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[2000-1 USTC ¶50,342] Whiting-Turner/A.L. Johnson, a Joint Venture, Plaintiff v. P.D.H. Development, Inc., United States of America, and Athens First Bank & Trust Company, Defendants

U.S. District Court, Mid. Dist. Ga., Athens Div., 3:98-CV-107(DF), 3/21/2000

[Code Sec. 6321 ]

Tax liens: Security interest: Priority: Accounts receivable: Existence of property.--A bank's security interest in a delinquent subcontractor's accounts receivable from a construction contract had priority over a subsequently filed federal tax lien. The taxpayer had performed part of its contract duties before the tax lien was filed and, thus, had rights to at least a portion of the receivables to which the bank's security interest could attach. Accordingly, the receivables were "in existence" when the tax lien was filed, regardless of whether state (Georgia) law gave the taxpayer an interest in the accounts as soon as the contract arose, or federal law gave the taxpayer an interest in the accounts only after it performed its contract duties.

[Code Sec. 6323 ]

Tax liens: Security interest: Accounts receivable: Existence of property: 45-day safe harbor provision.--A bank's security interest in a delinquent subcontractor's accounts receivable was superior to a subsequently-filed federal tax lien. Moreover, because the security interest arose from a commercial transaction financing agreement, the bank was also entitled to the payments that the subcontractor was owed within 45 days after the tax lien filing. However, a question of fact as to the amount of the receivables that were subject to the tax lien precluded summary judgment.

[Code Sec. 6323 ]

Tax liens: Notice of: Wrong name: Substantial compliance.--A federal tax lien sufficiently identified the delinquent taxpayer. Although the name listed on the lien differed from the taxpayer's incorporated name, under the substantial compliance standard of Code Sec. 6323 , it was sufficiently similar so that a reasonable inspection of the county lien index would have revealed the lien's existence.

[Code Sec. 7402 ]

Tax liens: Security interest: Priority: Evidence: IRS employees: Unsworn declarations: Hearsay: Best evidence.--In an action to determine the priority of competing security interests, unsworn declarations from IRS employees were admitted into evidence because they were made under penalty of perjury and verified as true and correct. However, their statements regarding the taxpayer's employer identification number were stricken as hearsay, and statements regarding the taxpayer's total tax liabilities were accepted only as proving that the taxpayer had a federal tax deficiency.

ORDER

FITZPATRICK, District Judge:

Whiting-Turner/A.L. Johnson ("Whiting-Turner")initiated this lawsuit in the Superior Court of Clarke County by filing a complaint in interpleader, as amended, in which it seeks to determine entitlement to $26,330.14 that it is obligated to pay P.D.H. Development, Inc. ("PDH") as compensation for work performed on the University of Georgia Animal Science Complex . Whiting Turner named three defendants to the action: (1) PDH; (2) Athens First Bank & Trust Company ("Athens First"); and (3) the United States of America . The complaint for interpleader was filed pursuant to 28 U.S.C. §2410, in which the United States waived its sovereign immunity for interpleader actions involving tax liens. The United States subsequently removed the case to federal court pursuant to 28 U.S.C. §1444, which allows the United States to remove any action brought in state court against the United States under §2410 to the district court. This matter is now before the Court on cross-motions for summary judgment filed by the United States and Athens First.

I. STATEMENT OF FACTS

On August 9, 1996 , Whiting-Turner entered into a subcontract (the "Subcontract") with PDH to perform all of the grading and site utilities work on a project known as the University of Georgia Animal Science Complex (the "Project"). In subsection (b) of Article 5 of the Subcontract, PDH agreed to submit to Whiting-Turner applications for payment by the fifteenth of each month, or as otherwise provided in the contract documents, so as to enable Whiting-Turner to apply for payment from the Project owner. Subsection (a) of Article 5 of the Subcontract provides for payment of the contract amount as follows: Whiting-Turner was obligated to pay PDH an amount equal to ninety percent (90%) of the value of the work performed as determined by the architect and approved by the construction manager during any calendar month within fifteen (15) days after payment therefore was received by the construction manager from the owner of the project or within such time as specified by law. Additionally, the contract provides that

Retainage and any other balance of the Contract Amount shall be payable within fifteen (15) days . . . after the work under this Agreement has been completed and accepted by Owner, Architect, and [Whiting-Turner] and following approval by the Architect of the final application for payment and settlement of all claims, if any under this Agreement, provided that Trade Contractor has fully performed all of its obligations hereunder.

Article 5(a) of the Subcontract.

On July 18, 1997 , Whiting-Turner declared PDH to be in default under the Subcontract. Whiting-Turner terminated the Subcontract and PDH ceased all work on the Project as of July 18, 1997 . The amount due and owning PDH for the services it performed on the Project is $26,330.14.

Two independent parties, Athens First and the United States , claim an interest in the money owed to PDH under the Subcontract. PDH has not claimed an independent entitlement to any portion of the fund involved in this case or indicated its support for either of the two claims of entitlement.

Athens First's claim is premised on its security interest in all of PDH's accounts receivable. Over a period of several years, Athens First advanced loans and funds to PDH. PDH executed numerous promissory notes, security agreements, and UCC-1 financing statements granting a security interest in all of PDH's accounts receivable to Athens First (Aff. of A. Middleton Ramsey (tab #22), paras. 3 & 4; Exhibits D, E, F, I, J, K, O, and Q). On February 10, 1994, Athens First filed a UCC-1 financing statement to perfect its interest in "All Furniture, Fixtures, Equipment, Accounts Receivable and General Intangibles now or hereafter existing or created" (Aff. of A. Middleton Ramsey (tab #22), Exhibit O). Athens First filed a second UCC-1 financing statement, covering "All Furniture, Fixtures, Equipment, Inventory, Accounts Receivable and proceeds thereof, all General Intangible instruments, chattel paper and cash of P.D.H. Development, Inc. now owned or hereinafter acquired or created," on June 8, 1995 (Aff. of A. Middleton Ramsey (tab #22), Exhibit Q). Athens First has not advanced any loans or funds to P.D.H. since August 4, 1995 (Aff. of A. Middleton Ramsey (tab #22), para. 5). As of January 31, 1997 , the balance owed by PDH to Athens First was $345,678.90 principal and $41,338.45 interest (Aff. Of A. Middleton Ramsey (tab #22), para. 6).

The United States' interest is premised on assessments made by the Internal Revenue Service ("IRS") against P.D. Hill Development, Inc. ¹ On July 15, 1996, the IRS made assessments against P.D. Hill Development, Inc. for $12,873.12 in unpaid Form 941 liabilities for the fourth quarter of 1995 (Athens First's Mot. for Summ. J. (tab #19), Exhibit BB). On January 31, 1997 , the IRS fried a Notice of Federal Tax Lien against "PD Hill Development Inc., a corporation DBA Phoenix Pipe & Dirt" in the Clarke County, Georgia Superior Court Clerk's Office (Athens First's Mot. for Summ. J. (tab #19), Exhibit BB). Samuel Elliot, a revenue officer with the IRS in Athens, Georgia, asserts that the "balance of P.D. Hill Development's Form 941 liabilities for the fourth quarter of 1995 as of May 3, 1999, is $23,592.51" (Decl. Of Samuel W. Elliot, para. 5, attached as Exhibit 3 to the United States ' Statement Of Material Facts Not In Dispute (tab #27)).

II. MOTIONS TO STRIKE

Athens First has objected to, and moved to strike, the affidavits of Paul Dennis Hill and Samuel W. Elliot, which the United States presented in support of its motion for summary judgment (Mot. to Strike Unsworn Decl. of Paul Dennis Hill (tab #31); Mot. to Strike Unsworn Decl. of Samuel W. Elliot (tab #33); Mot. to Strike Supplemental Decl. of Paul Dennis Hill and Renewed Mot. to Strike Decl. of Paul Dennis Hill (tab #42); Mot. to Strike Supplemental Decl. of Samuel W. Elliot and Renewed Mot. to Strike Decl. of Samuel W. Elliot (tab #44)). In an effort to cure the objectionable portions of the declarations, the United States filed a Supplemental Declaration of Paul Dennis Hill (tab #41) and a Supplemental Declaration of Samuel W. Elliot (tab #37) following Athens First's initial motions to strike. Given that the United States was able to address many of Athens First's concerns through the supplemental declarations, the Court considers the first motions to strike to be moot and will now address the issues raised in Athens First's motions to strike the supplemental declarations.

In order for the supplemental declarations to be used as summary judgment proof, they must be sworn and meet the requirements of Federal Rule of Civil Procedure 56(e). The unsworn declarations submitted by the United States are of the same force and effect as sworn affidavits because both were made under penalty of perjury and verified as true and correct. 28 U.S.C. §1746. Rule 56(e) also requires that

Supporting and opposing affidavits shall be made on personal knowledge, shall set forth such facts as would be admissible in evidence, and shall show affirmatively that the affiant is competent to testify to the matters stated therein. Sworn or certified copies of all papers or parts thereof referred to in an affidavit shall be attached thereto or served therewith.

Fed.R.Civ.P. 56(e).

With respect to the Supplemental Declaration of Paul Dennis Hill, Athens First objects to paragraph 5, in which Mr. Hill states that "[i]t is well known in the community of Clarke County that 'P.D. Hill Development, Inc.' and 'P.D.H. Development, Inc.' are the same corporation. It is known by all banks, suppliers and construction contractors in the community." In his declaration, Mr. Hill states that, as the president of "P.D. Hill Development, Inc. a/k/a P.D.H. Development, Inc." (para. 2), he has operated his construction business in Clarke County under these names since 1989 (para. 3). Mr. Hill also states that, as an agent for his construction business, he has dealt with every major bank, supplier of materials, and contractor in Clarke County (para. 4). Based on Mr. Hills extensive business dealings in Clarke County , perhaps the Court, or a jury at trial, could reasonably infer that the banks, suppliers and construction contractors in the community do know that "P.D. Hill Development, Inc." and "P.D.H. Development, Inc." are the same corporation. However, a reasonable inference based on specific admissible facts is different from Mr. Hills affirmative statement as to what he believes is known in the community. As Mr. Hills statements as to what is known in the community would not be admissible in evidence, the Court hereby strikes paragraph 5 of the Supplemental Declaration of Paul Dennis Hill pursuant to Rule 56(e).

Athens First also objects to parts of the Supplemental Declaration of Samuel W. Elliot. First, Athens First objects to Mr. Elliot's statements regarding the application for employer identification number filed in the name of "P.D. Hill Development, Inc." (para. 3). Athens First argues that these statements are hearsay and thus would not be admissible at trial. Specifically, Athens First objects to the second Sentence of paragraph 3, which provides that "[t]he name 'P.D. Hill Development, Inc.,' used by the Internal Revenue Service, is derived from the application for employer identification number filed by the taxpayer." The application for employer identification number, rather than Mr. Elliot's testimony about the contents of the application, would be the best evidence of the application's contents at trial. See Fed.R.Evid. 1002. As Mr. Elliot's testimony about the contents of the application would not be admissible at trial and a sworn or certified copy of the application is not attached to Mr. Elliot's declaration, the Court will strike the second sentence of paragraph 3 concerning the application for employer identification number.

Athens First also objects to the second sentence of paragraph 6, which states that "[t]he balance of P.D. Hill Development's Form 941 liabilities for the fourth quarter of 1995 as of May 3, 1999 , is $23,592.51." As he is the revenue officer assigned to collect PDH's tax liabilities, Mr. Elliot is certainly competent to testify about the tax liabilities of PDH as a matter within his personal knowledge. The Court agrees, however, that a proper foundation would have to be laid for this testimony to be admissible at trial. However, the Court does not deem it necessary to strike this portion of Mr. Elliot's declaration any more than it deems it necessary to strike the portion of A. Middleton Ramsey's affidavit stating that the amount PDH was indebted to Athens First on January 31, 1997 is $345,678.90 principal and $41,338.45 interest. Thus, for purposes of the United States ' motion for summary judgment, the Court will accept that PDH owes the United States a sum of money for its Form 941 liabilities for the fourth quarter of 1995. If necessary, the precise amount of money owed for PDH's Form 941 liabilities can be determined after the Court determines which of the parties is entitled to the $26,330.14 that Whiting-Turner is obligated to pay PDH.

III. CROSS-MOTIONS FOR SUMMARY JUDGMENT

A. Summary Judgment Standard

Summary judgment is appropriate when "there is no genuine issue as to any material fact . . . and the moving party is entitled to judgment as a matter of law." Fed.R.Civ.Proc. 56(c); Edwards v. Shalala, 64 F.3d 601, 603 (11th Cir. 1995). If the moving party demonstrates that there is "an absence of evidence to support the non-moving party's case," the burden shifts to the non-moving party to go beyond the pleadings and present specific evidence giving rise to a triable issue. Celotex Corp. v. Catrett, 477 U.S. 317, 325, 106 S.Ct. 2548, 2554, 91 L.Ed.2d 265 (1986); Clark v. Coats & Clark, Inc., 929 F.2d 604, 608 (11th Cir. 1991).

In reviewing a motion for summary judgment, the court must construe the evidence and all inferences drawn from the evidence in the light most favorable to the non-moving party. See Maynard v. Williams, 72 F.3d 848, 851 (11th Cir. 1996). Even if there exists some alleged factual dispute between the parties, summary judgment is not necessarily improper; there must be a genuine issue of material fact to render summary judgment improper. See Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248, 106 S.Ct. 2505, 2510, 91 L.Ed.2d 202 (1986).

B. Priority of Athens First's Security Interest to the Federal Tax Lien

Under the Internal Revenue Code, a tax lien arises at the time of assessment, 26 U.S.C. §6322, on "all property and rights to property, whether real or personal, belonging to" a delinquent taxpayer, 26 U.S.C. §6321. The lien also attaches to property acquired by the delinquent taxpayer after the initial imposition of the lien. See, e.g., Glass City Bank v. United States [45-2 USTC ¶9449], 326 U.S. 265, 268, 66 S.Ct. 108, 110, 90 L.Ed. 56 (1945). A tax lien is not valid as against any holder of a security interest under the Federal Tax Lien Act "until notice thereof which meets the requirements of subsection (f) has been filed." 26 U.S.C. §6323(a); see also United States v. Pioneer Am. Ins. Co. [63-2 USTC ¶9532], 374 U.S. 84, 88, 83 S.Ct. 1651, 1655 (1963). The United States ' lien commenced no sooner than January 31, 1997 , the date on which the IRS filed a Notice of Federal Tax Lien against "PD Hill Development Inc., a corporation DBA Phoenix Pipe & Dirt" in the Clarke County, Georgia Superior Court Clerk's Office. See United States v. McDermott [93-1 USTC ¶50,164], 507 U.S. 447, 449, 113 S.Ct. 1526, 1528, 123 L.Ed.2d 128(1993).

Athens First argues that its security interest is senior to the federal tax lien under §6323(a) because it possessed a perfected security interest in PDH's accounts receivable prior to the Internal Revenue Service's filing of notice of the tax lien. In order to come within the protections of §6323(a) as a holder of a security interest, both parties agree that Athens First must establish the four conditions set out by the Court of Appeals in Atlantic States Constr., Inc. v. Hand, Arendall, Bedsole, Greaves & Johnston [90-1 USTC ¶50,065], 892 F.2d 1530 (11th Cir. 1990). The four conditions are:

(1) that the security interest was acquired by contract for the purpose of securing payment or performance of an obligation or indemnifying against loss; (2) that the property to which the security interest was to attach was in existence at the time the tax lien was filed; (3) that the security interest was, at the time of the tax lien filing, protected under state law against a judgment lien arising out of an unsecured obligation; and (4) that the holder of the security interest parted with money or money's worth.

Id. at 1535 (citing 26 U.S.C.A. §6323(h)(1)).

Athens First maintains that the four conditions are met in this case. First, Athens First's security interest was acquired through the security agreements executed by PDH for the purpose of securing payment for the substantial funds it advanced to PDH. Second, Athens First contends that the property to which the security interest was to attach, the accounts receivable, were in existence at the time the tax lien was filed. Third, Athens First's security interest was protected under Georgia law by virtue of O.C.G.A. §11-9-310(a) against a judgment lien arising out of an unsecured obligation. Finally, Athens First satisfies the fourth condition because, by advancing substantial funds to PDH, Athens First "parted with money or money's worth."

In response, the United States recognizes that Athens First "has met conditions (1), (3), and (4), of the requirements of a security interest." (Mem. of Law of United States of America (tab #26), p. 6). The United States argues, however, that Athens First has not met the second condition. In support of this argument, the United States argues that federal law, rather than the state law relied on by Athens First, determines when an account receivable comes into existence. Although state law determines the nature of the legal or property interest of the entity With the competing lien, the United States asserts that, in the case of a federal tax lien, the priority of competing liens is a province of federal law. See Aquilino v. United States [60-2 USTC ¶9538], 363 U.S. 509, 512-14, 80 S.Ct. 1277, 1280, 4 L.Ed.2d 1365 (1960). The difficulty faced by the Court when applying this principle to the facts of this case, however, is that the characterization of when an account receivable is in existence differs significantly under Georgia law and the Treasury Regulations. Moreover, the Treasury Regulations appear to require that the federal definition control over an inconsistent state definition when the case involves a federal tax lien.

Under the Uniform Commercial Code, as adopted by the Georgia legislature, an "account" in the sense if collateral is defined as "any right to payment for goods sold or leased or for services rendered which is not evidenced by an instrument or chattel paper, whether or not it has been earned by performance." O.C.G.A. §11-9-106. A security interest does not attach unless: (1) the debtor has signed a security agreement which contains a description of the collateral; (2) value has been given; and (3) the debtor has rights in the collateral. O.C.G.A. §11-9-203(1). A security in accounts may be perfected by filing a financing statement. O.C.G.A. §11-9-302(1). If steps are taken to perfect the security interest before the security interest attaches, the security interest is perfected at the time when it attaches. O.C.G.A. §11-9-303(1).

Applying these principles to this case, the debtor, PDH, signed several security agreements which granted the secured party, Athens First, a security interest in the collateral described, in part, as "All Accounts Receivable, . . . now owned or hereinafter existing" (Aff. of A. Middleton Ramsey (tab #22), Exhibits D, E, F, I, J, & K). In addition, Athens First gave value for the security interest when it advanced loans and funds to PDH. Even though Athens First took steps to perfect its security interest by filing financing statements, Athens First's security interest did not attach until PDH had rights in the collateral.

Athens First argues that, under Georgia law, the account at issue arose upon the signing of the Subcontract on August 9, 1996 , when PDH acquired a right to payment under the Subcontract, even though that right to payment had not yet been earned by performance. Following this analysis, Athens First security interest attached to PDH's right to payment for services rendered on August 9, 1996 , and, because it previously took steps to perfect its security interest by filing financing statements on February 10, 1994 and June 8, 1995 , Athens First's security interest was perfected as of August 9, 1996 . Because the account receivable to which the security interest was to attach was in existence at the time the tax lien was filed, the second condition of Atlantic States is satisfied. As a result, if the Court applies the law as suggested by Athens First, Athens First's security interest has priority over the federal tax lien.

The United States argues that, although state law characterizes the property at issue, federal law applies to determine when that property interest, i.e., the account receivable, came into existence. Under the applicable Treasury Regulations, an account receivable, defined as "any right to payment for goods sold or leased or for services rendered which is not evidenced by an instrument or chattel paper" (Treas. Reg. §301.6323(c)-1(c)(2)(ii)), "is in existence when, and to the extent, a right to payment is earned by performance." Treas. Reg. §301.6323(h)-1(a)(1). Furthermore, the regulations require that

A security interest must be in existence within the meaning of this paragraph, at the time as of which its priority against a tax lien is determined. For example, to be afforded priority under the provisions of paragraph (a) of §301.6323(a)-1 a security interest must be in existence within the meaning of this paragraph before a notice of lien is filed. Treas. Reg. §301.6323(h)-1(a)(1). The language of this Treasury Regulation supports the Government's contention that, despite any provision of Georgia law to the contrary, Athens First's security interest must have been in existence in the federal sense for Athens First to benefit from the protections of §6323(a). Thus, PDH's accounts receivable did not come into existence until PDH earned the right to payment under the Subcontract by performance.

Without conceding that federal law determines when PDH's accounts receivable came into existence under the Subcontract, Athens First argues that the account receivable existed for purposes of federal law prior to the filing of the federal tax lien because PDH earned the right to payment of substantial funds by performance prior to January 31, 1997 . Apparently, Athens First bases this argument, in part, on the portions of the Subcontract which provide for the withholding of retainage.

As part of its summary judgment proof, Athens First submits the Supplemental Declaration of Scott Saarlas, who was employed as the project engineer or project manager by Whiting-Turner at the times relevant to this cause of action (Supplemental Aff. of Scott Saarlas (tab #30), para. 2). The United States objects to this affidavit on the grounds that (1) the affidavit contains blanks in paragraph 5 which makes the remaining statements in the affidavit nonsensical; (2) there is no evidentiary foundation for the documents attached as exhibits; and (3) the exhibits do not appear to be what the affidavit asserts them to be (Reply of the United States to Athens First's Opp'n to Mot. for Summ. J. (tab #40), p. 4). Although the Court agrees that paragraph 5, which is incomplete, lacks evidentiary value, the Court disagrees that the deficiencies of this paragraph make the remaining statements in the affidavit nonsensical. Similarly, the Court disagrees with the United States ' contentions that there is no evidentiary foundation for the attached exhibits and that the documents do not appear to be what the affidavit asserts them to be. In paragraph 4 of the affidavit, Mr. Saarlas states that the exhibits attached to his affidavit are "true and correct copies" of the pay requests that Whiting-Turner received from PDH for work performed on the Project. The Court has examined the documents and, although documents other than the pay requests are included, the exhibits certainly appear to be what Mr. Saarlas asserts them to be. Thus, although the Court may decline to consider certain portions of the supplemental affidavit, the Court will disregard the assertion by the United States that the entire supplemental affidavit should not be considered for purposes of determining the motions for summary judgment.

Based on the exhibits attached to the Supplemental Affidavit of Scott Saarlas, Athens First argues that, at the time of the filing of the federal tax lien on January 31, 1997 , Whiting-Turner owed PDH money for its performance under the Subcontract. PDH began performing its duties under the Subcontract on August 14, 1996 (Supplemental Aff. of Scott Saarlas (tab #30), para. 3). Undoubtedly, as the Subcontract specifically provided that Whiting-Turner would withhold retainage from its payments to PDH, some amount of money for work performed prior to January 31, 1997 , was due and owing PDH at the time of the federal tax lien filing. The evidence that Athens First provided the Court with respect to the amount of payment earned by performance, but retained by Whiting-Turner, during the period from August 14, 1996 and January 31, 1997 shows that Whiting-Turner owed PDH $11,115.00 as of October 20, 1996 (Supplemental Aff. of Scott Saarlas (tab #30), Exhibit C). Thus, an account existed as of October 20, 1996 because PDH had earned by performance a right to payment of $11,115.00 for services rendered as of this date.

Athens First also asserts an interest in the $19,801.73 in retainage owed to PDH as of March 12, 1997 (Supplemental Aff. of Scott Saarlas (tab #30), Exhibit D; Brief of Athens First filed June 29, 1999 (tab #36), p. 3). Given that Athens First refers to payments made within forty-five days of the filing of the tax lien, the Court assumes that Athens First is attempting to utilize the provisions of §6323(c). 26 U.S.C. §6323(c) provides as follows:

(c) Protection for certain commercial transactions financing agreements, etc.--

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

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

(i) a commercial transactions financing agreement, . . . and

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

(2) Commercial transactions financing agreement.--For purposes of this subsection--

(A) Definition.--The term "commercial transactions financing agreement" means an agreement (entered into by a person in the course of his trade or business)--

(i) to make loans to the taxpayer to be secured by commercial financing security acquired by the taxpayer in the ordinary course of his trade or business, . . . but such an agreement shall be treated as coming within the term only to the extent that such loan or purchase is made before the 46th day after the date of tax lien filing or (if earlier) before the lender or purchaser had actual notice or knowledge of such tax lien filing.

(B) Limitation on qualified property.--The term "qualified property", when used with respect to a commercial transactions financing agreement, includes only commercial financing security acquired by the taxpayer before the 46th day after the date of tax lien filing.

(C) Commercial financing security defined.--The term "commercial financing security means . . . (ii) accounts receivable, . . . .

Pursuant to §6323(c), Athens First's security interest prevails as to any account for construction services rendered which became due and owing within 45 days after the tax lien filing. Prior to the tax lien filing, Athens First and PDH entered into several commercial transaction financing agreements. In these agreements, Athens First, in the ordinary course of its business as a bank, agreed to make loans to PDH to be secured by commercial financing security, which includes the accounts receivable acquired by PDH in the ordinary course of its business. Given that no loans or funds have been advanced to PDH since August 4, 1995 , Athens First made its loans before the 46th day after the date of tax lien filing. In addition, because PDH acquired the accounts receivable before the 46th day after the date of tax lien filing, the accounts receivable come under the statute's definition of qualified property. The retainage of $19,801.73 represents the amount of accounts receivable generated by the services performed by PDH within the forty-five days following the filing of the tax lien on January 31, 1997 . Thus, Athens First's security interest in the accounts receivable takes priority over the federal tax lien on those accounts at least to the extent of $19,801.73.

With respect to the $19,801.73 owed to PDH as retainage, the parties do not address the effect, if any, of the conditional nature of this right to payment under the Subcontract. PDH was entitled to receive payment of the retainage amount only after completion and acceptance of the agreed upon work and following approval by the architect of the final application for payment provided that PDH fully performed all of its obligations under the Subcontract. The Court previously concluded that Athens First's security interest in the accounts receivable existed for purposes of the Federal Tax Lien Act when PDH performed the services giving rise to the accounts receivable. The Court now concludes that, even though the property subject to Athens First's security interest--the amount owing to PDH as of March 12, 1997 --was subject to final calculation or computation, the property was still in existence within the meaning of the FTLA at that time. Thus, although the amount of money subject to Athens First's security interest could have been reduced or eliminated in the future, the fact that the amount payable had not been finally ascertained does not affect the existence of the right to payment.

This conclusion is in accord with the case law concerning the doctrine of choateness. Generally, in order for a competing lien to take priority over a federal tax lien, the competing lien must be established, or "choate," prior to the attachment of the federal lien. A lien is "choate" under the federal rule when "the identity of the lienor, the property subject to the lien, and the amount of the lien are established." United States v. New Britain [54-1 USTC ¶9191], 347 U.S. 81, 84, 74 S.Ct. 367, 369, 98 L.Ed. 520 (1954). Athens First's security interest in PDH's accounts receivable satisfies these three requirements. First, the identity of the holder of the security interest (Athens First) was sufficiently established at the time of the tax lien filing. Second, the property subject to the security interest (PDH's right to the account receivable, or retainage, under the Subcontract) was established, even though the exact amount of the property itself--the precise value of the account receivable--had yet to be determined with complete accuracy. See, e.g., Corigliano v. Catla Constr. Co. [64-2 USTC ¶9657], 231 F.Supp. 245, 248-49 (S.D.N.Y. 1964) (concluding that "[a] state-created lien is not inchoate merely because the amount or value of the liened property has not been finally determined") (citing Brief for the Government at 6, Crest Fin. Co. v. United States [62-1 USTC ¶9105], 368 U.S. 347, 82 S.Ct. 384, 7 LEd.2d 342 (1961) (No. 325), rev'g United States v. Crest Finance Co. [61-1 USTC ¶9460], 291 F.2d 1 (7th Cir. 1961). Third, the amount of Athens First's interest (the amount of its loans to PDH) was fixed and specific. Thus, Athens First satisfied the three-part test for choateness with respect to its security interest at the time the IRS filed its notice of tax lien and within forty-five days thereafter.

However, a genuine issue of material fact, precluding summary judgment, remains as to the precise amount of the accounts receivable generated by the services performed before and within the forty-five days following the filing of the first tax lien. The United States offers the declaration of Paul Dennis Hill, the president of PDH, in which he states that "[a]ll of the work performed by [PDH] for Whiting-Turner . . . for which outstanding balances are due was performed after March 17, 1997, and before July 17, 1997" (Supplemental Decl. of Paul Dennis Hill (tab #41), para. 6). However, the exhibits attached to the affidavit of Scott Saarlas clearly show that, as of March 12, 1997 , Whiting-Turner owed PDH $19,801.73 in retainage. The Court is unable to determine from the evidence before the Court what amount, if any, of this $19,801.73 remains following the backcharges assessed by Whiting-Turner due to PDH's failure to complete and perform properly its obligations under the Subcontract. Accordingly, the cross-motions for summary judgment are hereby DENIED.

At this time, the Court does not consider a trial on this issue to be necessary. The total amount of funds deposited with the Court's registry is $26,330.14. The Court has determined in this order that Athens First may entitled to some amount of these funds less than or equal to $19,801.73. The United States is entitled to the remaining $6,528.41 of these funds in addition to any amounts that Athens First is not entitled to receive. If Athens First and the United States are able to reach an agreement as to the correct amount that each party should receive consistent with this decision, the Court will direct the disbursement of the funds in the agreed upon manner. If the parties are unable to agree within fifteen (15) days of the date of this order, the Court will consider motions for summary judgment on this issue. Athens First is directed to submit its motion and supporting evidence within fifteen (15) days of the termination of first fifteen (15) day period. The United States will then have fifteen (15) days from the date appearing on the certificate of service attached to Athens First's motion in which to respond.

C. Validity of the Federal Tax Lien

Section 6323(f) governs the place of filing for tax lien notices and gives the Secretary of the Treasury the authority to prescribe the form and content of the notice, 26 U.S.C. §6323(f)(3). Although the parties do not dispute that the notice was filed in the correct place and on the correct form, Athens First disputes whether the notice sufficiently identifies the taxpaying entity. The Treasury Regulation promulgated by the Secretary requires only that the notice of lien "must identify the taxpayer." Treas. Reg. §301.6323(f)-1(c)(2). The notice of federal tax lien filed on January 31, 1997 identifies the taxpayer as "PD Hill Development Inc., a corporation DBA Phoenix Pipe. & Dirt." Relying on the undisputed evidence that PDH is incorporated under the name of "P.D.H. Development, Inc." ( Athens First's Mot. for Summ. J. (tab #19), Exhibit AA), Athens First maintains that the tax lien is not valid because it was not filed against the proper corporate entity. The United States argues in response that the notice filed adequately identified the taxpayer.

In support of its argument, the United States relies on Brightwell v. United States [93-1 USTC ¶50,223], 805 F.Supp. 1464, 1471 (S.D. Ind. 1992), in which the district court stated that "lien notices . . . need to comply only substantially, rather than perfectly, to convey adequate notice of a lien." Several courts have applied, with different results, this substantial compliance standard when considering whether a lien notice adequately identifies the taxpayer. Many courts have enforced liens after finding that there is an error in the taxpayer's name. See, e.g., Kivel v. United States [89-2 USTC ¶9415], 878 F.2d 301 (9th Cir. 1989) ("Bobbie Morgan" rather than "Bobbie Morgan Lane"); United States v. Polk [87-2 USTC ¶9432], 822 F.2d 871 (9th Cir. 1987) ("Roy Bruce Polk" rather than "Bruce Polk"); Richter's Loan Co. v. United States [56-2 USTC ¶9706], 235 F.2d 753 (5th Cir. 1956) ("Freidlander" rather than "Friedlander"); Brightwell v. United States [93-1 USTC ¶50,223], 805 F.Supp. 1464 (S.D. Ind. 1992) ("William S. Van Horn" rather than "William B. Van Horn"); and United States v. Sirico [66-1 USTC ¶9209], 247 F.Supp. 421 (S.D.N.Y. 1965) ("Sirico, George" and "Sirico, A." rather than "Assunta Sirico"). Conversely, other courts have invalidated a federal tax lien where the IRS misspells or otherwise materially alters a taxpayer's name. See, e.g., Fritschler, Pellino, Schrank & Rosen, S.C. v. United States [89-1 USTC ¶9111], 716 F.Supp. 1157 (E.D. Wis. 1988) ("Allen G. Casey" rather than "Allen J. Casey"); Haye v. United States [79-1 USTC ¶9192], 461 F.Supp. 1168 (C.D. Cal. 1978) ("Castello" rather than "Castillo"); United States v. Ruby Luggage Corp. [54-2 USTC ¶9512], 142 F.Supp. 701 (S.D.N.Y. 1954) ("Ruby Luggage Corp." rather than "S. Ruby Luggage Corp."); and Continental Invs. [53-2 USTC ¶9625], 142 F.Supp. 542 (W.D. Tenn. 1953) ("W.R. Clark, Sr." rather than "W.B. Clark, Sr.").

Many of the above listed cases rely on the language of §6323(f)(4) which requires that, in the case of real property, the notice must be filed in such a manner that a reasonable inspection of the index will reveal the existence of the lien. In this case, a reasonable inspection of the Clarke County lien index would have revealed the existence of the federal tax lien. A certified copy of page 773 from the Clarke County Lien Index is attached to the Supplemental Declaration of Samuel W. Elliot as Exhibit C. The federal tax lien in the name of "PD HILL DEVELOPMENT INC." appears directly above a GED lien for "PDH DEVELOPMENT INC." on the same page. As these are the only two entries on the Lien Index under the name of "PD Hill" or "PDH," someone searching diligently under "PD Hill Development Inc." would be likely to notice an entry under "PDH Development Inc." In addition, even if there were multiple entries, the two names are sufficiently similar such that they would appear in close proximity on the Lien Index, which is arranged alphabetically. Because these two names are substantially identical, a reasonable searcher, noticing this similarity, would have looked at the lien notice and taken steps to discover the identity of the taxpayer. Thus, under the substantial compliance standard, the lien notice adequately identifies the taxpayer.

CONCLUSION

Athens First's motions to strike the supplemental declarations are hereby GRANTED in part and DENIED in part. Athens First's motion for summary judgment is hereby DENIED. The United States motion for summary judgment is hereby DENIED.

¹ P.D.H. Development, Inc. and P.D. Hill Development, Inc. are the same entity (Supplemental Decl. of Paul Dennis Hill (tab #41), para. 2).

 

 

[99-1 USTC ¶50,407] Kerry Villard, Plaintiff-Appellant v. United States of America, on behalf of United States Internal Revenue Service, Defendant-Appellee

(CA-5), U.S. Court of Appeals, 5th Circuit, 98-30421, 3/8/99, 176 F3d 479, Affirming an unreported District Court decision

[Code Sec. 6323 ]

Liens: Filing of: Misspelled name: Judgment liens: Priority of.--Summary judgment was granted to the IRS against a third-party creditor of the taxpayer because the mis-hyphenation of the taxpayer's name in the IRS's tax lien and the subsequent indexing discrepancy was not so extreme as to evade a reasonable inspection.

Before: HIGGINBOTHAM, JONES and WIENER, Circuit Judges.

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

Per Curiam"

EC: ^* In this contest for lien priority between (1) Plaintiff-Appellant Kerry Villard, as a judgment creditor against Whitehall-Windermere Company, Inc., the alter ego of Ms. Villard's ex-husband, Joseph Villard, Jr., and (2) the Internal Revenue Service (IRS), as federal tax lien holder against "White-Hall Windermere, Company, Inc." [sic], for federal taxes owed by Mr. Villard, Ms. Villard asserts that the government's mis-hyphenation of the corporation's name produced an error in the index to the applicable public records of Rapides Parish , Louisiana , identifying the tax lien debtor as "White-Hall Windermere, Company, Inc., Nominee of Joseph Villard, Jr." rather than Whitehall-Windermere Company, Inc. This, she urges, caused the failure of the IRS to meet its own test for determining whether a prior recorded federal tax lien primes a subsequently recorded judgment lien. Specifically, Ms. Villard insists that the name differences and the resulting mis-indexing of the tax lien does not satisfy 26 U.S.C. §6323(f)(4), which requires the IRS to file a Form 668 ¹ in the office designated under state law for the filing of liens "in such a manner that a reasonable inspection of the index would reveal the existence of the lien." ² The IRS, of course, insists that the misplaced hyphen produced an indexing discrepancy that was not so extreme as to evade a reasonable inspection.

We have carefully reviewed the opinion of the district court (which agrees with the position of the IRS), have familiarized ourselves with the operable facts of this case (which are essentially undisputed) and have studied the arguments and applicable law as advanced by able counsel for the parties in their respective appellate briefs and in their oral arguments to this court. As a result, we conclude that the district court's grant of summary judgment in favor of the IRS and adverse to Ms. Villard is correct, essentially for the reasons set forth in the court's opinion. Therefore, the judgment of the district court is, in all respects,

AFFIRMED. ¹

^* Pursuant to 5TH CIR. R. 47.5, the Court has determined that this opinion should not be published and is not precedent except under the limited circumstances set forth in 5TH CIR. R. 47.5.4.

¹ See 28 C.F.R. §301.6323(f)-1(d)(2).

² 226 U.S.C. §6323(f)(4); 26 C.F.R. §301.6323(f).

¹ We do not address Villard's alternative argument grounded in retroactivity of the judgment against the tax debtor's alter ego corporation as we find it to be unmeritorious under the established jurisprudence of the Supreme Court and this court.

 

 

[99-1 USTC ¶50,334] Joseph Daniel Brady, Plaintiff v. Internal Revenue Service, Defendant

U.S. District Court, East. Dist. Calif., CIV.S-97-2315 DAD PS, 2/23/99

[Code Secs. 6321 and 6323 ]

Liens: Notice of filing: Defective notice: Real property.--Summary judgment was granted to the IRS and denied to a joint owner of property in his third-party suit for refund of taxes that were owed by the other joint owner and collected by the IRS out of proceeds from the sale of the property. The IRS's notice of federal tax lien against the delinquent taxpayer was sufficient to protect its interest in the property, even though the lien was not in the proper form or properly indexed with respect to the property due to a misspelling of the taxpayer's name. Since the third-party owner did not purchase his interest from the delinquent taxpayer, he was not a subsequent bona fide purchaser protected under Code Sec. 6323 .

[Code Sec. 6323 ]

Liens: Notice of filing: Defective notice: Real property: Security interest.--Summary judgment was granted to the IRS and denied to a joint owner of property in his third-party suit for refund of taxes that were owed by the other joint owner and collected by the IRS out of proceeds from the sale of the property. The third-party owner's contention that he was protected under Code Sec. 6323(a) as a "holder of a security interest" was rejected because he provided no evidence that an agreement with the taxpayer creating a security interest in the property was ever formed. Moreover, there was no valid authority to support the argument that the lien was extinguished when the IRS recorded the defective notice of the lien. BACK REFERENCES: ¶38,160.0199

Joseph Daniel Brady, 1919 Grand Canal Blvd., Stockton, Calif. 95269-2133, pro se. Yoshinori H.T. Himel, United States Attorney, Sacramento, Calif. 95814, Diana P. Nowezki, Department of Justice, Washington, D.C. 20530, for defendant.

ORDER

DROZD, Magistrate Judge:

This action came before the undersigned on August 28, 1998 , for hearing on cross-motions for summary judgment. ¹ Plaintiff Joseph Daniel Brady (aka Dan Brady) appeared pro se. Michael J. Desmond, Trial Attorney, Tax Division, United States Department of Justice, appeared on behalf of defendant United States of America (sued as the Internal Revenue Service (IRS)). ² Having considered all written materials submitted with respect to the cross-motions and after hearing oral argument, the court took the motion under submission. For reasons explained below, plaintiff's motion for summary judgment will be denied and defendant's motion for summary judgment will be granted.

BACKGROUND

Plaintiff commenced this action by filing a civil complaint in small claims court in San Joaquin County on November 15, 1997 . The complaint alleges that defendant owes plaintiff $5,000.00, not including court costs, because the IRS misspelled a tax lien for Yolanda Braskat as "Y. Brasket." The complaint alleges that a title company search failed to discover the lien, resulting in the IRS taking $6,437.00 from plaintiff. ³ Defendant removed the complaint to federal court on December 11, 1997 , and filed an answer on January 28, 1998 . Jurisdiction exists pursuant to 28 U.S.C. §1441(a) and 28 U.S.C. §1346(a)(1).

On June 19, 1998 , the court held a Status (Pretrial Scheduling) Conference. At that time, the court refrained from setting pretrial and trial dates, pending resolution of the present motions.

PENDING MOTIONS

A. Undisputed Facts.

The parties submitted a joint statement of undisputed facts with respect to the cross-motions for summary judgment, stipulating that the facts are as follows.

On October 1, 1990 R. Weaver and Y. Braskat filed a joint tax return, reporting a liability owing of $7,976.00 for the 1988 year. On this return, Ms. Braskat's last name was misspelled as "Brasket." (Joint Stip. Facts paras. 1-3.) On October 18, 1990 , Weaver and Braskat filed a joint tax return, reporting a liability of $6,263.00 for 1989. Id. The tax liabilities from both returns were assessed by the IRS on November 26, 1990 . Id. On the same date, the IRS sent notice and demand for payment to Weaver and Braskat with respect to the unpaid taxes for 1988. Id. Also on November 26, 1990 , the IRS sent notice and demand for payment to R. Weaver and Y. Braskat with respect to their unpaid 1989 tax liability. Id. para. 4.

On August 12, 1991 , the IRS caused a Notice of Federal Tax Lien (Notice) to be filed in the San Joaquin County Recorder's Office, setting forth unpaid tax liabilities against Weaver and Braskat for the years 1987, 1988, and 1989. (Joint Stip. Facts para. 5.) The Notice misspelled Ms. Braskat's last name as "Brasket," and did not provide her Social Security number. Id. para. 5 & Ex. A.

On May 17, 1996, title to real property at 9433 Black Swain Place in Stockton, California (Black Swain property) was conveyed by grant deed from Mr. & Mrs. Briggs to plaintiff, Dan Brady. (Joint Stip. Facts para. 7 & Ex. B.) The grant deed was recorded on May 24, 1996 . Id. On May 22, 1996 , title to the Black Swain property was conveyed by grant deed from "Dan Brady" to "Joseph Daniel Brady and Yolanda Braskat, as tenants in common, in undivided 1/2 interests." Id. para. 8 & Ex. C. In May of 1996, prior to conveying an interest in the Black Swain property to Ms. Braskat, plaintiff requested North American Title to conduct a search to see if there were any liens recorded against Ms. Braskat. That title search, in addition to a subsequent title search conducted in August of 1996, failed to disclose the existence of the federal tax lien recorded against "Y. Brasket."

Plaintiff and Yolanda Braskat acquired their interest in the Black Swain property using $150,000.00 in unsecured funds borrowed from the Bank of Stockton in May of 1996 (hereafter, unsecured loan). (Joint Stip. Facts paras. 10-11.) The purchase price of the property was $150,000.00. Id. In August of 1996, plaintiff and Ms. Braskat obtained a second loan from the Bank of Stockton in the amount of $132,000.00 (hereafter secured loan), secured by a deed of trust recorded against the Black Swain property. The proceeds from this loan were used to pay down the original loan, leaving a balance owing of $18,000.00 on the unsecured loan. Id. para. 11.

In December of 1996, plaintiff and Ms. Braskat entered a contract to sell their interests in the Black Swain property to a third party, for $151,000.00. (Joint Stip. Facts paras. 12-13.) In the course of this sale, Central Valley Title Company conducted a search of the San Joaquin County title records and discovered a Notice of Federal Tax Lien filed August 12, 1991, against "Y. Brasket." Id. The title company confirmed with the IRS that the individual referenced in the lien was the same as Yolanda Braskat, whose undivided one half interest in the Black Swain property was being sold. Id. On January 10, 1997, escrow closed on the sale of the Black Swain property. Id. para. 14. Of the $151,000.00 in proceeds from the sale, $132,800.00 was paid to the Bank of Stockton to pay off the secured loan, $6,437.00 was paid to the IRS to pay off tax liens arising from Ms. Braskat's unpaid 1988 and 1989 tax liabilities, and $11,763.00 was paid to the Bank of Stockton to reduce the $18,000.00 balance on the unsecured loan. Id.

On January 21, 1997, plaintiff filed an admin istrative claim for refund with the IRS, seeking to recover the $6,437.00 the IRS received out of escrow to pay Ms. Braskat's tax liabilities. (Joint Stip. Facts paras. 15-16.) The IRS denied plaintiff's claim by letter dated October 31, 1997. Id.

B. Analysis.

Federal law governs the relative priority of federal tax liens. See Feiler v. United States [95-2 USTC ¶50,448], 62 F.3d 315 (9th Cir. 1995). The Internal Revenue Code provides that "if any person liable to pay any tax neglects or refuses to pay the same after demand, the amount . . . shall be a lien in favor of the United States upon all property and right to property . . . belonging to such person." Id. at 317 (quoting 26 U.S.C. §6321 (1988)). Section 6323 addresses the priority of the lien created under §6321, providing that such lien "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 . . ." 26 U.S.C. §6323(a).

In moving for summary judgment, plaintiff contends that notice meeting the requirements of subsection (f)(3) and (f)(4) has not been filed, because the Notice was not in the proper form and was not properly indexed with respect to real property. Defendant concedes the point for the purposes of these cross-motions. (Opp'n Summ. J. at 2:5-7.)

Plaintiff argues that he was a "purchaser" under §6323(a), because he purchased the Black Swain property as indicated by the May 17, 1996 grant deed, and the spelling error in recording the Notice prevented him from receiving constructive notice of the IRS' lien. See Orr v. Byers, 198 Cal. App. 3d 666, 668 (1988). However, the term "purchaser" in the §6232(a) (inserted under amendment of the tax lien statutes in 1913) was intended to protect subsequent bona-fide purchasers for value without notice of the lien. TKB Int'l Inc. v. United States [93-1 USTC ¶50,346], 995 F.2d 1460, 1463 (9th Cir. 1993) (emphasis added). In other words, the statute protects those who purchase from the taxpayer. Here, although plaintiff indeed purchased the Black Swain property, he did not purchase it from the taxpayer and is therefore not protected as a "purchaser" under §6323(a).

Plaintiff also contends that he is protected under §6323(a) because he is a "holder of a security interest." ⁴ A security interest under the statute means an "interest in property acquired by contract for the purpose of securing payment or performance of an obligation or indemnifying against loss or liability." 26 U.S.C. §6323(h)(1). A security interest exists at any time that "the property is in existence and the interest has become protected under local law against a subsequent judgement lien arising out an unsecured obligation," but only "to the extent that . . . the holder has parted with money or money's worth." Id.

Thus, in order to establish that he was a holder of a security interest under the statute at the time the IRS seized the funds, plaintiff would first have to come forth with evidence of an agreement with Ms. Braskat creating the security interest. However, plaintiff provides no evidence on summary judgment that such contract was ever formed. ⁵

Moreover, plaintiff provides nothing establishing that his security interest was properly perfected under state law. See Manalis Fin. Co. v. United States [80-1 USTC ¶9158], 611 F.2d 1270, 1272 (9th Cir. 1980); First Am. Title Ins. Co. v. United States [88-2 USTC ¶9408], 848 F.2d 969, 973 (9th Cir. 1988) (Tax Lien Act would give priority to bank's lien over IRS lien because bank perfected its lien before Government recorded its tax lien). Under California law, a security interest is perfected when it has attached and "when all of the applicable steps required for perfection have been taken." Cal. Com. Code §9302. "Such steps are specified in Sections 9302, 9304, 9305 and 9306." Id. Section 9302 provides that "a financing statement must be filed to perfect all security interests," with seven listed exceptions. Plaintiff does not argue that he is within one of the listed exceptions, and he clearly has not recorded a financing statement. Therefore, his security interest (if any) loses out to the government's lien.

Finally, the court will address plaintiff's argument that the "secret" lien created under §6323(a) was extinguished by the IRS's actions in recording defective notice of that lien. Plaintiff provides no authority for this notion. To the contrary, such liens appear to be valid for ten years after the assessment is made. See 26 U.S.C. §6502(a) (setting ten year limitation period for collection after assessment).

CONCLUSION

For the reasons explained above, plaintiff's third-party suit for refund of wrongfully collected taxes fails as a matter of law. Accordingly, the court HEREBY ORDERS that defendant's motion for summary judgment is granted and plaintiff's motion for summary judgment is denied.

¹ The parties consented to magistrate judge jurisdiction and the case was referred to the undersigned for all purposes by way of order filed August 14, 1998 . See 28 U.S.C. §636(c).

² This action is a third-party suit for refund of wrongfully collected taxes in absence of an alternative remedy, pursuant to 28 U.S.C. §1346(a)(1) and 26 U.S.C. §7422. Thus, the proper defendant is the United States , rather than the Internal Revenue Service. See Purk v. United States , 747 F. Supp. 1243, 1247 (S.D. Oh. 1989).

³ Plaintiff appears to have claimed damages of $5,000.00 rather than $6,437.00 in order to stay withing the jurisdictional amount for small claims court. The parties have informed the court that in the event the action survives summary judgment, a stipulated amendment will be filed increasing the amount of plaintiff's claimed damages.

⁴ More specifically, plaintiff argues that he is a "mortgagee" under the statute. The statute was amended in 1966 to substitute the words "holder of a security interest, mechanic's lienor, and judgment lien creditor" for former terms "mortgagee, pledgee, and judgment creditor." See 26 U.S.C. §6323(a) (historical and statutory notes). Thus, under present terminology, plaintiff claims to be a "holder of a security interest."

⁵ In his briefing on summary judgment and at oral argument, plaintiff stated that an oral contract existed between himself and Ms. Braskat whereby he extended credit to her, with the debt to be secured by her one-half interest in the Black Swain Property. Written or oral argument by a party does not constitute evidence on consideration of a motion for summary judgment. See Fed. R. Civ. P. 56(c) (opposition to summary judgment must include affidavits regarding relevant facts). Even assuming that such contract did exist, it was insufficient to render plaintiff a holder of a security interest because it was unrecorded, as explained below.

 

 

[99-1 USTC ¶50,277] In re Ronald D. Focht and Lois E. Focht, Debtors. James R. Walsh, Trustee of the Bankruptcy Estate of Ronald D. Focht and Lois E. Focht, Appellee v. United States of America , Internal Revenue Service, Appellant

U.S. District Court, West. Dist. Pa., Civ. 97-202J, 1/4/99, 243 BR 263, Affirming an unreported Bankruptcy Court decision

[Code Sec. 6323 ]

Bankruptcy: Notice of tax lien: Constructive notice: Priority.--The omission of an individual taxpayer's name from the notice of a federal tax lien that listed only the business name and the taxpayer's spouse as the general partner did not provide constructive notice of the lien. The notice requirement that the taxpayer be identified is a mandatory requirement. Since a reasonable search would not reveal the tax lien against the taxpayer, the lien was not perfected. Therefore, the IRS's claim was not entitled to priority status in the taxpayer's bankruptcy estate.

MEMORANDUM ORDER

SMITH, District Judge:

This bankruptcy appeal requires this Court to determine whether the Internal Revenue Service perfected its federal tax lien against debtor Ronald D. Focht, thereby entitling the IRS claim to priority. Debtors Ronald D. Focht and Lois E. Focht, husband and wife, reside at R.R. 1, Box 258 , Martinsburg, Blair County , Pennsylvania . R.--dkt. no. 11, exh. 5. Together with their son, Richard T. Focht, they formed a partnership which operated the Country Focht's Restaurant & Bakery at R.R. 1, Box 103 , Martinsburg, Blair County , Pennsylvania . R.--dkt. nos. 1, 4 ¶8 (complaint and answer).

Beginning in September 1993 and continuing through December 1995, the partnership failed to remit the federal employment taxes due for its employees. On April 22, 1996 , the IRS issued an assessment in the amount of $26,925.36 for the unpaid taxes, penalties and interest to:

Country Fochts Restaurant & Bakery

Focht, Lois E. Gen Ptr.

R.--dkt. no. 1, exh. 5. On April 30, 1996 , the IRS filed Form 668, Notice of Federal Tax Lien, in the Blair County Prothonotary's Office which referenced the federal lien for $26,925.36 against:

Country Fochts Restaurant & Bakery

Focht, Lois E. Gen Ptr[.]

R.--dkt. no. 1, exh. 6. The Notice indicated that the taxpayer's residence was R.R. 1, Box 103 , Martinsburg , Pennsylvania , 16662-9629 . Id.

Subsequently, on June 3, 1996 , Ronald D. Focht and Lois E. Focht filed a voluntary petition seeking protection under Chapter 7 of the Bankruptcy Code. James R. Walsh, Esquire, was appointed Trustee. R.--dkt. no. 11, exh. 5. On July 16, 1996 , the IRS filed a Proof of Claim for unpaid taxes which set forth a secured claim in the amount of $34,633.34, an unsecured priority claim for $5,368.50, and an unsecured general claim for $929.95. R.--dkt. no. 1, exh. 5. On October 24, 1996 , the Trustee filed an adversary proceeding against the IRS. Count I of the Trustee's complaint asserted that the federal tax lien against the partnership failed to establish a secured lien against three parcels of real estate owned by debtors Ronald D. Focht and Lois E. Focht as tenants by the entireties because the Form 668 Notice did not identify Ronald D. Focht as a taxpayer. Counts II and III sought to avoid the tax lien pursuant to §§544(a)(3) ¹ and 547 ² of the Bankruptcy Code. R.--dkt. no. 1 (citing 11 U.S.C. §§544(a)(3), 547).

The IRS moved for summary judgment, contending that it had a valid lien against Ronald D. Focht. In response, the Trustee argued that the lien had not been perfected because it failed to satisfy the notice requirements of 26 U.S.C. §6323 and Treasury regulation 26 C.F.R. §301.6323(f)-1. In support of his position, the Trustee filed an affidavit which confirmed that the records of the Prothonotary's Office of Blair County are computerized and that a lien search he personally conducted of the names Ronald D. Focht, Ronald Focht and R. Focht did not "disclose the existence of a federal tax lien against Ronald D. Focht." R.--dkt. no. 11, ¶5. The only entry indexed under these names was a judgment obtained by Altoona First Savings Bank. Id. The Trustee affirmed that the computerized entry for the federal tax lien at issue designated only Country Fochts Restaurant & Bakery and Lois E. Focht, general partner, as the delinquent taxpayers. Id. The address set forth on the Form 668 Notice was R.R.1, Box 103 ,