperfected security interest: After acquired
property.--It was determined in this interpleader action that a
federal tax lien, arising from an April 4, 1977 assessment for unpaid
1974 income taxes and recorded on December 2, 1977, had priority over
the taxpayer's assignment, on August 26, 1977, to a bank of money to be
received from a corporation under a sales agreement as security for a
loan. The assignment was not prohibited by
Ohio
law because it was an assignment of sales commissions to be received by
the taxpayer as deferred compensation for the taxpayer's transfer of
stock in a merger, and was not an assignment of compensation received by
the taxpayer as an employee. However, the assignment of the interest in
the sales commission agreement was not recorded by the bank and thus was
an unperfected security interest under Article 9 of the Uniform
Commercial Code under
Ohio
law. The federal tax lien attached to the taxpayer's property interest
in the sales commissions and attached to the commissions when they came
into existence because federal tax liens attach to after-acquired
property. The federal lien was entitled to priority because the bank's
assignment did not create a security interest in the commissions under
§6323(h)(1) because the commissions were not in existence at the time
of assignment for security and the bank's interest was not protected
under Ohio law against subsequent judgment liens because the financing
statement was not filed in order to perfect the security agreement. The
plaintiff, a trustee holding such sales commissions amounts, was ordered
to deposit such amounts with the court to be paid to the IRS.
Rob
ert E. Dever, 325 Masonic Bldg., Portsmouth, Ohio 45662, pro se. John J.
Cruze, Assistant United States Attorney, Cincinnati, Ohio 45202,
Jonathan B. Forman, Department of Justice, Washington, D. C. 20530, for
defendants.
Findings
of Fact, Conclusions of Law, and Order
SPIEGEL,
District Judge:
This is an
interpleader action originally filed in the Scioto County, Ohio
Common Pleas Court
. The
United States
had the action removed to this Court. The Court has jurisdiction under
28
U. S.
C. §2410.
The plaintiff,
as trustee, is in possession of money received by him on behalf of Glenn
E. Graham from the General Exploration Company. The Portsmouth Banking
Company claims these funds as a result of an
August 26, 1977
assignment to it by Glenn E. Graham, for the purpose of securing a loan,
of money due him under a "sales commission agreement" with
General Exploration Company. The
United States of America
, through its Internal Revenue Service, also claims the funds by virtue
of an
April 4, 1977
assessment for unpaid 1974 income taxes against Glenn E. Graham and Anna
L. Graham and the tax lien arising from that assessment.
