Contract Assignment Page2

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Originally, the United States sought to enforce its tax assessments against Harry Polk in the interpleader action on the theory that Polk, Bentonite, Inc. and Stage Construction Company are merely alter egos of one another. While the Court finds ample evidence to support this contention, the Government has essentially dropped this argument and now pursues the position that the tax liens arising as a result of the $103,232 assessment against Bentonite, Inc. on October 25, 1974, and the $20,005.93 assessment against Bentonite, Inc. on October 29, 1974, are entitled to priority over the unperfected and inchoate interests of each of the other claimants to the interpleader fund.

DID THE TAX LIENS OF THE UNITED STATES AGAINST BENTONITE, INC. GIVE THE UNITED STATES PRIORITY OVER THE OTHER CLAIMANTS TO THE INTERPLEADER FUNDS? The question of when a federal tax lien has priority over a security interest created under state law must be answered by reference to federal law. Aquilino v. United States [60-2 USTC ¶9538], 363 U. S. 509 (1960); Dugan v. Missouri Neon and Plastic Advertisig Company [73-1 USTC ¶9211], 472 F. 2d 944, 949 (8th Cir. 1973); Nevada Rock and Sand Company v. United States [74-2 USTC ¶9617], 376 F. Supp. 161, 163 (D. Nev. 1974).

While some have characterized the subject of federal tax liens as being somewhat complex, ¹ the complexities of this area of law fade if a step by step analysis is made as to the question of who has priority over the fund in issue.

The initial premise, not challenged by any of the parties to this action, is that the United States acquires a lien against all property and rights to property belonging to a taxpayer upon the assessment of unpaid taxes and notice of demand for payment of same being made upon taxpayer. Section 6321 of the Internal Revenue Code of 1954 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.

Section 6322 of the Code 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.

Here the United States obtained liens against Bentonite, Inc., on October 25, 1974 , and October 29, 1974 .

[Exceptions re Tax Lien Priority]

These liens immediately attached to all property or rights to property belonging to Bentonite, Inc. However, this lien was not valid against any purchaser, holder of a security interest, mechanic's lienor, or judgment lien creditor until March 6, 1975 , when a Notice of Federal Tax Lien was filed with the Secretary of State. See Code Section 6323(a) and (f); Nevada Revised Statute Section 108.827; Bank of Nevada v. United States [57-1 USTC ¶9561], 251 F. 2d 820, 826 (9th Cir. 1957), cert. denied, 356 U. S. 938 (1958).

[Property Subject to Lien]

DID BENTONITE, INC. HAVE PROPERTY RIGHTS TO PROPERTY IN THE REFUNDING AGREEMENT WHEN THE FEDERAL TAX LIENS ATTACHED? Valley Bank argues that Bentonite, Inc. had no property or property rights in the refunding agreement at the time the tax liens attached in October, 1974, because it had already assigned its rights to Valley Bank of Nevada . The same factual situation arose in Nevada Rock and Sand Company v. United States , supra, where the assignee was to receive the proceeds from the contract rights directly, instead of through the assignor. The same argument was made that there did not exist a property right to which a tax lien could attach since the assignor had assigned its interest. The court firmly rejected this argument and held that there was an interest to which the tax lien could attach.

While the language of the May 24, 1972 , "Assignment" could indicate an outright sale, the circumstances surrounding the assignment, the understanding of the parties and the subsequent conduct of the parties manifest the reality of the transaction as a financing arrangement where the agreement was used as collateral. Majors Furniture Mart v. Castle Credit Corp., 602 F. 2d 538, 543 (3rd Cir. 1979); In re Joseph Kanner Hat Co., Inc., 482 F. 2d 937, 940 (2nd Cir. 1973).

[Qualification re Holder of a Security Interest]

DID VALLEY BANK QUALIFY AS A "HOLDER OF A SECURITY INTEREST" UNDER SECTION 6323 OF THE CODE AND NOT ENTITLED TO PRIORITY OVER THE UNITED STATES? As noted previously, a tax lien attaches to all property or rights to property of a taxpayer at the moment when an assessment is made. See Bank of Nevada v. United States , supra, 251 F. 2d at 826; Nevada Rock and Sand Company v. United States , supra, 376 F. Supp. at 163 n. 1. That is not to say, however, that a creditor of the taxpayer cannot obtain priority over the United States after the lien has arisen. The "blueprint" on how to obtain priority is contained in Section 6323(a) of the Code which provides:

The lien imposed by section 6321 shall not be valid as against any purchaser, holder of a security interest, mechanic's lienor, or judgment lien creditor until notice thereof which meets the requirements of subsection (f) has been filed by the Secretary. ²

Here the Notice of Lien was filed on March 6, 1975 . Thus, the question is whether Valley Bank or any of the other parties to this action qualified as a "holder of a security interest" prior to March 6, 1975 . ³ A holder of a security interest is defined in Section 6323(h) of the Code as follows:

(1) Security Interest.--The term "security interest" means any interest in property acquired by contract for the purpose of securing payment or performance of an obligation or indemnifying against loss or liability. A security interest exists at any time (A) if, at such time, the property is in existence and the interest has become protected under local law against a subsequent judgment lien arising out of an unsecured obligation, and (B) to the extent that, at such time, the holder has parted with money or money's worth.

The Water Refunding Agreement was assigned to Valley Bank on July 16, 1974 . The remaining Water and Sewer Refunding Agreements were assigned to Valley Bank on May 24, 1972 , (although the bank's security interest in these agreements did not "attach" until January 2, 1973 . See N. R. S. Section 104.9203(1)(c). ⁴

The interest obtained by Valley Bank via these assignments, however, was not a security interest within the meaning of Section 6323(h)(1), inasmuch as its rights were not protected under local law against a judgment lien arising out of an unsecured obligation.

To obtain a "security interest" sufficient to defeat an unfiled federal tax lien, the creditor must perfects its security interest against a hypothetical judgment lien creditor prior to the time the United States files a Notice of a Federal Tax Lien. N. R. S. Section 104.9301(1)(b), (d). Dragstrem v. Obermeyer [77-1 USTC ¶9301], 549 F. 2d 25-26 (7th Cir. 1977); United States v. Trigg, supra, 564 F. 2d at 1269-1270; George W. Ultch Lumber Co. v. Hall Plastering, Inc. [80-1 USTC ¶9396], 477 F. Supp. 1060, 1071 (W. D. Mo. 1979); United States v. Sterling National Bank and Trust Co. [73-2 USTC ¶9494], 360 F. Supp. 917, 925 (S. D. N. Y. 1973) modified on other grounds [74-1 USTC ¶9336], 494 F. 2d 919 (2nd Cir. 1974). Contra, Nevada Rock and Sand Company v. United States , supra, 376 F. Supp. at 172 n. 17; United States v. Ed Lusk Construction Company, Inc. [74-2 USTC ¶9773], 504 F. 2d 328, 331 (10th Cir. 1974). ⁵

[Applicability of Article Nine]

WERE THE FINANCING TRANSACTIONS ENGAGED IN BY VALLEY BANK WITHIN THE SCOPE OF ARTICLE NINE? Valley Bank has argued that the assignments of the water and sewer refunding agreements do not fall within the scope of Article Nine of the Uniform Commercial Code and therefore, no perfection of the assignments by filing is required. This argument is totally without merit for a number of reasons.

Article 9 (N. R. S. Section 104.9101 et seq.) applies to any transaction which is intended to create a security interest in accounts and to any sale of accounts. N. R. S. Section 104.9102. The inclusion of outright sales of accounts within the scope of Article 9 was attributable to the fact that the distinction between a security transfer of an account or contract right and a sale of that account or contract right was often blurred. See Official Comment 2 to N. R. S. Section 104.9102; George W. Ultch Lumber Company v. Hall Plastering, Inc., supra, 477 F. Supp. at 1065-1066; Comment, Assignment of Accounts and Contract Rights, 1977 Utah L. Rev. 311, 333-334; 1 Bender's Uniform Commercial Code Service, Secured Transactions §5A.08[1] (1980).

. . .

N. R. S. Section 104.9104(6) removes certain transactions from the scope of Article Nine. ⁶ All the transactions removed, however, are outright transfers of accounts. In connection with the discussion of whether Bentonite had property or rights to property in the refunding agreements, the assignments involved here were never intended to be outright transfers, but, rather, were intended to provide Valley Bank with collateral to secure its loan. Indeed, in excluding from the U. C. C. "a transfer of a right to payment under a contract to an assignee who is also to do the performance under the contract," NRS 104.9104(6) illustrates that an assignment under which the payment of an outstanding loan is effectuated by a direct payment from the debtor to the assignee is within the scope of Article 9 where the assignee is not obligated to do the performance under the contract. ⁷ Here, Valley Bank is in no way required to perform under the refunding agreements. See also Official Comment 6 to U. C. C. Section 9-104 which provides:

In general sales as well as security transfers of accounts and chattel paper are within the Article (see Section 9-102). Paragraph (f) [N. R. S. Sec. 104.9104(6)] excludes from the Article certain transfers of such intangibles which, by their nature, have nothing to do with commercial financing transactions. (Emphasis added.)

Thus, Valley Bank's reliance on N. R. S. 104.9104(6) and the cases of Spurlin v. Sloan, 368 S. W. 2d 314 (Ky. Ct. App. 1963) and Lyon v. Ty-Wood Corporation, 292 Pa. Super. 69, 239 A. 2d 819 (1968) is misplaced. ⁸ See George W. Ultch Lumber Company v. Hall Plastering, supra, 477 F. Supp. at 1066; Consolidated Film Industries v. United States, 403 F. Supp. 1279, 1281-1282 (D. Utah, 1975), rev'd on other grounds [77-1 USTC ¶9188], 547 F. 2d 533 (10th Cir. 1977); United States v. Damrow [63-1 USTC ¶9144], 211 F. Supp. 615, 618 (D. Wyo. 1962).

[Test re Choate Lien]

ARE EQUITABLE LIENS INCHOATE LIENS AND NOT VALID AGAINST PERFECTED FEDERAL TAX LIENS? The federal rule "first in time first in right" determines whether a federal tax lien under §6321, Title 26, United States Code or a competing lien created by state law has priority. United States v. City of New Britain [54-1 USTC ¶9191], 347 U. S. 81 (1954).

Under this basic federal priority standard, a federal tax lien takes priority over a statecreated lien unless the state lien is specific and perfected in the federal sense. United States v. Crest Finance Co. [62-1 USTC ¶9454], 302 F. 2d 568, 569 (7th Cir. 1962), on remand from [62-1 USTC ¶9105] 368 U. S. 347 (1961); United States v. Trigg, supra, 465 F. 2d at 1269.

As part of this rule, the Supreme Court has announced that a state of local lien must be "choate" to defeat the federal lien. This is referred to as the doctrine of choateness. United States v. City of New Britain, supra. In order for a state of local lien to be "choate" it must meet the three tests of (1) certainty of the lienor, (2) certainty of the property subject to the lien, and (3) certainty of the amount of the lien. Id. In addition, the Supreme Court has indicated that in order to be choate, the state of local lien must also be enforceable summarily without the necessity of a judicial proceeding. United States v. Vermont, 377 U. S. 351 (1964), United States v. Security Trust & Savings Bank [50-2 USTC ¶9492], 340 U. S. 47 (1950).

In Bank of Nevada v. United States, supra, 251 F. 2d at 823-824, the Ninth Circuit specifically rejected a contention by the appellant bank that an equitable lien held by the bank in the form of a right of set-off could prime a federal tax lien. Thus, in this Circuit, the rule espoused in Morrison Flying Service v. Deming National Bank [68-2 USTC ¶9465], 404 F. 2d 856 (10th Cir. 1968), cert. denied, 393 U. S. 1020 (1969) and relied upon by Valley Bank is clearly not followed. ⁹ See also United States v. Morrison [57-2 USTC ¶9801], 247 F. 2d 285 (5th Cir. 1957), First National Bank of Cartersville v. Hill [76-2 USTC ¶9623], 412 F. Supp. 422, 424 (N. D. Ga. 1976).

[Inapplicability of U. C. C. §9-302(1)(e)]

IS N. R. S. 104.9302(1)(e) INAPPLICABLE WHERE AN ASSIGNMENT IS FOR COLLATERAL? Plaintiff's claims that Valley Bank's interest in the refunding agreements was perfected without filing because N. R. S. 104.9302(1)(e) exempts these transactions from the filing requirements of that Section are untenable.

At the time the tax liens attached in October, 1974, N. R. S. 104.9302(1)(e) provided:

(1) A financing statement must be filed to perfect all security interests except the following:

. . .

(e) an assignment of accounts which does not alone or in conjunction with other assignments to the same assignee transfer a significant part of the outstanding accounts of the assignor;

It is significant to note that Comment 5 to this section of the Uniform Commercial Code provides in pertinent part:

The purpose of the subsection (1)(e) exemptions is to save from ex post facto invalidation casual or isolated assignments: some accounts receivable statutes have been so broadly drafted that all assignments, whatever their character or purpose, fall within their filing provisions. Under such statutes many assignments which no one would think of filing may be subject to invalidation. The subsection (1)(e) exemptions go to that type of assignment. Any person who regularly takes assignments of any debtor's accounts should file. In this connection, Section 9-104(f) which excludes certain transfers of accounts and contract rights from the Article should be consulted. (Emphasis added)

Professor Gilmore, who was a reporter for Article 9, has stated that U. C. C. §9-302(1)(e) was "carefully drafted so that no assignee, engaged in a regular course of financing, will ever be tempted to rely on it in order to avoid a filing which ought to be made." 1 G. Gilmore, Security Interests in Personal Property, §19.6 at p. 538 (1965). [Hereinafter cited as Gilmore.]

N. R. S. Section 104.9302(1)(e) was never intended to provide an escape hatch for negligent institutional financiers. This section is applicable only when an outright sale of an account occurs, or the security interest is granted to an assignee who is not regularly engaged in financing activities. See e.g., Gilmore, supra, p. 538 (the "beneficient purpose" of U. C. C. §9-302(1)(e) was to protect "assignees who are both insignificant and ignorant.")

[Amendment of State Statute]

IS KNOWLEDGE BY THE UNITED STATES OF ANY PRIOR INTEREST BY VALLEY BANK OF NEVADA IRRELEVANT? As noted in footnote four of this decision, the Uniform Commercial Code was enacted in 1965. That version had Section 9-301(1)(b), which was adopted verbatim by the Nevada Legislature, as follows:

(1) Except as otherwise provided in subsection (2), an unperfected security interest is subordinate to the rights of . . .

(b) a person who becomes a lien creditor without knowledge of the security interest and before it is perfected.

The Nevada Legislature amended the Code to conform Nevada Law with the 1972 version of the Uniform Commercial Code. The amended version was adopted in 1973 and reads as follows:

(1) Except as otherwise provided in subsection (2), an unperfected security interest is subordinate to the rights of . . .

(b) a person who becomes a lien creditor before the security interest is perfected.

The Nevada Rock and Sand Company case was decided in 1974, but the facts of the case occurred in 1971 under the old version of N. R. S. 104.9301(1)(b) which required that the lien creditor acquire the interest without knowledge of any other security interest. This explains footnote 17 of Nevada Rock and Sand Company v. United States , supra, 376 F. Supp. at 172 n. 17, which states:

It should be noted that the IRS is entitled to priority over the unrecorded assignment only if it became a lien creditor without knowledge of the assignment. N. R. S. 104.9301(1)(b). . . .

The facts before this Court occurred after the adoption of the new version of N. R. S. 104.9301(1)(b) which does not have a "no-knowledge requirement." The official reasons for the change in the Uniform Commercial Code are stated in the comments of Appendix II for 9-301, as follows:

Paragraph (1)(b) has been amended to eliminate the element of knowledge in the conditions under which a lien creditor may defeat and unperfected interest. Knowledge of the security interest will no longer subordinate the lien creditor to the unfiled security interest. The former section denied the lien creditor priority even though he had no knowledge when he got involved in extending credit, if he acquired knowledge while attempting to extricate himself. It is completely inconsistent in spirit with the rules of priority between security interests, where knowledge plays a very minor role

Therefore, knowledge on the part of the Government with respect to Valley Bank of Nevada 's interest is irrelevant under N. R. S. 104.301(1)(b).

[Statute of Limitations]

ARE THE LIENS OF THE UNITED STATES AGAINST BENTONITE, INC. VALID? Both the Valley Bank and Benton ite, Inc. claim that the liens against Bentonite, Inc. arising on October 25, 1974 and October 29, 1974 , have lapsed and are therefore invalid. This contention is also untenable.

Section 6502(a) of the Code provides in pertinent part:

Length of Period.--Where the assessment of any tax imposed by this title has been made within the period of limitation properly applicable thereto, such tax may be collected by levy or by proceeding in court, but only if the levy is made or the proceeding begun--

(1) within 6 years after the assessment of the tax.

On July 29, 1980 , within the six year period provided for in the statute, the Internal Revenue Service levied upon the City of Henderson with respect to the tax assessments against Bentonite, Inc.

Both the Valley Bank and Bentonite, Inc. erroneously argue that the levy is somehow to be considered the filing of a lien. This position has absolutely no foundation in law. This Court differentiates between the attachment of the liens (which occurred in October, 1974) and the admin istrative procedure of levying upon the debtor. The latter event merely permits the Internal Revenue Service to preserve its lien with respect to any funds due from the City of Henderson to Bentonite, Inc., pursuant to any agreements between the City and Bentonite as of the date of the levy. The former event provides the key date for determining priority issues, along with the March 6, 1975 date of the filing of the notice of these tax liens.

Moreover, the institution of this action and the demand that the interpleaded funds be turned over to the United States set forth in the Government's answer served on July 23, 1979 , satisfies the requirement in Section 6502(a) that the tax may be collected by a proceeding begun within six years after the assessment of the tax.

Conclusion

The City of Henderson holds certain sums for the account of Bentonite, Inc. pursuant to the six water and sewer refunding agreements. At trial, the City of Henderson has abandoned its claim to any of the proceeds of the fund in issue. The United States and Valley Bank are not the only two claimants to the fund. However, the only party to have a perfected lien on this fund is the United States . Valley Bank could have perfected its security interest arising from the assignments of the water and sewer refunding agreements. All it had to do was to file a financing statement covering these assignments with the Secretary of State of the State of Nevada prior to March 6, 1975 . N. R. S. Section 104.9401. Failing to have taken this simple step, Valley Bank cannot now claim priority to the interpleaded fund. George W. Ultch Lumber Company v. Hall Plastering, Inc., supra, 477 F. Supp. at 1071; United States v. Trigg, supra, 465 F. 2d at 1270; Nevada Rock and Sand Company v. United States , supra.

IT IS HEREBY ORDERED that the Government shall submit proposed Findings of Fact, Conclusion of Law and Judgment consistent with this Decision.

¹ See e.g. Randall v. Nakashima [76-2 USTC ¶9770], 542 F. 2d 270 (5th Cir. 1976).

² Prior to 1966, Section 6323 provided that mortgages, pledges, purchases, and judgment creditors were entitled to priority over unfiled federal tax liens. In 1966, Congress amended the section and included holders of security interests, which covers others than mortgages and pledges, among the classes of persons entitled to prevail over unfiled federal tax liens. One of the major purposes of the revision was to harmonize the provisions of the Internal Revenue Code with the provisions of the Uniform Commercial Code. As the Senate Committee Report states (S. Rep. No. 1708, 89th Cong., 2d Sess., p. 2 (1966-2 Cum. Bull. 876)--

This bill is in part an attempt to conform the lien provisions of the internal revenue laws to the concepts developed in the Uniform Commercial Code. It represents an effort to adjust the provisions in the internal revenue laws relating to the collection of taxes of delinquent persons to the more recent developments in commercial practice (permitted and protected under State law) and to deal with a multitude of technical problems which have arisen over the past 50 years.

Congress did not, however, extend priority to all persons asserting security interests under local law, but, rather, limited the class to those persons who had taken steps under local law to protect their interests. United States v. Trigg [72-2 USTC ¶9642], 465 F. 2d 1264, 1269-1270 (8th Cir. 1972), cert. denied, 401 U. S. 909 (1973).

³ There is no claim by any of the parties to this action that they should be classified as purchasers, mechanic's lienors, or judgment lien creditors.

⁴ The Uniform Commercial Code was originally enacted in Nevada in 1965. That version was commonly referred to as the 1962 Code. In 1973, the Nevada legislature amended the Code to conform Nevada law with the 1972 Code version of the Uniform Commercial Code. The amendments, as they pertain to this case, are not significant. All references to Nevada Revised Statutes Sec. 104.9101 et seq. will be to the 1972 version of the Uniform Commercial Code, as amended.

⁵ In addition, it does not matter whether the "hypothetical lien creditor test" or the "subjective knowledge lien creditor test" is used, since there has been no evidence introduced that the Internal Revenue Service had knowledge of Valley Bank's security interests when the liens were acquired on October 25, 1974, and October 29, 1974. Compare Dragstrem v. Obermeyer, supra, 549 F. 2d at 25-26 with Nevada Rock and Sand Co. v. United States , supra, 376 F. Supp. at 172 n. 17. Contrary to Valley Bank's assertion at trial, the knowledge of the United States under this test is measured at the time it became a lien creditor against Bentonite, Inc. Such event occurred on October 25, 1974 , not on the date of levy on July 29, 1980 , as discussed.

⁶ N. R. S. 104.9104(6) provides that:

Transactions excluded from article. This article does not apply:

. . .

6. To a sale of accounts or chattel paper as part of a sale of the business out of which they arose, or an assignment of accounts or chattel paper which if for the purpose of collection only, or a transfer or a right to payment under a contract to an assignee who is also to do the performance under the contract or a transfer of a single account to an assignee in whole or in partial satisfaction of a pre-existing indebtedness . . .

⁷ When accounts receivable financing is involved, it is, of course, not abnormal to have payments from account debtors go directly to a bank. Under such circumstances a bank could not claim that the transaction was outside the scope of Article 9.

⁸ Both Spurlin and Lyon specifically held that the transactions at issue were absolute assignments and not security transactions. See also Sherburne Corp. v. Carter, 340 A. 2d 82, 17 U. C. C. Rptg. Serv. 523, 526 (Sup. Ct. Vt.) (Bank's failure to file financing statement with respect to accounts assigned to it in light of its "professional status" allowed subsequent lienholder to obtain priority status.)

⁹ The decision in Morrison Flying Service was made without any discussion of the choateness doctrine. Moreover, it appears that the subcontractor in whose favor the decision was entered could not perfect his lien. Such is clearly not the case here, since there is no dispute that Valley Bank could easily have perfected its security interest in this case.

 

 

[72-1 USTC ¶9289]Centex Construction Company, Inc. v. David M. Kennedy, Secretary of Treasury, United States Treasury Department, et al.

U. S. District Court, So. Dist. Tex., Corpus Christi Div., C. A. No. 69-C-190, 332 FSupp 1213, 8/23/71

[Code Sec. 6323(h)(1)]

Tax liens: Priority: Security interest: Contract rights: Property in existence.--A bank that filed its financing statement covering an assignment of accounts and a security interest in contract rights before the government filed its tax lien had a prior lien on the debtor's assets. Rights in a valid, binding contract that could be ordered to be specifically performed if breached are existing property under the Tax Lien Act of 1966, even though the contract has not yet been performed.

Gary Norton, Branscomb, Gary, Thomasson & Hall, 101 Hawn Bldg., Corpus Christi, Tex., for plaintiff. James R. Sorrell, Sorrell, Anderson, Sorrell & Atwill, 600 Petroleum Tower, Corpus Christi, Tex., for 1st State Bank, George R. Pain, Anthony J. P. Farris, Assistant United States Attorneys, Houston, Tex., for defendants.

Memorandum and Order

COX, District Judge:

The Plaintiff in this suit, Centex Construction Company, Inc., brought this interpleader action and deposited in the Registry of this Court the sum of $9,929.23.

The first named Defendant, David M. Kennedy, Secretary of Treasury (hereafter referred to as "the Government") claims a first and prior lien on the money deposited with this Court to the extent of $8,605.61 plus interest accruing according to law. The lien notices were properly filed on and subsequent to July 22, 1969 .

The Defendant First State Bank of Corpus Christi , having filed its financing statement covering an assignment of accounts and a security interest in contract rights with the Secretary of State of Texas on November 1, 1968 , claims a prior lien on the same moneys.

The Government and the First State Bank of Corpus Christi have filed with this Court a stipulation approved as of the 12th day of July, 1971, which is being considered by this Court to determine, without regard to any of the other parties, which of the two named Defendants, the Government and the First State Bank of Corpus Christi, has the prior lien against the money deposited.

[Uniform Commercial Code]

By the year of 1966, the Uniform Commercial Code had been or was in the process of being adopted in many states. It was adopted in Texas during the year of 1967. The term "security interest" was defined in this new code, §1.201, as an interest in personal property or fixtures which secures the payment or performance of an obligation, and includes "contract rights" which are subject to Chapter 9 of such code. The old designations of "chattel mortgage" and "pledge" were dropped. The Uniform Commercial Code in Texas , V. T. C. A., Bus. & C., §9.106, defines "contract rights" as being rights "not yet earned by performance." The chapter on "Secured Transactions," §9.102, recites that the chapter applies "so far as concerns any personal property and fixtures within the jurisdiction of this State

"(1) to any transaction (regardless of its form) which is intended to create a security interest in personal property . . ., including . . ., accounts or contract rights; and also (2) to any sale of accounts, contract rights or chattel paper."

and the provisions of §9.318 which permits, under certain circumstances, modification of the contract, does not change the effectiveness of the right §9.203 provides for the enforceability of a security interest in contract rights. These provisions of the uniform act establish "contract rights" as personal property in Texas .

Prior to the effective date of the Federal Tax Lien Act of 1966, a chattel mortgage or other lien covering some interest in property not yet "in esse" or "choate" could not prevail over a Federal tax lien arising out of and perfected under 28 U. S. C., §§ 6321, 6322 and 6323. This rule may still prevail.

In considering the Federal Tax Lien Act of 1966, Congress obviously recognized what was happening in the world of commercial financing, and, in amending 28 U. S. C., §6323, changed certain of its provisions to conform to the language of the Uniform Commercial Code, and substituted "holder of security interest" for "mortgage and pledge." While the term "security interest" as defined in paragraph (h)(1) of said §6323 differs in a number of respects from the way it is defined in the Uniform Commercial Code, nevertheless, it seems reasonable to say that what is properly the subject matter of a "security interest" under the Uniform Commercial Code would also be property under the Tax Lien Act of 1966, unless the expression in the tax lien act, "property in existence," carries forward the "choate" doctrine to such extent that property, because it is subject to a condition which cannot be violated without liability, is not "choate."

[Contract Rights]

Perhaps, at this point, a descriptive explanation of the use of "contract rights" is in order. In 81 Harvard Law Review 1369, at pages 1386 and 1387, an example is provided. Where the lending agency has no interest in a refrigerator, but only a security interest in the taxpayer-debtor's rights under a contract for the future sale and delivery of the refrigerator, we are dealing with "contract rights." Now, suppose the lending agency duly files its financing statement covering such "contract rights" but, before actual delivery of the refrigerator, the government files a tax lien under the 1966 act. Under such circumstances, does the lending agency have a protected interest in the refrigerator when the taxpayer-debtor gets it? Prior to the 1966 act, it would not have.

But, if the Congress recognized the applicability of the Uniform Commercial Code by its use of the term "security interest," and we believe it did, then there is justification to say that "contract rights" as such are property and the lending agency taking a security interest therein, which has properly perfected it by filing, is protected.

Assuming, as we must, the contract is valid and binding and whomever has agreed to deliver the refrigerator in the future is obligated to do so and would be subject to a claim for specific performance or liable for the breach if no delivery is made, and, if the refrigerator is delivered, taxpayer-debtor is obligated to pay for it, then, logically, such "contract rights" constitute personal property which is in existence, and effective so long as the lending agency is paying "money or money's worth." If protected by proper filing, a security interest in such property should have priority over a subsequently filed Federal tax lien. The fact that the taxpayer-debtor had not yet received the refrigerator nor paid for it, at the time the government filed its lien, should not defeat the lender's security.

Perhaps the Court has here drawn the lien too thin. There is no case law that says it hasn't. However, there is abundant scholarly authority for the inference that Congress intended to protect security interests in "contract rights." See Harvard Law Review, supra, and the various articles on the subject which are cited in Continental Finance, Inc. v. Cambridge Lee Material Co., 265 A. 2d 539 (Sup. Ct., New Jersey), and the references in such opinion to House Report No. 1884, Aug. 24, 1966, and Senate Report No. 1708, Oct. 11, 1966, regarding the Federal Tax Lien Act of 1966. Based upon the history of the act as it wended its way through the Congress, it seems plausible that the act would recognize as being property in existence, any binding contract which may involve future payments yet "unearned by performance."

The Fordham Law Review, Vol. 37, at page 564, in an article related to tax liens, says, "The Assistant Secretary of the Treasury, Stanley S. Surrey, under whose jurisdiction much of the drafting of the legislation took place, specifically indicated in his testimony before the House Ways & Means Committee that contract rights were an envisioned kind of security." This article further says, "It is submitted that as far as security interests are concerned, the act was intended to supersede completely the choate lien doctrine." Fordham Law Review is reassuring, and we will plunge ahead.

[Prior Cases]

The case of Continental Finance, Inc. v. Cambridge Lee Metal Co., Inc., and United States of America, supra, which has been discussed by several scholars, at page 539, holds that Continental Finance was protected as to the accounts receivable assigned to it before the government placed its tax lien against Cambridge; but the Court said the Federal government's lien was prior to the security interest in future accounts receivable. However, it seems clear from the opinion that Continental Finance did not, in trying to fix a security interest in the future accounts receivable, treat them as "contract rights" under the Uniform Commercial Code. So, this case does not defeat First State Bank's contention in the case now before this Court.

The only other case which seems to be concerned, at least to some extent, with the present right to receive money in the future is Hammes v. Tucson Newspapers, Inc. [63-2 USTC ¶9808], 324 F. 2d 101 (1963). This case was decided before the Federal Tax Lien Act was revised in 1966. The controversy arose out of a bankruptcy proceeding. The bankrupt had assigned to Tucson Newspapers the right to receive certain money. The Court held that the assignment took precedence over the Federal tax lien. The only language of the opinion which may have some significance is this statement, "The fact that the property subject to the lien is a present right to receive money in future does not make the lien in choate, at least where the right is unconditional." (Emphasis added.) This seems to imply that a conditional "present right" may be choate. If there is such an implication, we admit, it leaves much to be desired.

[Congressional Intent]

We are not much inclined toward any Court's use of congressional committee reports to determine what the words used by the Congress actually mean. One of my law school professors said this was a very bad practice; that no matter what Congress may have intended to do, if it didn't do it, Congress should legislate to remedy the defect, not the courts. Of course, this was quite a while ago, and the courts have legislated considerably since the mid-1930's. In any event, giving due regard for the present day scholars' concern with such committee reports, and our own feeling that the use in the 1966 Federal Tax Lien Act of the term "security interest" carried with it the pertinent portions of the Uniform Commercial Code above discussed, the Court concludes that the lien of the First State Bank of Corpus Christi is prior to the tax lien of the United States.

It is, therefore, ordered that, as between the Secretary of the Treasury and First State Bank of Corpus Christi , the bank has a subsisting security interest in the money on deposit with this Court which is first and superior to the Federal tax lien under which the Secretary of the Treasury is claiming. This Court does not here pass on the priority of the security interest of said bank or of the Secretary as to the other claimants in this cause.

 

 

[64-2 USTC ¶9853]In the Matter of Mile Hi Restaurants, Inc., Bankrupt

U. S. District Court, Dist. Colo., No. 32109, 233 FSupp 936, 10/21/64

[1954 Code Sec. 6323(a)]

Lien for taxes: Priority: Validity against pledgees.--The Government's lien for taxes, filed against all of the property of the bankrupt-taxpayer, was inferior to the claims of certain other creditors of the taxpayer with regard to certain insurance policies which the taxpayer had validly pledged to the other creditors before the tax lien was filed.

Donald Bain, 1700 Broadway, Denver , Colo. , for petitionering creditors. Rob ert Sunshine, Eugene J. Rob erts, 515 Majestic Bldg., Denver , Colo. , for respondent.

Order

CHILSON, District Judge:

This matter is before the Court on a petition for review of certain orders entered by the Referee in Bankruptcy. Involved is the priority of claims of the United States of America , Foster R. Orr and Arden R. Grover to the proceeds of certain life insurance policies.

The essential facts are not in dispute.

Mile Hi Restaurants, Inc., a Colorado corporation, was adjudged a bankrupt on an involuntary petition filed on August 6, 1962 . On that day two policies of life insurance were among the bankrupt's assets. The policies were issued respectively by Equitable Life Insurance Company of Iowa (Equitable) and Connecticut General Life Insurance Company ( Connecticut ). Each insured the life of Arthur S. Miller, Sr., and the bankrupt was, under the terms and conditions of each of the policies, both the owner and the beneficiary thereof.

On April 5, 1961 , the bankrupt executed to the Union National Bank (Union) its promissory note in the principal amount of $38,000.00, and secured the payment of the note with the two policies here involved by delivery of the policies to Union and by executing and delivering to Union blank forms of "Assignment of Life Insurance as Collateral." On the same date Orr executed and delivered to Union a guaranty of the payment of the note to the extent of $15,000.00. July 31, 1961 , Orr paid Union the balance of the principal then due, $14,207.68, and the then accrued interest of $64.13. Thereupon Union endorsed and delivered the note to Orr together with the policies and the assignments heretofore mentioned. Neither Orr nor Union delivered the assignments to Equitable or Connecticut .

On October 20, 1961 , the bankrupt executed its promissory note to Grover in the principal amount of $12,500.00. (This was a renewal note for a note executed on April 7, 1961, for $15,000.00 executed by the bankrupt to Grover).

On November 1, 1961, in accordance with a corporate resolution, the bankrupt assigned to Grover the Connecticut policy as collateral security for any and all indebtedness owing to Grover by the bankrupt remaining unpaid at the time of the settlement of the policy. Grover transmitted the executed assignment to Connecticut and the company noted on the assignment that it had been "recorded and filed" on January 27, 1962.

[Assessment and Lien]

On December 1 and 4, 1961 and on February 2, 1962, the United States assessed excise, withholding and F. I. C. A. taxes against the bankrupt which became a lien upon the property interest of the bankrupt in the policies as of the date of assessment by virtue of Title 26 U. S. C. Sections 6321 and 6322. Notice of the lien was filed in accordance with Title 26 U. S. C. Section 6323(a) on February 2, 1962.

As previously noted, the bankruptcy petition was filed on August 6, 1962 . On August 10, 1962 , the insured died and both policies were then in effect.

The Grover note had been in default since December 1, 1961 , and Grover had paid all premiums on the Connecticut policy from that date to the date of the insured's death, amounting to $1704.27.

On the date of death the benefits payable on the Equitable policy were $36,244.16 and on the Connecticut policy $20,453.49.

The United States claimed a lien on the proceeds of the policies for $48,180.58 under Title 26 U. S. C. Sections 6321-23(a).

Orr, as pledgee of the policies, claimed the proceeds of the policies to the extent of the balance due on the Union note which had been assigned to him, plus interest and attorney's fees.

Grover claimed a right to have his note, together with interest, attorney's fees and the amount paid for insurance premiums paid out of the proceeds of the Connecticut policy.

By stipulation the proceeds of the policies were paid by the insurers to the trustee to be held pending the determination of the various claims.

[Referee's Order]

The Referee determined the amounts due from the bankrupt to the three claimants. The petitions for review do not attack the Referee's determination of the amounts due the respective claimants and the Referee's findings in this respect are not here in issue.

The Referee determined that Orr's claim should be allowed, as secured, to be paid out of the proceeds of the Equitable policy.

The Referee denied Grover's claim to the proceeds of the Connecticut policy and his claim was allowed as unsecured.

As to the claim of the United States , the Referee allowed $48,180.58 as a secured claim to be paid out of the Equitable policy remaining after Orr's claim had been satisfied.

The United States and Grover have petitioned for a review.

On September 17, 1964 , this matter was heard before the Court and the Court is now duly advised.

The taxes became a lien upon whatever property interest the bankrupt had in the policies on the date of the tax assessment.

The bankrupt's property interest at that time depends upon the validity or invalidity of the Orr and Grover liens. If these liens were invalid, the tax lien attached to the entire interest and ultimately to the entire proceeds of the policies. If, however, Orr and Grover had valid liens, we then have three liens competing for the same property and the relative priorities of these liens must be determined.

Therefore, in essence the Court must determine:

(1) Whether or not Orr and Grover had valid liens upon the policies; and

(2) If so, the relative priorities of those liens with the tax lien of the United States .

The first question is to be determined by state law, the second by federal law. Aquilino v. United States [60-2 USTC ¶9538], 363 U. S. 509.

Unless the Orr and Grover transactions are affected by the Colorado Accounts Receivable Statute, Chapter 11-2-1 C. R. S. '53, a question which we shall later discuss, both Orr and Grover had liens upon the policies which were valid under the laws of Colorado .

In the Orr transaction, both policies were delivered to the Union Bank as a pledge to secure the bankrupt's debt to Union . Orr, as assignee of that debt, became possessed of the policies as collateral security for the debt assigned to him. The delivery of a life insurance policy to a creditor as collateral security for the debt has been recognized by the Supreme Court of Colorado as a valid pledge. Collins v. Dawley, 4 Colo. 138.

Grover received an assignment of the Connecticut policy as collateral security for the bankrupt's debt to him. The assignment was filed with Connecticut . It is admitted and the Court finds that Grover had a valid lien under Colorado law upon the Connecticut policy unless the Colorado Accounts Receivable State affected the transaction.

[Priority]

Assuming for the moment that neither the Orr nor Grover liens are affected by the Accounts Receivable Statute, we turn to a consideration under federal law of the relative priority of the three competing liens.

Title 26 U. S. C. Section 6323(a) provides that the tax lien of the United States shall not be valid as against any pledgee or mortgagee until notice thereof has been filed by the Secretary. This notice was filed February 2, 1962 .

Orr being a pledgee and the pledge having been effected prior to the filing of the United States ' lien, Orr's claim would appear to have priority under Section 6323(a).

However, for the Orr lien to prevail over the tax lien, we must apply the "perfected lien standard". See United States v. L. R. Foy Construction Company [62-1 USTC ¶9325], 300 F. 2d 207 (10th Cir.). This standard requires that in order for the Orr lien to prevail over the tax lien it must have been perfected or choate prior to the filing of the tax lien; that is, it must have been definite in the identity of the lienor, the property subject to the lien, and the amount of the lien. The Orr lien stands this test in every respect.

Grover is a mortgagee within the meaning of Section 6323(a), for it was held in United States v. Foy [62-1 USTC ¶9325], 300 F. 2d 207 (10th Cir.) that an assignment of the nature and character here involved is a mortgage within the meaning of Section 6323(a).

The Grover claim also meets the perfected lien standard, that is to say, it was perfected or choate prior to the filing of the notice of the tax lien.

It is apparent then that if the Orr and Grover liens are valid, they have priority over the tax lien.

[Accounts Receivable Statute]

There remains for determination the effect, if any, the Accounts Receivable Statute of the State of Colorado may have upon the validity of the Orr and Grover liens.

The United States contends that the life insurance policies here involved are accounts receivable and as such are subject to the provisions of Chapter 11, Article 2, Section 1 of the Colorado Revised Statutes 1953.

This statute provides in essence that assignment of accounts receivable, whether existing or contracted in the future, "may be protected" by following the procedure specified in the statute, which includes the filing of a notice of the assignment with the Secretary of State. Admittedly neither Orr nor Grover complied with this statutory requirement.

When the statutory procedure is followed the assignee is protected against the claims of third parties to the extent set forth in the statute.

The specific question before the Court is whether or not the life insurance policies here involved are included in or excluded from the operation of this statute.

The definition of an account receivable as set forth in the statute and insofar as here pertinent states:

`Account' or 'account receivable' means an existing or future right to the payment of money presently due, or to become due:

"Which right to payment is not represented by a judgment, a negotiable instrument, or a nonnegotiable instrument which so represents the obligation that an assignee who takes possession of it, takes rights superior to those of a prior assignee of the obligation who did not take possession of the instrument."

Counsel have cited no Colorado court decisions construing this particular provision of the statute and we have found none.

[Decision on Similar Statute]

From other jurisdictions the case most nearly in point is Landy v. Nicholas, 221 F. 2d 923 (5th Cir.) which considered an identical provision of the Florida Accounts Receivable Statute. The instruments involved in Landy were warrants issued by the United States evidencing the bankrupt's rights to payments of choices in action or accounts owing by the United States to the bankrupt. These accounts were assigned to Landy to secure loans made by him to the bankrupt, and the warrants were delivered to Landy as collateral security therefor. The court found itself in a situation similar to this Court, for the Florida courts had not construed this provision of the statute. The court in Landy stated at page 928:

"Therefore, we conclude that although there are no Florida cases of which we are aware holding that any non-negotiable instrument can 'so represent the obligation that an assignee who takes possession of it, takes rights superior to those of a prior assignee of the obligation who did not take possession of the instrument,' there must certainly be such instruments. And we think that the statutory language indicates clearly that the Florida legislature intended to except from 'accounts receivable' that class of non-negotiable instruments the delivery of which effects a valid pledge of the obligations represented by or embodied in those instruments. In other words, to take the present example, if the delivery of the warrants here was a pledge of the claim against the Government, Landy's failure to record did not prevent his security interest from being a perfected one under the terms of the Florida statute. We shall therefore proceed to inquire as to the scope of the class of non-negotiable instruments which embody obligations, for the purposes of the law of pledges."

The court then cited several cases which hold that delivery of stock certificates, insurance policies and savings bank books effects a valid pledge of the obligations represented by those instruments."

The court concluded at page 931:

"The very fact the the Florida legislature excluded from accounts receivable obligations 'represented by' non-negotiable instruments, recognizes the fact that some obligations may be embodied in such instruments. We do not see any compelling reason to limit this embodiment to insurance policies or bonds, but on the contrary think that the better authorities, and certainly the greater number, require us to hold that the possession of the warrants by Landy in the instant case was a pledge of the claim against the Government, a perfected security interest, and was expressly excluded from the statutory requirement of filing of assignments of accounts receivable."

We believe that the reasoning of the court in Landy which led to its construction of the Florida statute is sound and equally applicable to the Colorado Accounts Receivable Statute.

We conclude, therefore, that the life insurance policies here in question are non-negotiable instruments which are expressly excluded from the operation of the Colorado Accounts Receivable Statute.

The Referee, while recognizing the rule of Collins v. Dawley, supra, thought the rule should be limited to "indispensable instruments" and held that the Connecticut policy was not an indispensable instrument because it provided "the policy proceeds are payable upon receipt of due proofs of loss and, if required by the company, upon surrender of the policy." (Italics added). It is true, as pointed out in Landy, that while many authorities have adopted the rule that insurance policies and similar non-negotiable instruments may be the subject of pledges by delivery alone, the Restatement of Securities is more conservative in that it would limit this rule only to "indispensable instruments". (Restatement of Securities, Section 1, Comment (e)).

We are here, however, confronted with a rule of law established by the highest court of the State of Colorado in Collins v. Dawley, supra, and this rule is binding upon this Court in determining the property interests in the policies.

That rule does not recognize the "indispensable instruments" limitation but recognizes that a valid pledge of a life insurance policy is accomplished by delive