Security Interest Page3

---

 

[96-2 USTC ¶50,694] The Twin City Bank, Plaintiff v. United States of America , Defendant

U.S. District Court, East. Dist. Ark. , West. Div., Civ. LR-C-95-678, 7/11/96

[Code Secs. 6323 and 7426 ]

Validity of lien: Security interest: Civil actions: Creditor.--The IRS wrongfully levied on funds owed by a school district to a contracting company because a bank had perfected a security interest in the funds under state (Arkansas) law before the tax lien was filed. The description of the property in the financing statement that was required to perfect the security interest was sufficient for third parties to inquire further in identifying the property. The bank did not have standing to recover amounts paid by a surety to the IRS because a notice of levy was never served on the surety.

ORDER

HOWARD, District Judge:

On April 24th, plaintiff filed a motion for summary judgment supported by brief and exhibits concerning the defendant's levy on accounts in which plaintiff asserts it had a perfected security interest. Plaintiff asks for judgment in the principal amount of $28,227.58, plus interest, costs and attorney's fees. The defendant responded on May 6th with its own summary judgment motion. Plaintiff responded to the defendant's motion on May 17th and defendant then filed a reply on May 24th.

Summary judgment can properly be entered when there are no genuine material facts that can be resolved by a finder of fact; that is, there are no facts which could reasonably be resolved in favor of either party. The Court must determine "whether the evidence presents a sufficient disagreement to require submission to a jury or whether it is so one-sided that one party must prevail as a matter of law." Anderson v. Liberty Lobby, Inc., 106 S.Ct. 2505, 2512 (1986). The non-moving party may not just rest upon his or her pleadings, but must set forth specific facts showing that there is a genuine issue for trial. Celotex Corp. v. Catrett, 106 S.Ct. 2548 (1986); Civil Procedure Rule 56. "The mere existence of a factual dispute is insufficient alone to bar summary judgment; rather the dispute must be outcome determinative under prevailing law." Holloway v. Pigman, 884 F.2d 365, 366 (8th Cir. 1989).

Local Rule C-10 provides that a party moving for summary judgment must file a separate, short and concise statement of material facts as to which it contends there is no genuine issue to be tried. The rule further provides that unless the non-moving party files a separate, short and concise statement of the material facts as to which it contends a genuine issue exists to be tried, all material facts set forth in the moving party's statement will be deemed admitted.

The following facts from defendant's Local Rule C-10 statement are deemed admitted:

1. On July 17, 1992 , the North Little Rock Plumbing and General Contracting Co., Inc. ("taxpayer") and Squadron 314 Cons/LGCC of the United States Air Force ("Air Force") in Little Rock , Arkansas entered into a contract for the repair of Group Headquarters, B-1250.

2. On April 26, 1993, the taxpayer and the Air Force entered into a contract for the repair of Squadron Ops, Bldg 290.

3. On April 18, 1994, the taxpayer and the Little Rock School District ("School District") entered into a contract for the construction of a cafetorium addition onto the Chicot Elementary School located at 11100 Chicot Road , in Little Rock , Arkansas .

4. On April 14, 1995, and April 26, 1995, the Internal Revenue Service filed Notice of Federal Tax Liens with the Circuit Clerk and Recorder for Pulaski County and the Arkansas Secretary of State, respectively, against the taxpayer for unpaid employment taxes for the periods ending September 30, 1994, and December 31, 1994.

5. On April 25, 1995, the Internal Revenue Service served a levy on the Air Force.

6. By letter date April 26, 1995, the Internal Revenue Service requested that the Reliance Surety Company ("Reliance") "make payment as provided by the terms of the performance bond executed by you as surety, and by the principal under the Miller Act ..." for unpaid federal tax liabilities owed by the taxpayer.

7. On April 26, 1995, the Internal Revenue Service, on behalf on the United States served a Notice of Levy on the School District to collect unpaid federal employment taxes owed by the taxpayer, in the amount of $28,263.84.

8. On May 12, 1995, the Internal Revenue Service received a check from the School District in the amount of $23,392.25 in satisfaction of that levy.

9. The funds paid over to the United States by the School District were owed to the taxpayer as a result of work completed on the Chicot Elementary School project.

10. By letter dated July 18, 1995, Reliance forwarded a check in the amount of $4,835.23 to the Internal Revenue Service.

11. On October 31, 1995, the plaintiff filed this suit pursuant to Section 7426 of the Internal Revenue Code seeking a determination that the Internal Revenue Service had wrongfully levied on the amounts held by the Little Rock School District and the United States Air Force.

26 U.S.C. §7426(a)(1) provides:

If a levy has been made on property or property has been sold pursuant to levy, any person (other than the person against whom is assessed the tax out of which such levy arose) who claims an interest in or lien on such property and that such property was wrongfully levied upon may bring a civil action against the United States in a district court of the United States. Such action may be brought without regard to whether such property has been surrendered to or sold by the Secretary.

Treasury Regulation §301.7426-1(b)(1) provides that a levy is wrongful if it destroys or irreparably injures a senior interest in the levied property.

26 U.S.C. §6321 provides in relevant part that "[i]f any person liable to pay any tax neglects or refuses to pay the same" after assessment, notice and demand, the amount of the unpaid taxes "shall be a lien in favor of the United States upon all property and rights to property, whether real or personal belonging to such person." The lien becomes valid against any holder of a security interest once a Notice of Tax Lien meeting the requirements of 26 U.S.C. §6323(f) has been filed by the IRS.

26 U.S.C. §6323(h) defines a security interest as:

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(c) provides that the priority of perfected security interests in accounts acquired by the taxpayer within 45 days of the filing of the federal tax lien shall have priority over the federal tax lien.

Ark. Code Ann. §4 -9-203(1)(a) (Supp. 1995) states that a security interest attaches when "[t]he collateral is in the possession of the secured party pursuant to agreement, the collateral is investment property and the secured party has control pursuant to agreement, or the debtor has signed a security agreement which contains a description of the collateral...."

Ark. Code Ann. §4 -9-303(1) provides:

A security interest is perfected when it has attached and when all of the applicable steps required for perfection have been taken. Such steps are specified in §§4 -9-302 and 4-9-304--4-9-406. If such steps are taken before the security interest attaches, it is perfected at the time when it attaches.

Under Ark. Code Ann. §4 -9-302(1) (Supp. 1995), a financing statement was required to be filed in this situation to perfect the security interest.

The following pertinent portions of Ark. Code Ann. §4 -9-402 (Supp. 1995) state:

(1) A financing statement is sufficient if it gives the names of the debtor and secured party, is signed by the debtor, gives an address of the secured party from which information concerning the security interest may be obtained, gives the mailing address of the debtor, and contains a statement indicating the types or describing the items, of collateral. A financing statement may be filed before the security agreement is made or a security interest otherwise attaches.

(8) A financing statement substantially complying with the requirements of this section is effective even though it contains minor errors which are not seriously misleading.

The financing statement at issue filed by plaintiff with the Pulaski County Circuit Clerk on December 27, 1994, and the Arkansas Secretary of State on December 28, 1994 recites in part the following:

A. A certain tract of land located in Pulaski County, Arkansas, specifically described in Exhibit "A" hereto (the "Land"), together with all improvements now or hereafter erected thereon (the "Improvements"), and all rights and appurtenances thereunto in anywise belonging (said Land and Improvements are hereinafter sometimes collectively referred to as "the Premises").

C. All funds, bank accounts (including, without limitation, deposit accounts), notes, accounts receivable, contracts, contract right and general intangibles of whatever nature, existing or hereafter acquired or generated, which relate in any way to the Premises, or which represent proceeds from the sale of any part of the Premises, including, but not limited to, utility service contracts, easements and rights-of-way, permits, licenses and other approvals by Governmental Authority or otherwise, contracts of sale or lease of all or any part of the Premises, or notes received for sale of any part of the Premises.

The exhibit referred to and attached to the financing statement lists the following tracts:

Tract 4:

Lot 1-R, Block 7, Lake Cherrywood Subdivision No. 1, Pulaski County, Arkansas, now in the City of Sherwood, Arkansas.

Tract 7:

Lot 24, Block 2, Melanie Park Subdivision, North Little Rock , Pulaski County , Arkansas .

At issue regarding the School District levy is whether plaintiff's security interest was valid at the time the federal tax liens were filed. Defendant contends that plaintiff did not have a security agreement from the taxpayer granting the plaintiff an interest in the property in exchange for "money or money's worth" and that plaintiff's financing statement fails to sufficiently describe the property against which it claims to be secured.

The Court finds that plaintiff had a valid security agreement in light of Exhibit C to the complaint and the Keith Cox affidavit in support of plaintiff's summary judgment motion. Moreover, the Court is persuaded that under the principles clarified at pages 123-K and 123-L in Womack v. Newman Fixture Co., 27 Ark. App. 117, 785 S.W.2d 226 (1990) that the description was sufficient for third parties to inquiry further in identifying the property, here, accounts receivable related to the taxpayer's business at the specified tracts. Therefore, the School District levy was wrongful.

Plaintiff has not countered that the payment by Reliance was made pursuant to the Miller Act, 40 U.S.C. §§270(a) and (d), while acting as a surety, nor has plaintiff established that the Reliance payment was pursuant to a levy since it is undisputed that a Notice of Levy was never served on Reliance. Thus, plaintiff does not have standing to recover the $4,835.23 surety payment from Reliance to the IRS on the Air Force contract as a wrongful levy.

Accordingly, plaintiff's April 24th motion for summary judgment (#8) is granted in part and denied in part. The School District levy in the principal amount of $23,392.35 was wrongful. Plaintiff is entitled to recover that sum along with interest at the overpayment rate established in 26 U.S.C. §6621 . Defendant's May 6th motion for summary judgment (#10) is granted in part and denied in part. The Reliance surety payment of $4,835.23 was not a levy.

IT IS SO ORDERED.

 

 

[96-2 USTC ¶50,484] Virginia H. McAnulty, Plaintiff v. American National Bank and Trust Company of Chicago, as Trustee under Trust No. 107722-00, Numisco Rare Coins, Ltd., an Illinois Corporation and the United States of America Internal Revenue Service, Defendants United States of America Internal Revenue Service, Cross-Claim Plaintiff v. American National Bank and Trust Company of Chicago, Numisco Rare Coins, Ltd., and Walter Perschke, Cross-Claim Defendants United States of America Internal Revenue Service, Counter-Claim Plaintiff v. Virginia McAnulty, Counter-Claim Defendant

U.S. District Court, No. Dist. Ill. , East. Div., 94 C 6192, 4/1/96

[Code Sec. 6323 ]

Tax liens: Land trust: Priority: Creditor: Security interest: Beneficial interest in land trust: Attachment: Choate.--The IRS failed to prove that tax liens against an individual's real property for taxes assessed before the property was transferred into a land trust had priority over a creditor who held a security interest in the property in the form of a collateral assignment of beneficial interest in the land trust. Since the creditor claimed an interest in the property subject to the tax liens, the liens were deemed to have attached when the IRS filed the notice of tax liens, which occurred after the property was transferred to the land trust. The creditor's security interest attached when it became choate. The creditor showed that she was the lienor and that her interest was definite as to the collateral's identity. However, she did not substantiate her claims regarding her loans to the land trust's beneficiary and the amount due. The collateral assignment, under state ( Illinois ) law, did not have to be filed with the secretary of state to be perfected. Her failure to lodge the collateral assignment with the land trust's trustee did not mean that the interest was not perfected or that the assignment was not binding.

[Code Sec. 6203 ]

Assessments: Presumption of correctness: Notice.--Since an individual failed to rebut the presumption of correctness of tax assessments that related to tax liens against the individual's real property, the IRS was entitled to judgment as a matter of law against the beneficiary of a land trust to which the property had been transferred in the amount of the assessments' unpaid balance. The IRS offered sufficient evidence that the notice of the assessments and demand for their payment were made.

[Code Sec. 6321 ]

Tax liens: Creditor: Attachment: Property ownership.--A creditor failed to present admissible evidence that a beneficiary of a land trust did not have an interest in the real property res of the trust. The beneficiary, as well as the IRS, stated that the beneficiary was the record owner of the real property at the time the IRS assessed its tax liens, which was prior to the transfer of the property to the land trust.

Edward R. White, Kusper & Raucci, 30 N. LaSalle St., Chicago, Ill. 60602, David Louis Passman, 451 W. Aldine Ave., Chicago, Ill. 60657-3607, for plaintiff. David A. Epstein, 30 N. LaSalle St., Chicago, Ill. 60602, Joel R. Nathan, Anthony J. Masciopinto, 219 S. Dearborn St., Chicago, Ill. 60604, Karen A. Smith, Douglas W. Snoeyenbos, Department of Justice, Washington, D.C. 20530, for defendant. Joel R. Nathan, Anthony J. Masciopinto, 219 S. Dearborn St., Chicago, Ill. 60604, Karen A. Smith, Douglas W. Snoeyenbos, Department of Justice, Washington, D.C. 20530, for cross-claimant. David A. Epstein, 30 N. LaSalle St. , Chicago , Ill. 60602 , for cross-defendant. Joel R. Nathan, Anthony J. Masciopinto, 219 S. Dearborn St., Chicago, Ill. 60604, Karen A. Smith, Douglas W. Snoeyenbos, Department of Justice, Washington, D.C. 20530, for counter-claimant. David L. Passman, 451 W. Aldine Ave. , Chicago , Ill. 60657-3607 , for counter-defendant.

MEMORANDUM OPINION AND ORDER

NORDBERG, District Judge:

Before the Court is Defendant United States of America Internal Revenue Service's Motion for Summary Judgment against Plaintiff Virginia McAnulty.

I. BACKGROUND

On June 1, 1982, Walter R. Perschke ("Perschke") obtained legal title to the property located at 1421 West Fullerton Avenue , Chicago , Illinois ("Real Property"). (Pl.'s 12(N) Stmt., ¶12). In her Complaint, Plaintiff Virginia McAnulty ("Plaintiff") alleges that on various dates in 1986, she lent money, totaling $185,000, to Defendant Numisco Rare Coins, Ltd. ("Numisco"). (Pl.'s Complaint, ¶1). Numisco made some payments of interest to Plaintiff, but paid no principal. Id. By June 15, 1994, the loans were in default and Numisco was indebted to Plaintiff in the aggregate amount of $234,378.28. Id.

On January 30, 1989, Perschke, the President, sole director and sole shareholder of Numisco, executed a Trust Agreement naming Defendant American National Bank and Trust Company of Chicago as trustee ("Trustee") under Trust No. 107722-00 ("Land Trust") and Numisco as the sole beneficiary of the Trust. (Def.'s 12(M) Stmt., ¶4; Pl.'s 12(N) Stmt. ¶4). The Trust was established with the stated purpose of taking title to the Real Property. (Def.'s 12(M) Stmt., ¶4; Pl.'s 12(N) Stmt. ¶4); however, the Real Property was not transferred to the Land Trust by Perschke until June 5, 1989. (Def.'s 12(M) Stmt., ¶9; Pl's 12(N) Stmt., ¶9).

On February 6, 1989, before Perschke deeded the Real Property to the Land Trust, Plaintiff and Numisco executed a Collateral Assignment of Beneficial Interest in the Land Trust. (Pl.'s Complaint, ¶4, Exhibit B). This alleged assignment was never delivered to the Trustee, and, therefore, the Trustee had no notice of the alleged assignment. (Pl.'s Complaint, Exhibit B). Plaintiff alleges that, pursuant to the Collateral Assignment of Beneficial Interest, she became the secured creditor of one hundred percent of the beneficial interest in the Land Trust. (Pl.'s Complaint, ¶4). On March 6, 1989, also before Perschke deeded the Real Property to the Land Trust, the IRS made assessments against Perschke for unpaid federal income taxes and interest for the years 1980 and 1982 totalling $708,594.55 as of March 15, 1995. (Def.'s 12(M) Stmt., ¶¶5,8). Notice of the assessments and demand for payment of the assessments were sent to Perschke, but Perschke failed to pay the assessments. (Def.'s 12(M) Stmt., ¶¶7,8). On June 5, 1989, Perschke transferred the Real Property by deed to the Trustee under the Land Trust. (Def.'s 12(M) Stmt., ¶9; Pl.'s 12(N) Stmt., ¶9). On May 24, 1991, the IRS filed notice of the federal tax liens associated with the assessments on the Real Property with the Cook County Recorder of Deeds. (Def.'s 12(M) Stmt., ¶10, Pl.'s 12(N) Stmt., ¶10).

To recover some of the money owed to her by Numisco, Plaintiff sought to liquidate her interest in the Land Trust. (Pl.'s Complaint, ¶6). Consequently, on August 2, 1994, pursuant to a Notice of Public Sale, Plaintiff attempted to sell her interest in the Trust. Id. She notified the Trustee of her interest and of her intention to sell and requested the Trustee to recognize her as the sole beneficiary of the Trust. Id. at ¶7. However, because of the IRS' lien the Trustee refused to recognize Plaintiff as the sole beneficiary of the Trust with power of direction over it. Id. Plaintiff asserts that the position taken by the Trustee is unjustifiable as a matter of law.

Plaintiff originally filed her Complaint in the Circuit Court of Cook County on September 4, 1994. The IRS removed the case to this Court on October 12, 1994. The Trustee was served with the Summons and the Complaint by the Sheriff of Cook County on September 12, 1994. Plaintiff asserted that the Trustee was obligated to file its appearance and a responsive pleading by October 12, 1994, and because the Trustee had not done so, it was in default. Accordingly, Plaintiff requested that this Court enter an Order of Default against the Trustee enjoining the Trustee from recognizing any rights of the IRS in the trust and requiring the Trustee to recognize Plaintiff as the sole beneficiary of Land Trust with power of direction over it. This Court issued a Memorandum Opinion and Order on January 6, 1995, in which it recognized that, because a beneficiary of a trust exercises all rights of ownership other than that of holding bare legal title, the Trustee could not answer Plaintiff's Complaint unless Plaintiff directed the Trustee to answer. (Memorandum Opinion and Order, January 6, 1995, pp. 6-7). This Court concluded that "to enter a default judgment in favor of Plaintiff where such a judgment might affect the claim of a third party, in this case the IRS, who has not had an opportunity to have its claim presented and decided, would not be appropriate." Id. at 7.

Numisco filed its Answer to Plaintiff's Complaint on November 4, 1994 stating that it had no objection to the relief requested by Plaintiff and no claim to an interest in the Real Property. In addition, Numisco admitted that in 1986, Plaintiff had loaned to Numisco $185,000 and that Numisco had made some payments of interest but had not paid any of the principal as of June 15, 1994 when the indebtedness totaled $234,378.28. (Numisco's Answer, ¶1).

The IRS filed its Answer to Plaintiff's Complaint on November 14, 1994. In addition to its Answer, the IRS filed a Cross-Claim against Numisco, the Trustee and Walter Perschke and a Counter-Claim against Plaintiff. In its Cross-Claim and Counter-Claim, the IRS seeks to recover Perschke's unpaid federal income tax liability for the 1980 and 1982 taxable years and to foreclose and enforce its liens on the Land Trust property in which Numisco, the Trustee, Perschke and Plaintiff have or may claim an interest. (Cross-Claim and Counter-Claim, ¶1). The IRS alleges that Perschke's tax liabilities totaled $732,272.89 as of November 30, 1994. (Cross-Claim and Counter-Claim at ¶8; Perschke's Answer to Cross-Claim, ¶8). The IRS stated in its Answer that it did not have sufficient information to form a belief, and thereby requires strict proof of, Plaintiff's claims that she made loans to Numisco and that she received an assignment of beneficial interest in the Land Trust as security for such alleged loans. (IRS' Answer, ¶1).

Perschke filed an Answer to the IRS' Cross-Claim on March 31, 1995, and Plaintiff filed an Answer to the IRS' Counter-Claim on February 10, 1996. Neither the Trustee nor Numisco has filed an answer to the IRS' Cross-Claim. In his Answer to the IRS' Cross-Claim, Perschke admits that the IRS made assessments against him on March 6, 1989 for unpaid federal income taxes, interest and additional amounts totaling $732,272.89 as of November 30, 1994. (Perschke's Answer to Cross-Claim, ¶8). Perschke does not deny that proper notice of and demand for payment of assessments were given to him, and he admits that he failed to pay the taxes. Id. at ¶¶9, 10. Perschke admits that the January 30, 1989 Trust Agreement named Numisco as the one hundred percent beneficial owner of the Trust, but that as the President of Numisco, he held the power of direction over the Trust. Id. at ¶16. Perschke states that the deed from Perschke to the Trust on June 5, 1989 was valid and effective. Id. at ¶15. In Plaintiff's Answer to the IRS' Counter-Claim, Plaintiff also admits that on June 5, 1989, Perschke transferred the deed to the Real Property to the Trustee. (Pl.'s Answer to Counter-Claim, ¶15).

On March 27, 1995, the IRS filed a Motion for Summary Judgment, including a Local Rule 12(M) Statement, seeking to reduce federal tax assessments against Perschke to judgment and seeking an order of foreclosure and sale of the Real Property. The IRS supports its assertions in its 12(M) Statement with the affidavit of Ronald A. Carr, who worked at the Special Procedures Branch at the IRS and reviewed the records with respect to Perschke. (Affidavit of Carr, ¶¶1-3). Plaintiff filed a response to the IRS' Motion for Summary Judgment on February 7, 1996, in which she does not deny the accuracy of the IRS' 12(M) Statement.

The IRS and Plaintiff agree that there is no genuine issue of material fact that on January 30, 1989, the Land Trust was established with the stated purpose of taking title to the Real Property. (Def.'s 12(M) Stmt, ¶4; Pl.'s 12(N) Stmt., ¶4). In addition, the parties agree that Perschke deeded the Real Property to the Trustee on June 5, 1989, and the IRS filed a notice of federal tax liens on May 24, 1991. (Def.'s 12(M) Stmt., ¶¶9-10; Pl.'s 12(N) Stmt., ¶¶9-10). However, in Plaintiff's Response, Plaintiff alleges that there is a genuine issue of material fact as to whether the IRS has valid liens on the Real Property because Perschke may not have been "the real party in interest" in the ownership of the Real Property. (Pl.'s 12(N) Stmt., ¶¶12-13).

II. ANALYSIS

A. Motion for Summary Judgment Standard

Summary judgment is appropriate against a party who fails to make a sufficient showing to establish the existence of an essential element to its case on which that party will bear the burden of proof at trial. Celotex Corp. v. Catrett, 477 U.S. 317, 322 (1986). The moving party bears the initial burden of identifying the portions of the record which it believes demonstrate the absence of a genuine issue of material fact and entitle it to judgment as a matter of law. Id. at 323; Adickes v. S.H. Kress and Co., 398 U.S. 144, 157 (1970). All the evidence submitted must be viewed in the light most favorable to the non-moving party. Adickes, 398 U.S. at 157.

Once a properly supported motion for summary judgment has been filed, the non-moving party must set forth specific facts showing there is a genuine issue for trial. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248 (1986) (quoting First National Bank of Arizona v. Cities Service Co., 391 U.S. 253 (1968)). An issue of fact is genuine only if a jury could reasonably return a verdict for the non-moving party. Id. at 248. Only facts that might affect the outcome of the case are material. Id. Therefore, if the evidence provided by the non-moving party is merely colorable or is not significantly probative, summary judgment may be granted. Id. at 249-50.

B. Judgment on Federal Tax Assessments Against Perschke

The IRS claims that, because the tax assessments against Perschke are prima facie correct, and because Perschke has failed to overcome the presumption of correctness, the IRS is entitled to judgment as a matter of law against Perschke in the amount of $708,595.55, plus interest and other statutory additions accruing after March 15, 1995. Federal tax assessments made by a delegate of the Secretary of the Treasury are presumptively correct. Once the United States presents evidence of an assessment of tax due, the presumption arises that the assessment is correct and the burden is then on the taxpayer to go forward with evidence to the contrary and to show by a preponderance of the evidence that the determination is incorrect. Welch v. Helvering [3 USTC ¶1164 ], 290 U.S. 111, 115 (1933); Helvering v. Taylor [35-1 USTC ¶9044 ], 293 U.S. 507, 515 (1935); U.S. v. Running [93-2 USTC ¶50,568 ], 7 F.3d 1293, 1297 (7th Cir. 1993).

In Plaintiff's Response, Plaintiff asserts that she has "neither interest nor standing" on the issue of whether the IRS is entitled to judgment against Perschke. (Pl.'s Response, p. 2). Perschke has not filed a response to the IRS' Motion for Summary Judgment, so the IRS' factual presentation stands admitted. Moreover, Perschke filed an Answer to the IRS' Cross-Claim in which he admits that the IRS made assessments against him on March 6, 1989 for unpaid federal income taxes, interest and additional amounts totaling $732,272.89 as of November 30, 1994. (Perschke's Answer to Cross-Claim, ¶8).

In the instant case, assessments were made against Perschke for 1980 and 1982 income taxes and interest on March 6, 1989, and those assessments are still due and owing. (Affidavit of Carr, ¶3; Def.'s 12(M) Stmt., ¶7; Perschke's Answer to Cross-Claim, ¶8). Because Perschke has failed rebut the presumption of correctness of the tax assessments, the IRS is entitled to judgment as a matter of law against Perschke in the amount of the unpaid balance of the tax assessments of $708,595.55 plus interest and statutory additions from March 15, 1995.

C. Order of Foreclosure and Sale

The IRS seeks to foreclose its federal tax liens on the real property located at 1421 West Fullerton, Chicago ("Real Property") and to have the Real Property sold, with net proceeds, after sale expenses, distributed first to the IRS for Perschke's tax liabilities. The IRS asserts that pursuant to Title 26 United States Code Sections 6321 and 6322 , a federal lien attached to all of Walter Perschke's property once the United States made assessments against Walter Perschke on March 6, 1989 for unpaid federal income tax liabilities. The IRS argues further that, as the Real Property was not transferred to the Land Trust until June 5, 1989, it was transferred subject to the liens of the United States which attached on March 6, 1989. Thus, when Numisco, the beneficiary of the trust, assigned its interest to Plaintiff, it could not assign an interest greater than it held and consequently, Plaintiff's interest is subject to the United States ' liens. Plaintiff argues that, even if Perschke transferred the property subject to the liens of the United States , the IRS has failed to demonstrate a sufficient interest in the property because the IRS did not file notice of its liens with the Cook County Recorder of Deeds until May 24, 1991. To win on a motion for summary judgment, the IRS must show that there is no genuine issue of material fact as to the priority of the tax liens over Plaintiff's assignment of beneficial interest in the Land Trust.

The priority of a federal tax lien is a matter of federal law. United States v. Pioneer American Insurance Co. [63-2 USTC ¶9532 ], 374 U.S. 84, 83 S. Ct. 1651 (1963). Sections 6321 and 6322 of the Tax Lien Act authorize the imposition by the IRS of a tax lien upon the property of the taxpayer when he is in default. ¹ 26 U.S.C. §§6321 , 6322 . In general, the Tax Lien Act follows the rule that a "lien first in time is first in rights." Pioneer American Insurance [63-2 USTC ¶9532 ], 374 U.S. at 87; J.D. Court, Inc. v. United States [83-2 USTC ¶9454 ], 712 F.2d 258, 260 (7th Cir. 1983), cert. denied, 466 U.S. 927, 104 S. Ct. 1708 (1984).

Because Section 6322 provides that a federal tax arises, or "attaches," when the tax assessment is made, "a tax lien normally takes priority over other liens arising subsequent to assessment of the delinquent tax." Id. However, Section 6323(a) provides an exception to the rule in Section 6322 . 26 U.S.C. §6323(a) . "Under §6323(a) , when the 'holder of a security interest' also claims an interest in property subject to a federal tax lien, the federal tax lien is deemed to have attached when the IRS files a notice of tax lien, rather than when the delinquent tax was first assessed." J.D. Court [83-2 USTC ¶9454 ], 712 F.2d at 260. Section 6323 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 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) . Section 6323(f) provides that the place of filing of a notice of tax lien is "in one office within the State (or the county, or other governmental division), as designated by the laws of such State, in which the property subject to the lien is situated." 26 U.S.C §6323(f) . Illinois law provides that "notices of liens upon real property for obligations payable to the United States ... shall be filed in the office of the recorder of the county in which the real property subject to the liens is situated." 770 ILCS 110/2(b). In the instant case, the Real Property is located at 1421 West Fullerton, Chicago , which is in Cook County , Illinois ; therefore, the IRS must have filed its notice of tax liens on the Real Property at the Cook County Recorder of Deeds.

To determine whether the tax liens have priority over Plaintiff's competing claim, the Court must determine two factors: (1) when the federal tax liens "attached" and (2) when the Plaintiff's security interest "attached". United States v. Equitable Life Assurance Society [66-1 USTC ¶9444 ], 384 U.S. 323, 327-28, 86 S. Ct. 1561, 1564 (1966); J.D. Court [83-2 USTC ¶9454 ], 712 F.2d at 261; United States v. 110-118 Riverside Tenants Corp. [90-2 USTC ¶50,493 ], 886 F.2d 514, 518 (2d Cir. 1989).

First, according to Section 6323(a) , a federal lien attaches when the notice of tax lien is filed in the Cook County Recorder of Deeds. J.D. Court [83-2 USTC ¶9454 ], 712 F.2d at 261. Second, a security interest "attaches" when it is "specific and perfected," which means it attaches only when it becomes "choate." Equitable Life Assurance [66-1 USTC ¶9444 ], 384 U.S. at 327-28; J.D. Court [83-2 USTC ¶9454 ], 712 F.2d at 261. A state law security interest is deemed to be "choate" when the following three requirements are met: (1) the identity of the lienor is established; (2) the property subject to the lien is established; and (3) the amount of the lien is certain. Pioneer American Insurance [63-2 USTC ¶9532 ], 374 U.S. at 89. A security interest will take priority over a competing tax lien if the three-part test for "choateness" is satisfied at the time the IRS files its notice of tax lien, or within 45 days thereafter. 26 U.S.C. §6323(c) ; J.D. Court [83-2 USTC ¶9454 ], 712 F.2d at 261.

Plaintiff argues that she became a holder of a security interest by virtue of the Collateral Assignment of Beneficial Interest executed on February 6, 1989, which was prior to the time the IRS filed notice of its liens against Perschke with the Recorder of Deeds. Thus, Plaintiff argues that her beneficial ownership is not subject to the IRS' liens, and the IRS' Motion for Summary Judgment should be denied. An assignment of beneficial interests in a land trust is a security interest under the Illinois Commercial Code. Federal Deposit Insurance Co. v. Wooten, 80 B.R. 917, 919 (N.D. Ill. 1987) (citing In re Loop Hospital Partnership, 50 B.R. 565, 568 (Bankr. W.D.Ill. 1985); First Federal Savings and Loan Association of Chicago v. Pogue, 389 N.E.2d 652, 656 (Ct. App. Ill. 1979)). Therefore, the Court finds that Plaintiff holds a security interest in the real property in the form of an assignment of beneficial interest in the Land Trust as of June 5, 1989.

As a holder of a security interest, Plaintiff can prevail against the tax liens only if her security interest "attached" before the IRS filed notice of the tax liens with the Cook County Recorder of Deeds on May 24, 1991. See, J.D. Court [83-2 USTC ¶9454 ], 712 F.2d at 261. Accordingly, the Court will apply the test for "choateness" to Plaintiff's security interest to determine whether Plaintiff's security interest may have "attached" before the filing of the tax liens. First, to be "choate," the identity of the lienor must be established. Plaintiff allegedly loaned Numisco money in 1986. She obtained an assignment of beneficial interest in the Land Trust on February 6, 1989, and the Land Trust obtained title to the Real Property on June 5, 1989, all before May 24, 1991. Therefore, the identity of the lienor is Plaintiff. The second and third elements for "choateness" require that Plaintiff's security interest be definite as to the identity of the collateral and be definite as to the amount due. Id.

Second, Plaintiff's security interest was definite as to the identity of the collateral. In the Assignment of Beneficial Interest, dated February 6, 1989, Numisco, with Perschke signing as President, transferred to Plaintiff one hundred percent beneficial interest of the Land Trust established by the Trust Agreement. The Trust Agreement specified that the Land Trust was "about to take title to" the Real Property, and the identity of the Real Property was stated in the Trust Agreement. On June 5, 1989, Perschke transferred the Real Property by deed to the Trustee; thereby granting Plaintiff a beneficial interest in the Land Trust containing the Real Property before the IRS filed its notice of tax liens. Accordingly, the Court finds that Plaintiff's security interest was definite as to the identity of the collateral on May 24, 1991.

Third, Plaintiff alleged in her Complaint that she had loaned a total of $185,000 to Numisco in 1986. Plaintiff alleges that Numisco made some payments of interest to Plaintiff, but no payments of principal, so that, as of June 15, 1994, the loans were in default in the amount of $234,378.28. In its Answer, Numisco admitted that Plaintiff's allegations regarding the amounts owed to it were correct. The IRS has not offered any evidence that loans were not made by Plaintiff to Numisco. As Plaintiff has not substantiated her claims regarding the loans and the amount due with admissible evidence, the Court can not determine at this time that the sum due to Plaintiff was in the amount of $185,000 plus interest not paid by Numisco as of May 24, 1991, the date that the IRS gave notice of the tax lien. However, if the allegations in Plaintiff's Complaint are proved to be true, Plaintiff's claim would satisfy the test for "choateness" at the time the IRS filed notice of its tax liens, and Plaintiff's security interest would have attached before the tax liens attached. Because the IRS has not proven that its security interest has priority over Plaintiff's security interest, the Court denies the IRS' Motion for Summary Judgment as to the foreclosure and sale of the Real Property.

The Court recognizes that the Seventh Circuit articulated a concern in Jersey State Bank v. United States [91-1 USTC ¶50,089 ], 926 F.2d 621, 623 (7th Cir. 1991) over whether the doctrine of "choateness" survived the enactment of the Tax Lien Act of 1966. The court in Jersey State Bank noted that the Tax Lien Act was silent in regard to the issue of "choateness" and that "all that is required is that the state security interest have been obtained prior to the filing of the federal tax lien." Id. Because the requirements of "choateness" had been met in Jersey State Bank, the court did not try to resolve the question. Id. at 624. However, because some courts have rejected the reliance on "choateness" under Section 6323 in situation clearly covered by the Uniform Commercial Code, and because the Seventh Circuit has expressed doubt to its continued applicability, the Court will address whether Plaintiff may have perfected her beneficial interest in the Land Trust before the IRS filed notice of the tax lien. See Aetna Insurance Co. v. Texas Thermal Industries Inc. [79-1 USTC ¶9287 ], 591 F.2d 1035, 1038 (5th Cir. 1979); Atlantic States Construction, Inc. v. Hand et al. [90-1 USTC ¶50,065 ], 892 F.2d 1530, 1540 (11th Cir. 1990).

The IRS argued in its Response to Plaintiff's Motion for Default Judgment, citing Arcadia Upholstering, Inc. v. 165 Restaurant, Inc., 516 N.E.2d 523 (Ill.App. 1987), that, as there is no indication that Plaintiff filed the Collateral Assignment of Beneficial Interest with the Secretary of State, Plaintiff has failed to perfect her interest against subsequent creditors such as the IRS. As an initial matter, this Court notes that Arcadia Upholstering confronts a purchase money security interest, not the assignment of a beneficial interest in a land trust. More importantly, this Court finds that, under Illinois law, the assignment of a beneficial interest in a land trust does not have to be filed in order to be perfected. See In re Cutty's-Gurnee, Inc., 133 B.R. 934, 943-44 (Bankr. N.D.Ill. 1991); In re Goode, 131 B.R. 835, 839 (Bankr. N.D.Ill. 1991); Federal Deposit Insurance Co. v. Wooten, 80 B.R. 917, 919 (N.D.Ill. 1987).

Section 9-303 of the Illinois Commercial Code provides that a security interest is perfected when it has attached and when the steps outlined in §§9-302, 9-304, 9-305 and 9-306 have been followed. Wooten, 80 B.R. at 919; 810 ILCS 5/9-303. However, Section 9-302(1)(c) exempts assignments of beneficial interests in land trusts from the normal filing requirement necessary for the perfection of a security interest. Wooten, 80 B.R. at 919; 810 ILCS 5/9-302(1)(c).

Thus, according to the relevant provisions of the Illinois Commercial Code, a security interest in the assignment of a beneficial interest in a land trust is perfected as long as the requirements for attachment under Section 9-203(1) are met. A security interest attaches under Section 9-203(1) when:

(a) The collateral is in possession of the secured party pursuant to agreement, or the debtor has signed a security agreement which contains a description of the collateral ..., and

(b) value has been given; and

(c) the debtor has rights in the collateral.

810 ILCS 5/9-203(1).

The IRS has failed to show that there is no genuine issue of material fact that Plaintiff has not met all of the requirements for attachment under Section 9-203(1), and, therefore, the IRS has not shown that there is no genuine issue of material fact that the tax liens have priority over Plaintiff's security interest. First, Plaintiff possesses a signed Collateral Assignment of Beneficial Interest from Perschke, on behalf of Numisco. The Assignment of Beneficial Interest incorporates by reference the Trust Agreement which formed the Land Trust. The Trust Agreement contains a complete description of the Real Property, stating that the title to the Real Property is about to be transferred into the Land Trust. The IRS admits that the Real Property was transferred by deed to the Land Trust on June 5, 1989. 8 Ronald A. Anderson, Anderson on the Uniform Commercial Code §9-203:36 (1985) ("A security agreement need not be a single document entitled 'security agreement'....").

Second, in 1986, Plaintiff allegedly loaned Numisco $185,000, which Numisco did not repay; however, as discussed above, neither Plaintiff nor the IRS has offered any proof of this. Because the IRS has not offered evidence that Plaintiff's allegations regarding the loans to Numisco are not true, the Court can not grant the IRS' Motion for Summary Judgment. If Plaintiff did make these loans, Plaintiff gave value to Numisco in the form of a loan. A creditor gives value by taking a security interest to secure a pre-existing claim against the debtor. 810 ILCS 5/1-201(44)(b) (A person gives "value" for rights "if he acquires them ... as security for ... a pre-existing claim."); 2 James J. White and Rob ert S. Summers, Uniform Commercial Code §24 -6 (1988); In re Mattress Factory Sleep Shop, Inc., 717 F.2d 1225 (8th Cir. 1983) ("antecedent debt" satisfied "value" requirement). Third, Numisco had rights in the Land Trust. The Trust Agreement dated January 30, 1989 specifies that one hundred percent beneficial interest was held by Numisco, and Numisco's name, with Perschke's signature as its President, appears in the space identifying beneficiaries. The Assignment of Beneficial Interest to Plaintiff was made by Numisco, with Perschke signing as the President of Numisco. The IRS has not offered any evidence that Numisco did not have rights in the Land Trust, and, therefore, Plaintiff's claims stand unrebutted.

Thus, this Court agrees with Plaintiff that her failure to file the Collateral Assignment of Beneficial Interest with the Secretary of State does not mean that she did not perfect her beneficial interest in the Land Trust. Accordingly, because Plaintiff became the beneficial owner of one hundred percent of the Land Trust, which included the Real Property, prior to the time the IRS filed notice of its liens against Perschke, Plaintiff's interest may not be subject to the IRS' lien. See 26 U.S.C. §6323(a) . The IRS has not carried its burden of proof in the instant case. Neither side has offered sufficient evidence to determine conclusively the priority of the parties' claims, and, therefore, this Court can not grant summary judgment to the IRS.

Additionally, the IRS asserted in its Response to Plaintiff's Motion for Default Judgment, that even if Plaintiff did not have to file a financing statement to perfect her interest in the assignment of the beneficial interest of the Land Trust, the assignment of the beneficial interest in the Land Trust is not binding because the assignment was not lodged with or signed by the Trustee. The note at the bottom of the Collateral Assignment of Beneficial Interest states, "[t]his assignment shall not be binding on the Trustee unless and until the original or a duplicate thereof is lodged with the Trustee and its acceptance indicated thereon." (Pl.'s Complaint, Exhibit B).

At least three courts have rejected the argument that Illinois law requires endorsement or any form of lodging on the part of the land trustee for perfection of an assignment of a beneficial interest in a land trust. See In re Goode, 131 B.R. at 839-41; Wooten, 80 B.R. at 919-20; In re Loop Hospital Partnership, 50 B.R. 565, 569 (Bankr. N.D.Ill. 1985). While a failure to lodge the assignment with the Trustee, and acquire the Trustee's signature indicating its acceptance of the assignment, may mean that the assignment is not effective with respect to the Trustee or a subsequent assignee or purchaser without notice, it does not mean that the assignment is not binding as between the assignor and the assignee. In re Goode, 131 B.R. at 839. The parties have not presented any legal argument, nor is the Court aware of any authority, that the IRS is in the position of a subsequent assignee or a purchaser without notice.

The IRS does not cite any cases to persuade this Court to depart from the well reasoned analysis of Goode and Wooten. Thus, this Court concludes that Plaintiff's failure or inability to lodge the Collateral Assignment of Beneficial Interest with the Trustee, and to acquire its signature thereon, does not mean that Plaintiff did not perfect her assignment of beneficial interest in the Land Trust or that the assignment is not binding as between Numisco and Plaintiff. Accordingly, the IRS is not entitled to summary judgment on the grounds that the assignment of beneficial interest was not lodged with the Trustee.

The Court notes that the IRS has made no allegations, nor has it presented any evidence, of fraud in the transactions at issue in this case. If the conveyance of the Real Property was intended to defraud the government, it is voidable as to the IRS. United States v. Denlinger [93-1 USTC ¶50,040 ], 982 F.2d 233, 236 (7th Cir. 1992). In addition, the Illinois Commercial Code provides that the parties must have acted in good faith in performing the subject transactions. 810 ILCS 5/1-203 ("Every contract or duty within this Act imposes an obligation of good faith in its performance or enforcement.").

D. Plaintiff's Additional Arguments

Although the Court has determined that the IRS has not shown that it is not entitled to priority over Plaintiff's security interest, the Court will resolve, for the sake of completeness, two other arguments set forth by Plaintiff in her Response to the IRS' Motion for Summary Judgment. First, Plaintiff claims that the IRS has failed to adequately show that proper notice of the tax assessments and demand for payment were made. In its Reply, the IRS argues that it has properly supported its Motion for Summary Judgment and the Court should disregard Plaintiff's Response because it fails to submit any affidavits or other admissible evidence to support her allegations. ²

The Court finds that the IRS has properly supported its Motion for Summary Judgment as to the issue of notice of and demand for payment of the assessments. In a sworn affidavit, Ronald R. Carr, an employee of the IRS, asserts that "proper notice of, and demand for payment of, the assessments were sent to Walter R. Perschke." (Affidavit of Carr, ¶¶3(b)-(c)). In his Answer to the IRS' Cross-Claim, Perschke does not deny that he had received notice of the tax assessments and demand for payment. (Perschke's Answer to Cross-Claim, ¶9). Without giving any credence to the word "proper," the Court finds that the IRS has offered sufficient evidence that notice of the assessments and demand for their payment were made, and Plaintiff has not offered any evidence at all to show that there is a genuine issue of material fact on this issue.

Second, in Plaintiff's Response to the IRS' Motion for Summary Judgment, Plaintiff asserts in a conclusory fashion that Numisco, not Perschke, was "the real party in interest" when Perschke took title to the subject property on June 1, 1982, and, therefore, Perschke did not have a property interest in the Real Property at the time the IRS imposed its liens. (Pl.'s 12(N) Stmt., ¶12). To support this assertion, Plaintiff offers the following documents as evidence: (1) A letter dated January 27, 1982 from the law firm Shefsky & Froelich, Ltd. to Numisco, Inc.; (2) The first page of a letter dated April 1, 1982 from the attorneys for the seller of the 1421 West Fullerton property to Numisco, Inc. (3) Three preliminary drafts, none of which are dated, of only one page of a Real Estate Sale Contract for the 1421 West Fullerton property, two of which show Numisco, Inc. as purchaser, and one of which shows Perschke as Purchaser; (4) A contract dated June 9, 1982 between Numisco, Inc. and Cleveland Wrecking Company to demolish a building on the 1421 West Fullerton property; (5) The cover of an "insurance binder" dated August 24, 1983, with "Numisco, Inc. et al" identified as the "Assured," and with a notation from the insurance broker that Perschke is the owner of the building at 1421 West Fullerton; and (6) Copies of four checks made payable to Cook County Collection from Numisco Rare Coins, Ltd. for tax bills sent to Perschke at 1423 West Fullerton. Plaintiff claims that she has examined Perschke, and he allegedly stated that there are no other documents relevant to this issue, but Plaintiff did not submit any affidavits or depositions of Perschke to substantiate her claim.

The Court finds that Plaintiff's exhibits are not admissible evidence, and even if the evidence was admissible, Plaintiff has failed to demonstrate that a genuine issue of material fact exists. To ward off a motion for summary judgment, a party must submit evidence to the Court, consisting of admissible documents or sworn testimony, such as that found in depositions or in affidavits, to demonstrate that there is a genuine issue of material fact. Winskunas v. Birnbaum, 23 F.3d 1264, 1267 (7th Cir. 1994). "On a summary judgment motion, when a party seeks to offer evidence through exhibits, they must be identified by affidavit or otherwise be admissible." Powers v. Dole, 782 F.2d 689, 696 (7th Cir. 1986) (citing Martz v. Union Labor Life Ins. Co., 757 F.2d 135, 138 (7th Cir. 1985)); Steinle v. Warren, 765 F.2d 95, 100 (7th Cir. 1985) (finding that an unauthenticated copy of a purported affidavit, which did not show where it was executed, was not part of the trial court record and did not create a genuine issue of material fact); Davis v. Frapolly, 756 F. Supp. 1065, 1070 (N.D. Ill. 1991) (determining that a dated letter standing alone was inadmissible hearsay which could not be considered in opposition to a motion for summary judgment). Plaintiff has failed to submit any affidavits or other documents identifying or authenticating the exhibits attached to her Response. As none of the documents are self-authenticating, the Court finds that the documents attached to Plaintiff's Response are inadmissible.

The imposition of a tax lien must be limited to the actual property interest of the taxpayer. United States v. Rodgers [83-1 USTC ¶9374 ], 461 U.S. 677, 690-91, 103 S. Ct. 2132, 2141 (1983). Whether Perschke had a property interest when the IRS filed its liens with the Recorder of Deeds is a question of state law. Aquilino v. United States [60-2 USTC ¶9538 ], 363 U.S. 509, 513, 80 S. Ct. 1277, 1280 (1960). Under Illinois law, record title can only be defeated by a showing of equitable ownership by reason of a constructive trust, a resulting trust, or an oral agreement to convey. Hanley v. Hanley, 14 Ill. 2d 566, 571, 152 N.E.2d 879, 882 (1958). Plaintiff has not presented any admissible evidence on this. ³ Perschke stated that he was the record owner of the Real Property at the time the IRS assessed the tax liens, and the IRS also stated that Perschke was the owner. No one else is claiming an interest in the Real Property and only Plaintiff suggests that someone else might have had some kind of equitable interest. This is mere speculation. Accordingly, because there is no admissible evidence that Perschke is not the owner and because speculation does not raise a genuine issue of material fact, Plaintiff's claim that Perschke did not hold a property interest in the Real Property at the time the IRS assessed the tax liens is without merit.

III. CONCLUSION

For the foregoing reasons, the IRS' Motion for Summary Judgment is GRANTED in part and DENIED in part. The IRS is entitled to judgment as a matter of law in its favor against Walter R. Perschke for unpaid federal income taxes and interest for the years 1980 and 1982 in the amount of $708,595.55 plus interest and statutory additions from March 15, 1995. The Court denies the IRS' Motion for Summary Judgment as to its claimed tax liens on the Real Property at 1421 West Fullerton, Chicago , Illinois , and, therefore, denies its motion to foreclose on the same.

¹ Section 6321 of the Internal Revenue Code reads as follows:

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 .

Section 6322 of the Internal Revenue Code reads 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 .

² Not only does the IRS allege that Plaintiff failed to submit any affidavits or other admissible material to defeat the IRS' Motion for Summary Judgment, but the IRS also asserts that Plaintiff has failed to comply with Local Rule 12(N) because she did not submit a "memorandum of law," nor did she submit a document specifically headed "Local Rule 12(N) Statement." The Court finds that Plaintiff's "Introduction" to its Response may be construed as a memorandum of law and that Plaintiff's "Response to United States ' Rule 12(M) Statement" and "Additional Facts" may be construed as Plaintiff's Local Rule 12(N) Statement.

³ Moreover, the Court notes that the insurance statement submitted as an exhibit by Plaintiff specifically identifies Perschke as the owner of the building on the Real Property.

 

 

[96-2 USTC ¶50,485] Virginia H. McAnulty, Plaintiff v. American National Bank and Trust Company of Chicago, as Trustee under Trust No. 107722-00, Numisco Rare Coins, Ltd., an Illinois Corporation, and the United States of America Internal Revenue Service, Defendants United States of America Internal Revenue Service, Cross-Claim Plaintiff v. American National Bank and Trust Company of Chicago, Numisco Rare Coins, Ltd., and Walter Perschke, Cross-Claim Defendants United States of America Internal Revenue Service, Counter-Claim Plaintiff v. Virginia McAnulty, Counter-Claim Defendant

U.S. District Court, No. Dist. Ill. , East. Div., 94 C 6192, 6/25/96, On motion for reconsideration of a District Court decision, 96-2 USTC ¶50,484

[Code Sec. 6323 ]

Tax liens: Land trust: Priority: Tax assessments: Creditor: Security interest: Beneficial interest in land trust: Money or money's worth: Res of land trust.--Tax liens against an individual's real property for taxes assessed before the property was transferred into a land trust had priority over the land trust's interest in the property. Since the assessments were made prior to the transfer, the tax liens attached to all of the individual's property. Thus, the real property was transferred to the land trust subject to the tax liens. Further, a creditor who executed, with the individual who was the trust's beneficiary, a collateral assignment of beneficial interest in the land trust was not a holder of a security interest in the beneficial interest of the land trust. The creditor who did not loan any additional funds when she executed the collateral assignment did not part with any "money or money's worth" under Code Sec. 6323 . Even if the creditor had a security interest, she did not hold a security interest in the res of the land trust. Under state ( Illinois ) law, a beneficial interest in a land trust is an interest in personal property, not a direct interest in the res of the trust.

MEMORANDUM OPINION AND ORDER

NORDBERG, United States District Judge:

Before the Court is Defendant/Counter-Claim Plaintiff United States of America Internal Revenue Services' ("IRS' ") Motion for Reconsideration, or in the Alternative, Renewed Motion for Summary Judgement and Plaintiff/Cross-Claim Defendant Virginia H. McAnulty's ("McAnulty's") Cross Motion for Summary Judgment.

I. BACKGROUND

The undisputed facts are as follows. During or prior to 1986, McAnulty loaned $185,000 to Numisco Rare Coins, Ltd. ("Numisco"). During 1986, Numisco executed promissory notes to McAnulty for the $185,000 in loans. The promissory notes were renewed annually until 1992. Prior to 1989, the $185,000 amount loaned by McAnulty to Numisco was not secured by any collateral. From 1983 to 1991, Numisco timely made interest payments to McAnulty on the $185,000 loans; however, Numisco did not repay any of the principal.

On January 30, 1989, Perschke, the President, sole director and sole shareholder of Numisco, executed a Trust Agreement naming Defendant American National Bank and Trust Company of Chicago as trustee ("Trustee") under Trust No. 107722-00 ("Land Trust") and Numisco as the sole beneficiary of the Land Trust. The Land Trust was established with the stated purpose of taking title to the real property located at 1421 West Fullerton, Chicago , Illinois , 60614 ("Real Property"). However, the Real Property was not transferred to the Land Trust by Perschke until June 5, 1989.

On February 6, 1989, before Perschke deeded the Real Property to the Land Trust, Plaintiff and Numisco executed a Collateral Assignment of Beneficial Interest in the Land Trust as security for the $185,000 in loans. The alleged assignment was never delivered to the Trustee, and, therefore, the Trustee had no notice of the alleged assignment.

On March 6, 1989, also before Perschke deeded the Real Property to the Land Trust, the IRS made tax assessments against Perschke for unpaid federal income taxes and interest for the years 1980 and 1982. As of March 15, 1995, these totalled $708,594.55. On June 5, 1989, Perschke transferred the Real Property by deed to the Trustee under the Land Trust. On May 24, 1991, the IRS filed notice of the federal tax liens associated with the assessments on the Real Property with the Cook County Recorder of Deeds.

On March 29, 1996, this Court entered judgment against Perachke and in favor of the IRS for the unpaid tax assessments in the amount of $708,595.55, plus interest and statutory additions from March 15, 1995. (Memorandum Opinion and Order, March 29, 1996, p. 9). In its Memorandum Opinion and Order dated March 29, 1996, the Court set out a detailed analysis regarding the determination of priorities between McAnulty's security interest in the beneficial interest in the Land Trust and the IRS' tax liens. The Court denied the IRS' Motion for Summary Judgment as to its claimed tax liens on the Real Property, and, therefore, also denied the IRS' motion to foreclose on the same.

In McAnulty's Cross Motion for Summary Judgment, McAnulty requests summary judgment declaring McAnulty sole titleholder of the beneficial interest in the Land Trust, free and clear of any and all lien rights asserted by the IRS. In support of her Motion, McAnulty adopts the findings and legal analysis as set forth in this Court's Memorandum Opinion and Order dated March 29, 1996. In addition, McAnulty offers evidence of the value given by McAnulty to Numisco as loans during and prior to 1986 for which the Collateral Assignment of Beneficial Interest was made from Numisco to McAnulty in 1989.

The IRS requests that the Court reconsider its Memorandum Opinion and Order, dated March 29, 1996, for the following reasons:

1. The IRS' tax liens on the Real Property take priority over the Land Trust's interest in the Real Property;

2. McAnulty's security interest in the Land Trust did not attach to the underlying trust res;

3. Even if McAnulty's security interest did attach to the underlying trust res, the Collateral Assignment of Beneficial Interest in the Land Trust to McAnulty did not create a valid "security interest" under 26 U.S.C. §6323 ; and

4. McAnulty did not obtain a beneficial interest in the Land Trust by virtue of the Collateral Assignment that was binding against the IRS because the assignment was not lodged with and accepted by the Trustee.

II. ANALYSIS

A motion to reconsider, more accurately called a motion to alter or amend a judgment, serves the limited purpose of allowing a court to correct manifest errors of law or fact. Publishers Resource, Inc. v. Walker-Davis Publications, Inc., 762 F.2d 557, 561 (7th Cir. 1985) (citing Keene Corp. v. International Fidelity Ins. Co., 561 F. Supp. 656, 665-66 (N.D. Ill. 1982), aff'd, 736 F.2d 388 (7th Cir. 1984)). Based on the argument and authority presented by the IRS, the Court grants the IRS' Motion to Reconsider and makes the following corrections to its Memorandum Opinion and Order, dated March 29, 1996.

1. The Tax Liens Take Priority over the Land Trust's Interest.

First, the Court finds that the IRS is correct in its assertion that the tax liens in the Real Property, which were assessed before the Real Property was transferred into the Land Trust, take priority over the Land Trust's interest in the Real Property. The priority of a federal tax lien is a matter of federal law. United States v. Pioneer American Insurance Co. [63-2 USTC ¶9532 ], 374 U.S. 84, 83 S. Ct. 1651 (1963). Sections 6321 and 6322 of the Tax Lien Act authorize the imposition by the IRS of a tax lien upon the property of the taxpayer when he is in default. ¹ 26 U.S.C. §§6321 , 6322 . In general, the Tax Lien Act follows the rule that a "lien first in time is first in rights." Pioneer American Insurance [63-2 USTC ¶9532 ], 374 U.S. at 87; J.D. Court, Inc. v. United States [83-2 USTC ¶9454 ], 712 F.2d 258, 260 (7th Cir. 1983), cert. denied, 466 U.S. 927, 104 S. Ct. 1708 (1984).

It is undisputed that on March 6, 1989, federal income tax assessments were made against Perschke for outstanding 1980 and 1982 income tax liabilities. On March 29, 1996, this Court entered a judgment against Perschke, and in favor of the IRS, for the unpaid tax assessments in the amount of $708,595.55, plus interest and statutory additions from March 15, 1995. Moreover, by virtue of the tax assessments on March 6, 1989, a federal tax lien attached to all of Perschke's property, including the Real Property. Therefore, when the Real Property was transferred to the Land Trust on June 5, 1989, the Real Property was transferred subject to the federal tax liens. Pursuant to the general rule of priority, the IRS' tax liens take priority over the Land Trust's interest in the Real Property. Accordingly, McAnulty's security interest in the beneficial interest in the Land Trust is subordinate to the IRS' tax liens.

2. McAnulty Did Not Hold a Security Interest in the Res of the Land Trust.

In its Memorandum Opinion and Order dated March 29, 1996, this Court found that McAnulty was a holder of a "security interest" in the beneficial interest of the Land Trust, and, therefore, the IRS' tax liens were deemed to attach when the IRS filed notice of the tax lien, and not when the taxes were assessed. 26 U.S.C. §6323(a) . The Court was incorrect as a matter of law for two reasons. First, McAnulty had obtained from Numisco a security interest in the Land Trust, and not a security interest in the Real Property itself. Second, McAnulty was not a holder of a "security interest" as it is defined under federal law in 26 U.S.C. 6323(h).

Because Section 6322 provides that a federal tax lien arises, or "attaches," when the tax assessment is made, "a tax lien normally takes priority over other liens arising subsequent to assessment of the delinquent tax." J.D. Court [83-2 USTC ¶9454 ], 712 F.2d at 260; 26 U.S.C. §§6321 , 6322 . However, Section 6323(a) provides an exception to the rule in Section 6322 . 26 U.S.C. §6323(a) . "Under §6323(a) , when the 'holder of a security interest' also claims an interest in property subject to a federal tax lien, the federal tax lien is deemed to have attached when the IRS files a notice of tax lien, rather than when the delinquent tax was first assessed." J.D. Court [83-2 USTC ¶9454 ], 712 F.2d at 260. Section 6323 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 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) (emphasis added). The Court was incorrect in its finding that McAnulty's interests fell within the exception to the general rule provided by Section 6323(a) because, even if McAnulty was a holder of a security interest in the beneficial interest of the Land Trust, she was not a holder of a security interest in the Real Property itself.

On February 7, 1989, McAnulty and Numisco executed a Collateral Assignment of Beneficial Interest as security for the loans extended to Perschke prior to or during 1986. Under Illinois law, "[a] beneficial interest in an Illinois land trust is an interest in personal property and not a direct interest in the real estate res of the trust." First Federal Savings and Loan Assn. of Chicago v. Pogue, 389 N.E.2d 652, 655 (Ill. App. Ct. 1979); In re Goode, 131 B.R. 835, 839 (N.D. Ill. Bankr. 1991). Therefore, according to the Collateral Assignment of Beneficial Interest, McAnulty obtained a security interest in the beneficial interest of the Land Trust, and not a security interest in the Real Property itself. The Real Property in the Land Trust was transferred into the Land Trust on June 5, 1989, subject to the tax liens, which attached on March 6, 1989. Therefore, McAnulty's beneficial interest is in a land trust which holds property that is subject to tax liens.

3. McAnulty Did Not Hold a "Security Interest" Under 26 U.S.C. §6323 in the Beneficial Interest of the Land Trust.

In its Memorandum Opinion and Order dated March 29, 1996, this Court found that McAnulty was the holder of a security interest in the beneficial interest of the Land Trust, and, therefore, fell within the exception provided by Section 6323(a) . Even if holding a security interest in the beneficial interest of the Land Trust, rather than a security interest in the Real Property itself, was sufficient to meet the Section 6323(a) exception, this Court was incorrect in finding that McAnulty held a security interest in the beneficial interest of the Land Trust.

In analyzing whether McAnulty held a security interest, this Court applied Illinois law in finding that McAnulty had given value to Numisco for the assignment of beneficial interest in the form of an antecedent debt. (Memorandum Opinion and Order, March 29, 1996, p. 18). In the instant case, however, whether a creditor has been given a "security interest" is to be determined by federal law. Cipriano v. Tocco [91-1 USTC ¶50,132 ], 757 F. Supp. 1484, 1493 (E.D. Mich. 1991); see also United States v. Rotherman, 836 F.2d 359, 362 (7th Cir. 1988). Under federal law, a "security interest" is defined as follows:

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) . At issue is whether McAnulty "parted with money or money's worth" at the time the Collateral Assignment of Beneficial Interest was executed. Under federal law, the Section 6323(h)(1)(B) "money or money's worth" requirement is not met when a creditor receives a collateral assignment solely in exchange for an antecedent debt. Cipriano [91-1 USTC ¶50,132 ], 757 F. Supp. at 1493. ²

In the instant case, it is undisputed that Plaintiff loaned $185,000 to Numisco prior to or during 1986, and that Numisco made timely payments of interest to McAnulty on the loans until 1991. In addition, prior to the February 6, 1989 Collateral Assignment of Beneficial Interest, the $185,000 was not secured by any collateral. It is also undisputed that at the time of the Collateral Assignment, McAnulty did not loan Numisco any additional money or provide any other consideration. Therefore, under federal law, at the time of the February 6, 1989 Collateral Assignment, McAnulty did not part with any "money or money's worth." Accordingly, McAnulty was not the holder of a security interest as defined by Section 6323(h) and as provided for in Section 6323(a) . McAnulty's interest in the Land Trust, therefore, is not free and clear of the tax liens because the tax liens attached on March 6, 1989 when they were assessed, which is before the Real Property was deeded into the Land Trust, and not at the time that notice of the tax liens was filed at the Cook County Recorder of Deeds.

4. Lodging with the Trustee is not Required to Perfect an Assignment of Beneficial Interest.

Finally, the IRS claims that McAnulty did not obtain a beneficial interest in the Land Trust by executing the Collateral Assignment of Beneficial Interest because the assignment was not lodged with or accepted by the Trustee. The IRS does not dispute the Court's holding that:

At least three courts have rejected the argument that Illinois law requires endorsement or any form of lodging on the part of the land trustee for perfection of an assignment of a beneficial interest in a land trust. See [In re Goode, 131 B.R. 835, 839-41 (N.D. Ill. Bankr. 1991); FDIC v. Wooten, 80 B.R. 917, 919-20 (N.D. Ill. 1987]; In re Loop Hospital Partnership, 50 B.R. 565, 569 (Bankr. N.D.Ill. 1985). While a failure to lodge the assignment with the Trustee, and acquire the Trustee's signature indicating its acceptance of the assignment, may mean that the assignment is not effective with respect to the Trustee or a subsequent assignee or purchaser without notice, it does not mean that the assignment is not binding as between the assignor and the assignee. In re Goode, 131 B.R. at 839.

(Memorandum Opinion and Order, March 29, 1996, pp. 20-21). The IRS does, however, contend that the cases relied on by the Court should not be extended to disputes which are not between the assignor and assignee. The IRS does not offer any authority which directly stands for this proposition. In addition, the court in Wooten recognized that, "[a]lthough a lodgement requirement might be worthwhile so as to give notice to third parties, it cannot be said that one currently exists under the Illinois Commercial Code." Wooten, 80 B.R. at 920.

In light of the uncertain nature of Illinois law on this issue, and in light of the fact that the Court has already determined that any interest McAnulty has in the Land Trust is subject to the tax liens, the Court finds the issue moot so that it is unnecessary to rule on this position.

III. CONCLUSION

For the foregoing reasons, the IRS' Motion to Reconsider is GRANTED. In addition, the IRS' Renewed Motion for Summary Judgment is GRANTED and McAnulty's Cross Motion for Summary Judgment is DENIED. The Court hereby enters judgment in favor of the IRS and against McAnulty, and orders the foreclosure and sale of the Real Property located at 1421 West Fullerton Avenue, Chicago, Illinois 60614, with the net proceeds after sale expenses to be distributed first to the United States for payment of the judgment against Walter R. Perschke plus interest, with any surplus to be paid to the Trustee of the Land Trust for distribution to its beneficiaries. The IRS is directed to file its motion for foreclosure and sale within 60 days herein.

¹ Section 6321 of the Internal Revenue Code reads as follows:

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 .

Section 6322 of the Internal Revenue Code reads 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 .

² This finding supports Congress' intent in enacting the tax laws. The Court agrees with the IRS' observation that a contrary definition of a security interest would allow a taxpayer, facing federal tax assessments, to arbitrarily provide collateral assignments to favored unsecured creditors. Such a policy would arbitrarily give the favored creditors an enhanced position vis a vis the IRS.

 

 

[97-1 USTC ¶50,374] In re Beverly A. Straight, doing business as Centerline Traffic Control & Flagging; and Milton L. Straight, also known as Milton Lloyd Straight, also known as Milton Straight, also known as Mickie Straight, Debtors. In re Beverly A. Straight, doing business as Centerline Traffic Control & Flagging, Debtor. Beverly A. Straight and Milton L. Straight, Plaintiffs-Counter-Defendants-Appellees and Cross-Appellants. Randy Royal, Chapter 7 Trustee, Appellee and Cross-Appellant v. First Interstate Bank of Commerce, Defendant-Counter-Claimant-Cross-Claimant-Appellant and Cross-Appellee. Internal Revenue Service, Defendant-Cross-Defendant-Appellee and Cross-Appellee

U.S. Bankruptcy Appellate Panel, 10th Circuit, WY-96-1, WY-96-3, 4/14/97 , 207 BR 217, 207 BR 217. Affirming a Bankruptcy Court decision, 96-2 USTC ¶50,423

[Code Sec. 6323 ]

Liens: Tax liens: Security interests: Subject property.--

An IRS tax lien had priority on the proceeds of a bankrupt individual's business account receivable because a bank did not have a security interest in the account receivable. The description of the collateral covered by the security agreement did not encompass any accounts except those arising from a disposition of the debtor's equipment or inventory. Moreover, the security interest was not perfected by filing in the appropriate recording office.

[Code Sec. 6871 ]

Bankruptcy: Tax Claims: Avoidance of liens: Proper filing place.--

Under state ( Wyoming ) law, the IRS properly filed its notice of tax lien in the office of the county clerk of the county where a bankrupt individual's business account receivable, cash, security deposit, and vehicles were located. The IRS did not have to comply with the Uniform Commercial Code (UCC) when filing the notice of tax lien since, by its terms, the UCC does not apply to statutory liens.

[Code Sec. 6332 ]

Liens: Tax liens: Avoidance: Purchaser without notice: Securities: Tangible personal property.--

A bankruptcy trustee could not avoid a tax lien on an account receivable or a security deposit as a purchaser without notice. The account receivable did not qualify as tangible personal property, and the security deposit did not qualify as a security.

Stephen R. Winship, Winship & Winship, P.C., 100 N. Center St., Casper, Wyo. 82601, for plaintiffs-counter-defendants-appellees and cross-appellants. Stuart S. Healy, 49 S. Main St. , Sheridan , Wyo. , for defendant-counter-claimant-cross-claimant-appellant and cross-appellee. David D. Freudenthal, United States Attorney, Donald R. Wrobetz, Assistant United States Attorney, Cheyenne, Wyo. 82008, Susan A. Berson, Senior Trial Attorney, Jerome H. Fridkin, Department of Justice, Washington, D.C. 20530, for defendant-cross-defendant-appellee and cross-appellee.

Before: MCFEELEY, Chief Judge, and PUSATERI and CLARK, Bankruptcy Judges.

OPINION

PUSATERI, Bankruptcy Judge:

First Interstate Bank of Commerce ("Bank") appeals a judgment of the United States Bankruptcy Court for the District of Wyoming denying its motion for summary judgment, granting a motion for summary judgment filed by the Internal Revenue Service ("IRS"), and granting, in part. a motion for summary judgment filed by the Chapter 13 Debtors, Beverly A. Straight and Milton L. Straight (collectively the "Debtors"). See Straight v. First Interstate Bank (In re Straight) [96-2 USTC ¶50,423], 200 B.R. 923 (Bankr. D. Wyo. 1996). The Debtors cross-appealed the Bankruptcy Court's judgment denying a portion of their motion for summary judgment.

After the Debtors filed their cross-appeal, Milton L. Straight's Chapter 13 case was dismissed. After the briefs were filed, Beverly A. Straight's Chapter 13 case was converted to a case under Chapter 7 of the Bankruptcy Code, the Chapter 7 case was assigned a new case number, and Randy Royal was appointed Chapter 7 Trustee. The Chapter 7 Trustee has been joined as a party to the appeals pursuant to Fed. R. App. P. 43(a)-(b) and 10th Cir. BAP L.R. 8018-1(e). We will refer to the Debtors for matters which occurred before Mr. Straight's case was dismissed, but will discuss the cross-appeal as being pursued by Ms. Straight since she was the only cross-appellant when the appellate briefs were filed.

In these appeals, we are asked to determine whether the Bankruptcy Court erred in concluding, in relevant part, that: (1) the Chapter 13 Debtors have standing to commence avoidance actions under 11 U.S.C. §§544(a), 545(2), and 547(b); (2) the Bank does not have a security interest in a certain account receivable; (3) a payment made to the Bank during the ninety days prior to the filing of the Debtors' bankruptcy case is avoidable as a preference under 11 U.S.C. §547(b); and (4) a tax lien held by the IRS is not avoidable under 11 U.S.C. §545(2). We affirm the Bankruptcy Court's judgment.

I. Background

1. The Alleged Interests of the Bank

(a) The Security Agreements and Business Loan Agreement

Beverly A. Straight ("Straight") operated a road construction flagging company doing business as Centerline Traffic Control and Flagging. On May 7, 1993, Straight executed a promissory note in the amount of $35,000 and a Security Agreement in favor of the Bank. On May 12, 1993, the Bank filed the Security Agreement in the Office of the Sheridan County Clerk, the county where all of the Debtors' property is located. The Bank extended additional credit to Straight pursuant to a number of promissory notes executed between June 1993 and October 1994. Although not part of the record on appeal, the parties agree that these notes were accompanied by security agreements, all of which were filed with the Office of the Sheridan County Clerk in November of 1994. The definition of "collateral" in these later security agreements is apparently identical to the definition of "collateral" contained in the Security Agreement executed on May 7, 1993, which is part of the record on appeal.

In connection with a loan made on June 8, 1993, Straight also executed a Business Loan Agreement. This Agreement contains a different definition of the word "collateral" than the one used in the Security Agreement. The Business Loan Agreement was not filed with the Office of the Sheridan County Clerk, the Secretary of State of Wyoming, or in any other place.

(b) Assignment of Subcontract Proceeds

Prior to obtaining credit from the Bank, Straight entered into a Subcontract Agreement with a joint venture comprised of Lobo, Inc. ("Lobo") and Carr Construction, Inc. ("Carr"). In June 1993, Straight purportedly assigned payments due to her from the Subcontract Agreement ("Lobo Carr account") to the Bank. Notice of this alleged assignment was given to Lobo and Carr by the Bank. However, proof of the assignment was not recorded by the Bank with the Office of the Sheridan County Clerk, the Secretary of State of Wyoming, or in any other place.

2. Payment to the Bank During the 90-Day Pre-Petition Period

According to documents submitted on appeal, a company called Safetymaster Corporation ("Safetymaster") obtained a default judgment against Straight in Wyoming state court. In July 1994, Safetymaster (or perhaps the court clerk) served writs of continuing garnishment on Lobo and Carr. On December 12, 1994, the state court held a hearing involving the Bank, Safetymaster, Lobo, and Carr; the Bank and Safetymaster presented a stipulation to the court. On December 30, 1994, the state court entered an order as a result of that hearing, ordering Lobo and Carr to pay $26,605.04 immediately into the court's registry and directing the court clerk to disburse $10,000 of that money to Safetymaster and the balance to the Bank. The Bank does not dispute that it received, in December 1994, $16,605.04 paid into state court by Lobo and Carr (the "Stipulation Payment").

This statement of the facts is based on a copy of Safetymaster's default judgment ("Default Judgment"), copies of writs of continuing garnishment served by Safetymaster on Lobo and Carr ("Writs of Continuing Garnishment"), and a copy of the state court's order entered on December 30, 1994 ("State Court Order"), all of which were supplied to this Court as "evidence" as part of the appellate record. The documents, however, are not supported by affidavits attesting to their authenticity and showing them to be admissible under the Federal Rules of Evidence. See Fed. R. Bankr. P. 7056: Fed. R. Civ. P. 56(e). Moreover, because the parties have not provided us with their statements of facts and supporting materials. or their memoranda in support of their respective summary judgment motions, it is impossible to discern whether the Default Judgment, Writs of Continuing Garnishment or the State Court Order were part of the record below.

What we do know is that in its recitation of the facts, the Bankruptcy Court said: "On December 30, 1994, [the Bank] was paid $16,605.04 from the Lobo/Carr contract payments. The payment was made upon stipulation of the parties from funds held by the [state court]. . . . The payment was within 90 days of the filing of the bankruptcy petition." Straight [96-2 USTC ¶50,423], 200 B.R. at 927. ¹ In discussing the preference claim, the Bankruptcy Court noted that the Bank contended that "the debtor" (apparently referring to Straight alone) had been involved in the stipulation that led to the Stipulation Payment being made. Id. at 932. On appeal, the Bank repeats its assertion that Straight participated in getting the money paid to the Bank. So it is clear the parties informed the Bankruptcy Court that the Bank received $16,605.04 through the state court proceeding, and that the money came from Lobo and Carr.

3. The IRS Tax Lien

In September 1994, the IRS filed a Notice of Federal Tax Lien in, among other places, the Office of the Sheridan County Clerk for unpaid employment taxes. This lien ("Tax Lien") extends to "all property and rights to property, whether real or personal," belonging to Straight, 26 U.S.C. §6321.

4. The Debtor's Bankruptcy Case and Chapter 13 Plan

On January 13, 1995, the Debtors filed a petition seeking relief under Chapter 13 of the Bankruptcy Code. The Bank filed a proof of claim asserting a secured claim in the amount of $150,351.21 as of the petition date. The IRS filed a proof of claim asserting a claim in the total amount of $119,990.62 as of the petition date, of which $87,389.96 is classified as secured. $26,624.36 as an unsecured priority claim. and $5,976.30 as a general unsecured claim.

The Debtors filed a Chapter 13 plan with the Bankruptcy Court providing, in relevant part, that the Lobo/Carr account would be surrendered to the Bank. The IRS objected to the proposed plan because it did not provide for the IRS's secured claim. The IRS asserted that the Tax Lien covered the Lobo/Carr account and had priority over the Bank's lien. claims which the Bank contested. Due to this dispute, the Bankruptcy Court granted the Debtors' motion to continue the hearing on confirmation of their proposed plan, requiring the parties to "independently resolve the disputes which affect confirmation, or to initiate proper pleadings with the court."

5. The Adversary Proceeding Commenced by the Debtors

After the Bank and the IRS were unable to resolve their dispute regarding their respective lien interests, the Debtors brought an adversary proceeding against them, seeking, in relevant part, to: (1) avoid the Bank's lien in the Lobo/Carr account under 11 U.S.C. §544(a) and Wyo. Stat. Ann. §34.1-9-401(a)(i); (2) avoid the Stipulation Payment to the Bank as a preference under 11 U.S.C. §547(b); and (3) avoid the IRS Tax Lien under 11 U.S.C. §545(2). The Bank and the IRS answered the Debtors' Complaint, and the Bank asserted ten affirmative defenses, including that the Debtors did not have standing to commence avoidance actions. The Bank also filed a counterclaim against the Debtors and a cross-claim against the IRS. The Bank's counterclaim against the Debtors was subsequently dismissed by the Bankruptcy Court. and the propriety of that dismissal has not been raised on appeal.

On opposing motions for summary judgment, the Bankruptcy Court concluded, in pertinent part, that: (1) the Debtors had standing to pursue avoidance actions under 11 U.S.C. §§544(a), 545(2), and 547(b); (2) the Bank did not have a lien on the Lobo/Carr account and, even if it did, its lien was unperfected and void under 11 U.S.C. §544(a); (3) the Stipulation Payment made to the Bank was avoidable as a preference under 11 U.S.C. §547(b); and (4) the IRS Tax Lien was not avoidable under 11 U.S.C. §545(2). Straight [96-2 USTC ¶50,423], 200 B.R. at 927-32. These appeals followed. We have jurisdiction over the appeals pursuant to 28 U.S.C. §158(a)(1) and (c).

II. Standard of Review

These appeals are from a judgment of the Bankruptcy Court on opposing motions for summary judgment. The United States Court of Appeals for the Tenth Circuit has stated:

We review the grant or denial of summary judgment de novo, applying the same legal standard used by the [trial] court pursuant to Fed. R. Civ. P. 56(c). Summary judgment is appropriate if the pleadings depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to judgment as a matter of law. When applying this standard, we examine the factual record and reasonable inferences therefrom in the light most favorable to the party opposing summary judgment. If there is no genuine issue of material fact in dispute, then we next determine if the substantive law was correctly applied by the [trial] court.

Wolf v. Prudential Ins. Co. of America, 50 F.3d 793, 796 (10th Cir. 1995) (citations and internal quotation marks omitted).

With certain exceptions discussed below, the facts material to these appeals are undisputed. Accordingly, we must determine upon de novo review whether the substantive law was correctly applied by the Bankruptcy Court.

III. Discussion

1. Chapter 13 Debtors' Standing To Commence Avoidance Actions

The Bankruptcy Court held, in pertinent part, that the Chapter 13 Debtors had standing to commence avoidance actions under 11 U.S.C. §§544(a), 545(2), and 547(b), provided that they deposit any recovery obtained with the Chapter 13 Trustee "for distribution to and for the benefit of the unsecured creditors." Straight [96-2 USTC ¶50,423], 200 B.R. at 928. Since the Bankruptcy Court entered its judgment, however, Straight's husband's case has been dismissed, her Chapter 13 case has been converted to a case under Chapter 7 of the Bankruptcy Code, a Chapter 7 Trustee has been appointed, and the Chapter 7 Trustee has been joined as a party to these appeals. The Chapter 7 Trustee clearly has standing to pursue the avoidance actions asserted in this proceeding. Accordingly, issues related to the Debtors' standing under Chapter 13 are moot and shall not be considered by this Court.

2. The Bank's Interest in the Lobo/Carr Account

The Bankruptcy Court held that the Bank's Security Agreement does not create a security interest in the Lobo/Carr account because the Agreement does not describe it as collateral. Straight [96-2 USTC ¶50,423], 200 B.R. at 930. Whether the Bank has an interest in the Lobo/Carr account requires us to interpret the Bank's Security Agreement. The Security Agreement states that it shall be construed in accordance with the laws of the State of Wyoming . Accordingly, we begin our analysis with a review of the relevant portions of the Uniform Commercial Code ("UCC") as it has been adopted in Wyoming .

A "security interest" is "an interest in personal property or fixtures which secures payment or performance of an obligation." Wyo. Stat. Ann. §34.1-1-201(a)(xxxvii). It is not disputed that Article 9 of the Wyoming UCC applies to the Lobo/Carr account. See Wyo. Stat. Ann. §34.1-9-102(1)(a). Under Article 9, a security interest is "not enforceable against the debtor or third parties with respect to . . . collateral and does not attach unless: (i) . . . the debtor has signed a security agreement which contains a description of the collateral." Wyo. Stat. Ann. §34.1-9-203(a)(i). A "security agreement" is "an agreement which creates or provides for a security interest." Wyo. Stat. Ann. §34.1-9-105(a)(xii). The description of collateral in a security agreement need not be specific, but it must "reasonably identif[y]" the collateral in question. Wyo. Stat. Ann. §34.1-9-110; see Wyo. Stat. Ann. §34.1-9-105(a)(iii) (" '[C]ollateral' means the property subject to a security interest. . . ."); New Oil, Inc. v. First Interstate Bank, 895 P.2d 871, 873 ( Wyo. 1995) (description of collateral sufficient if it makes it possible to identify items with reasonable effort and inspection); Wailes v. Rocky Mountain Pre-Mix Concrete, 783 P.2d 1138, 1140 ( Wyo. 1989) (must have a reasonable identification of collateral).

The Bank's Security Agreement states. in relevant part:

Collateral. The word "Collateral" means the following described property of [Straight]:

All equipment and inventory on the attached Schedules . . .

In addition, the word "Collateral" includes all of the following, whether now owned or hereafter acquired, whether now existing or hereafter arising and wherever located:

. . . .

(c) All accounts. contract rights. . . . monies, payments, and all other rights, arising out of a sale, lease or other disposition of any of the property described in this Collateral section.

The Schedules attached to the Security Agreement do not mention any type of account, much less the Lobo/Carr account. Nor is the Lobo/Carr account included in the "accounts" or "contract rights . . . arising out of a sale, lease or other disposition of any of the property described" in the Collateral section of the Security Agreement. Accordingly, the Bankruptcy Court correctly concluded that the Bank's Security Agreement does not create a security interest in the Lobo/Carr account as a matter of law because the description of the collateral covered by the Agreement does not encompass any accounts except those arising from a disposition of Straight's equipment or inventory.

The Bank contends all of the parties assumed that the definition of the word "collateral" in the Security Agreement embraced the Lobo/Carr account and, therefore, the Bankruptcy Court acted improperly when it unilaterally decided that the Bank's interest did not extend to it. The Bank argues that this interpretation was inappropriate on summary judgment because parol evidence would prove that the parties intended the Lobo/Carr account to be encompassed within the definition of the word "collateral" set forth in the Security Agreement.

It is well-settled that parol evidence is admissible only if a contract is ambiguous. See, e.g., Patel v. Harless, 926 P.2d 963, 965 ( Wyo. 1996); Brockway v. Brockway, 921 P.2d 1104, 1106 ( Wyo. 1996); Ames v. Sundance State Bank, 850 P.2d 607, 609 ( Wyo. 1993); see also Mid-West Conveyor Co. v. Jervis B. Webb Co., 92 F.3d 992. 995 (10th Cir. 1996). "'An ambiguous contract is an agreement which is obscure in its meaning, because of indefiniteness of expression, or because a double meaning is present. Ambiguity justifying extraneous evidence is not generated by the subsequent disagreement of the parties concerning its meaning.' " Brockway, 921 P.2d at 1106 (quoting Carlson v. Water Unlimited, Inc., 822 P.2d 1278, 1281 ( Wyo. 1991) (internal quotation marks omitted)). The Security Agreement contains no language that might cover the Lobo/Carr account, so under this test, parol evidence would not be admissible, and the Bankruptcy Court was correct in interpreting the Agreement as a matter of law in the context of a summary judgment proceeding. See, e.g., Mid-West Conveyor, 92 F.3d at 995 (citing Teton Exploration Drilling, Inc. v. Bokum Resources Corp., 818 F.2d 1521, 1526 (10th Cir. 1987)) (question of whether contract is clear or ambiguous is a question of law); Brockway, 921 P.2d at 1106 (interpretation of contract is a question of law); Sannerud v. First Nat'l Bank, 708 P.2d 1236, 1240 ( Wyo. 1985) (same).

Even if Straight intended to grant the Bank a security interest in the Lobo/Carr account, the Bank's reliance on parol evidence misses the point. A third-party creditor or a bankruptcy trustee exercising avoiding powers is entitled to rely on the clear. unambiguous terms of a security agreement to be informed of what collateral is covered without regard to the intent of the parties. Sannerud, 708 P.2d at 1241. As discussed above, the Bank's Security Agreement does not inform third parties that the Bank's security interest might extend to the Lobo/Carr account. ²

The Bank also maintains that notwithstanding the terms of the Security Agreement, its interest in the Lobo/Carr account is evidenced by the notice of assignment given to Lobo and Carr and the description of collateral contained in the Business Loan Agreement. This argument is flawed for several reasons.

The notice of assignment served by the Bank on Lobo and Carr does not constitute a "security agreement" because it is not an "agreement which creates . . . a security interest." Wyo. Stat. Ann. §34.1-9-105(a)(xii). Moreover, even if it somehow created one, the security interest would not be enforceable because the notice of assignment was not signed by Straight. See Wyo. Stat. Ann. §34.1-9-203.

While an assignment agreement between the Bank and Straight might be deemed to create a security interest, no such agreement was provided to the Bankruptcy Court as part of the summary judgment proceedings. ³ The only evidence in the record on appeal which shows that Straight assigned her interest in the Lobo/Carr account to the Bank is the Bank's notice of assignment, and a letter from Straight to Lobo and Carr stating that they would be receiving an assignment of contract proceeds. For the reasons discussed, such documents are simply not sufficient to create a security interest in the Lobo/Carr account.

In addition, the Business Loan Agreement does not create a security interest with respect to any collateral, much less the Lobo/Carr account. The Agreement defines the word "collateral" as:

[A]ll property and assets granted as collateral security for a Loan, whether real or personal property, whether granted directly or indirectly whether granted now or in the future, and whether granted in the form of a security interest, mortgage, deed of trust, assignment. . . . or any other security or lien interest whatsoever, whether created by law, contract, or otherwise.

This Agreement assumes that a separate contract exists which creates a security interest in Straight's property. As discussed above, the Security Agreement and the notice of assignment do not create a security interest in the Lobo/Carr account. There simply is no security agreement in the record on appeal which contains a description of the Lobo/Carr account as collateral. Thus, the Bankruptcy Court was correct in determining that the Bank does not have a security interest in the Lobo/Carr account.

In the alternative, if the notice of assignment and the Business Loan Agreement could somehow be construed to create a security interest in the Lobo/Carr account, it is undisputed that no document perfecting such an interest was ever filed in the appropriate state and local recording offices and, therefore, the Bank's interest has not been perfected. Wyo. Stat. Ann. §§34.1-9-302 & 34.1-9-401(a)(i). Accordingly, any interest created by these documents is avoidable under 11 U.S.C. §544(a) and we would affirm the Bankruptcy Court's order on this basis.

3. Avoidance of the Stipulation Payment

The Bankruptcy Court held that the Stipulation Payment made to the Bank was a preferential transfer avoidable under 11 U.S.C. §547(b). While, as we noted above, it is unclear what was asserted before the Bankruptcy Court, we do know the Bank argued that the Stipulation Payment was not avoidable under section 547(b) because it was made pursuant to a stipulation with Straight and the State Court Order. Straight [96-2 USTC ¶50,423], 200 B.R. at 932. The Bankruptcy Court correctly concluded that these assertions did not create a defense under section 547, Id. Both voluntary and involuntary transfers may be avoided under section 547(b), so neither Straight's agreement, if any, to the Stipulation Payment, nor the fact the state court ordered it to be made has any bearing on its avoidability. See 11 U.S.C. §101(54) ("transfer" includes voluntary and involuntary dispositions of property): 5 Lawrence P. King, Collier on Bankruptcy ¶547.03 at 547-14 (15th ed. rev. 1996) ("The debtor's intent or motive is not material in the consideration of an alleged preference under section 547.")

On appeal, the Bank claims the transfer was made by Safetymaster, not Straight, because Safetymaster had garnished Lobo and Carr. Under Wyoming law, the Bank says, a garnishment "dispossess[es] the judgment debtor from his (her) interest in the property in the hands of the garnishee from the date that the garnishee is served with the writ of garnishment."

First, we note we could reject the Bank's argument simply because it failed to provide an adequate record for us to determine the state of the parties' factual and legal presentation to the Bankruptcy Court. See, e.g., Tele-Communications, Inc., v. Commissioner [97-1 USTC ¶50,155], 104 F.3d 1229, 1232-33 (10th Cir. 1997) (an appellate court has discretion to consider new issues on appeal, but ordinarily will not consider them, so that parties will be encouraged to present all issues at the trial level); Magnum Foods, Inc., v. Continental Casualty Co., 36 F.3d 1491, 1502 n.12 (10th Cir. 1994) (although appellate court may appropriately take judicial notice of developments that are a matter of public record and are relevant to the appeal. review of summary judgment is limited to the record before the trial court: documents submitted in appendix on appeal not presented to the trial court were stricken); John Hancock Mut. Life Ins. Co. v. Weisman, 27 F.3d 500, 506 (10th Cir. 1994) (in reviewing summary judgment, appellate court will not consider evidence not before the trial court) (citing Allen v. Minnstar, Inc., 8 F.3d 1470, 1475 (10th Cir. 1993)). Without the Debtors' and the Bank's statements of uncontroverted facts and supporting materials, and all their memoranda in support of their positions, we cannot tell whether anyone informed the Bankruptcy Court of the facts concerning Safetymaster's state court proceeding which have been presented to us on appeal but which the Bankruptcy Court did not mention in its decision. However, we find that even when we consider all of the facts and legal arguments the Bank has now asserted, the Bank's defense to the preference action still fails because it is based on a misreading of the cited case law and a misunderstanding of the effect of a lien obtained through garnishment.

The Bank's argument begins with the decision in Platte County State Bank v. Frantz, 239 P. 531 ( Wyo. 1925). That case involved a creditor's suit to collect a debt and its pre-judgment attachment of property the debtor had transferred, allegedly in fraud of his creditors. Id. at 532. Rejecting the argument that the attachment was premature, the court held that a creditor should be allowed to obtain an attachment lien on property alleged to have been fraudulently conveyed without waiting until it has reduced its debt to judgment, although the conveyance should not be set aside until the debt has been established by judgment. Id. at 535. Obviously, the decision has nothing to say about the effect of the creditor's attachment lien on the debtor's interest in the property attached, because the debtor had already conveyed his interest to a third party.

From Frantz, the Bank moves to United States v. Hunt [74-1 USTC ¶9481], 373 F. Supp. 1079 (D. Wyo. 1974). aff'd in part, rev'd in part [75-1 USTC ¶9327], 513 F.2d 129 (10th Cir. 1975). As stated by the district court. its published decision addressed the single question whether a federal tax lien takes priority over a prior unrecorded judgment lien when the government had actual knowledge of the announcement of the judgment. [74-1 USTC ¶9481], 373 F. Supp. at 1080. In the course of its decision. the court said:

In State Bank v. Frantz, 33 Wyo. 326, 239 P. 531 (1925), the Supreme Court of Wyoming held that a writ of attachment created a lien as of the date of service. See Great Falls Transfer & Storage Co. v. Pan Am. Petroleum Corp., 353 F.2d 348 (10th Cir. 1965). "The Wyoming Supreme Court decision has never been reversed and its conclusion does not appear to be clearly erroneous. As such it is entitled to substantial weight. A garnishment is virtually a process of attachment and under Wyoming law, a garnishee is bound from the time of service, Wyo. Stat. §1-243 (1957). It gives the creditor a paramount right, although not necessarily title, to such property as a security for his demand.

Id. at 1081. On appeal, the Tenth Circuit affirmed the district court's decision on the priority question. [75-1 USTC ¶9327 ], 513 F.2d at 133-39. The Circuit also reversed part of the district court's judgment, but that part concerned claims the IRS was asserting against the taxpayer, not the creditor. Id. at 139. Except for the dicta quoted above, this decision did not directly address the question whether the eventual judgment debtor retained any interest in the money that was paid into court after it was garnished.

Nevertheless, although these cases directly concern only the interest a creditor obtains through an attachment or garnishment, their description of that interest as a "lien" rather than "ownership" or "title" makes clear that Straight retained some interest in the Lobo/Carr account even after Safetymaster garnished it. The Wyoming statutes governing the continuing garnishments employed here specify that such garnishments become liens on the garnished earnings to the extent they are not exempt. Wyo. Stat. Ann. §1-15-502; see Barnhill v. Johnson, 503 U.S. 393, 398 (1992) (absent controlling federal law, state law defines property and interests in property). The statutes also give some substance to the interest the judgment debtor retains: (1) some earnings are exempt from continuing garnishment, §§1-15-503(b) and 511: (2) notice of the garnishment is to be given to the debtor, §§1-15-505 and 506; (3) the debtor may object to the calculation of the amount of exempt earnings, §1-15-507; (4) the debtor may apparently claim the property is otherwise exempt, §1-15-107; and (5) although a debtor would not likely do so to recover garnished earnings, the debtor can obtain the release of garnished property by posting a bond, §1-15-105. Clearly, the Bank's argument that Safetymaster's garnishment immediately dispossessed Straight of all her interest in the garnished money is wrong.

The preference cases the Bank cites offer it no help, either. The cases all involved a garnishment, attachment, or similar procedure which a creditor obtained before the 90-day preference period, followed by payment to or entry of a judgment for the creditor during the preference period. Freedom Group v. Lapham-Hickey Steel Corp. (In re Freedom Group), 50 F.3d 408 (7th Cir. 1995); Battery One-Stop v. Atari Corp. (In re Battery One-Stop), 36 F.3d 493 (6th Cir. 1994); Wind Power Systems v. Cannon Financial Group (In re Wind Power Systems), 841 F.2d 288 (9th Cir. 1988); Phillips v. Mbank Waco (In re Latham), 823 F.2d 108 (5th Cir. 1987) (per curiam); Askin Marine Co. v. Conner (In re Conner), 733 F.2d 1560 (11th Cir. 1984); Butler v. Grimminger (In re Carlson), 177 B.R. 645 (Bankr. D. Neb. 1995). The question faced by all these courts was whether transfers to the creditors were made, within the meaning of 11 U.S.C. §547(e)(2), when the garnishment or attachment procedure occurred, or only later when the payment or judgment occurred. All but the Freedom Group court concluded such a transfer occurred at the earlier time. Although some of the opinions at least imply that the later payment or judgment was not a transfer at all under section 547, we believe these events were also transfers, see 11 U.S.C. §101(54), but they were not avoidable as preferences because they did not enable the creditors to receive more than they would have without them if the debtor were liquidated in chapter 7. See 11 U.S.C. §547(b)(5); Aspen Data Graphics v. Boulton (In re Aspen Data Graphics), 109 B.R. 677, 680-82 (Bankr. E.D. Pa. 1990) (where pre-preference period garnishment gave lien under Pennsylvania law, payment of money from garnished bank account during preference period was a transfer but was not avoidable because secured, unavoidable garnishment lien would be paid in chapter 7 liquidation); see also Barnhill v. Johnson, 503 U.S. at 396-98 (for purposes of §547, what constitutes a transfer and when it is complete is a matter of federal law). The earlier garnishments or attachments were the transfers accomplishing that for the creditors. None of these decisions hold that the debtors retained no interest at all in the garnished or attached property after those transfers.

Section 547(b) allows a trustee to avoid only a "transfer of an interest of the debtor in property." The Bankruptcy Court concluded the materials presented to it showed the Bank received a transfer of Straight's interest in the garnished portion of the Lobo/Carr account on December 30, 1994. While the record on appeal shows some of her interest had been transferred earlier when Safetymaster obtained its garnishment lien, nothing the Bank has presented shows that Straight's remaining interest in the garnished portion of the account was extinguished before the state court ordered Lobo and Carr to pay that portion into court for distribution to Safetymaster and the Bank. Since, as we have already determined, the Bank's other claims to the Lobo/Carr account were ineffective or unperfected and therefore properly avoided, the Bank has not shown that the Bankruptcy Court erred when it ruled the Stipulation Payment was an avoidable preference. ⁴

4. Avoidance of the IRS Tax Lien

The Bankruptcy Court gave three reasons for rejecting the Debtors' attempt to avoid the Tax Lien under 11 U.S.C. §545(2). First, it concluded the lien was properly perfected under Wyo. Stat. Ann. §29-6-204(c)(iv) and was not subject to Article 9 of the Wyoming UCC. Second, the Court ruled that a hypothetical bona fide purchaser under section 543(2) does not qualify as a "purchaser" with the power to invalidate an otherwise perfected tax lien under 26 U.S.C. §6323(b). Finally, it determined that the Debtors did not have standing to avoid the Tax Lien because they were trying to do so for their own benefit, not for their creditors. Straight, 200 B.R. at 928-30. Although this Court cannot agree with all the reasoning employed by the Bankruptcy Court, we are convinced that the result reached was correct.

Relying on various provisions of Article 9 of the Wyoming UCC. Straight contends the Tax Lien is unperfected with respect to: (1) two vehicles because the lien was not noted on their titles: (2) $30 in cash and a $175 security deposit which she refers to as "securities," because the IRS did not possess them: and (3) the Lobo/Carr account because the IRS's notice of lien was not filed in the proper office for perfecting a lien in accounts. However, as correctly determined by the Bankruptcy Court. Article 9 of the UCC does not apply to statutory liens like the one the IRS obtains under 26 U.S.C. §6321. See Wyo. Stat. Ann. §34.1-9-102(b). Perfection of a federal tax lien is instead governed by the Uniform Federal Lien Registration Act, Wyo. Stat. Ann. §29-6-201, et seq. To perfect the lien in personal property owned by anyone other than a corporation, partnership, trust, or estate of a decedent, the IRS need only file notice of the lien with the county clerk in the county of the taxpayer's residence. Wyo. Stat. Ann. §29-6-204(c)(iv). Indeed, a state cannot require the IRS to file its lien notice in more than one location. 26 U.S.C. §6323(f)(1).

Straight argues that even if the Tax Lien is perfected, it is avoidable under 11 U.S.C. §545(2) because of certain provisions of 26 U.S.C. §6323(b). Section 6323(b) invalidates otherwise valid tax liens in certain property as against, among others, a "purchaser" without notice of a tax lien. For purposes of that subsection, a "purchaser" is defined to be a "person who, for adequate and full consideration in money or money's worth, acquires an interest . . . in property which is valid under local law against subsequent purchasers without actual notice." 26 U.S.C. §6323(h)(6). According to Straight, a trustee relying on the status of a hypothetical bona fide purchaser under section 545(2) could use the status afforded to a "purchaser" under section 6323(b) to avoid the Tax Lien on the security deposit, Lobo/Carr account, motor vehicles and $30 cash.

Section 6323(b), however, does not apply to the security deposit or the Lobo/Carr account. The security deposit Straight calls a "security" does not qualify as such under section 6323(b)(1) because it does not satisfy the definition contained in section 6323(h)(4). Although she has not identified the specific subsection on which she relies, she apparently contends that the Lobo/Carr account is "personal property" covered by section 6323(b)(3), (4) or (5). These provisions, however, apply only to "tangible personal property." 26 U.S.C. §6323(b)(3)-(5). The Lobo/Carr account, of course, is intangible property, so a "purchaser" of the account would not be protected under section 6323(b).

Section 6323(b) could apply to the two vehicles, and since "money," oddly enough, is defined to be a "security" under the statute, it could also apply to the $30 cash. See 26 U.S.C. §6323(b)(1)-(2) and (h)(4). In a ruling that would cover any trustee as well, the Bankruptcy Court concluded that the Debtors were precluded from avoiding the Tax Lien because a bona fide purchaser under 11 U.S.C. §545(2) does not qualify as a "purchaser" for "adequate and full consideration" under section 6323(b). Straight, 200 B.R. at 929-30. The phrase "bona fide purchaser" is not defined by the Bankruptcy Code. A "bona fide purchaser" is ordinarily one who, among other things, gives "value" for property. See Black's Law Dictionary 161 (5th ed. 1979). While "value" would not necessarily amount to "adequate and full consideration," as required under section 6323(b) and (h)(6), it could reach that level. Consequently, a section 545(2) bona fide purchaser is not necessarily precluded from qualifying as a "purchaser" under section 6323. For the reasons set forth below, we find it unnecessary to resolve this issue. However, we note that something more than general definitions is required to determine which level of bona fide purchaser Congress intended to create under section 545(2). But see United States v. Hunter (In re Walter) [95-1 USTC ¶50,072], 45 F.3d 1023, 1030 (6th Cir. 1995) (because a bona fide purchaser is not necessarily a purchaser for purposes of §6323(b), it follows the purchaser under §545(2) is not).

The Debtors' amended complaint makes clear that to avoid the IRS's interest in the vehicles, they were relying on 11 U.S.C. §522(g) and (h), which generally permit a debtor to exempt certain property a trustee recovers through use of the avoiding powers, and under certain circumstances where the trustee has not done so, to exercise the avoiding powers to the extent the debtor could have exempted the property recovered if the trustee had done so. Even if the Chapter 7 Trustee could avoid the Tax Lien on the vehicles under section 545(2), the Debtors cannot. Section 522(c) provides:

Unless the case is dismissed, property exempted under this section is not liable during or after the case for any debt of the debtor that arose. or that is determined under section 502 of this title as if such debt had arisen, before the commencement of the case, except--

. . .

(2) a debt secured by a lien that is--

. . .

(B) a tax lien, notice of which is properly filed. . . .

This specific provision overrides the general exemption and avoidance powers granted in section 522(g) and (h), and precludes Straight from avoiding the Tax Lien in this case. DeMarah v. United States (In re DeMarah), 62 F.3d 1248, 1250-52 (9th Cir. 1995). Although the Trustee is now a party to this proceeding. it seems unlikely he will attempt to avoid the lien on the vehicles since Straight and her husband had exempted them.

The record on appeal does not make clear whether the Debtors had claimed the cash as exempt, but if they did, section 522(c)(2)(B) precludes their attempt to avoid the Tax Lien on it as well. If not, but for the Bankruptcy Court's ruling about the hypothetical bona fide purchaser under 11 U.S.C. §545(2), it appears the Trustee could attempt to avoid the Tax Lien on the cash under section 545(2) and 26 U.S.C. §6323(b)(1). However, it seems unlikely the Trustee would go to that trouble for a mere $30, and we decline to consider such an important issue when it is doubtful the real party in interest would pursue the matter.

IV. Conclusion

For the reasons set forth herein, the Court concludes that: (1) whether the Chapter 13 Debtors had standing to pursue avoidance actions is moot in light of the joinder of the Chapter 7 Trustee to this appeal: (2) the Bank does not have an interest in the Lobo/Carr account; (3) the Stipulation Payment is avoidable under 11 U.S.C. §547(b); and (4) the Tax Lien has been properly perfected and may not be avoided with respect to the vehicles, the security deposit, or the Lobo/Carr account. Under the circumstances, we decline to determine whether the Trustee could avoid the lien on the cash under section 545(2). Accordingly, the judgment of the Bankruptcy Court is hereby affirmed.

¹ The State Court Order indicates that as of December 12, 1994 , Lobo and Carr had not yet paid any garnished money into the state court registry, and on that day, they were ordered to do so. For the Bank to have received the Lobo and Carr money on December 30, 1994 , as the Bankruptcy Court stated, Lobo and Carr must have paid the money into the registry on or after December 12 but not later than December 30. Even if the Bank got some interest in the money as soon as it was paid in, the earliest day that might have happened, December 12, is still well within the 90-day preference period, since the Debtors filed for bankruptcy in January 1995.

² The parties have raised several arguments regarding the Bank's perfection of its alleged interest in the Lobo/Carr account. The Bank maintains that the Lobo/Carr account is a "contract right" and its purported interest therein is properly perfected because it filed its Security Agreement with the Office of the Sheridan County Clerk, and, even if the account is not a "contract right," its interest is nonetheless perfected under the "good faith exception" to filing set forth in Wyo. Stat. Ann. §34.1-9-401. These arguments, however. are irrelevant. Since the Bank does not have any interest in the Lobo/Carr account under the unambiguous terms of the Security Agreement, perfection is not an issue.

While the Bank does not have an interest in the Lobo/Carr account, it seems to have an interest in other property of Straight identified as "Collateral" in the Security Agreement. Whether the Bank's interest in this property is perfected by an unavoidable lien was not raised before the Bankruptcy Court and has not been raised on appeal.

³ The Bankruptcy Court noted that "[t]he parties do not dispute that Mrs. Straight assigned the subcontract payments to the Bank], although the assignments were not provided to the court as [the Bank] indicated." Straight [96-2 USTC ¶50,423], 200 B.R. at 927. On appeal, the Debtors state that "[d]espite the Bank's references to an assignment of the Lobo/Carr account[] . . . no such assignment was executed by Straights [sic]."

⁴ The Debtors' amended complaint does not assert a cause of action under 11 U.S.C. §550 to recover the avoided Stipulation Payment from the Bank, and the application of section 550 does not appear to have been raised before the Bankruptcy Court. The Bankruptcy Court entered judgment against the Bank for the amount of the Stipulation Payment and stated that "any recovery [was] to be immediately deposited with the chapter 13 standing trustee." Straight [96-2 USTC ¶50,423], 200 B.R. at 933. Since the issue of recovery of the avoided transfer under section 550 was not raised below, we will not address it even though the parties mentioned it at oral argument.

 

 

[96-1 USTC ¶50,278] Accurate Filter Products, Inc., Plaintiff v. United States Department of Treasury/Internal Revenue Service, Craig Assembly, Inc., Wood & Wood, P.C., Huntington Banks f/k/a Liberty State Bank & Trust, Globe Midwest Corporation and Steven Rabinovitz, Defendants

U.S. District Court, East. Dist. Mich. , So. Div., 95-70406, 4/5/96

[Code Sec. 6323 ]

Liens: Priority: Interpleader action.--In an interpleader action filed by a corporate taxpayer, a bank's security interest was determined to have priority over federal tax liens and other creditors' claims with respect to funds received by the taxpayer in settlement of its suit against insurance carriers concerning a theft loss. Although the tax liens arose before the bank filed its financing statement, the bank's statement was filed, and its lien perfected, before the government perfected its lien by filing its tax lien notices. The IRS tax lien was second in priority since it was perfected before the claims of the other parties.

Steven Rabinovitz, Cohen & Elias, 6735 Telegraph Rd., Bloomfield Hills, Mich. 48301-3145, for plaintiff. Doris D. Coles, Department of Justice, Washington, D.C. 20530, Brian H. Herschfus, Wood & Wood, 37000 Grand River Ave., Farmington Hills, 48335, Brian A. Potestivo, Shaw & Potestivo, 730 S. Rochester Rd., Rochester Hills, Mich. 48307, Ethan A. Gross, Melamed & Dailey, 24901 Northwestern, Southfield, Mich. 48075, for defendant.

OPINION AND ORDER REGARDING DEFENDANTS' MOTIONS FOR SUMMARY JUDGMENT

I. INTRODUCTION

ROSEN, District Judge:

Plaintiff Accurate Filter Products brings this interpleader action for the payment of proceeds of an insurance settlement. At issue is the relevant priorities of Plaintiff's creditors with respect to the proceeds.

The parties stipulated to the payment of some of the proceeds to Defendant Rabinovitz, leaving for resolution the claims of the IRS, Craig Assembly, Huntington Banks, and Globe Midwest. These remaining defendants have now filed motions for summary judgment concerning the remaining proceeds.

Having reviewed and considered the parties' respective Briefs and supporting documents, the Court has determined that oral argument is unnecessary, and therefore, pursuant to Local Rule 7.1(e)(2) this matter will be decided "on the briefs". This Opinion and Order sets forth the Court's decision.

II. FACTUAL BACKGROUND

On May 5, 1992 , Plaintiff Accurate Filter sustained a theft loss. Plaintiff brought suit against its insurance carriers to compel payment of its insurance claims concerning the stolen property. The lawsuit settled on November 29, 1993 for $22,500 and a judgment resolving the insurance action was subsequently entered. A number of Plaintiff's creditors subsequently filed liens on the settlement. To resolve the dispute as to who is entitled to share the proceeds, Plaintiff initiated this interpleader action.

All of the defendants stipulated that Plaintiff's attorney, Steven Rabinovitz, was entitled to payment of his attorney's fees of $7,612.33 for his efforts in connection with the insurance coverage action. Accordingly, this Court issued an Order for Disbursement of Funds to Rabinovitz on July 19, 1995 . The payment to Rabinovitz left $14,887.67 to be distributed.

A. THE REMAINING CREDITORS' CLAIMS

1. The IRS

A federal tax lien was assessed against Plaintiff on November 9, 1992 for unpaid withholding taxes and FICA for the fourth quarter of 1991, and the first two quarters of 1992, in the amount of $45,986. The tax lien arose and attached to all property or rights to property that was held by Plaintiff on that date. The United States subsequently filed notices of the federal tax lien with the Oakland County Register of Deeds and the Michigan Department of State Uniform Commercial Code Unit on February 23, 1993 and February 17, 1993, respectively. On October 26, 1993, after judgment was entered in Plaintiff's insurance action, the IRS filed a Notice of Levy on the settlement proceeds.

2. Huntington Bank

Defendant Huntington Bank's claim arises out of its signed security agreement with Plaintiff dated November 12, 1992 for a loan secured by all of Plaintiff's machinery and equipment, furniture and fixtures. The Bank's lien then was perfected when Huntington filed its financing statement evidencing its security interest in the collateral on December 9, 1992. Upon Plaintiff's default in 1994, this security interest was valued at $9,412 by Huntington .

3. Craig Assembly

Defendant Craig Assembly obtained a judgment against Plaintiff on August 11, 1993 for $23,722.40. That interest was later perfected on September 7, 1993 with the filing of a "Notice of Lien by Judgment Creditors" with the Oakland County Circuit Court.

4. Globe Midwest

Defendant Globe Midwest's lien arises out of a contract entered into with Plaintiff on August 19,1992, in which Plaintiff agreed to pay 10% of all monies received from insurance proceeds in return for assistance in the preparation and presentation of such claims to the insurance company. Globe Midwest 's claim for $2,250 matured upon the judgment being entered upon settlement of Plaintiff's theft loss litigation on November 29, 1993 for payment by the insurance companies of $22,500. Globe's position is that it assisted Defendant Rabinovitz in securing the $22,500 settlement and, thus, its claim should be treated like an attorney's lien.

III. ANALYSIS

A. HUNTINGTON PERFECTED FIRST AND, THEREFORE, HAS A LIEN SUPERIOR OVER OTHER CLAIMANTS

Defendant Huntington Bank's security interest arose when the security agreement was signed on November 12, 1992. Huntington then perfected that interest when it filed a financing statement with the Michigan Department of State on December 9, 1992.

The formal requisites for a valid security interest and attachment are set forth in MCL §440.9203, which states:

(1) Subject to the provisions of section 4208 on the security interest of the collecting bank, section 8321 on the security interest in securities, and section 9113 on a security interest arising under the article on sales, a security interest is not enforceable against the debtor or third parties with respect to the collateral and does not attach unless:

(a) The collateral is in the possession of the secured party pursuant to the agreement, or the debtor has signed a security agreement which contains a description of the collateral and in addition, when the security interest covers crops growing or to be grown or timber to be cut, a description of the land concerned; and

(b) Value has been given; and

(c) The debtor has rights in the collateral.

(2) A security interest attaches when it becomes enforceable against the debtor with respect to the collateral. Attachment occurs as soon as all of the event specified in subsection (1) have taken place unless explicit agreement postpones the time of attachment.

Section 9203 makes clear that Huntington 's security agreement created a valid security interest in this case as it was: (a) signed by the debtor, (b) value was given, and (c) indicated which collateral was covered under the security agreement. The security agreement also covered any proceeds derived from the collateral, including insurance payments on stolen collateral. The security interest attached on November 12, 1992, when the security agreement was executed. When Huntington filed a financing statement with the Michigan Department of State on December 9, 1992, it perfected its interest in the collateral and established a priority over any subsequent third party claims. See MCL §440.9302.

At time of default, Huntington 's interest amounted to $9,412.16. For Huntington to collect on this debt, it must first show entitlement to the funds. Huntington offered that in 1988 Plaintiff had an initial $15,000 line of credit which was later extended to $35,000. Additional funds were lent in 1991 and 1992 to purchase the Plastic Injection Molds. Huntington executed additional security agreements and financing statements for the loans in 1992. When Accurate defaulted in 1994, the balance on the loans was $9,412.16. This court is satisfied that Huntington has established its entitlement for the claim.

B. HUNTINGTON HAS PRIORITY OVER THE FEDERAL TAX LIEN

Under federal law a state-created lien must be "choate" in order to compete against a federal tax lien. United States v. City of New Britain [54-1 USTC ¶9191 ], 347 U.S. 81, 84 (1954). A lien is choate when there are no further steps needed to perfect the security interest. Huntington 's lien became choate when it filed its financing statement on December 9, 1992.

A federal tax lien arises under 26 U.S.C. §6321 , which provides:

If any person liable to pay any tax neglects or refuses to pay the same after demand, the amount (including any interest, additional amount, addition to tax, or assessable penalty, together with any amounts 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.

Accordingly, when the United States made assessments against Plaintiff on November 9, 1992, and November 15, 1992 for unpaid withholding and FICA taxes for the forth quarter of 1991, and the first two quarters of 1992, it established a federal tax lien for the amount of $45,986.34. Upon the assessment, the federal tax lien arose and attached to all property or rights to property that Plaintiff had, including the funds at issue.

However, federal tax liens do not automatically have priority over all other liens. The established rule concerning priorities of federal tax liens is "first in time, first in right", i.e., the party which perfects its lien first establishes its priority over all other lienors. United States v. McDermott [93-1 USTC ¶50,164 ], 113 S.Ct. 1526, 1528 (1993); United States v. City of New Britain [54-1 USTC ¶9191 ], 347 U.S. 81, 85 (1954). Although the federal tax lien "arose" prior to Huntington 's filing date, it could not defeat a valid prior state law created lien unless it was perfected first through the filing of a "Notice of a Federal Tax Lien". The Notices of Federal Tax Lien in this case were not filed until February 17 and 23, 1993. Since Huntington Bank perfected its security interest more than two months earlier, on December 9, 1992, Huntington has priority over the United States in its interest in the insurance proceeds.

C. HUNTINGTON HAS PRIORITY OVER CRAIG ASSEMBLY'S JUDGMENT LIEN

Huntington also has priority over Defendant Craig Assembly as it perfected its interest prior to September 7, 1993, the date on which Craig filed a Notice of Lien by Judgment Creditors with the Oakland County Circuit Court. Moreover, Huntington had filed it financing statement before Craig's Judgment Lien ever arose on August 11, 1993 when the underlying judgment was entered by the court.

The United States ' tax lien also has priority over Craig since the tax lien was filed more than six months before Craig's judgment lien was perfected.

D. GLOBE ASSEMBLY'S CONTRACTUAL INTEREST DOES NOT TAKE PRECEDENCE OVER HUNTINGTON 'S PERFECTED SECURITY INTEREST

Huntington 's security interest is also superior to Defendant Globe Assembly's claim for $2,250. Globe contends that it is entitled to this amount as fees for services provided to Plaintiff pursuant to a contract dated August 19, 1992. The contract provided that Globe would receive ten percent of all insurance proceeds recovered as compensation for its assistance to the insured in the preparation and presentation of its insurance claims. Since the insurance claims ultimately resulted in a settlement of $22,500, Globe contends that it has a right to $2,250.

Under the same rationale that allowed Defendant Rabinovitz to be paid first, Globe argues that if not for its efforts in connection with the initial insurance proceedings, there would be no funds to be disbursed to the other parties. Globe contends that Warner v. Tarver, 158 Mich App 593, 405 N.W.2d 109 (1986), and Silverman v. Michigan Basic Property Insurance Association et al., No. 101403, (Mich. App. May 16, 1989) (unpublished decision), establish a rule in Michigan law that all persons who assist in the recovery of the insurance proceeds have first priority over other creditors. The Court is not persuaded by this argument.

In Warner, the Michigan Court of Appeals found that equity required payment to an attorney of his reasonable fees out of insurance proceeds before any payments were made to the competing holders of valid security interests. The court stated:

[I]t would be inequitable to allow the entire funds produced by the efforts of [attorney] Hertzog to be applied toward payment of the prior security interests and leave [defendant] Hertzog to seek his fee solely from Tarver ... equity demands that the secured parties bear a pro rata share of the reasonable attorneys fees for the services rendered by Hertzog in securing a judgment for the insurance proceeds.

Id. at 600-02, 113. Globe's position in this case is distinguishable, as the Warner rule only provides a priority for attorneys' fees. Globe was acting as a claim adjuster, and not as an attorney for Plaintiff. Moreover, in this case, attorney Rabinovitz was paid pursuant to the stipulation of all other Defendants.

While it is true that in Silverman, the Michigan Court of Appeals upheld the award of an appraiser's fees prior to payment to secured parties, Silverman is an unpublished decision which has no precedential value. The Court declines to extend the rule of Warner to cover an insurance claims adjuster like Globe in order give them first priority over two other parties holding perfected security interests prior to the date of judgment.

Even if Globe's interest were deemed to be the equivalent of that of an attorney, that interest did not become a "choate" lien before the IRS's lien was filed. The Supreme Court addressed this same issue in United States v. Equitable Life [66-1 USTC ¶9444 ], 384 U.S. 323 (1966) when it held that a federal tax lien, filed before the default of the mortgage, was entitled to priority over the mortgagee's claim for attorney's fees. At the time of recordation of the attorney's lien, no sums were adjudged to be paid. Therefore, the Court determined that the statutory lien for attorney's fees was inchoate. The same is true in this case. Globe's interest did not become a choate lien until judgment on the settlement was entered on November 29, 1993. See also, United States v. Pioneer American Insurance Co. [63-2 USTC ¶9532 ], 374 U.S. 84 (1963). The Sixth Circuit has also held in U.S. v. Komisar [66-2 USTC ¶9640 ], 365 F.2d 318 (6th Cir. 1966), that a federal tax lien has priority over attorney's fees when the tax lien is recorded prior to the attorney's lien becoming choate.

In this case, the federal tax lien was perfected on February 23, 1993 . This was more than eight months prior to the judgment of November 29, 1993, which established the amount owed to Globe. Since Huntington Bank has a priority over the federal tax lien, it also has priority over the interest of Globe.

IV. THE FEDERAL TAX LIEN HAS PRIORITY OVER THE INTERESTS OF DEFENDANTS CRAIG AND GLOBE MIDWEST

A. THE FEDERAL TAX LIEN PRECEDES CRAIG'S INTEREST IN THE PROCEEDS

Although the United States ' interest is subordinate to that of Huntington , it does take precedence over the interest of Craig and Globe Midwest. Craig Assembly obtained a judgment against Plaintiff on August 11, 1993 . It then filed a Notice of Lien by Judgment Creditor with the Oakland County Circuit Court on September 7, 1993 . However, as indicated above, since Craig's filing occurred after the United States filed its Notices of Federal Tax Liens (February 17, 1993, and February 23, 1993), under 26 U.S.C. §6323 , Craig's interest is subordinate to the federal tax lien.

B. THE FEDERAL TAX LIEN HAS PRIORITY OVER GLOBE MIDWEST

The United States ' tax lien also has priority over the claim of Globe Midwest. Although Globe's interest arose on August 19, 1992 , it could not become a "choate" interest until the amount owed to Plaintiff was established by the judgment entered on November 29, 1993 . The judgment was entered in favor of Plaintiff for $22,500 and according to the contract, Globe was then owed $2,250 (i.e., 10% of insurance proceeds recovered) for past services. Since the United States filed its lien with the Oakland County Register of Deeds and the Michigan Department of State, on February 23, 1993 , and February 17, 1993 , respectively, it has priority over any interest Globe had in the insurance proceeds.

V. CONCLUSION

After the amount of $7,612.33 was paid to Rabinovitz, a balance of $14,887.67 was left for distribution amongst the remaining creditors. Huntington has the first priority interest in the remaining proceeds, Therefore, Huntington is entitled to payment for the full amount of its claim of $9,412.16. The remaining $5,475.51 shall be paid to the United States , as the federal tax lien is next in priority. The claims of Defendant Craig Assembly and Defendant Globe Midwest shall be dismissed, as the leftover insurance proceeds failed to fully satisfy even the United States ' second priority tax lien.

VI. ORDER

For all of the reasons stated above in this Opinion and Order, IT IS HEREBY ORDERED that Defendant Huntington Bank's Motion for Summary Judgment is GRANTED, Defendant United States' Cross-motion for Summary Judgment is GRANTED IN PART, and Defendants Craig Assembly's and Globe Midwest's Motions for Summary Judgment are hereby DENIED.

Let Judgment be entered accordingly.

 

 

[96-1 USTC ¶50,288] United States of America, for the use and benefit of Citizens Security Bank (Guam), Inc., Plaintiff v. Norse, Inc., et al., Defendants United Pacific Insurance Company, Plaintiff v. Allied Technical, Ltd., et al., Defendants

U.S. District Court, Dist. Guam, Civ. 95-00090, 95-00107, 4/29/96

[Code Sec. 6323 ]

Lien: Priority: IRS claim: Security interest: Release of levy.--The IRS's claim to the proceeds of a Miller Act bond prevailed over a bank's security interest in a subcontractor's contracts because the IRS's properly filed tax lien on the subcontractor's property for withholding tax delinquencies was first in time. The bond proceeds resulted from a contractor's default on its contract with the subcontractor. Even though prior to extending a line of credit the bank received assurances from the IRS that a levy against the subcontractor's property had been released, the bank was not told that the lien had been lifted, and it neglected to ascertain whether a tax lien had been filed against the subcontractor. Further, the lien attached to the bond proceeds even though the terms of a security agreement placed the funds directly into the bank's possession.

Thomas C. Sterling, Klemm, Blair, Sterling & Johnson, 238 Archbisop Flores St., Agana, Guam 96910, for United Pacific Ins., Co., June S. Mair, Mair, Mair, Spade & Thompson, 414 W. Soledad Ave., Agana, Guam 96910, for Citizens Security Bank (Guam), Inc., Mikel W. Schwab, Assistant United States Attorney,238 Archbishop Flores St., Agana, Guam 96910, for I.R.S.

ORDER

UNPINGCO, District Judge:

This case is before the Court on the cross motions for summary judgment of defendants Citizen's Security Bank ( Guam ) Inc., ("Citizen's") and the United States of America Department of the Treasury, Internal Revenue Service ("the IRS").

Procedural History:

This arose as a Miller Act case. The United States entered into a contract with Norse, Inc. for construction projects on Anderson Air Force Base, Guam . Union Pacific Insurance Company ("UPIC") gave Norse the Miller Act bond required by the United States . Norse subcontracted out a portion of the project to Allied Technical Ltd. ("Allied") for $2,329,380.00 of the contract. Norse eventually defaulted on this subcontract, owing Allied $128,222.59.

When it learned that Norse defaulted on its obligations to Allied, UPIC filed an interpleader action, depositing the bond proceeds so that the proper party could lay claim to them. UPIC's interpleader suit was filed in Superior Court on August 3, 1995. On August 29, 1995, Citizen's filed a motion to dismiss UPIC's suit in Superior Court because as a Miller Act case, Superior Court did not have jurisdiction. Citizen's also filed a Complaint for relief under the Miller Act in the District Court of Guam, claiming the right to the $128,222.50, and also claiming bad faith against UPIC. On September 1, 1995, the U.S. , on behalf of the IRS, removed the first interpleader suit from Superior Court to District Court, and the U.S. thereafter, on October 4, 1995, filed an Answer to the Miller Act Complaint, with a Claim of Right to the proceeds. On November 1, 1995, the two cases were consolidated.

On October 18, 1995, Citizen's filed a motion for summary judgment against the IRS. The motion was not set for oral argument. Several weeks later, on December 1, 1996, the United States filed a brief on behalf of the IRS, opposing Citizen's motion for summary judgment and cross-moving for summary judgment. Citizen's filed a fifteen-page Reply Brief on December 18, 1995. The IRS has filed no Reply Brief.

In addition to the cross motions for summary judgment, UPIC filed a motion to be discharged from the lawsuit. This motion settled when the parties came before the Court on a Motion for a Protective Order on January 19, 1996. Though the parties stated that UPIC would be discharged from the proceedings and remain a nominal defendant only, no documents are before the Court indicating that such a settlement has been reached.

The Motion for Summary Judgment:

To get started on the subcontract on Anderson Air Force Base, Allied sought financing from Citizen's Security Bank. Citizen's issued Allied a $200,000.00 line of credit, using several of Allied's contracts as security, including the Norse contract. Citizen's filed a UCC-1 financing statement on eleven contracts of Allied's (including the contract which became the subject of this lawsuit), thereby perfecting its security interest.

Long before Allied sought the line of credit from Citizen's, Allied had apparently slipped into arrears in its withholding and employment tax obligations to the IRS. Because of the past-due amounts, tax liens arose under the Internal Revenue Code §6321 , on December 14, 1992, March 3, 1993, June 7, 1993, September 20, 1993 and December 27, 1993. The IRS was negotiating with Allied over the arrearages for some months prior to the time that Citizen's began dealing with Allied. The IRS had levied on some of Allied's property before Citizen's extended the line of credit to Allied. In the midst of negotiating the line of credit with Allied, Citizen's discovered the levy. Citizen's contacted the IRS to find out whether the levy was going to be released. Shortly thereafter, the IRS released the levy. Satisfied that it had been released, Citizen's extended the line of credit for $200,000.00.

When Norse defaulted on its contract to Allied, Allied owed Citizen's the full $200,000.00 on its line of credit. Citizen's now wants the $128,222.50 owed by Norse to Allied. They claim that their perfected security interest puts them first in line. IRS argues that its lien, because it arose first, prevails.

Citizen's argues that it would never have approved the loan to Allied had the IRS not assured them that the levy was released. Though Citizen's ensured there was no levy in place, they did not ensure that there was no tax lien in place. A levy is only a tool granted by Congress by which the IRS can collect taxes admin istratively without having to go to court under 26 U.S.C. §6331 . The lien is the mechanism by which IRS places their claim to the property. 26 U.S.C. §6321 . Though the IRS released its levy, this does not release the lien--it merely frees up the property which was under levy. It does not eliminate the tax liability and the ensuing liens placed. IRS had a lien, properly filed at this District Court, and at the Department of Land Management on February 14, 1994, which lien has never been lifted. Allied and Citizen's entered into their agreement months after the lien was recorded, in July of 1994.

The sole issue before this Court is whether the IRS lien prevails. Citizen's argues that because Allied never owned the bond proceeds (because Citizen's Security Agreement places them directly into Citizen's hands), then they are not the property of Allied, so the lien never attaches. The Court is not persuaded by this. It is black letter law that a tax lien arises automatically at the time of the assessment, and continues thereafter until the underlying tax liability is extinguished. A tax lien attaches to all property rights then held by the taxpayer or subsequently acquired. United States v. McDermott [93-1 USTC ¶50,164 ], 507 U.S. 447, 453 (1994). There is no dispute in the case law over the principle that an IRS lien attaches to after-acquired property. See Glass City Bank of Jeanette, Pa. v. United States [45-2 USTC 9449], 326 U.S. 265 (1945); Seaboard Surety Co. v. United States [62-2 USTC ¶9653 ], 306 F.2d 855 (9th Cir. 1962). Because the IRS was the first-filed lien, they will prevail ("first-in-time, first-in-line").

A further reason for ruling in favor of the IRS is that the IRS lien was on file, for the entire world to see. Citizen's could have come to the District Court or the Department of Land Management, as many lenders do to ensure that the borrower does not have a tax lien filed against them. They did not do this, and instead relied on the release of the levy to assume that they would be in the first position on the contracts. For this same reason, the Court declines to rule against the IRS on the policy argument urged by Citizen's; the IRS did not lure Citizen's into approving this loan on the basis of misleading statements. Lending institutions are expected to be appreciative of the distinction between an IRS lien and an IRS levy. The assurance of an IRS official that a levy has been released should not be taken as an assurance that the property would not be subject to future collection efforts emanating from a valid, existing tax lien.

The issue of the wage claimants remains. The IRS concedes that the wage claimants are owed the first $36,416.86 of the funds. However, Citizen's does not concede this point. In fact, they argue that "unless a claim was made on the bond within the statutory time period, the employees have no right to the funds on deposit with the court." The IRS states that in the event that Citizen's does not concede this point, the bank still does not have priority.

The documents on file in this case do not present a motion for summary judgment by the Department of Labor on the wage claims; this is not before the Court on summary judgment. The only issue is whether Citizen's Security Agreement defeats the IRS lien. Accordingly, the Court cannot adjudicate on the issue of the Department of Labor claims at this time.

In conclusion, the IRS is first in line to claim the legal right to these proceeds. No other issues are before the Court at this time. Summary Judgment is granted for the Internal Revenue Service.

 

 

[96-1 USTC ¶50,272] Bank One, West Virginia, N.A., formerly Bank One, West Virginia, Huntington, N.A., a national banking association, Plaintiff v. United States of America, Defendant

U.S. District Court, So. Dist. W. Va., Huntington, Civ. 3:93-1053, 3/29/96

[Code Secs. 6323 and 7426 ]

Liens: Security interest: Priority of claims: Choateness: Property subject to lien: Civil actions by nontaxpayers.--A bank's security interest in real property was choate and, therefore, had priority over later-filed tax liens because the property subject to the security interest was established before the government recorded the tax liens. The bank had a valid security interest because the interest was appropriately filed and perfected under state ( West Virginia ) law and the bank parted with money or money's worth in the form of several large loans in obtaining the interest. The property at issue was not the rent payments due pursuant to a sublease that was executed after the liens were filed and to which the IRS liens attached. The property subject to the bank's security interest consisted of the leasehold estate, the rents and the underlying real property, and the sublease did not alter the essential character of the property subject to the security interest.

Daniel A. Earl, Christopher J. Plybon, Huddleston, Bolen, Beatty, Porter & Copen, P.O. Box 2185, Huntington, W.Va. 25332-3234, for plaintiff. R. Scott Clarke, Department of Justice, Washington, D.C. 20530, Gary L. Call, Assistant United States Attorney, United States Attorney's Office, P.O. Box 3234, Charleston, W.Va. 25332-3234, for defendant.

MEMORANDUM OPINION AND ORDER

STAKER, Senior District Judge:

This wrongful levy suit is now pending before the court on the parties' cross motions for summary judgment.

STATEMENT OF THE CASE

Bank One, West Virginia , N.A. ("Bank One" or the "Bank") filed suit against the United States pursuant to I.R.C. §7426 . Bank One asserted that the United States (the "Government"), more specifically the Internal Revenue Service (the "IRS"), wrongfully levied against some real property in which Bank One claimed a prior perfected security interest. Bank One sought a judgment equaling the rents the IRS had obtained pursuant to the levy, plus interest. Bank One also sought injunctive relief and the costs associated with bringing this action.

The parties stipulated to the relevant facts and there are no material facts in dispute. The stipulated facts (entitled "Stipulation") are incorporated by reference as if fully set forth herein and are attached hereto as "Exhibit A." The court also notes that the facts set forth in the Affidavit submitted by Charles Lanham, Chairman of Bank One, are not in dispute. That Affidavit is attached hereto as "Exhibit B." The parties submitted this case on cross motions for summary judgment. The motions have been thoroughly briefed and are now mature for the court's decision.

The question presented is: Whether the Government's tax lien or Bank One's security interest has priority under the principles set forth in I.R.C. §§6321 -6323 and IRS v. McDermott [93-1 USTC ¶50,164 ], 507 U.S. 447 (1993)?