6321 After Acquired Property page1

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

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

[ Code Secs. 6321 and 6323]

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

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

ORDER ON INTERVENOR'S MOTION FOR SUMMARY JUDGMENT

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

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

I. BACKGROUND

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

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

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

II. SUMMARY JUDGMENT STANDARD

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

III. DISCUSSION

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

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

IV. CONCLUSION

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

IT IS SO ORDERED.

ENTRY OF JUDGMENT

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

 

 

 

 

Catherine F. Quist, Clerk of Knox County General Sessions Court , Plaintiff v. Leon Wiesener, United States of America , The Internal Revenue Service, Defendants.

U.S. District Court, East. Dist. Tenn. , at Knoxville ; 3:03-CV-100, June 18, 2004.

[ Code Sec. 6321]

Liens for taxes: Validity and priority against third parties: Notice or knowledge of liens: Property subject to: After-acquired property. --

The proceeds of the auction of the personal property of a corporation were ordered to be disbursed to the United States and not to a third party. Because a federal tax lien had attached to the personal property, the lien automatically had also attached to the sale proceeds of that property.

[ Code Sec. 6323]

Liens for taxes: Validity and priority against third parties: Notice or knowledge of liens. --

The proceeds of the auction of the personal property of a corporation were ordered to be disbursed to the United States and not to a third party. The federal tax lien on the corporation under its legal name constituted proper constructive notice of the lien to the third party, who had a judgment against the corporation, but under a slightly different name. Requiring the government to file a notice of tax lien using all of the possible names of the taxpayer would be an unreasonable burden. Because the notice was properly filed using the taxpayer's registered corporate name, proper notice has been given, and the lien had priority over all subsequent lien holders. Back reference: ¶38,160.41.

MEMORANDUM OPINION

PHILLIPS, District Judge: The United States of America has moved for summary judgment [Doc. 12], to which defendant Leon Wiesener (Wiesener) has responded [Doc. 18]. Wiesener has also moved for summary judgment [Doc. 14], which the United States has opposed [Doc. 17]. For the reasons discussed below, the court finds in favor of the United States .



FACTS

On January 31, 2000 and April 17, 2000, the Internal Revenue Service (IRS) made two assessments against "Joint Effort, Inc.," Employer Identification Number 62-0968367, for employment taxes for the quarters ending September 30, 1999 and December 31, 1999. On June 19, 2000, Wiesener filed a Civil Warrant and Oath of Account in the General Sessions Court for Knox County , Tennessee ( General Sessions Court ) against "Joint Effort Productions, Inc.," for breach of contract to pay for stock purchased. Wiesener and Joint Effort Productions, Inc. appeared before a judge on October 2, 2000, and announced that the parties had reached an agreement. Subsequently, on October 10, 2000, an Agreed Judgment was entered in favor of Wiesener and against Joint Effort Productions, Inc. for $15,000.00 plus ten percent (10%) statutory interest to begin accruing one year after the date of the judgment. The parties agreed that the judgment would not be executed upon until after October 3, 2001. To date, Wiesener has recovered nothing from Joint Effort Productions, Inc. in satisfaction of the Agreed Judgment.

On April 22, 2002, the Internal Revenue Service (IRS) filed a Notice of Federal Tax Lien, No. 62-0968367, in the Knox County Register of Deeds Office against "Joint Effort," for $55,247.04 in unpaid tax assessments by "Joint Effort, a corporation." However, no Notice of Federal Tax Lien was filed against "Joint Effort Productions, Inc." On November 12, 2002, Wiesener filed an Execution and Non-Wage Third Party Garnishment (Garnishment) against Joint Effort Productions, Inc. The personal property of Joint Effort Productions, Inc. was then sold at public auction on November 16, 2002. On that same day, Wiesener served the Garnishment with instructions to seize the proceeds of the auction. Subsequently, the Garnishee, Dyer Realty and Auction Services, placed $10,703.85 in proceeds in the Registry of the General Sessions Court for disbursement pursuant to the Garnishment. At the time the funds were placed in the Registry, Wiesener was the only creditor to execute upon the proceeds of the sale of the personal property. The IRS failed to execute upon either the personal property of Joint Effort Productions, Inc. or the proceeds from the sale prior to the funds being placed in the Registry.

On January 8, 2003, the IRS issued a Notice of Levy to the General Sessions Court , attempting to attach the funds deposited by the Garnishee into the Registry. Catherine F. Quist (Quist), Clerk of the General Sessions Court , Civil Division, refused to disburse the funds to Wiesener. On January 22, 2003, Quist filed a Motion for Instruction in the General Sessions Court as to the appropriate disbursement of the funds. On February 6, 2003, Wiesener filed a Petition for Writ of Mandamus in the Chancery Court for Knox County, Tennessee (Chancery Court) against Quist, ¹ request that Quist be commanded to pay him the $10,703.85 held in the Registry. Quist filed a Complaint in Interpleader in this court against Wiesener, the United States of America and the IRS on February 10, 2003. On February 25, 2003, Quist filed a Motion to Stay Proceedings in the Chancery Court pending resolution of the Interpleader action filed in this court.

Rule 56 of the Federal Rules of Civil Procedure provides that the judgment sought "shall be rendered forthwith 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 a judgment as a matter of law." Fed. R. Civ. P. 56(c). The moving party bears the initial burden of demonstrating the absence of any genuine issue of material fact. See Celotex Corp. v. Catrett, 477 U.S. 317, 323 (1986). Once the moving party properly supports a motion for summary judgment, the burden of proof shifts to the non-moving party, who "must set forth specific facts showing that there is a genuine issue of material fact for trial." Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 250 (1986). It is not enough for the party opposing a properly supported motion for summary judgment to "rest on mere allegations or denials of his pleadings." Id. at 248.

The United States contends that the Federal Tax Lien it filed against "Joint Effort, Inc." also covers "Joint Effort Productions, Inc.," and was filed prior to the lien of Wiesener. The Government asserts its notice was filed in a manner such that a reasonable inspection would have revealed the notice of the Federal Tax Lien.

Wiesener argues that in order for a Federal Tax Lien to be enforceable, notice must be provided pursuant to Tenn. Code Ann. §67-1-1403(b), which requires the lien be filed with the Knox County Register of Deeds. Determination of the sufficiency of filing of a Federal Tax Lien is governed by federal law. See United States v. Polk [ 87-2 USTC ¶9432], 822 F.2d 871, 873 (9 ^th Cir. 1987). The lien must be filed and indexed such that "a reasonable inspection of the index will reveal the existence of the deed." 26 U.S.C. 6323(f)(4). See Van Dolen v. Dept. of the Treasury [ 96-1 USTC ¶50,266], 929 F.Supp. 1083, 1086 (M.D. Tenn. 1996).

In Continental Investments v. United States of America [ 53-2 USTC ¶9625], 142 F.Supp. 542 (W.D. Tenn. 1953), the United States District Court for the Western District of Tennessee found that the purpose of registration of a Federal Tax Lien is to provide constructive notice to all interested parties, including judgment creditors. Id. at 544 (W.D. Tenn. 1953). Registration of a Federal Tax Lien will only serve as constructive notice of what is "upon [the] face" of the lien. Id. The Western District held that the use of the name W.G. Clark, Sr. on a tax lien filing was insufficient to impute constructive notice to the creditors of W.R. Clark, Sr. Id. Accordingly, Wiesener argues the use of only "Joint Effort" was wholly inadequate notice to the judgment creditors of "Joint Effort Productions, Inc.," as a lien search of "Joint Effort Productions, Inc.," did not reveal the IRS' Notice of Federal Tax Lien.

The Knox County Recorder of Deeds maintains a computerized indexing system for performing lien searches, which may be performed by inputting a "name or organization" into the system. Different inputs into the system yield different results:

1. When the name "Joint" is searched, the following liens are listed: 1) the Federal Tax Lien filed on April 30, 2002 against Joint Effort; 2) a lien filed by Wenger Corporation on July 2, 2002 against Joint Effort Productions; and 3) a lien filed by Leon Wiesener on November 13, 2002 against Joint Effort Productions.

 

2. When the name "Joint Effort" is searched, the following liens are listed: 1) the Federal Tax Lien filed on April 30, 2002 against Joint Effort; 2) a lien filed by Wenger Corporation on July 2, 2002 against Joint Effort Productions; and 3) a lien filed by Leon Wiesener on November 13, 2002 against Joint Effort Productions.

 

3. When the name "Joint Effort Productions" is searched, the following liens are listed: 1) a lien filed by Wenger Corporation on July 2, 2002 against Joint Effort Productions; and 2) a lien filed by Leon Wiesener on November 13, 2002 against Joint Effort Productions.

The Tennessee Anytime website provides a tool for searching information about Tennessee corporations. The "Tennessee Secretary of State Business Information Search" reveals three listings for entities with the names "Joint Effort" or "Joint Effort Productions." The three entities listed share the same identification number --0016984, the same date of formation --November 28, 1975, the same place of incorporation --Knox County, the same principal office located at 1805 Maryville Pike, Knoxville, Tennessee 37920, and the same registered agent --Conrad R. Loy, Jr.

To accept Wiesener's argument is to impose on the IRS, if it wants to be sure of its liens, the burden of checking whether the taxpayer has acquired property under a different name from the name under which the taxpayer has filed a return. In Kivel v. United States [ 89-2 USTC ¶9415], 878 F.2d 301, 303 (9 ^th Cir. 1989), the Ninth Circuit Court of Appeals ruled that the IRS is not required to record Federal Tax Liens under every known name of the taxpayer. The Middle District of Tennessee has found that the filing of a Federal Tax Lien under the taxpayer's legal name constitutes proper constructive notice. See Van Dolen v. Dept. of the Treasury [ 96-1 USTC ¶50,266], 929 F.Supp. 1083, 1086 (M.D. Tenn. 1996) ("If Congress had intended to impose upon the Internal Revenue Service the duty to investigate what property is owned by a delinquent taxpayer, record the name under which it was acquired, and file a separate notice of tax lien for each such name, it could have done so"). Id. at 1086 (citing Kivel [ 89-2 USTC ¶9415], 878 F.2d at 303).

An otherwise valid and properly recorded notice of Federal Tax Lien is effective even when there are minor errors or omissions in the name identified on the notice. See United States v. Sirico [ 66-1 USTC ¶9209], 247 F.Supp. 421, 422 (S.D. N.Y. 1965); see also United States v. Feinstein [ 89-2 USTC ¶9547], 717 F.Supp. 1552, 1557 (S.D. Fla. 1989):

The mere fact that a full name is not given or that there is an addition, omission or errors, does not, in and of itself, invalidate the notice. [ ] The essential purpose of the filing of the lien is to give constructive notice of its existence. [ ] The test is not absolute perfection in compliance with the statutory requirement for filing the tax lien, [ ] but whether there is substantial compliance sufficient to give constructive notice and to alert one of the government's claim. [ ].

Sirico [ 66-1 USTC ¶9209], 247 F.Supp. at 422.

In the view of the court, because the notice of Federal Tax Lien appears when the names "Joint" and "Joint Effort" are input into the system, a reasonable inspection of the Knox County indexing system by Wiesener would have revealed the earlier Federal Tax Lien. As noted, "Joint Effort, Inc." and "Joint Effort Productions, Inc." are the same entity. According to the records of the Tennessee Secretary of State, Joint Effort, Inc. and Joint Effort Productions, Inc. have the same identification number --0016984, the same date of formation --November 28, 1975, the same place of incorporation --Knox County, the same principal office located at 1805 Maryville Pike, Knoxville, Tennessee 37920, and the same registered agent --Conrad R. Loy, Jr. The records also indicate that the entity changed names more than once and that it was administratively dissolved on September 20, 2002, which was shortly before the sale of property giving rise to the funds at issue in this case. Accordingly, the Federal Tax Lien was properly filed against Joint Effort, Inc., the taxpayer's legal name, and constituted proper constructive notice that the property of "Joint Effort Productions, Inc." was encumbered.

The IRS asserts that the Federal Tax Lien attached to all property and rights to the property of Joint Effort, Inc. See 26 U.S.C. §6321, 6322. The Federal Tax Lien attaches to property whether real or personal and after acquired property. See 26 U.S.C. §6321; United States v. McDermott [ 93-1 USTC ¶50,164], 507 U.S. 447, 453 (1993). Assuming that the order of sale destroyed the liens on the specific property sold at the auction of November 2002, then the lien was transferred to the proceeds realized from the sale. See Phelps v. United States [ 75-1 USTC ¶9467], 421 U.S. 330, 334 (1975); Beaty v. United States [ 91-2 USTC ¶60,077], 937 F.2d 288, 292 (6 ^th Cir. 1991) (stating that "when a tax lien is displaced by a transfer, a lien on the proceeds of the transfer does result"); In re Nevada Environmental Landfill, 81 B.R. 55, 56 (Bankr. D. Nev. 1987). "The lien reattaches to the thing and to whatever is substituted for it ..." The owner and the lien holder, whose claims have been wrongfully displaced, may follow the proceeds wherever they can distinctly trace them. Phelps [ 75-1 USTC ¶9467], 421 U.S. at 334-35.

The court finds that when the property of Joint Effort was sold at auction, the Government's lien attached to the proceeds realized from the sale of the property. If the sale did not divest the liens, then the Federal Tax Lien attached to the sale proceeds immediately upon their creation, as after-acquired property of the taxpayer. See McDermott [ 93-1 USTC ¶50,164], 507 U.S. at 453. Accordingly, the Federal Tax Lien against Joint Effort, Inc. is attached to the funds at issue in this interpleader suit. Because Wiesener did not become a judgment lien creditor of Joint Effort until November 13, 2002, which was after the notice of Federal Tax Lien was filed in accordance with §6323, the Federal Tax Lien is valid against and prior to Wiesener's judgment lien. The proceeds of the auction of the personal property of Joint Effort Productions, Inc., having been placed in the Registry of the General Sessions Court , must now be disbursed by Quist to the United States .

The motion for summary judgment by the United States is GRANTED and the summary judgment motion of Wiesener is DENIED. The Knox County Clerk is DIRECTED to release the interpleaded funds to the United States .

ORDER TO FOLLOW.

JUDGMENT ORDER

For the reasons stated in the memorandum opinion filed contemporaneously with this order, the summary judgment motion of the United States [Doc. 12] is GRANTED and the motion of Leon Wiesener [Doc. 14] is DENIED. Catherine F. Quist, Clerk of the Knox County General Sessions Court, is DIRECTED to release the interpleaded funds to the United States.

¹ On April 11, 2003, Wiesener filed a First Amended Petition for Writ of Mandamus, naming the United States of America and IRS as Defendants and requesting the Chancery Court order that the IRS' lien is not effective against the funds held by Quist in the Registry of the General Sessions Court .

 

 

 

 

Bednarowski and Michaels Development, LLC, and Citizens Bank, Plaintiffs v. John C. Wallace, et al, Defendants.

U.S. District Court, East. Dist. Mich. ; 2002-60181, June 16, 2003.

[ Code Secs. 6321 and 6323]

Validity and priority against third parties: Priority of tax liens: Subrogation: Tax liens, property subject to: After-acquired property: Property transferred to third party. --

An IRS tax lien had priority over a purchase money mortgage by a third-party corporation because subrogation was not available when the purchase of the property was voluntary. The corporation purchased real property from a married couple who had executed a mortgage on the property by executing another mortgage to pay off the first. After the couple had executed their mortgage, and before the corporation executed theirs, the IRS made a tax assessment against the couple and a tax lien was recorded on the property. The corporation's contention that it became subrogated to the priority position of the first mortgage was rejected. Equitable subrogation is only available when the parties paying off the obligations are not doing so freely but, rather, pursuant to preexisting agreements, such as insurance or guaranty contracts. Moreover, purchase money mortgages only have priority when the mortgagor is the taxpayer because the property is owned to a certain extent before the tax lien attaches.

OPINION AND ORDER OF THE COURT GRANTING DEFENDANT USA'S MOTION FOR SUMMARY JUDGMENT AND DENYING PLAINTIFFS' MOTION FOR SUMMARY JUDGMENT

I. INTRODUCTION

BATTANI, District Judge: Before the Court are Plaintiffs' and Defendant United States of America 's Cross-Motions for Summary Judgment. Plaintiffs Bednarowski & Michaels Development (hereinafter "Bednarowski") and Citizens Bank seek to quiet title to a parcel of real property in Shelby Township (hereinafter "the Property"), and argue in this motion that they should be awarded that title as a matter of law. Specifically, Plaintiffs assert that Bednarowski's title (in which Citizens Bank has a mortgage interest) is unencumbered by the USA 's tax lien on the Property because it gained the priority of a preexisting mortgage on the Property. The USA responds in its cross-motion that Bednarowski's title is junior to the government's tax lien, so that the USA has title to the Property. The Court agrees with the USA that Plaintiffs' interests in the Property is encumbered by the tax lien. The Court also agrees with Defendant that the tax lien has priority over Citizens Bank's mortgage despite the fact that Citizens Bank's mortgage is a purchase money mortgage.



II. STANDARD OF REVIEW

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



III. BACKGROUND

In January 1995, Defendants John and Dawn Wallace purchased the Property for $40,000. In 1999, the Wallaces executed a mortgage in favor of Michigan National Bank to secure loans, including a $150,000 line of credit. In January 2001, the IRS made a tax assessment against the Wallaces, and a tax lien was recorded on the Wallaces' property on April 12, 2001. Meanwhile, the Wallaces decided to sell a portion of the Property to Bednarowski, who, in turn, sought Citizens Bank's help in financing the purchase. Citizens Bank agreed to receive a mortgage on the condition that Bednarowski find a way to discharge the 1999 mortgage. These terms were memorialized in a Purchase Agreement signed on October 29, 2001, and accepted on October 31, 2001. Accordingly, in November 2001, Bednarowski finalized the agreement with Standard Federal Bank, the successor by merger to Michigan National Bank, to pay off the 1999 mortgage with a $238,992.76 payment. Shortly thereafter, the Wallaces sold about 2/3 of the Property to Bednarowski, who executed a mortgage on the Property in favor of Citizens Bank for a $288,000 loan. The USA claims title to the Property by virtue of its tax lien, which predated the sale to Bednarowski. Plaintiffs contend that although they acquired their interest in the Property after the USA had acquired its tax lien, they can assume the priority of the 1999 mortgage to gain precedence over the USA 's title. The instant cross-motions ask the Court to quiet title with respect to the claims made by Plaintiffs and the USA .



IV. DISCUSSION

A. Plaintiffs do not have priority through equitable subrogation because Bednarowski was a volunteer when it bought the Property

Plaintiffs acknowledge that their purchase of the Property post-dated the federal tax lien, but argue that they are subrogated to rights of Standard Federal Bank/Michigan National Bank, and that their interest is therefore prior to the tax lien. Plaintiffs observe that under the Internal Revenue Code, the Court must look to Michigan law to determine whether subrogation applies here. Plaintiffs contend that, under Michigan law, they were subrogated to the first mortgage-holder's rights when they paid off the first mortgage. Under the Internal Revenue Code, a federal tax lien "shall not be valid as against any purchaser, holder of a security interest, mechanic's lienor, or judgment lien creditor until notice thereof ... has been filed by the Secretary." 26 U.S.C. §6323(a). Thus, "priority of the federal tax lien provided by 26 U.S.C. §6321 as against liens created under state law is governed by the common-law rule --the first in time is the first in right." United States v. Pioneer Am. Ins. Co. [ 63-2 USTC ¶9532], 374 U.S. 84, 87 (1963).

There is an important qualification, however, to the first-in-time rule: "Where, under local law, one person is subrogated to the rights of another with respect to a lien or interest, such person shall be subrogated to such rights for purposes of any lien imposed by section 6321." 26 U.S.C. §6323(i)(2). The Court must therefore look to Michigan law to determine whether Plaintiffs' interests are subrogated to the holder of the 1999 mortgage.

Equitable subrogation is a legal fiction which permits a party who satisfies another's obligation to recover from the party `primarily liable' for the extinguished obligation... The doctrine rests on the equitable principle that one who, in order to protect a security held by him, is compelled to pay a debt for which another is primarily liable, is entitled to be substituted in the place of and to be vested with the rights of the person to whom such payment is made, without agreement to that effect.

In re Air Crash Disaster, 86 F.3d 498, 549 (6th Cir. 1996) (internal citations omitted).

The USA asserts that Plaintiffs cannot claim subrogation because they paid off the mortgage voluntarily. A key requirement for equitable subrogation is that the party seeking subrogation was "compelled" to pay the debt in question; in other words, that the party was not a volunteer. Id. ; Hartford Accident & Indem. Co. v. Used Car Factory, Inc., 461 Mich. 210, 215 (internal citations omitted). The USA insists that Plaintiffs paid off the 1999 mortgage voluntarily because the purchase of the Property was a voluntary transaction, so subrogation is not available to prioritize Plaintiffs' interest over the tax lien.

There is no dispute that Bednarowski paid off the Wallace's 1999 mortgage held by Standard Federal Bank/Michigan National Bank. The only question, therefore, is whether Bednarowski was somehow "compelled" to make the payment, or whether it was a volunteer and therefore ineligible to claim subrogation. Bednarowski claims that it was not a volunteer because paying off the 1999 mortgage was a condition precedent to obtaining a new mortgage from Citizens Bank. This argument, however, does not comport with the examples of entities that have been "compelled to pay a debt" and were therefore eligible for subrogation. Air Crash, 86 F.3d at 549. In Hartford Accident, 461 Mich. at 218, for example, an insurer was subrogated to the rights of its insured's employee after discharging a contractual duty to pay the employee's claim. See also Auto-Owners Ins. Co. v. Amoco Prod. Co., 658 N.W.2d 460, 463 ( Mich. 2003) ("When an insurance provider pays expenses on behalf of its insured, it is not doing so as a volunteer"). Similarly, in Harley J. Robinson Trust v. Ardmore Acres, Inc. [ 98-1 USTC ¶50,343], 6 F.Supp.2d 640 (E.D. Mich. 1998), to which Plaintiffs cite, the court considered whether a guarantor for a loan could be subrogated to the rights of the lender. In that case, Comerica loaned $2.4 million to the defendant in return for a mortgage on certain property, and the plaintiff agreed to serve as guarantor for the loan. Id. at 642. Two federal tax liens were recorded against the defendant, after which the defendant defaulted on Comerica's loan. The plaintiff paid off the loan pursuant to the guaranty agreement and received Comerica's mortgage, and the court ruled that the plaintiff therefore became equitably subrogated to Comerica's rights. Id. at 643, 645.

In these cases, the parties seeking subrogation were not volunteers because they did not pay off the obligations freely, but rather paid them off pursuant to preexisting agreements ( i.e., insurance or guaranty contracts). In the case at bar, in contrast, Bednarowski paid off the 1999 mortgage for the purpose of gaining the security interest; Bednarowski had no relationship with the 1999 mortgage-holder until payoff itself. A virtually identical position was presented in Lentz v. Stoflet, 280 Mich. 446, 451 (1937). In Lentz, the plaintiff paid off the defendant's 1919 and 1923 mortgages in return for a mortgage of its own in 1930. Id. at 448. A competing mortgage had been placed on the property in 1929, and the plaintiff sought to obtain the priority of the 1919 and 1923 mortgages through equitable subrogation. The Michigan Supreme Court denied this request on the grounds that the plaintiff paid off the 1919 and 1923 mortgages as a volunteer, rather than pursuant to some preexisting arrangement or interest. Id. at 451. In a more recent case, the Bankruptcy Court for the Western District of Michigan held that a bank that obtained a mortgage by paying off a prior mortgage could not equitably subrogate itself to the prior mortgage because it was a volunteer. In re Lewis, 270 B.R. 215, 216-17 (Bankr. W.D. Mich. 2001). The Court finds this case is analogous to Lentz and Lewis, and denies Plaintiffs' request for equitable subrogation.

At oral argument, Plaintiffs implied that, although their actual purchase came after the tax lien was recorded, the agreement that contractually obligated Plaintiffs to pay off the mortgage predated their access to knowledge of the lien. The Court is sympathetic to this position, but it is of no consequence. The tax lien was filed in April and the Purchase Agreement was not signed until October (although a previous agreement was attempted in August). Plaintiffs have not presented any evidence that the lien was not recorded, they only argue that they did not learn of it. The Court further notes that the date of the commitment for title insurance was July 2001, well before the signing of the Purchase Agreement. No evidence was presented that any subsequent title search was completed. The Court cannot merely assume that the lien was somehow "in transit" for over four months, and that Plaintiffs were therefore justifiably ignorant of it.

Plaintiffs' other cited caselaw does not change this conclusion. For example, Plaintiffs cite to Mort v. United States [ 96-1 USTC ¶50,315], 86 F.3d 890, 894 (9th Cir. 1996), to establish that they are not volunteers, but Mort relied on a more restrictive definition of volunteer supplied by California law. Specifically, the Mort court read California law as allowing subrogation for a "person who lends money to pay off an encumbrance on property and secures the loan with a deed of trust on that property," id.; this is clearly contradictory to Michigan law as pronounced in Lentz and Lewis. Plaintiffs also argue that the government would unjustly receive a windfall if the Court denied subrogation here, because the USA 's lien would have its priority elevated with the 1999 mortgage's priority disappearing. See Dietrich Indus., Inc. v. United States , 988 F.2d 568, 573 (5th Cir. 1993). Plaintiffs' windfall argument is not persuasive, however, because allowing subrogation would give Plaintiffs the windfall; further, the logic of Plaintiffs' argument would have applied just as well in Lentz or Lewis, and both of those courts denied subrogation. Finally, Plaintiffs cite to United States v. Baran, 996 F.2d 25, 29 (2nd Cir. 1993), but Baran never discussed the volunteer issue. In conclusion, the Court denies Plaintiffs equitable subrogation argument.

B. Citizens Bank's Mortgage gets priority over the tax lien as a purchase money mortgage under federal law

Both parties agree that Citizens Bank has a purchase money mortgage on the property, but disagree over whether such a mortgage gets priority over the tax lien. Plaintiffs argue that the current state of Michigan law favors their position. Specifically, Plaintiffs contend that a Michigan Appeals Court decision, Graves v. American Acceptance Mortgage Corp., 246 Mich. App. 1 (2001), held that purchase money mortgages always have highest priority. Plaintiffs acknowledge that the Michigan Supreme Court later overruled Graves , but observe that the Michigan Supreme Court has since vacated its overruling opinion to reconsider the case. Plaintiffs conclude that with the Supreme Court opinion vacated, the Appeals Court opinion is once again good law. The government responds that state law is unsettled as to the priority of a purchase money mortgage versus other liens and securities. The USA continues to say that the state of Michigan law is irrelevant, because priority in this case is governed by federal law, and federal law allows for no special priority for purchase money mortgages.

As both parties agree, state law dictates the existence of property interests, but the priority of those interests with respect to tax liens or other portions of the tax law is an issue of federal law. United States v. National Bank of Commerce [ 85-2 USTC ¶9482], 472 U.S. 713, 722 (1985); Blachy v. Butcher [ 2000-2 USTC ¶50,629], 221 F.3d 896, 905 (6th Cir. 2000). Defendant is correct that the dispute over Graves is moot, as the question of priority is not governed by state law. Federal law, however, does generally give priority to purchase money mortgages. The Supreme Court has held that a federal tax lien is subordinate to "a purchase-money mortgage regardless of whether the agreement was entered into before or after the filing of a tax lien." Slodov v. United States [ 78-1 USTC ¶9447], 436 U.S. 238, 257-58 (1978). "Decisional law has long established that a purchase-money mortgagee's interest in the mortgaged property is superior to antecedent liens prior in time ... and, therefore, a federal tax lien is subordinate to a purchase-money mortgagee's interest notwithstanding that the agreement is made and the security interest arises after notice of the tax lien." Id. at n. 23; accord First Interstate Bank of Utah , N.A. v. Internal Revenue Serv. [ 91-2 USTC ¶50,303], 930 F.2d 1521, 1523 (10th Cir. 1991). This fact has recently been recognized by another court in this District. Wilson v. Wilson [ 2003-1 USTC ¶50,153], No. 02-CV-70833, 2002 WL 31545995, at *8 (E.D. Mich. Oct. 21, 2002) (citing First Interstate Bank [ 91-2 USTC ¶50,303], 930 F.2d at 1523). Thus, the government's tax lien seems at first glance subordinate to Citizens Bank's mortgage.

The Court, however, agrees with Defendant that Slodov is distinguishable from the instant case because the mortgagor in Slodov was the taxpayer himself, whereas here, the mortgagor is Bednarowski, a separate purchaser. Defendant insists that this is a crucial distinction between Slodov and the instant case because of the rationale underlying the priority given to purchase money mortgagees. In a typical purchase money mortgage situation, the property-buyer receives a loan from the lender to buy property, and secures that loan by granting the lender a mortgage on the purchased property. In such a scenario, the purchase of the land and the mortgage are seen as simultaneous events, so that the mortgagor obtains the land already encumbered by the mortgage. United States v. New Orleans R.R., 79 U.S. 362, 365 (1870); cited in Slodov [ 78-1 USTC ¶9447], 436 U.S. at n. 23. In other words, it is not the case that the mortgagor acquires the land and then gives a mortgage interest to the lender.

This chronology is critical in explaining why purchase money mortgages get priority over preexisting liens. A preexisting lien, i.e., a tax lien, encumbers whatever property the lienee thereafter acquires. Thus, when a lienee buys property, the lien automatically attaches to it. This is in contrast to a non-purchase money situation, in which the lien is the first encumbrance on the property. If the lienee subsequently gives out a mortgage on that property, the lien takes priority over the mortgage because the lien attached first. In a purchase money situation, on the other hand, the property enters the lienee's hands with the mortgage already attached, and so the lien attaches after the purchase money mortgage, even though the lien existed in time before the purchase money mortgage. Thus, the purchase money mortgage has priority over the lien, because it attached to the property before the lien. Put another way, the lien can only extend to the property actually owned by the lienee; the priority given to purchase money mortgages reflects the fact that the property comes to the mortgagor already "owned" to a certain extent (the extent of the mortgage amount) by the mortgagee. Slodov [ 78-1 USTC ¶9447], 436 U.S. at n. 23 (citing New Orleans R.R., 79 U.S. at 365; Rev. Rul. 68-57, 1968-1 C.B. 553). Therefore, the lienor's interest in the property is subordinate to the mortgagee's, because the lien does not encumber the portion of the property "owned" by the mortgagee.

The Court finds that the rationale for granting priority to purchase money mortgages does not apply in the case at bar. In the instant case, the tax lien had already attached to the Property before Plaintiffs got involved. In this way, Bednarowski acquired the Property with the lien attached. Even though the mortgage to Citizens Bank occurred simultaneously with Bednarowski's acquisition of the property, it still occurred after the tax lien had attached. Put another way, when the tax lien attached, Citizens Bank did not yet have an interest in the Property, unlike the classic purchase money mortgage situation described above. While Citizens Bank's mortgage would take priority over any tax liens imposed on Bednarowski, it does not take priority over a preexisting tax lien on Wallace that was inherited by Bednarowski in its purchase of Wallace's property. Therefore, the Court concludes that the purchase money mortgage in this case does not take priority over the tax lien.



V. CONCLUSION

For the reasons set forth above, the Court GRANTS Defendant's Motion for Summary Judgment and DENIES Plaintiff's Motion for Summary Judgment. Specifically, the Court holds that the Property is encumbered by the tax lien, and that the tax lien has priority over Citizens Bank's mortgage.

IT IS SO ORDERED.

 

 

Bernice C. Williams, Executor, etc., Plaintiff v. U.S. Department of Treasury, Defendant

U.S. District Court, No. Dist. Ohio, West. Div., 3:01 CV 7077, 6/14/2001

[Code Secs. 6321 and 6323 ]

Tax liens, validity of: Motion to dismiss: Interpleader actions: State law: Equitable interest: Attachment of liens.--Tax liens attached to a legatee's interest in the property of a decedent's estate because, under state (Ohio) law, he had a current equitable interest in any property of the estate to which he was entitled. Accordingly, the legatee was not entitled to dismissal of an interpleader action filed by the estate's executor to determine the proper distribution of the property in the estate.

MEMORANDUM OPINION

KATZ, District Judge:

This matter is before the Court on the motion for dismissal of interpleader filed by Defendant Douglas Smith in the Probate Court of Auglaize County, Ohio, on January 31, 2001. The case was removed to this Court pursuant to 28 U.S.C. §§1441, 1442, 1444, and 1446. For the following reasons, the motion to dismiss will be denied.

BACKGROUND

On January 26, 2001, Bernice Williams, executor for the Estate of Wayne H. Williams, filed an action for interpleader in the Probate Court of Auglaize County, Ohio. In her complaint, the executor averred knowledge that one of the legatees of the estate, Douglas Smith ("Smith"), was the subject of two liens filed by the Department of Treasury, Internal Revenue Service ("IRS"). ¹ The executor then stated her desire not to make a final estate distribution to Smith until her concerns regarding the liens were resolved.

On January 31, 2001, Smith filed a motion to dismiss the interpleader for failure to state a claim upon which relief can be granted, pursuant to Ohio Civ. R. 12(b)(6). Smith argued that the action should be dismissed because the IRS had not claimed any right or interest in the estate, and because the executor lacked the authority to file an action in interpleader. On February 21, 2001, the action was removed to this Court by the IRS. Finally, on March 22, 2001, the IRS filed a memorandum in opposition to Smith's motion to dismiss. Smith did not reply, and the matter is ripe for consideration. The parties' contentions are discussed below.

DISCUSSION

I. Motion to Dismiss Standard

In deciding a motion to dismiss under Federal Rule of Civil Procedure 12(b)(6), the function of the Court is to test the legal sufficiency of the complaint. In scrutinizing the complaint, the Court is required to accept the allegations stated in the complaint as true, Hishon v. King & Spalding, 467 U.S. 69, 73, 104 S.Ct. 2229, 2232, 81 L.Ed.2d 59 (1984), while viewing the complaint in a light most favorable to the plaintiffs, Scheuer v. Rhodes, 416 U.S. 232, 236, 94 S.Ct. 1683, 1686, 40 L.Ed.2d 90 (1974); Westlake v. Lucas, 537 F.2d 857, 858 (6th Cir. 1976). The Court is without authority to dismiss the claims unless it can be demonstrated beyond a doubt that the plaintiff can prove no set of facts that would entitle it to relief. Conley v. Gibson, 355 U.S. 41, 45-46, 78 S.Ct. 99, 101-02, 2 L.Ed.2d 80 (1957); Westlake, supra, at 858. See generally 2 JAMES W. MOORE, MOORE'S FEDERAL PRACTICE, §12.34[1] (3d ed. 1997).

II. Potential Applicability of Tax Liens

For the purposes of this motion to dismiss, this Court must assume that tax liens were assessed against Smith on September 14, 1992, and December 28, 1992, pursuant to Sections 6321 ² and 6322 ³ of the Internal Revenue Code, 26 U.S.C. §6321-22. Further, the Court must assume that those liens have neither been satisfied nor rendered unenforceable. With those assumptions having been made, it is clear that Smith's motion to dismiss must be denied.

By operation of Sections 6321 and 6322, a tax lien in favor of the United States arose against Smith on all of Smith's real and personal property and rights to such property. Under Ohio law, Smith has a current equitable interest in any property of the estate to which he is entitled. See Braun v. Central Trust Co., 109 N.E.2d 476, 479-80, 92 Ohio App. 110, 115-16 (1st Dist. 1952); 31 Ohio Jurisprudence 3d, Decedents' Estates, §1277 (1997). The Supreme Court has made clear that there is no lien exception for an inheritance. See Drye v. United States [99-2 USTC ¶51,006; 99-2 USTC ¶60,363], 528 U.S. 49, 56, 120 S.Ct. 474, 480, 145 L.Ed.2d 466 (1999); see also United States v. McDermott [93-1 USTC ¶50,164], 507 U.S. 447, 453, 113 S.Ct. 1526, 1530, 123 L.Ed.2d 128 (1993) (holding that interest in property of the estate attaches at the death of the testator). Therefore, the liens against Smith would attach to his interest in the property of the estate.

Smith's motion to dismiss is utterly without merit. Although Smith's claim that the IRS has not placed any lien against the assets of the estate may be true, the existence of such liens against the estate is irrelevant to the motion to dismiss when the action for interpleader alleges liens against Smith himself. ⁴ When the allegations of the action for interpleader are taken as true and viewed in the light most favorable to the non-movant, there clearly exists a claim upon which relief may be granted. Accordingly, Smith's motion to dismiss will be denied.

CONCLUSION

For the foregoing reasons, Douglas Smith's motion to dismiss (filed on January 31, 2001, and contained in Doc. No. 10) will be denied.

IT IS SO ORDERED.

¹ The interpleader action also requests an order allowing distribution to two other legatees. Those legatees are not material to the resolution of the pending motion to dismiss. The matter in the state court was Williams v. Department of Treasury, Case No. 201-99.

² Section 6321 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 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 (West 2001).

³ Section 6322 provides:

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 (West 2001).

⁴ Similarly unavailing are Smith's unsupported arguments that the action must fail because the Will does not give the executor power to withhold or place other contingencies on Smith's funds.

 

 

 

In re Douglas A. & Cathy E. Eschenbach, Debtors

U.S. Bankrupcty Court, No. Dist. Tex., Ft. Worth Div., 00-45215-BJH-13, 9/14/2001

[Code Secs. 6321 and 6871 ]

Bankruptcy: Avoidance of liens: After-acquired property: Filing and refiling of notice.--The government was entitled to secured creditor status in connection with married debtors' unpaid tax liabilities. The IRS's tax lien attached to personal property the debtors acquired in their state of new residence (Texas), after the notice of federal tax lien was filed in their previous state of residence (Florida). The government's secured claim was not limited to the value of personal property owned by the debtors in Florida when the tax lien arose. The notice of lien was properly filed and attached to all personal property of the debtors during the life of the lien, regardless of their relocation to another state. Moreover, the government was not required to file another notice of federal tax lien in the manner designated by the state of Texas.

MEMORANDUM OPINION AND ORDER

FELSENTHAL, Bankruptcy Judge:

Douglas and Cathy Eschenbach, the debtors, object to the proof of secured claim filed by the United States on behalf of the Internal Revenue Service. The court held a hearing on the allowance of the IRS claim on August 9, 2001.

The allowance of a claim raises a core matter over which this court has jurisdiction to enter a final order. 28 U.S.C. §§157(b)(B), 1334. This memorandum opinion contains the court's findings of fact and conclusions of law. Bankruptcy Rules 7052, 9014.

The facts are basically undisputed. Previously, the debtors lived in Martin County, Florida. On September 22, 1997, while the debtors lived in Martin County, Florida, the IRS filed a notice of federal tax lien in the Martin County courthouse. The notice of lien covers federal income taxes for 1994 and 1995 and applies to real and personal property.

Thereafter, the debtors moved to Tarrant County, Texas. On October 2, 2000, the debtors filed their petition for relief under Chapter 13 of the Bankruptcy Code. The IRS filed a proof of secured claim for unpaid 1995 taxes which, as of the petition date, totaled $5,906.12.

According to the debtors' schedules, they owned personal property on October 2, 2000, valued at greater than $5,906.12. Accordingly, the IRS, asserts that it has a fully secured claim. However, the debtors contend that before they moved from Florida to Texas, they only owned personal property valued at $3,000.

On May 31, 2001, the debtors filed an objection to the IRS' proof of secured claim. The debtors asserted that the lien only applied to personal property in Florida, but that the debtors no longer owned personal property in Florida. At the hearing the debtors refined the issue. The debtors stipulated that the lien covered all personal property that they owned in Florida and that the lien followed that property when they moved to Texas. But, the debtors contend that the lien does not cover the personal property that they acquired in Texas. Therefore, they maintain that the secured claim must be limited to the $3,000 of value of the property that they acquired while living in Florida, making the remainder of the claim unsecured. 11 U.S.C. §506(a).

As a result of this position, the parties agree that the court must decide whether a notice of federal tax lien for personal property, properly filed in the county where the taxpayer resided at the time the notice is filed, attaches to personal property acquired by the taxpayer after the taxpayer moves to a county in another state? If it does, then the IRS must be allowed its secured claim. However, if it does not, then the IRS would be allowed a secured claim of $3,000, with the balance of the claim allowed as unsecured. See 11 U.S.C. §506(a).

If a person fails to pay their taxes, then the Internal Revenue Code imposes a lien for unpaid taxes upon the delinquent taxpayer's property. Under 26 U.S.C. §6321, a federal tax lien arises:

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 (emphasis added).

The tax lien attaches to the taxpayer's property upon the filing of a notice of lien. 26 U.S.C. §6323(a). For a taxpayer's personal property, the Internal Revenue Code deems the property situated at the residence of the taxpayer at the time the notice of lien is filed. 26 U.S.C. §6323(f)(2)(B). The lien applies to all the taxpayer's property until either the taxpayer satisfies the liability or the statute of limitations on collection runs. 26 U.S.C. §6322.

The notice of federal tax lien must be filed in accordance with 26 U.S.C. §6323, which states that "[t]he lien imposed by section 6321 shall not be valid . . . until notice thereof which meets the requirements of subsection (f) has been filed by the Secretary." Subsection (f) requires the IRS to file the notice of its lien according to laws of the state of the taxpayer's domicile. The Florida Uniform Federal Lien Registration Act requires that notices of federal tax liens for personal property be filed in the county where the taxpayer resides. Fla. Stat. Ann. §713.901 (West 2001).

On September 22, 1997, the IRS filed its notice of federal tax lien in Martin County, Florida, where the debtors then resided. Consequently, under the Internal Revenue Code, from that time until the tax liability is paid, the lien attaches to all property belonging to the taxpayer, and all the property belonging to the taxpayer during that period of time is deemed situated in Martin County, Florida. Thus, wherever the taxpayer roams after September 27, 1997, the tax lien applies to his property until either the tax liability is paid or collection is barred by the statute of limitations, as if the taxpayer never left Martin County, Florida.

Accordingly, the United States Supreme Court has held that a federal tax lien attaches to any "property owned by the delinquent at any time during the life of the lien." Glass City Bank v. United States [45-2 USTC ¶9449], 326 U.S. 265, 268-69 (1945). If a federal tax lien arises pursuant to §6321, then it attaches (and remains attached) to all property belonging to the debtor, including any after-acquired property, until paid. See United States by and through IRS v. McDermott [93-1 USTC ¶50,164], 507 U.S. 447, 448 (1993); In re Orr [99-2 USTC ¶50,668], 180 F.3d 656, 660 (5th Cir. 1999). Additionally, once properly filed, the lien attaches to property no matter where it is located. Grand Prairie State Bank v. United States [53-2 USTC ¶9481], 206 F.2d 217, 219-20 (5th Cir. 1953). Moreover, the lien remains valid even if the debtor leaves the residence. 26 U.S.C. §6323(f)(2)(B); United States v. Cohen [67-2 USTC ¶9602], 271 F.Supp. 709, 715 (S.D. Fla. 1967).

In this case, the debtors concede those points. But, they observe that relocation to a different state significantly changes the analysis. As previously stated, a federal tax lien follows the taxpayer and his property when the taxpayer relocates to a different state. However, to be effective against third parties, the Internal Revenue Code requires that notice of federal tax liens be filed as designated by the state of the taxpayer's residence. In this case, the debtors contend that if the taxpayer becomes a resident of a different state, then, to attach to property acquired in the new state, the IRS must file another notice of federal tax lien in the manner designated by the new state. The debtors argue that this interpretation of the law accords meaning to the requirement that the notice of federal tax liens for personal property be filed as designated by the several states and is consistent with lending practices under the Uniform Commercial Code.

The Internal Revenue Code does not require the IRS to file a tax lien in every county to which a taxpayer could carry personal property. See 26 U.S.C. §§6321 and 6323; Grand Prairie State Bank [53-2 USTC ¶9481], 206 F.2d at 219. "To hold otherwise, would be to overlook the practical necessities of the situation and would require the Collector to file tax liens in every jurisdiction to which the taxpayers may at any time remove the property." Id. Similarly, by providing that the lien attaches to all property "belonging to" the taxpayer, 26 U.S.C. §6321, for the period until paid, 26 U.S.C. §6322, with the property deemed situated at the taxpayer's residence at the time the notice of lien is filed, 26 U.S.C. §6323(f)(2)(B), the Internal Revenue Code eliminates any need for the IRS to file tax liens in every jurisdiction to which a taxpayer may move and acquire new property. The IRS need not chase taxpayers, filing in every state to which the taxpayer moves. Taxpayers cannot pocket tax money, move to another state and acquire new property, thereby avoiding the IRS' lien. Moreover, the broad statutory language that appears in §6321 "reveals on its face that Congress meant to reach every interest in property that a taxpayer might have." See United States v. National Bank of Commerce [85-2 USTC ¶9482], 472 U.S. 713, 720 (1985). In fact, "stronger language could hardly have been selected to reveal a purpose to assure the collection of taxes." Glass City Bank v. United States [45-2 USTC ¶9449], 326 U.S. at 267.

The notice of tax lien filed September 27, 1997, captures all the debtors' personal property as if the debtors never left Martin County, Florida.

The Internal Revenue Code cannot be compared to the Uniform Commercial Code. Collection of taxes to finance the United States operates in a difference sphere than perfection of security interests for commercial transactions. Besides, for registered organizations, recent revisions to the Uniform Commercial Code result in filing of financial statements in the place of incorporation, regardless of the location of the collateral. See, e.g., U.C.C. §9-301, 307 (1998).

Finding that the tax lien attaches to the debtors' property acquired in Texas,

IT IS ORDERED that the objection to the claim of the United States is OVERRULED and the claim is ALLOWED.

 

 

 

Sejax Warehousing, Ltd., Plaintiff v. United States of America, et al., Defendants

U.S. District Court, Mid. Dist. Fla., Tampa Div., 97-1241-CIV-T-23(B), 4/12/99

[Code Secs. 6321 and 6323 ]

Liens: Validity and priority against third parties: Application of state law.--A tax lien attached to property purchased by a corporation from a delinquent taxpayer because the deed was recorded after the lien arose. The question of the type of interest that the taxpayer had in the property on the date when the tax assessment was made had to be determined under state (Florida) law. Pursuant to Florida law, the unrecorded deed was not "good and effectual in law or equity against creditors," and the government qualified as a "creditor" of the taxpayer. The corporation would be able to defeat the tax lien by showing that it had paid "adequate and full consideration" for the property. Even if it failed to make such a showing, it was not likely to suffer a gross inequity because the amount of the levies was probably less than the difference between the value of the property obtained and the price paid for that property. Creamer Industries, Inc. (CA-5), 65-2 USTC ¶9527 , followed.

[Code Secs. 7402 and 7426 ]

Wrongful levy: Civil actions by nontaxpayers: Property owner: Summary judgment: Existence of unresolved factual issues.--A corporation that had purchased real property from a delinquent taxpayer was not entitled to summary judgment in its suit alleging that the IRS wrongfully levied against rents due from the lessee of the property. Since a factual dispute existed as to whether the corporation purchased the property for full and adequate consideration, the issue regarding whether its deed had priority over IRS tax liens could not be resolved on a motion for summary judgment. BACK REFERENCES: ¶41,605.105 and 41,713.20

ORDER

WILSON, Magistrate Judge:

THIS CAUSE came on to be heard upon the Plaintiff's Motion for Summary Judgment (Doc. 34) and the Defendant's Motion for Summary Judgment (Doc. 38). For the following reasons, both motions will be denied.

I.

This is a suit by the plaintiff Sejax Warehousing, Ltd., seeking recovery for an alleged wrongful levy arising from a federal tax lien against Rich Photos, Inc. The levy was upon an interest in real property located at 1600 West Flagler Street, Miami, Florida. That property was owned by Rich Photos until at least July 1994.

Rich Photos in 1992 had filed a bankruptcy petition. In connection with a purported reorganization plan, on July 1, 1994, a warranty deed was executed which reflected a sale of the 1600 West Flagler Street property from Rich Photos to Sejax. In September 1994, before the deed was recorded, federal taxes were assessed against Rich Photos. On May 31, 1995, the warranty deed from Rich Photos to the plaintiff was finally recorded. In September 1995 and February 1996, notices of federal tax liens, reflecting the earlier tax assessments, were filed. In May 1996 a notice of federal tax liens was filed against the plaintiff as a nominee of Rich Photos. The Internal Revenue Service (IRS) subsequently levied upon rents due the plaintiff from the lessee of the property at 1600 West Flagler Street.

The Second Amended Complaint in this case alleges that the levy was wrongful. Such an action may be brought pursuant to 26 U.S.C. 7426. Prior to the filing of the Second Amended Complaint, the parties had consented to the exercise of jurisdiction in this case by a United States Magistrate Judge (Doc. 13).

The plaintiff filed a Motion for Summary Judgment on the grounds (1) that the taxpayer Rich Photos was not an owner and had no interest in the Flagler Street property in September 1994 when the federal tax lien arose, and (2) that, in all events, the plaintiff was a purchaser of the property for adequate and full consideration and its deed has priority over the tax liens under 26 U.S.C. 6323(a). The defendant's motion contends, in essence, that the opposite of the plaintiff's assertions is true.

Argument at the hearing demonstrated that there is a factual dispute whether the plaintiff paid adequate and full consideration for the Flagler Street property. Consequently, the issue whether the plaintiff was protected by §6323(a) could not be resolved on the motions for summary judgment.

II.

The plaintiff argues that, even if there is a dispute concerning whether it paid adequate and full consideration for the Flagler Street property, it is nevertheless entitled to summary judgment because, as of September 1994, Rich Photos, the taxpayer, had no interest in that property. This contention is based upon 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 costs that may accrue in addition thereto) shall be a lien in favor of the United States upon all property and rights to property, whether real or personal, belonging to such person.

The plaintiff argues that, since Rich Photos had sold the property prior to September 1994, the time when the first tax lien arose, Rich Photos had no interest in the property to which the tax lien could attach. If the warranty deed had been promptly recorded, that argument would prevail. ^*

The deed to the property, however, was not recorded prior to the time the first tax lien arose. This fact changes the outcome of the plaintiff's §6321 argument under a binding decision of this circuit. United States v. Creamer Industries, Inc. [65-2 USTC ¶9527], 349 F.2d 625 (5^th Cir. 1965).

The question of what interest Rich Photos had in the property as of September 1994 is determined by state law. Id. at 628. Consequently, the Government relies upon the Florida recording statute, Fla. Stat. §695.01(1), which provides:

No conveyance, transfer, or mortgage of real property, or of any interest therein, nor any lease for a term of 1 year or longer, shall be good and effectual in law or equity against creditors or subsequent purchasers for a valuable consideration and without notice, unless the same be recorded according to law; nor shall any such instrument made or executed by virtue of any power of attorney be good or effectual in law or in equity against creditors or subsequent purchasers for a valuable consideration and without notice unless the power of attorney be recorded before the accruing of the right of such creditor or subsequent purchaser.

By this statute's plain language, the plaintiff's unrecorded deed was not "good and effectual in law or equity against creditors." And importantly, the former Fifth Circuit in Creamer held that, "[a]s to the taxes owed to it, the United States was a 'creditor' within the Texas recording statute." [65-2 USTC ¶9527], 349 F.2d at 628. Similarly, the Government in this case would be a "creditor" of Rich Photos within the meaning of the Florida recording statute.

In Creamer, when land was purchased from the taxpayer, the deed incorrectly failed to include several lots. A correcting deed was recorded only after federal tax liens against the seller had arisen and been filed. Noting that the seller's interest could differ with respect to the purchaser and a creditor, the court of appeals held that, under the Texas recording statute, the Government's tax liens had priority over the purchaser's right to reformation of the deeds. This decision is binding precedent in this circuit. Bonner v. City of Prichard, 661 F.2d 1206, 1209 (11^th Cir. 1981) (en banc).

Creamer has been criticized by other courts of appeals. Those decisions simply look at the respective interests of the taxpayer and the person to whom the property was conveyed, and, unlike Creamer, do not permit the United States to take advantage of a state recording statute. United States v. Gibbons [96-1 USTC ¶50,008], 71 F.3d 1496, 1500-1501 (10^th Cir. 1995); Thomson v. United States [95-2 USTC ¶50,549], 66 F.3d 160 (8^th Cir. 1995); United States v. V & E Engineering & Construction Company, Inc. [87-1 USTC ¶9355], 819 F.2d 331, 333-334 (1^st Cir. 1987). On the other hand, a panel of the new Fifth Circuit has followed Creamer. Prewitt v. United States [86-2 USTC ¶9513], 792 F.2d 1353, 1355-1356 (5^th Cir. 1986).

Arguably, Creamer might be limited to the particular factual situation presented in that case. However, none of the courts of appeals has attempted to distinguish Creamer on that basis. Moreover, the plaintiff has not sought to do so here, either. Consequently, any effort to limit Creamer to its facts would seemingly not constitute a fair reading of that decision.

Moreover, Creamer should not be given a crabbed construction based upon the notion, gleaned from the decisions of other circuits, that virtually all the equities favor the party to whom a taxpayer has conveyed property by an unrecorded document. A rule that permits a taxpayer to transfer its property interest by unrecorded deed and does not afford the IRS the benefit of state recording statutes can easily be unfairly manipulated to avoid a levy upon the taxpayer's property. In other words, neither of the solutions advocated by the federal appellate decisions is satisfactory for all situations. Particularly in that circumstance, there is no justification for second-guessing the position adopted in Creamer by Judges Rives and Wisdom.

Furthermore, this case does not present a situation where the plaintiff is likely to suffer a gross inequity. As indicated, the plaintiff, pursuant to §6323(a), can defeat the federal tax liens by showing that it paid "adequate and full consideration" for the property. Even if it fails to make such a showing, the amount of the levies in this case is most likely less than the difference between the value of the property obtained and the price paid for it. This circumstance thus contradicts any notion that Creamer needs to be modified in order to avoid a perceived unfairness in this case.

In sum, Creamer, a binding decision in this circuit, establishes that the IRS is entitled to take advantage of state recording statutes. Further, it demonstrates that the IRS by virtue of its tax lien is a creditor within the meaning of Florida's recording statute. Therefore, the deed to the Flagler Street property was not "good or effectual in law or equity" against the IRS prior to the time it was recorded. Fla. Stat. §695.01(1). Since that recording occurred after the federal tax lien arose, the tax lien attached to the property under §6321. Whether the plaintiff can trump that lien by virtue of §6323(a) as a purchaser for adequate and full consideration presents a factual question that cannot be resolved on a motion for summary judgment.

It is, therefore, upon consideration

ORDERED:

1. That the Plaintiff's Motion for Summary Judgment (Doc. 34) be, and the same is hereby DENIED.

2. That the Defendant's Motion for Summary Judgment (Doc. 38) be, and the same is hereby DENIED.

^* The Government contends that the bankruptcy court had not authorized a sale of the property to the plaintiff and that the sale was therefore a nullity. The Government, however, has cited no authority to support its argument. Moreover, the Government could not satisfactorily explain the status of the title to the property under its contention. Accordingly, that argument was rejected.

 

 

 

United States of America and Ellis Campbell, Jr., Appellants, v. Creamer Industries, Inc., Appellee

(CA-5), U. S. Court of Appeals, 5th Circuit, No. 21188, 349 F2d 625, 7/2/65, Reversing and remanding District Court, 63-2 USTC ¶9699

[1959 Code Sec. 6323]

Tax lien: Sale of assets: Imperfect conveyance.--A federal tax lien filed after a delinquent taxpayer sold its assets to a bona fide purchaser was valid against real property which was inadvertently omitted from the contract of sale, since the conveyance of such real property was not recorded as of the date that notice of the federal tax lien was filed

Louis F. Oberdorfer, Assistant Attorney General, Robert J. Golten, Lee A. Jackson, Joseph Kovner, Department of Justice, Washington, D. C. 20530, for appellants. R. B. Cannon, Suite 525, Fort Worth Nat'l Bank Bldg., Fort Worth, Tex., for appellee.

Before RIVES, BROWN, and WISDOM, Circuit Judges.

[Issue]

RIVES, Circuit Judge:

This action was brought by a purchaser from the taxpayer. The deed had inadvertently failed to include certain real property located in Tarrant County, Texas. A correcting deed was executed and recorded after the tax lien was filed. The question is whether the federal tax lien attaches to the property erroneously omitted from the original deed.

[Facts]

On January 21, 1959, Creamer Industries, Inc., the ultimate purchaser, and Maxwell Steel Company, Inc., the taxpayer, entered into a contract whereby all of Maxwell's assets were to be transferred and conveyed to Creamer. The consideration paid by Creamer was $183,000 and the assumption of some of Maxwell's indebtedness, amounting in total to more than $1,100,000. By inadvertence the contract failed to list or describe in any way the six lots of land, five of which are the subject of this lawsuit. The deeds executed on the same day likewise omitted these six lots.

On March 24, 1959, the United States made a jeopardy assessment against Maxwell for $430,523.09, which included past due income taxes and excise taxes. Notice of the tax lien which arose by virtue of the assessment was filed on March 26, 1959, two days after the assessment.

Thereafter, on or about April 1, 1959, Maxwell executed and delivered a correcting deed, conveying these lots to Creamer. The deed was back-dated to January 21, 1959, but was recorded on April 28, 1959.

[Jurisdiction]

Before discussing and deciding the merits, we must dispose of a question of jurisdiction. While Professor Moore questions with deference whether such an inflexible rule is needed or sound, ¹ the present rule is that a fundamental question must be raised sua sponte by a federal appellate court first as to its own jurisdiction and then as to the jurisdiction of the court from which the appeal comes. ² Jurisdiction of this appeal from a final decision of the district court is conferred on this Court by 28 U. S. C. 1291. While the action in the district court sought an injunction, we think that the district judge did not err in treating it as a suit to quiet title to real property clouded by a federal tax lien. The complaint alleged that the proceeding is brought under 28 U. S. Code 2410. The district court stated: "So far as Section 2410 is a point, I do not see any attending lack of jurisdiction in this suit. United States v. Morrison [57-2 USTC ¶9801], 247 F. 2d 285." The Ninth Circuit disagrees with our decision in United States v. Morrison, supra, relied on by the district court, but bases jurisdiction of a suit to quiet title to land attacking the validity or priority of a federal tax lien upon 28 U. S. C. 1340. ³ The Government has now abandoned its attack upon the jurisdiction of the district court. Upon one basis or another, we are satisfied that there was no lack of jurisdiction. ⁴

[Lower Court Holding]

The district court based its ruling with the plaintiff Creamer upon two conclusions of law, expressed as follows:

"1. It is manifest as a matter of law that the buyer corporation had become 'purchaser,' in the most literal sense of Section 6323(a), as to the great mass of property and assets constituting the subject matter of the contract between the two corporations, and stood in that position thereunto at the time the tax lien was filed.

"2. The two corporations had a single contract of sale and, although the subject matter included a multiplicity of items, there was simply a common and blanket consideration for the whole property, and consequently it would be too rigid in the light of the 'realities' referred to in the Regulation to split the concept of 'purchaser' and say that the buyer corporation, at the time the tax lien was filed, had become a 'purchaser' in very large part, but had not become a 'purchaser' as to the very minor part of the subject matter in the contract of sale."

[Statutory Provisions]

26 U. S. C. 6323(a) referred to by the district court reads, in pertinent part, as follows:

"§6323. Validity against mortgagees, pledgees, purchasers, and judgment creditors

"(a) Invalidity of lien without notice.--. . . the lien imposed by section 6321 shall not be valid as against any mortgagee, pledgee, purchaser, or judgment creditor until notice thereof has been filed by the Secretary or his delegate--"

That statute was recently considered by this Court in Fore v. United States, 5 Cir. 1964, [65-1 USTC ¶9101] 339 F. 2d 70. As implicit in that decision, and as held in one of the cases there cited, ⁵ the purpose of the statute was "to protect mortgagees, purchasers and judgment creditors against a secret lien for assessed taxes and to postpone the effectiveness of the tax lien as against these interests until the tax lien was filed." In the present case, as has been seen, the United States made the jeopardy assessment on March 24, and notice of the tax lien was filed on March 26. During the two intervening days there was no happening or occurrence which could change Creamer's rights in the slightest. The rights of the parties were the same at the time the lien arose and at the time when notice was filed. In our opinion, therefore, section 6323(a) has no application to the facts of this case.

The sections providing for the creation of the lien are quoted in the margin. ⁶ The question to be decided is whether at the time of the assessment on March 24, 1959, the taxpayer, Maxwell, owned any property or rights to property in the six lots upon which the tax lien could fasten. The nature and extent of Maxwell's interest in the lots on that date must be determined by state law. ⁷

As between Maxwell, the seller, and Creamer, the purchaser, Maxwell's interest may differ from its interest with respect to a creditor without notice, such as the United States . Most pertinent is the Texas recording statute, 19 Vernon 's Ann. Tex. Civ. St. , art. 6627:

"All bargains, sales and other conveyances whatever, of any land, tenements and hereditaments, whether they may be made for passing any estate of freehold of inheritance or for a term of years; and deeds of settlement upon marriage, whether land, money or other personal thing; and all deeds of trust and mortgages shall be void as to all creditors and subsequent purchasers for a valuable consideration without notice, unless they shall be acknowledged or proved and filed with the clerk, to be recorded as required by law; but the same as between the parties and their heirs, and as to all subsequent purchasers, with notice thereof or without valuable consideration, shall be valid and binding."

[Valid Federal Lien]

As to the taxes owed to it, the United States was a "creditor" within the Texas recording statute. ⁸ A creditor who has obtained a lien by operation of law is protected by the statute. ⁹ In Henderson v. Odessa Bldg & Finance Co., just cited (n. 9), a judgment creditor asserted its lien against lot 3 which the debtor had intended to convey prior to the levy, but his deed had mistakenly described lot 5 instead of lot 3. It was held:

"The failure to convey the lot levied upon by plaintiffs in error through mutual mistake of the parties gave defendant in error an equitable right to have the deed reformed by correction deed or a decree in equity, but, as plaintiffs in error had no knowledge of such equity at the time their levy was made, the lien thereby fixed was superior to defendant in error's right to such reformation."

24 S. W. 2d at 394.

That decision seems almost "on all fours" with the present case. It follows that the judgment should have gone for the defendants.

The judgment of the district court is therefore reversed and the cause remanded.

REVERSED AND REMANDED

¹ 1 Moore , Federal Practice ¶0.60[4], p. 610.

² Mansfield, C. & L. M. Ry. Co. v. Swan, 1884, 111 U. S. 879, 382; McNutt v. General Motors Acc. Corp., 1936, 298 U. S. 178, 189; Birmingham Post Co. v. Brown, 5 Cir. 1954, 217 F. 2d 127, 130.

³ Shaw v. United States, 9 Cir. 1964, [64-1 USTC ¶9421] 331 F. 2d 493, 496; United States v. Coson, 9 Cir. 1961, [61-1 USTC ¶9219] 286 F. 2d 453, 456-59.

⁴ See the annotation in 5 L. Ed. 2d 867-887 on "construction and application of statute [28 U. S. C. 2410(a)(c)] dealing with actions affecting property on which the United States has a lien."

⁵ United States v. Pioneer American Ins. Co., 1963, [63-2 USTC ¶9532] 374 U. S. 84, 89; see also United States v. Gilbert Associates, 1953, [53-1 USTC ¶9291], 345 U. S. 361, 363-64.

⁶ "§6321. Lien for taxes.

"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."

"§6322. Period of lien.

"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 is satisfied or becomes unenforceable by reason of lapse of time."

26 U. S. C.

⁷ United States v. Bess, 1958, [58-2 USTC ¶9595], 357 U. S. 51, 55; Aquilino v. United States, 1960, [60-2 USTC ¶9538] 363 U. S. 509, 513; Folsom v. United States , 5 Cir. 1962, [62-2 USTC ¶9648] 306 F. 2d 361, 368.

⁸ Underwood v. United States, 5 Cir. 1941, [41-1 USTC ¶9296] 118 F. 2d 760-61; Uhlorn v. Owens, S. D. Tex., 1962, 211 F. Supp. 798, 802, aff'd per curiam "on the reasoning contained in the opinion of the trial court," 5 Cir. 1963, 325 F. 2d 92; Hams v. Marshall, 2 Cir. 1930, 43 F. 2d 703-04 (opinion by Swan, Circuit Judge, concurred in by Judges Learned Hand and Augustus Hand); Edmundson v. Scofield, S. D. Tex. 1950, [50-1 USTC ¶9318] 92 F. Supp. 91, 95.

⁹ Henderson v. Odessa Bldg. & Finance Co. (Texas Com'n of Appeals, 1930), 24 S. W. 2d 393; United States v. Davidson, 5 Cir. 1943, 139 F. 2d 908, 911