, Plaintiff v. Gary M. Poling, et al., Defendants
District Court, So. Dist.
, East. Div., C-2-97-773, 9/21/99, 73 FSupp 2 d 882
Secs. 6321 and 6323 ]
Lien for taxes: Priority: Annuity payments: Assignment of: Absolute
or security interest: Summary judgment: Issues of fact precluding: State
law: New York: Ohio.--Summary judgment was inappropriate to
determine whether federal tax liens had priority over annuity payments
that a former insurance agent had assigned to a bank since issues of
fact remained, under New York and Ohio law, regarding the intent of the
parties to the assignment transaction. Specifically, it was unclear
whether the assignment was absolute or was intended as security for the
taxpayer's line of credit and whether the taxpayer could revoke the
assignment at any time or if the bank intended to take an ownership,
rather than a security interest, in the payments.
Lien for taxes: Priority: Annuity payments: Holder of security
interest: Validity of lien against: Perfection of security interest:
Judgment lien creditor: State law: Ohio.--A bank failed to establish
that it was the "holder of a security interest" in annuity
payments to an individual that were the subject of IRS liens.
Consequently, it was not entitled to summary judgment that it had
priority over the IRS. The bank never perfected its interest by filing a
law did not exempt the bank from the perfection requirement since the
right to receive the payments was not an account or a policy of
law did not give a security interest priority against a judgment lien
OPINION AND ORDER
States of America ("Government") brings this action against
Gary M. Poling and Fifth Third Bank of Northwestern Ohio pursuant to 26
U.S.C. §§7401 and 7403. 1
This matter is before the Court on the parties' cross-motions for
summary judgment (docs. 18, 20).
As the result
of Poling's failure to pay federal tax liabilities assessed against him,
federal tax liens arose and attached to all his property and rights to
property. In its motion for summary judgment, the Government contends
that the tax liens attached and continue to attach to his right to
receive monthly annuity payments from New York Life Insurance Company
("NYLIC"), even though the Bank maintains that Poling assigned
this right to it before the tax liens arose. The Government contends
that Poling assigned only a security interest to the Bank and that the
Bank never perfected its security interest in the annuity payments.
Therefore, the Bank has no right to retain the annuity payments because
the tax liens have priority over the Bank's interest in these payments.
contends, however, that the tax liens have not attached to Poling's
right to receive the annuity payments because Poling assigned to the
Bank all of his rights to the annuity payments before the tax liens
arose. Assuming arguendo that Poling retained some property
interest in the annuity payments, the Bank argues that its interest in
the payments is senior to the Government's interest because (1) it is
entitled to the protections of 26 U.S.C. §6323(a) as the "holder
of a security interest" because its assigned interest in the
annuity payments is protected against the claims of a judgment lien
creditor of Poling by Ohio Rev. Code §3911.10. and (2) Poling's
assignment of his right to receive the annuity payments is excluded from
the provisions of Article 9 of the Uniform Commercial Code
reasons that follow, both motions are denied.
as an insurance agent for NYLIC for over twenty years, Poling became a
participant in a benefit plan for NYLIC agents known as Nylic No. 5
("NYLIC plan"). Pursuant to the NYLIC plan, NYLIC agreed to
make monthly annuity payments to Poling from
December 1, 1980
until his death. 2
(Government's Mot., Ex. 10.) The monthly income is assignable, but the
NYLIC plan provides that "no assignee shall acquire any rights
thereto, without written consent" of NYLIC. (Bach Aff., Ex. A, p.
3.) The NYLIC plan does not provide for a cash withdrawal or a cash
26, 1980, Poling "assign[ed], transfer[red] and set over" to
the Bank "all [his] right, title and interest in and to any monthly
income payments" due under the NYLIC plan. (Government's Mot., Ex.
12.) The document evidencing the 1980 Assignment was prepared by NYLIC.
It provides in relevant part:
VALUE RECEIVED, I hereby assign, transfer and set over
all of my
right, title and interest in and to any monthly income payments now due
me and which may hereafter during my lifetime become payable to me from
the NEW YORK LIFE INSURANCE COMPANY in accordance with and subject to
all the terms, provisions, conditions and rules of the Nylic No. 5 now
applicable to me or any Nylic Plan hereafter applicable to me, and
subject to any indebtedness which I may owe to said Company now or at
any future date.
hereby affirm that this assignment is made for a lawful consideration
and is not made for the purpose of directly or indirectly evading the
YORK LIFE INSURANCE COMPANY assumes no responsibility for the validity
of this assignment.
) The document is signed by Poling, a witness, and a general manager who
is apparently a representative of NYLIC. The Court will refer to this
assignment document as the "1980 Assignment".
testified that the purpose of the 1980 Assignment was to secure a
commercial line of credit with the Bank and that he did not intend to
assign his entire interest in the annuity payments to the Bank:
Q. At some
point did you come to assign the payments under the NYLIC policy?
Q. Who did you
assign them to?
A. It was
First National Bank at that time.
Q. What was
the purpose of the assignment?
A. To help
cash flow. I mean where I could have access to a line of credit.
Q. So the
assignment was security for a loan or a line of credit?
A. For a line
Q. Could you
read it over, Mr. Poling. Do you notice it says that for value received,
I hereby assign and transfer and set over to First National Bank of
, all my right, title and interest to any monthly income payments now
due me, etc.
signed this assignment, did you mean to assign the entire interest of
your policy forever to the bank?
Q. Let me
finish my question. To First National Bank?
A. No. That
was not the intent at all.
Q. What was
A. To cover
the indebtedness of the line of credit only.
Q. So it was
solely to secure the line of credit you were receiving from First
Dep., pp. 6-9.) The original note or written agreement between Poling
and the Bank evidencing the establishment of the line of credit has
apparently been lost. Except for the period from December of 1992
through May of 1993 when NYLIC suspended payments, the Bank has received
the annuity payments from 1981 through the present. (Bach Aff., ¶8.)
May 23, 1986
, Poling refinanced his outstanding debt with the Bank and received new
credit in the amount of $136,660.04. (Bach Aff., ¶6.) In connection
with the refinancing, Poling and his former wife executed a
"Commercial Secured Note" in which they agreed to make
"59 consecutive monthly payments of $1,574.40 each beginning
June 8, 1986
with the balance if any due on
May 8, 1991
." (Government's Mot., Ex. 13.) They also agreed that the interest
rate would be the Bank's base rate plus 1% per annum and that the
interest charged would be payable out of the monthly payments. (
) The Court will refer to this refinancing agreement as the "1986
Agreement states that the Polings deposited with the Bank, as
"collateral security" for the payment of the principal amount
of the note, the following property: the "[a]ssignment of annuity
payment (1574.40) from New York Life" and the "[a]ssignment of
$150,000 life insurance policy from Gleaner Life Insurance Policy."
(Government's Mot., Ex. 13.) Poling testified that the principal amount
of the note represented the total amount of money borrowed pursuant to
the line of credit:
Q. What was
the purpose of this commercial secured note?
business purposes. I don't remember exactly at that time, but it was for
Q. At that
time, did you receive a principal amount of $136,660.04, as it states on
the top left-hand corner?
Q. Well, let
me ask you this. When you first got your line of credit back in 1981,
did you make immediate borrowings?
Q. Did you
keep track of how much you borrowed?
A. And this is
a cumulative total in answer to your question, a cumulative total of all
the monies that were borrowed over the time period.
Q. As of--
Q. Right, as
May 23, 1986
Dep., pp. 10-11.)
June 1, 1990
, Poling filed a Chapter 7 bankruptcy petition. (Government's Mot., Ex.
15.) He was granted a discharge on
October 15, 1990
. Pursuant to the discharge, Poling was relieved of any personal
liability for the 1986 Agreement.
July 9, 1991
, Poling and the Bank entered into an "Agreement to Extend Maturity
Date of Note". (Bach Aff., ¶7.) The Court will refer to this
extension agreement as the "1991 Agreement". The 1991
Agreement extends the maturity date of the 1986 Agreement to
May 8, 2001
, and it provides for the continued assignment of the annuity payments
to the Bank until the loan is satisfied or Poling's death, whichever
occurs first. (Id., Ex. E.) The 1991 Agreement also states that
all terms and conditions of the 1986 Agreement remain in full force and
effect except for the assignment of the $150,000 life insurance policy.
) Poling testified that it was not his understanding that he assigned
his entire right, title and interest in the annuity payments to the
Q. Now, if you
look down to the second whereas clause on the agreement, it says,
"Whereas, said Exhibit A [the 1986 Agreement] is secured by an
assignment of borrower's right, title and interest in and to monthly
income payments in the amount of $1,574.40, and which are guaranteed to
him for life, and which assignment shall terminate upon the satisfaction
of the loan represented by A or borrower's death, whichever first
occurs." Is that statement correct?
Q. So, in
other words, you didn't assign your entire--
A. At no
title and interest?
A. At no time
did I ever, under my understanding.
Dep., pp. 13-14.)
entering the 1991 Agreement, Poling received a letter from the Bank's
attorney, Thomas Drake. In the letter, Drake states:
you are aware, Fifth Third is receiving monthly payments in the amount
of $1,574.40 from New York Life Insurance Company pursuant to an
assignment of an annuity which you made to the bank to secure the
payments of a note which you signed on
May 23, 1986
maturity date for this loan was May 8, 1991, and while the bank is
satisfactorily secured so long as the annuity payments are being made,
the bank is going to be forced by the banking regulators to show this
loan as a non-performing asset on its books because technically it is
now in default. Based on current interest rates, this loan will be paid
in full in 7.9167 years. If interest rates go up, the loan will take
longer to pay off, and if interest rates go down, the reverse will be
purpose of my letter is to ascertain if you would be willing to enter
into an agreement with Fifth Third for the extension of the due date on
your loan. By doing so, I want to assure you that you will not in any
way be reinstating your personal liability for this loan that was
discharged in bankruptcy.
Mot., Ex. 16.)
November 28, 1995
, the IRS issued a Notice of Levy to the Bank. (Government's Mot., Ex.
24.) The Notice of Levy specified that a levy had attached to the
annuity payments received by the Bank on or after
October 15, 1990
January 9, 1996
, the IRS served a Final Demand on the Bank. (
, Ex. 25.) On
February 12, 1996
, the Bank responded to the Final Demand by letter, stating that it had
a prior security interest in the annuity payments by virtue of the
November 26, 1980
and that it did not owe any sums to the taxpayer. (
, Ex. 26.)
On July 8,
1997, the Government filed this action against Poling and the Bank,
seeking to: (1) reduce to judgment outstanding federal tax assessments
against Poling; (2) foreclose its federal tax liens on the annuity
payments made to the Bank; (3) obtain a judgment against the Bank for
tortious conversion of the Government's liens; and (4) obtain a judgment
against the Bank for its failure to honor a levy served on it on
November 28, 1995.
In an Opinion
and Order dated
June 3, 1999
, the Court rendered judgment in favor of the Government and against
Poling in the amount of $158,269.10, plus interest from
November 12, 1998
. The Court deferred ruling on the Government's claims against the Bank
and ordered the parties to submit supplemental briefs addressing the
following issues: (1) the applicable state law on assignments; (2) the
application of the state law on assignments to the facts underlying the
assignment at issue here; (3) whether Broadcast Music, Inc. v.
Hirsch, 104 F.3d 1163 (9th Cir. 1997) is applicable to the facts of
this case; and (4) whether Poling has retained any control over the
annuity payments, any authority to collect the annuity payments or any
power to revoke the assignment to the Bank. Each party has filed two
supplemental briefs addressing these issues.
Standard for Summary Judgment
judgment is governed by Rule 56(c) of the Federal Rules of Civil
Procedure which provides:
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 judgment as a
matter of law.
standard provides that the mere existence of some alleged factual
dispute between the parties will not defeat an otherwise properly
supported motion for summary judgment; the requirement is that there be
no genuine issue of material fact." Anderson v.
Liberty Lobby, Inc., 477
242, 247-248 (1986) (emphasis in original);
v. The Hoover Co., 751 F.2d 171, 174 (6th Cir. 1984).
judgment will not lie if the dispute about a material fact is genuine;
"that is, if the evidence is such that a reasonable jury could
return a verdict for the nonmoving party." Anderson, 477
at 247-248. The purpose of the procedure is not to resolve factual
issues, but to determine if there are genuine issues of fact to be
tried. See Lashlee v. Sumner, 570 F.2d 107, 111 (6th Cir. 1978).
Therefore, summary judgment will be granted "only where the moving
party is entitled to judgment as a matter of law, where it is quite
clear what the truth is, . . . [and where] no genuine issue remains for
trial, . . . [for] the purpose of the rule is not to cut litigants off
from their right of trial by jury if they really have issues to
try." Poller v. Columbia Broadcasting Systems, Inc., 368
464, 467 (1962); accord
v. City of
, 742 F.2d 289, 297 (6th Cir. 1984).
In making this
inquiry, the standard to be applied by the Court mirrors the standard
for a directed verdict. See Celotex Corp. v. Catrett, 477
317, 323 (1986). Anderson, 477
difference between the two motions is procedural: summary judgment
motions are usually made before trial and decided on documentary
evidence, while directed verdict motions are made at trial and decided
on the evidence that has been admitted. Bill Johnson's Restaurants,
Inc. v. NLRB, 461
731, 745, n. 11 (1983). In essence, though, the inquiry under each is
the same: whether the evidence presents a sufficient disagreement to
require submission to a jury or whether it is so one-sided that one
party must prevail as a matter of law.
although summary judgment should be cautiously invoked, it is an
integral part of the Federal Rules which are designed "to secure
the just, speedy and inexpensive determination of every action." Celotex,
at 327 (quoting Fed. R. Civ. P. 1).
In a motion
for summary judgment the moving party bears the "burden of showing
the absence of a genuine issue as to any material fact, and for these
purposes, the [evidence submitted] must be viewed in the light most
favorable to the opposing party." Adickes v. S.H. Kress &
144, 157 (1970) (footnote omitted); accord Adams v. Union Carbide
Corp., 737 F.2d 1453, 1455-56 (6th Cir. 1984), cert. denied,
1062 (1985). Inferences to be drawn from the underlying facts contained
in such materials must be considered in the light most favorable to the
party opposing the motion. See
v. Diebold, Inc., 369
654, 655 (1962); Watkins v. Northwestern Ohio Tractor Pullers
Association, Inc., 630 F.2d 1155, 1158 (6th Cir. 1980).
Additionally, "unexplained gaps" in materials submitted by the
moving party, if pertinent to material issues of fact, justify denial of
a motion for summary judgment. See Adickes, 398
at 157-60; Smith v. Hudson, 600 F.2d 60, 65 (6th Cir. 1979), cert.
dismissed, 444 U.S. 986 (1979).
If the moving
party meets its burden and adequate time for discovery has been
provided, summary judgment is appropriate if the opposing party fails to
make a showing sufficient to establish the existence of an element
essential to that party's case and on which that party will bear the
burden of proof at trial. See Celotex, 477
at 322. The mere existence of a scintilla of evidence in support of the
opposing party's position will be insufficient; there must be evidence
on which the jury could reasonably find for the opposing party. See
at 251 (quoting Improvement Co. v. Munson, 14 Wall. 442, 448
(1872)). As is provided in Fed. R. Civ. P. 56(e):
When a motion
for summary judgment is made and supported as provided in this rule, an
adverse party may not rest upon the mere allegations or denials of his
pleading, but his response, by affidavits or as otherwise provided in
this rule, must set forth specific facts showing that there is a genuine
issue for trial. If he does not so respond, summary judgment, if
appropriate, shall be entered against him.
"a party cannot rest on the allegations contained in his . . .
[pleadings] in opposition to a properly supported motion for summary
judgment against him." First National Bank of Arizona v. Cities
Service Co., 391
253, 259 (1968) (footnote omitted).
of the Internal Revenue Code ("IRC") 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
U.S.C. §6321. Under §6322, the lien generally arises when an
assessment is made, and it continues until the taxpayer's liability
"is satisfied or becomes unenforceable by reason of lapse of
time." 26 U.S.C. §6322; see also United States v. National Bank
of Commerce [85-2 USTC ¶9482], 472 U.S. 713, 719 (1985). "The
statutory language 'all property and rights to property,' appearing in
§6321 . . . is broad and reveals on its face that Congress meant to
reach every interest in property that a taxpayer might have." National
Bank of Commerce [85-2 USTC ¶9482], 472
controls in determining the nature of the legal interests which a
taxpayer may have in property. See National Bank of Commerce
[85-2 USTC ¶9482], 472
at 722 (citing Aquilino v. United States [60-2 USTC ¶9538], 363
U.S. 509, 513 (1960)). Once it is determined that the taxpayer has
rights in property, state law is inoperative, and the tax consequences
are dictated by federal law.
(citing United States v. Bess [58-2 USTC ¶9595], 357 U.S. 51,
Applicable state law on assignments
is located in
and the annuity payments are sent from
, it is arguable that
's law on assignments is applicable to the contracts at issue in this
case. A federal court applies the choice-of-law rules of the forum
state. See Cole v. Mileti, 133 F.3d 433, 437 (6th Cir.), cert.
--, 119 S.Ct. 42 (1998); Klaxon Co. v. Stentor Elec. Mfg. Co.,
487, 496 (1941). The Ohio Supreme Court has adopted the Restatement
(Second) of Conflict of Laws as the governing law for
conflicts issues. See Cole, 133 F.3d at 437 (citing Lewis v.
Steinreich, 652 N.E.2d 981, 984 (
1995) and Morgan v. Biro Mfg. Co., Inc., 474 N.E.2d 286, 288-89 (
Section 188 of
the Restatement (Second) of Conflict of Laws applies to contract
disputes where, as here, the parties did not expressly designate the law
of a particular jurisdiction to govern any disputes. See Macurdy v.
Sikov & Love, P.A., 894 F.2d 818, 820 (6th Cir. 1990) (citing Gries
Sports Enterprises v. Modell, 473 N.E.2d 807, 810 (
1984), cert. denied, 473 U.S. 906 (1985)). Pursuant to section
188, the law of the state which has the "most significant
relationship" to the contract and the parties is applied to the
Contacts to be taken into account in determining which state has the
most significant relationship to the contract and the parties include
the place of contracting, the place of negotiation, the place of
performance, the situs of the subject matter, and the domicile of the
contend that the Court need not undertake a conflict of laws analysis
because there is no conflict between
's law on assignments and
's. The Bank relies upon the Ninth Circuit's analysis of New York law in
Broadcast Music, Inc. v. Hirsch, 104 F.3d 1163 (9th Cir. 1997) to
argue that New York law requires no particular form for an assignment
and that "an assignment occurs only when the assignor retains no
control over the funds, no authority to collect and no power to
revoke." 104 F.3d at 1167. Relying upon State ex rel. Leach v.
Price, 156 N.E.2d 316, 320 (Ohio 1959), the Bank contends that Ohio
law, like New York law, requires no particular form for an assignment
and that Ohio law also defines an assignment as a transfer of property
from one person to another which, unless qualified in some way,
transfers a person's entire interest in the assigned property with no
retained control, authority or power over the assigned property. See
156 N.E.2d at 316.
agrees with the Bank's contention that there is no conflict between
's law on assignments and
's. The Government also accepts the Bank's definition of an assignment
law. Because the parties agree that there is no conflict between Ohio's
law on assignments and New York's and the Court has not found any cases
indicating otherwise, the Court will refer to both Ohio's and New York's
law on assignments in discussing whether the parties intended an
absolute assignment or a security interest. See Carbonic Products Co.
v. Welding & Cutting Supply Co., No. 86-1730, 1987 WL 38061, at
*2 (6th Cir. July 17, 1987) (declining to decide whether Michigan or
Ohio law should have been applied because Michigan and Ohio law were the
same with respect to the issues presented) (citing Keene Corp. v.
Insurance Company of North America, 667 F.2d 1034, 1041 n. 10 (D.C.
Cir. 1981)); see also Lucker Manufacturing v. Home Ins. Co., 23
F.3d 808, 813 (3d Cir. 1994) (referring to laws of both Wisconsin and
Pennsylvania because outcome of lawsuit was the same under either
state's law); FDIC v. Massingill, 24 F.3d 768, 775 (5th Cir.
1994) (where there is no difference between the laws of the forum state
and another state, a court need not decide the choice of law issue).
Whether Poling assigned to the Bank all of his rights to the annuity
A federal tax
lien arose and attached to all Poling's "property and rights to
November 20, 1989
. The Government contends that Poling's property and rights to property
included his right to receive the monthly annuity payments under the
NYLIC plan. The Bank contends, however, that the federal tax liens did
not attach to Poling's right to receive the annuity payments because he
had no property interest in the annuity payments on
November 20, 1989
or at any time thereafter. According to the Bank, after assigning his
right to receive the annuity payments to the Bank on
November 26, 1980
, Poling had no further interest in the annuity payments to which a
federal tax lien could attach.
In order to
determine to what extent Poling has property or rights to property to
which a tax lien can attach, the Court must decide whether Poling has
assigned to the bank all of his interest in the annuity payments or
whether he has transferred a security interest. The Government argues
that the Court must examine the 1986 Agreement between Poling and the
Bank, and not the 1980 Assignment, in order to determine Poling's
interest in the annuity payments. According to the Government, the 1980
Assignment does not govern Poling's interest in the annuity payments
because (1) it was prepared by NYLIC and uses boiler-plate language
likely used in all assignments of annuity policies issued by NYLIC and
(2) it does not constitute the contract between the parties in interest,
Poling and the Bank.
next argues that the 1986 Agreement did not constitute an absolute
assignment of Poling's interest in the annuity payments. Rather, it
merely created a security interest in favor of the Bank. According to
the Government, the 1986 Agreement indicates that the parties intended
that there be an assignment of a security interest and not an ownership
interest because (1) it provides that the annuity policy was deposited
with the Bank as "collateral security" for the Commercial
Secured Note and (2) it does not provide that the annuity policy would
become the absolute property of the Bank.
In response to
the Government's arguments, the Bank argues that the parties' intent
when the 1980 Assignment was executed and delivered to NYLIC is
controlling here and that the parties' intent was to give the Bank the
right to receive all future annuity payments. The Bank maintains that
the clear language of the 1980 Assignment reveals that Poling
transferred his entire right, title and interest in the annuity payments
in order to satisfy his financial obligations to the Bank. The Bank also
argues that there is nothing in the 1986 Agreement which created or
referred to a security interest, and there is nothing which changed
Poling's previous assignment of his entire interest into a security
In support of
its argument that the 1980 Assignment resulted in the absolute
assignment of Poling's interest in the annuity payments, the Bank relies
upon the Ninth Circuit's reasoning in Broadcast Music, Inc. v.
Hirsch, 104 F.3d 1163 (9th Cir. 1997), in which the court addressed
the issue of whether a federal tax lien took priority over prior
unrecorded assignments of a taxpayer's rights to receive royalty income
from the performance of a copyrighted work.
Ronald Miller was a songwriter to whom Broadcast Music, Inc.
("BMI") paid royalties derived from his compositions. To
satisfy debts Miller owed two creditors, he executed assignments to them
of future royalties and directed BMI to pay the creditors directly.
Before the debts were satisfied, the IRS assessed deficiencies against
Miller and recorded notices of tax liens against his royalty income. The
IRS served BMI with notices of levy, and BMI filed an interpleader
action to resolve the conflicting claims to Miller's royalty income.
that Miller's assignment of future royalties to the creditors was not
subject to the recording rules of the Copyright Act, 17 U.S.C. §101, et
seq., the court examined whether, under New York law, the
instruments executed by Miller in favor of the creditors
"transferred all of his rights to the future royalties he purported
to assign (i.e., whether Miller had anything left to which the
liens could attach)." Hirsch, 104 F.3d at 1165. In support
of its argument that Miller did not transfer all of his rights, the
government maintained that an agreement to pay a debt out of a
designated fund does not operate as a legal or equitable assignment
because the assignor retains control over the subject matter.
rejected the government's argument because Miller did not control the
royalty payments after executing the assignments and, in those
assignments, he expressly waived his right to terminate his agreement
with BMI until his loans were repaid. Thus, although Miller retained a
residual interest in the excess royalty income over the amounts
assigned, the court found that the assignments constituted irrevocable
instructions to pay the specified sums directly to the creditors as
royalties came into BMI's hands and that Miller had no control
whatsoever over the amounts he had assigned.
also argued that the assignments merely transferred security interests
that were never perfected. After noting that it must look to the
substance of the transaction rather than its form, the court concluded
that Miller made complete assignments of the monies specified in the
assignment documents, leaving him without a current vested interest.
at 1167-68. Because the assignments were complete under
law, they transferred Miller's interests to the creditors before the
federal tax liens could attach.
at 1168. Therefore, Miller's creditors, and not the government, had a
right to the copyright royalties.
argues that the facts of Hirsch parallel the facts of this case
in four critical aspects. First, in Hirsch, Miller did not
control the royalty payments after executing the assignments. Here,
except for a brief period when NYLIC suspended the payments, the Bank
has been the sole recipient of the annuity payments for 19 years.
Second, in Hirsch, Miller expressly waived his right to terminate
the assignment until his loans were repaid. Referring to the 1986
Agreement, the Bank maintains that Poling has also agreed to assign his
interest in the annuity payments until his loan is fully satisfied.
Third, although Miller possessed a residual interest in the funds
remaining after his loans were repaid, he retained no control whatsoever
over the amounts necessary to repay his loans. Again referring to the
1986 Agreement, the Bank maintains that although Poling may have a
residual interest in the annuity payments after his loan is fully
satisfied, he does not have a current vested interest in the annuity
payments. Finally, the Bank maintains that Poling, like Miller,
possesses no authority to collect the annuity payments or to revoke the
maintains that the facts of Hirsch do not apply to the facts of
this case. The Government argues that, unlike the assignments executed
by Miller, Poling did not expressly waive his right to terminate his
agreement with NYLIC until his debt to the Bank was repaid. The 1980
Assignment was signed by Poling only as a unilateral statement of
intention, and there is no indication that Poling could not revoke the
assignment at any time.
further argues that the parties' intent when the 1980 Assignment was
executed and delivered to NYLIC must be examined. Poling has testified
that the purpose of the 1980 Assignment was to secure a commercial line
of credit and that he did not intend to assign his entire interest in
the annuity payments to the Bank. The Bank, however, has not offered any
evidence showing that its intention was to take an ownership, rather
than a security, interest in the annuity payments.
also directs the Court's attention to In re Willowood East Apartments
of Indianapolis II, Ltd., 114 B.R. 138 (Bankr. S.D.
1990), In re Nat'l Equipment & Mold Corp., 64 B.R. 239
(Bankr. N.D. Ohio 1986), and United States v. Talco Contractors, Inc.
[99-1 USTC ¶50,577], 93-CV-6389T (W.D.N.Y. May 7, 1999). In Willowood,
the debtor's obligations under a promissory note were secured by a
mortgage and an assignment of rents. The assignment of rents provided,
in pertinent part:
As part of the
consideration for the indebtedness evidenced by the Note, Borrower
hereby absolutely and unconditionally assigns and transfers to Lender
all the rents and revenues, including all security deposits, of the
hereby authorizes Lender or Lender's agents to collect the aforesaid
rents and revenues and hereby directs each tenant of the Project to pay
such rents to Lender or Lender's agents . . . it being intended by
Borrower and Lender that this assignment of rents constitutes an
absolute assignment and not an assignment for additional security only.
assignment of rents shall terminate at such time as this Instrument
ceases to secure indebtedness held by Lender.
114 B.R. at 140-41. Applying Indiana's law on assignments, the court
held that the lender's interest in the rentals was not an absolute
transfer of ownership because (1) the right to collect the rents
reverted back to the debtor once the debtor's financial obligations
under the note were repaid and (2) the parties treated the transaction
as a loan with a grant of a security interest.
at 141-42. The Government contends that the holding in Willowood
applies here because it contends that the Bank would not be entitled to
continue receiving the annuity payments if Poling decided to pay off his
Equipment & Mold Corporation, the debtor assigned to the bank an
interest in its accounts receivable in exchange for a loan in the amount
of $250,000. The agreement between the parties provided in relevant
undersigned agrees, until payment of all indebtedness and of liability
of every kind of the undersigned to the Bank . . . to make collection of
the said Receivable as agent for the Bank, and remit the proceeds
thereof forthwith to the Bank.
of all collections of the Receivables shall be the absolute property of
the Bank, and they shall not be deposited or mingled with any other
moneys or funds of the undersigned.
B.R. at 241. After the debtor filed a Chapter 11 bankruptcy petition,
the issue arose as to whether the agreement transferred ownership of the
accounts receivable or merely created a security interest. Although the
agreement did not use language which is customarily employed in a
conveyance of title, the court found that the parties intended for the
debtor to convey ownership of its accounts receivable to the bank.
at 245. The Government contends that National Equipment & Mold
Corporation applies to the instant dispute because unlike the
agreement between the debtor and the bank, the 1986 Agreement does not
provide that the annuity policy would become the "absolute
property" of the Bank. Rather, it provides that the Bank would have
to purchase the annuity policy at a sale in order to become the owner.
a tax dispute between the government and Talco was settled, and the
court retained jurisdiction to enforce the terms of the settlement
agreement. The agreement provided that Talco would pay the government
the first $400,000 of the proceeds of a condemnation suit Talco had
brought against the State of New York, and it would pay the government
an additional 50% of any damages award after payment of reasonable
attorney fees and litigation expenses.
entering into the agreement with the government, Talco had made an
assignment of the proceeds of the suit to Chase Manhattan Bank in the
amount of $124,000. Kendamar Corporation ultimately became the holder of
this assignment, which provided in pertinent part: "[f] or value
received, . . . Talco . . . hereby grants a security interest in and
assigns, transfers and sets over unto Chase . . . all of Assignor's
right, title and interest in a certain claim of the Assignor . . . and
all proceeds of the foregoing." Talco, slip op. at 4-5. The
assignment also provided that it was "made by Assignor as
collateral and security for any and all liabilities of Assignor to
Bank" and that "[i]f the Condemnation Claim exceed[ed] the
Liabilities, Bank [would] refund the difference to the Assignor."
at 5. A letter from a Chase vice president indicated that Talco assigned
its right, title and interest in the proceeds as "collateral
security" for its obligations to Chase.
law, the court held that it was clear that the parties' intent was that
the assignment was for collateral/security purposes and not an outright
at 6. Because Chase did not properly perfect its security interest, the
court ruled that Kendamar, as successor in interest to Chase, held an
unperfected security interest and that the government's lien had
priority over Kendamar's interest.
contends that Talco applies to the facts of this case because the
only document reflecting the agreement between the Bank and Poling (the
1986 Agreement) unambiguously shows the parties' intent to be that the
Bank was to have a security interest in the annuity payments. The Bank
contends that the facts of Talco are not at all similar to those
present in this case because no portion of the proceeds were ever paid
out to Chase and it is unclear whether Talco ever directed the proceeds
to be paid directly to Chase. Moreover, the Bank maintains that the Talco
decision is devoid of reference to any case law and contains no
substantive discussion of
's law on assignments.
have agreed that an "assignment" is a transfer of property
from one person to another which, unless qualified in some way,
transfers a person's entire interest in the assigned property with no
retained control, authority or power over the assigned property. Article
9 of the UCC, which has been adopted both in Ohio and in New York,
applies "[t]o any transaction, regardless of its form, which is
intended to create a security interest in personal property or fixtures
including goods, documents, instruments, general intangibles, chattel
paper, or accounts." Ohio Rev. Code §1309.02(A)(1). Pursuant to
Article 9, a "security interest" is defined as "an
interest in personal property or fixtures that secures payment or
performance of an obligation." Ohio Rev. Code §1301.01(KK)(1).
"It is a
long-standing rule that 'courts will determine the true nature of a
security transaction, and will not be prevented from exercising their
function of judicial review by the form of words the parties may have
chosen.' " In re Hurricane Elkhorn Coal Corp., 19 B.R. 609,
616 (Bankr. W.D. Ky. 1982) (quoting 1 Gilmore, Security Interests in
Personal Property §2.6, at 47 (1965)); see also Hirsch, 104 F.3d
at 1167 (court must look to substance of transaction rather than form of
contract); Columbus Motor Car Co. v. Textile-Tech, Inc., 428
N.E.2d 882, 885 (Franklin Cty. Mun.
1981) (same). The "absolute" nature of an assignment does not
preclude its service as a security agreement. See In re Navigation
Technology Corp., 880 F.2d 1491, 1493 (1st Cir. 1989).
whether the 1980 Assignment and/or 1986 Agreement resulted in an
absolute assignment of Poling's interest in the annuity payments or
merely created a security interest in favor of the Bank, the Court must
examine the intent of the parties. See Goldstein v.
Nat'l Bank of
, 89 B.R. 274, 276 (D.D.C. 1988); Nat'l
Equipment & Mold Corp., 64 B.R. at 245. This intent is to be
discerned from the contents of the documents at issue, the testimony of
the contracting parties, the circumstances surrounding the transaction
and the parties' conduct, practices, objectives, business activities and
relationships. See Goldstein, 89 B.R. at 276; In re Tyson
Metal Products, Inc., 117 B.R. 181, 184 (Bankr. W.D. Pa. 1990); In
re Evergreen Valley Resort, Inc., 23 B.R. 659, 661 (Bankr. D.
several factors which indicate when an assignment operates to create a
security interest instead of an absolute assignment: (1) the assignment
is delivered simultaneously with the loan, see In re Joseph Kanner
Hat Co., 482 F.2d 937, 940 (2d Cir. 1973); Hurricane Elkhorn,
19 B.R. at 616-17; (2) the payments received are used to reduce the
outstanding balance, id.; (3) any payments received pursuant to
the assignment and exceeding the loan are returned to the assignor, id.;
(4) the assignee retains a right to a deficiency on the debt if the
assignment does not provide sufficient funds to satisfy the amount of
debt, see Major's Furniture Mart, Inc. v. Castle Credit Corp.,
602 F.2d 538, 545 (3d Cir. 1979); (5) the assignee acknowledges that his
rights in the assigned property would be extinguished if the debt owed
were to be paid through some other source, see Joseph Kanner, 482
F.2d at 940; and (6) the bank treats the assignment as a method of
payment of the loan.
Assignments have been found to be absolute transfers where the
assignment operates to discharge the underlying debt.
Resort, 23 B.R. at 661-62.
factors here, the Court concludes that whether Poling's assignment was
absolute or intended as security presents a triable issue of fact which
cannot be disposed of by summary judgment. See In the Matter of Candy
Lane Corp. v. Leff, 38 B.R. 571, 577 (Bankr. S.D.N.Y. 1984); Major's
Furniture Mart, 602 F.2d at 543. The language used in the 1980
Assignment supports a finding that Poling's assignment was absolute and
not one for security because it states that he "assign[ed],
transfer[red] and set over" to the Bank "all [his] right,
title and interest in and to any monthly income payments" due under
the NYLIC plan. The following facts, however, weigh in favor of a
finding that Poling assigned merely a security interest to the Bank: (1)
the 1980 Assignment was delivered in exchange for a commercial line of
credit for which Poling undertook an obligation to repay; (2) Poling
testified that the purpose of the 1980 Assignment was to secure the line
of credit and that he did not intend to assign his entire interest in
the annuity payments to the Bank; and (3) the payments received were
applied to reduce the outstanding balance of the line of credit. It is
unclear whether Poling could have or did make payments on the line of
credit through other sources, whether the Bank's rights in the annuity
payments would have been extinguished prior to the 1986 Agreement if
Poling had paid his debt through some other source, or whether Poling
could have revoked the assignment and collected the annuity payments
himself. The Court also notes that there is some uncertainty as to how
the transaction between Poling and the Bank was structured because NYLIC
prepared the 1980 Assignment and the original note or written agreement
between Poling and the Bank evidencing the establishment of the line of
credit has apparently been lost.
The fact that
the 1986 Agreement refers to the annuity payments as "collateral
security" for a loan supports a finding that Poling assigned merely
a security interest to the Bank. Moreover, the fact that the 1986
Agreement did not operate to discharge the amount owed by Poling, i.e.,
the Bank retained a right to a deficiency on the loan if the annuity
payments did not provide sufficient funds to satisfy the amount of the
May 8, 1991
, further supports such a finding. On the other hand, the following
facts weigh in favor of a finding that Poling's assignment was absolute
and not one for security: (1) the annuity payments have been sent
directly to the Bank since 1981; (2) despite the 1986 Agreement's
reference to the annuity payments as "collateral security", no
event of default triggered the Bank's receipt of the annuity payments;
(3) the loan payment schedule matches the amount of the annuity
payments; and (4) there is no evidence that Poling has made any payments
on the loan through any other source besides the annuity. The Court also
notes that the 1991 Agreement makes clear that the assignment terminates
once the loan is paid in full, a fact which could support either a
finding of an absolute assignment or a security interest. 3
Based upon the foregoing, the Court concludes that a finder of fact
could conclude either that the assignment was absolute or that it
created a security interest in favor of the Bank.
Whether the Bank is the "holder of a security interest"
In addition to
arguing that Poling assigned all of his rights to the annuity payments,
the Bank argues that even if Poling transferred only a security interest
in the annuity payments, it is entitled to the protections of 26 U.S.C.
§6323(a) because it is the "holder of a security interest".
Section 6323 of the Internal Revenue Code provides that liens arising
under §6321 are not valid as against "any purchaser, holder of a
security interest, mechanic's lienor, or judgment lien creditor until
notice thereof which meets the requirements of subsection (f) has been
filed[.]" 26 U.S.C. §6323(a).
argues that the Bank is not entitled to this priority because the Bank's
interest in the annuity payments has never been perfected as required by
§6323(h)(1), which provides that a security interest must have, among
other requirements, "become protected under local law against a
subsequent judgment lien arising out of an unsecured obligation."
26 U.S.C. §6323(h)(1)(A). According to the Government, to perfect its
interest under Ohio law, the Bank needed to file a financing statement
pursuant to Ohio Rev. Code §1309.21 because an annuity contract is a
"general intangible" under Article 9. 4
Because the Bank never filed a financing statement, it never perfected
its security interest in the annuity payments under
law; therefore, it is not entitled to the protections of §6323.
The Bank does
not contend that it filed a financing statement. Rather, the Bank argues
that it was not required to file a financing statement to meet the
requirements of 26 U.S.C. §6323(h)(1)(A). According to the Bank, its
security interest is protected against the claims of a judgment lien
creditor of Poling by the provisions of Ohio Rev. Code §3911.10. The
Bank maintains that Ohio Rev. Code §3911.10, which requires no filing
of a financing statement, excepts the annuity payments from the claims
of Poling's creditors by providing that:
All . . .
annuities upon the life of any person, or any interest therein, which
may hereafter mature and which have been taken out for the benefit of,
or made payable by change of beneficiary, transfer, or assignment to, .
. . any creditor . . . shall be held, together with the proceeds or
avails of such contracts, subject to a change of beneficiary if desired,
free from all claims of the creditors of such insured person or
Rev. Code §3911.10. Because its interest in the annuity payments is
protected against the claims of a judgment lien creditor by §3911.10,
the Bank argues that its interest qualifies as a security interest under
26 U.S.C. §6323(h)(1). Therefore, the Bank contends that it is entitled
to the protections of §6323(a) because it is the "holder of a
alternative, the Bank argues that it is the "holder of a security
interest" because the filing requirements of Article 9 do not apply
to a person's transfer of his rights to receive annuity payments.
Without citing any case law, the Bank argues that Ohio Rev. Code §§1309.04(E)
and (F) exclude the assignment from the provisions of Article 9. Ohio
Rev. Code §1309.04(E) excludes "a transfer of a single account to
an assignee in whole or partial satisfaction of a pre-existing
indebtedness." Ohio Rev. Code §1309.04(F) excludes "a
transfer of an interest or claim in or under any policy of
contends that the Bank's arguments are without merit. With regard to the
Bank's reliance on §3911.10, the Government maintains that "[i]t
is black letter law that state-law limitations on the ability of general
creditors to reach certain types of property of a taxpayer have no
effect on the attachment of federal tax liens." (Government's Br.
in Opp'n, doc. 21, p. 4) (citing Bank One Trust Co., N.A. v. United
States, 80 F.3d 173, 175 (6th Cir. 1996)). Therefore, any protection
may give an assignment for security against state law creditors is
irrelevant where a federal tax lien is involved. With regard to the
Bank's reliance on §§1309.04(E) and (F), the Government contends that
the annuity payments at issue are not properly defined as either an
"account" or a "policy of insurance."
that the Bank holds a security interest in the annuity payments, the
Court concludes that Ohio Rev. Code §§1309.04(E) and (F) do not
exclude the Bank from the provisions of Article 9. First, §1309.04(E)
does not apply because the right to receive the annuity payments is not
an account, which is defined as "any right to payment for goods
sold or leased or for services rendered which is not evidenced by an
instrument or chattel paper, whether or not it has been earned by
performance." See Ohio Rev. Code §1309.01(A)(15) and
Commentary (stating that an account is the "ordinary commercial
account receivable" and that in some cases a right to receive money
"crystallizes not into an account but into a general intangible,
for it is a right to payment of money that is not for goods sold or
leased or for services rendered"); see also In re Hayes, 168
B.R. at 727 n. 36 (finding that the right to receive annuity payments
was not an account because an account is defined in terms of "good
sold or leased or for services rendered").
does not apply because the NYLIC plan is not a policy of insurance.
"An annuity contract is not necessarily a life insurance policy
simply because a life insurance company issued it." In re
Vinzant, 108 B.R. 752, 757 (Bankr. D.
1989). The Supreme Court of Ohio has stated:
annuity contract and the ordinary contract of life insurance are
different in essential respects. The former is distinguishable from the
latter in that a life insurance contract constitutes an agreement to pay
a specified sum of money on the death of the insured or on his reaching
a certain age, whereas an annuity contract is one in which there is an
agreement to pay a certain sum to the annuitant annually during life or
for a given number of years.
149 Ohio St.
57, 59 (1948). Because the NYLIC plan is an agreement to pay a certain
sum to Poling during his life rather than an agreement to pay a
specified sum of money upon his death, the Court finds that the NYLIC
plan is not a policy of insurance.
further concludes that, assuming arguendo that the Bank holds a security
interest in the annuity payments, the Bank's interest in the annuity
payments is not protected against the claims of a judgment lien creditor
by Ohio Rev. Code §3911.10; therefore, it is not entitled to the
protections of 26 U.S.C. §6323(a) because it is not the "holder of
a security interest." Because the annuity was not taken out for the
Bank's benefit, the Bank must show that the annuity has been "made
payable by change of beneficiary, transfer, or assignment to" it.
Although there is no Ohio case law interpreting this phrase, a plain
reading of the statute and the fact that Ohio's version of Article 9
does not incorporate or refer to §3911.10 leads the Court to the
conclusion that the phrase refers to an absolute assignment, and not an
assignment of a security interest. Because the issue of whether Poling's
assignment was absolute or intended as security is a triable issue of
fact, the Court cannot find that the Bank's interest in the annuity
payments is protected against the claims of a judgment lien creditor of
Poling by the provisions of Ohio Rev. Code §3911.10.
that the Bank holds a security interest in the annuity payments, the
Court concludes that the Bank is not a "holder of a security
interest" as set forth in 26 U.S.C. §§6323(a) and (h) because:
(1) it did not perfect its security interest by filing a financing
statement as required by Ohio Rev. Code §1309.21; (2) Ohio Rev. Code
§§1309.04(E) and (F) do not exclude the Bank from the provisions of
Article 9; and (3) the Bank's interest in the annuity payments is not
protected against the claims of a judgment lien creditor by Ohio Rev.
For the above
stated reasons, the Court DENIES the Government's motion for
summary judgment with respect to its claims against the Bank (doc. 18)
and DENIES the Bank's motion for summary judgment (doc. 20).
The predecessor in interest of defendant Fifth Third Bank is First
National Bank of
. Fifth Third Bank and First National Bank will be collectively referred
to as "the Bank."
The monthly annuity payment was initially $1,574.40 per month, but since
July of 1996, it has been reduced to $1,479.90 by NYLIC to permit income
The courts in Joseph Kanner and Hurricane Elkhorn viewed
this fact as supporting the conclusion that the parties intended a
security interest. The court in Hirsch, however, found that an
absolute assignment was intended even though the debtor retained a
residual interest in the excess royalty income over the amounts
assigned. The court reasoned that an absolute assignment was intended
because the debtor had no control whatsoever over the amounts he had
The Government relies upon In the Matter of Newman, 993 F.2d 90,
95 (5th Cir. 1993) (finding that an annuity contract is a general
intangible) and In re Hayes, 168 B.R. 717, 727 n. 36 (Bankr. D.
1994) (noting that debtor's right to receive annuity payments logically
falls within the class of general intangibles) for this proposition of
¶50,569] In re Construction Alternatives, Inc., Debtor. Indiana
Lumbermens Mutual Ins. Co., Inc., Plaintiff-Appellant v. Construction
Alternatives, Inc., United States of America, Defendants-Appellees
Court of Appeals, 6th Circuit, 92-3961,
, 2 F3d 670. Affirming an unreported District Court decision
[Code Sec. 6323 ]
Priority of tax liens: Surety's interest: State law.--The IRS,
and not a surety, had a priority lien with regard to the proceeds of a
construction contract that were placed in a fund pursuant to the
bankruptcy of a construction company. The company earned the right to
receive the payment that comprised the fund because it had completed the
work on its project at the time that it petitioned for bankruptcy. The
surety's claim to the proceeds was rejected because no express trust had
been created in the suretyship agreement and no constructive trust arose
by operation of law or fact. There is no state (
) law that creates a constructive trust in favor of unpaid suppliers or
contractors. Further, the General Agreement of Indemnity did not create
an express trust because it did not require the taxpayer to keep any
portion of its payments as a separate trust fund. Therefore, the
taxpayer was vested with both the legal and equitable interests in the
fund to which tax liens could attach. The tax liens took priority over
the equitable lien claimed by the surety because the equitable lien was
not perfected at the time the tax liens were filed. Affirming unreported
and JONES, Circuit Judges; and BROWN, Senior Circuit Judge.
Indiana Lumbermens Mutual Insurance Company ("Lumbermens")
appeals the judgment of the district court affirming the decision of the
bankruptcy court. Lumbermens contends that the bankruptcy court and
district court erred in concluding that the Internal Revenue Service
("IRS") had a lien and that this lien gave it priority to the
proceeds of a construction contract that the debtor-taxpayer,
Construction Alternatives, Inc. ("CA"), received from a
project on which Lumbermens paid as
's surety. For the reasons stated below, we AFFIRM the district
May 16, 1990
, the debtor, CA, an
corporation, entered into a contract with the Forest Hills,
") to remove asbestos from four of its schools. To obtain the
contract, CA was required, under
law, to supply a surety bond to assure performance of its obligations
under the contract and to assure that it would pay the subcontractors,
suppliers, and laborers that provided material and labor to the project.
Lumbermens had issued a surety bond on
April 6, 1990
, and the bond was submitted to the
along with CA's bid.
tax assessments made against CA for unpaid taxes, the IRS filed a notice
of tax lien against CA on
May 14, 1990
in the amount of $13,146.61, and, on
August 20, 1990
, the IRS filed a second notice of tax lien against CA for the
additional amount of $30,194.90. 1
The next day,
August 21, 1990
, CA filed a petition for relief under Chapter 11 of the Bankruptcy
On August 21,
CA had completed all of its work on the asbestos removal project and was
due to receive its final progress payment; however, CA had not paid all
of its bills arising from the project. Pursuant to its obligation on the
surety bond, Lumbermens paid at least two of the unpaid subcontractors
or suppliers on the project, but the record does not reflect when or how
much it paid them. 2
At the time
that CA filed its bankruptcy petition, CA and the
had not yet agreed on the final amount due on the contract, although, as
stated, the work was completed. On
September 4, 1990
, however, two weeks after CA filed its bankruptcy petition, CA and the
agreed that $39,705 was the correct amount due. On
September 6, 1990
, CA filed a turnover complaint in bankruptcy court, seeking to have the
$39,705 turned over to CA as the debtor-in-possession, and to have the
validity and extent of any claims to the funds adjudicated. The
bankruptcy court entered a turnover order on
September 27, 1990
, and the
paid over the $39,705 to a cash collateral account established for the
purpose of holding this final payment on the contract (referred to
hereinafter as the "Fund"). The order provided that any party
that wished to assert a claim to the Fund would be required to file an
answer or the claim would be lost. Lumbermens and the IRS then filed
filed a motion for partial summary judgment, alleging that no claimant
to the Fund had a lien superior to the IRS' lien, that the amounts owed
to the IRS exceeded the balance of the Fund, and, therefore, the IRS was
entitled to the whole Fund. Lumbermens also filed a motion for partial
summary judgment, asserting that CA holds the Fund in trust for
Lumbermens' benefit; therefore, it argued, CA only has a legal interest
in the Fund while Lumbermens has the equitable interest; thus, it
contended, its equitable interest had never become part of the
bankruptcy estate and had never been subject to the federal tax liens.
Lumbermens also argued that it has an equitable lien on the Fund,
through subrogation to the rights of the
and the suppliers and subcontractors that it paid, that is superior to
the IRS' lien. Last, Lumbermens contended that it has a lien superior to
any that the IRS might have pursuant to 26 U.S.C. §6323(c)
September 30, 1991
, the bankruptcy court entered an order granting CA's motion for partial
summary judgment and denying Lumbermens' motion. The court rejected
Lumbermens' contention that CA held the Fund in trust for Lumbermens,
reasoning that no express trust had been created in the suretyship
agreement and that no constructive trust arose by operation of law or
fact; therefore, it held, the Fund was property of CA's bankruptcy
estate to which the tax lien had attached. It also held that Lumbermens
had no equitable lien or interest in the Fund. The district court
affirmed the bankruptcy court, and Lumbermens then appealed to this
court, it is the position of the IRS that it has a lien on the Fund and
that Lumbermens has no interest in the Fund. It is the position of
Lumbermens that it has an equitable lien or beneficial interest in the
Fund and that the IRS has no lien. It is Lumbermens' alternative
position that, even if the IRS has a lien, Lumbermens' lien or interest
has priority over the lien of the IRS.
reviews de novo the decision of the district court reviewing a
grant of summary judgment by the bankruptcy court. Stephens Indus.,
Inc. v. McClung, 789 F.2d 386, 391 (6th Cir. 1988).
first contends on appeal that the bankruptcy court erred in granting
summary judgment to CA on the theory that the IRS has a valid lien
because, it contends, CA has no interest in the Fund to which a tax lien
could attach. This is so, Lumbermens contends, because CA had not, when
it filed its Chapter 11 petition, satisfied all of the requirements of
the contract inasmuch as it had not complied with certain provisions of
Ohio law governing contracts with the state and with certain provisions
in the contract between CA and the School District requiring CA to pay
its subcontractors and materials suppliers. It also contends that,
though CA had completed the work when it filed the Chapter 11 petition,
CA has no interest in the Fund because CA and the
had not agreed on the final amount due on the contract at the time the
bankruptcy petition was filed. Thus, Lumbermens argues, since CA did not
have the right, at the time CA filed its bankruptcy petition, to receive
the final payment, CA has no property interest in the final payment to
which a tax lien could have attached.
The issue we
must initially decide, therefore, is whether CA has an interest in the
Fund to which a tax lien could attach. A tax lien arises "upon
assessment and attaches to 'all property and rights to property, whether
real or personal, belonging to [the taxpayer]' including property which
the taxpayer subsequently acquires." United States v. Safeco
Ins. Co. of Am. [89-1
USTC ¶9227 ], 870 F.2d 338, 340 (6th Cir. 1989) (quoting 26 U.S.C. §6321
(1988)) (alteration in original). State law determines what rights a
taxpayer possesses in property; however, federal law determines whether
those state-created rights are "property" or "rights to
property" under §6321
It is settled that a tax lien can attach to "a taxpayer's interest
in property regardless of whether that interest is less than full
ownership or is only one among several claims of ownership."
at 341. "Unresolved questions concerning the ultimate ownership of
the property will not prevent provisional attachment of a federal tax
In the case at
bar, it is undisputed that the work on the project was complete at the
time that CA petitioned for bankruptcy. There were several bookkeeping
istrative matters, pursuant to state law and CA's contract with the
School District, to be completed and several subcontractors to be paid,
but CA owed nothing to the School District, 3
and therefore, no payments to the School District were required or other
expenses incurred to perfect CA's claim to the final progress payment.
Thus, we conclude that CA had earned the right to receive its final
progress payment, and, under the principles stated above, we hold that
the government has two valid tax liens on the Fund. See J.A. Wynne
Co. v. R.D. Phillips Constr. Co. [81-1
USTC ¶9305 ], 641 F.2d 205, 208-09 (5th Cir. 1981). The question to
which we now turn is whether Lumbermens also has a lien on the Fund, and
if so, whether that lien is superior to the tax liens.
contends that as a surety obligated to pay any unpaid contractors,
laborers, or suppliers on the project, it has an equitable lien on the
Fund, to the extent of its losses, through subrogation to the rights of
the suppliers, laborers, and contractors that it paid in CA's stead, and
also through subrogation to the rights of the
. Citing Western Casualty & Surety Co. v Brooks, 362 F.2d 486
(4th Cir. 1966), a Fourth Circuit case applying
law, it contends that its equitable lien relates back to the date the
surety bond was issued.
The nature of
the surety's interest is ascertained by reference to state law. Western
Casualty & Surety Co. v Brooks, 362 F.2d 486, 490 (4th Cir.
1966); see Safeco [89-1
USTC ¶9227 ], 870 F.2d at 341. All parties agree that
law controls on state law issues. Under Ohio law, a surety that pays
amounts owed to a subcontractor, laborer, or supplier is subrogated to
the rights of those it has paid and to the rights of those persons whose
obligations the surety has discharged, i.e., the owner and the
ex rel. Star Supply v.
, 528 F. Supp. 955, 959 (S.D.
1981). A surety's rights, however, are no greater than the rights of the
party to whom it is subrogated.
v. Munsey Trust Co., 332
234, 241-42 (1947); Miami Conservancy Dist. v. New Amsterdam Casualty
Co., 118 F.2d 604, 606 (6th Cir.), cert. denied, 314 U.S. 640
(1941); Western Casualty, 362 F.2d at 491 (applying
law). Therefore, in the instant case, Lumbermens has no greater rights
to the Fund than does the
, CA, or the unpaid subcontractors.
first contends that it has an equitable lien on the Fund by subrogation
to the rights of the
. It reasons that CA has not earned the right to receive the final
payment on its contract with the
because it failed to complete the contract by failing to pay the
subcontractors. Thus, Lumbermens contends, the School District had a
right to recoup enough of the final payment to pay the subcontractors
and, therefore, Lumbermens has the same right to recoup from the Fund
through subrogation to the rights of the
between CA and the School District required the School District to
disburse payments to CA under a "progress payments"
arrangement: every two weeks, CA could request another progress payment,
and the amount due would be determined by the value of the work that CA
had done during the two-week period. Further, the
had no right, under its contract with CA, to retain any portion of the
progress payments to CA pending CA's payments of subcontractors and
suppliers. Once the work and bookkeeping details were completed, the
final payment was due and was made, and, as we have previously noted,
had no right to retain the final progress payment. Thus, in short, the
School District has no claim to the Fund under the terms of its contract
with CA, and likewise, Lumbermens has no claim to the Fund through
subrogation to the rights of the
. Western Casualty, 362 F.2d at 492.
contends, however, that under the rule in Pearlman v. Reliance Ins.
Co., 371 U.S. 132 (1962), it has an equitable lien on the Fund that
is superior to the tax lien. We disagree. There, a contract between a
contractor and the government provided that a certain percentage of each
progress payment would be retained by the government to pay any unpaid
suppliers or subcontractors. The Supreme Court held that the surety had
an equitable lien on the retained funds through subrogation to the
rights of the government, the subcontractors that the surety had paid,
and the bankrupt contractor itself.
at 141. In the case at bar, however, the contract between CA and the
, as heretofore pointed out, provided for no such retained fund. The
Fund is simply the final progress payment on the contract and the
has no further rights in the payment because the contract was complete.
was nothing more than a stakeholder. Western Casualty, 362 F.2d
also contends that it has a claim to the Fund through subrogation to the
rights of the unpaid subcontractors, the two unpaid contractors whom it
paid. Again, we disagree. Under
law, when a subcontractor, laborer or supplier files a mechanics lien
against a state project and proper notice of the lien is given to the
state entity, such entity is then obligated to retain money from
payments to the general contractor in an escrow account in an amount
sufficient to satisfy the mechanics lien. Ohio Rev. Code Ann. §1311.28
ex rel. Star Supply v.
, 528 F. Supp. 955, 959 (S.D.
1981). But, if the unpaid supplier or contractor does not file a
mechanics lien, the governmental entity is not obligated or permitted to
retain money from the contractor, and the unpaid suppliers and
subcontractors have no rights to the progress payment. In the instant
case, none of the unpaid suppliers or subcontractors filed a mechanics
lien, so the School District was not required or permitted to retain any
money from the progress payments to satisfy obligations to unpaid
suppliers and subcontractors; thus, the
has no rights to the Fund to which Lumbermens can be subrogated.
, subcontractors and suppliers that do not file a mechanics lien have no
rights in the Fund.
at 959. In this priority contest against the IRS, an unsecured creditor
loses, and therefore, Lumbermens, which is subrogated to the rights of
or an unsecured supplier or subcontractor, must lose.
that Lumbermens does indeed have an equitable lien on the Fund through
subrogation, Lumbermens would still lose in a priority contest with the
IRS. As the Supreme Court has recently held, federal tax liens do not
"automatically have priority over all other liens"; rather,
they follow the "first in time, first in right rule"; however,
a state law lien is not first in time unless it is "perfected"
at the time the notice of the federal tax lien is filed. United
States ex rel. Internal Revenue Serv. v. McDermott [93-1
USTC ¶50,164 ], 113
1526, 1528 (1993). "Perfected" for purposes of the federal tax
lien statute means that the identity of the lienholder, the property
subject to the lien, and the amount of the lien are certain.
; United States v. Pioneer Am. Ins. Co. [63-2
USTC ¶9532 ], 374 U.S. 84 (1963).
In the case at
bar, the amount of Lumbermens' alleged equitable lien was not certain at
the time that the tax liens were filed because the amounts owed to the
unpaid persons on the project were not yet certain. Thus, the equitable
lien, if indeed it exists, was not "perfected" when the tax
liens were filed and, therefore, the tax liens take priority.
next contends that the tax liens did not attach to the Fund because, it
contends, CA holds the Fund as Lumbermens' trustee under the General
Agreement of Indemnity, which CA executed with Lumbermens as part of the
bonding undertaking; therefore, it contends, CA has no more than a legal
interest in the Fund, while Lumbermens holds the equitable interest. 4
Since CA has only a legal interest in the Fund, Lumbermens contends, the
tax lien only attached to the legal interest and the equitable interest
is not subject to the tax lien. Therefore, if the Fund were determined
to be subject to a trust, Lumbermens' equitable interest would not be
subject to the IRS' liens.
There are two
situations in which the Fund could be subject to a trust: 1) Ohio law
provided that a portion of the progress payments were subject to a
constructive trust for the benefit of unpaid suppliers and
subcontractors; or, 2) the suretyship agreement created an express trust
with the Fund as the trust corpus. There is no
law that creates a constructive trust in favor of unpaid suppliers or
contractors. The only case that Lumbermens cites in its favor is a Third
Circuit case, Universal Bonding Ins. Co. v. Gittens & Sprinkle
Enters., Inc., 960 F.2d 366 (3rd Cir. 1992). There, the Third
Circuit held that funds paid by the state to a bankrupt general
contractor were held in trust pursuant to a
statute and were not part of the bankruptcy estate. Since, however,
has no such statute, as the district court pointed out, Universal
Bonding does not apply to the facts of this case. We conclude that
no trust was created by operation of
contrary to Lumbermens' contention, we conclude that the General
Agreement of Indemnity does not create an express trust. To create an
express trust in
, there must be a manifestation of intent to create a trust, there must
be created a trust corpus, and there must be a fiduciary relationship
between the trustee and the beneficiary. Brown v. Concerned Citizens
for Sickle Cell Anemia, Inc., 382 N.E.2d 1155, 1158 (
1978). With respect to the creation of a trust, this court has stated,
It is a
well-settled principle of law in this and other jurisdictions that if
one person pays money to another it depends upon the manifested
intention of the parties whether a trust or a debt is created. If the
intention is that the money shall be kept or used as a separate fund for
the benefit of the payor, or a third person, a trust is created. If the
intention is that the person receiving the money shall have the
unrestricted use thereof, being liable to pay a similar amount whether
with or without interest to the payor or to a third person, a debt is
created. The intention of the parties will be ascertained by a
consideration of their words and conduct in light of surrounding
Ins. Co. v. Fifth Third Bank, 867
F.2d 330, 333 (6th Cir. 1989) (quoting Guardian Trust Co. v. Kirby,
199 N.E. 81, 83 (1935)). In this case, no provision of the General
Agreement of Indemnity required CA to keep any portion of the progress
payments as a separate trust fund, and the record does not indicate that
CA kept the progress payments in a separate account. Thus, since there
was no trust corpus, no trust was created. Accordingly, we conclude that
CA was vested with both the legal and equitable interests in the Fund to
which the tax liens could attach, and that Lumbermens was not vested
with an equitable interest by the General Agreement of Indemnity.
next contends that under the federal tax lien statute, sureties' liens
are given priority over tax liens, even if they are not yet
"perfected" at the time of tax lien filing. Title 26 U.S.C. §6323(c)
does indeed give priority to certain liens and security interests
that are inchoate when the tax lien is filed. Section
6323(c) provides that a tax lien is primed by a surety's
"security interest," even though the surety's "security
interest" came into existence after the tax lien was filed, under
the following circumstances: (1) the surety's "security
interest," as here, is an obligatory disbursement agreement such as
a suretyship agreement; (2) as here, the surety's interest is in
"qualified property" 5
covered by the terms of a written agreement entered into before the tax
lien filing; 6
and (3) the "security interest" would be protected under local
law against a judgment lien that arose at the same time as the tax lien.
26 U.S.C. §6323(c) (1988).
Lumbermens contends, relying on the General Agreement of Indemnity, that
under §6323(c) its
"security interest" is superior to IRS' tax liens.
conclude that the General Agreement of Indemnity does not create a
security interest. Subsection 6323(h) states that a "security
interest" exists if "the property is in existence and the
interest has become protected under local law against a subsequent
judgment lien creditor." 26 U.S.C. §6323(h)
(1988). Before Lumbermens' alleged "security interest" in
the Fund would take priority over a subsequently-arising judgment lien
under local law, Lumbermens would have been required to perfect its
"security interest" by filing a financing statement in the
appropriate office. Ohio Rev. Code Ann. §§1309.21, 1309.23 (
Supp. 1992). Lumbermens did not do so; thus, we conclude that Lumbermens
does not possess a "security interest" under §6323(c)
, and, therefore, the IRS has priority to the Fund.
of the district court is AFFIRMED.
The IRS also served a levy on the
August 9, 1990
In its motion for summary judgment in bankruptcy court, Lumbermens
appended to the motion copies of two documents furnished by Central
Acoustical Supply House and Grayling Industries, releasing it from any
further obligation to them. The amount that Lumbermens paid them,
however, is not specified.
As will be seen, the
had no right under its contract with CA to retain any portion of
progress payments to insure payment of unpaid suppliers and
The portion of the General Agreement of Indemnity upon which Lumbermens
expressly understood and declared that all monies due and to become due
under any contract or contracts covered by the Bonds are trust funds,
whether in the possession of the Indemnitor or Indemnitors [CA] or
otherwise, for the benefit of and for payment of all such obligations in
connection with any such contract or contracts for which the Surety
[Lumbermens] would be liable under any of said Bonds, which said trust
also inures to the benefit of the Surety for any liability or loss it
may have to sustain under any said Bonds, and this Agreement and
declaration shall also constitute notice of such trust.
J.A. at 39.
"Qualified property" includes "the proceeds of the
contract the performance of which was ensured" by the surety bond.
26 U.S.C. §6323(c)(4)(C)(i)
The General Agreement of Indemnity, which is part of the bonding
agreement between CA and the
Agreement shall constitute a Security Agreement to the Surety and also a
Financing Statement, both in accordance with the provisions of the
Uniform Commercial Code of every jurisdiction wherein such Code is in
effect and may be so used by the Surety without in any way abrogating,
restricting or limiting the rights of the Surety under this Agreement or
under law, or in equity.
Section 6323(c) provides in relevant part:
To the extent
provided in this subsection, even though notice of a lien imposed by section
6321 has been filed, such lien shall not be valid with respect to a
security interest which came into existence after tax lien filing but
(A) is in
qualified property covered by the terms of a written agreement entered
into before tax lien filing and constituting--
obligatory disbursement agreement, and
protected under local law against a judgment lien arising, as of the
time of tax lien filing, out of an unsecured obligation.
¶9565]The Paramount Finance Company, a corporation v. Cleveland's
Peppermint Lounge, Inc
of Ohio, County of Cuyahoga, Court of Common Pleas, No. 805,632, 12/6/65
[1954 Code Sec. 6323]
Lien for taxes: Ohio liquor license as property: Security interest in
liquor license under Uniform Commercial Code.--Under the Uniform
Commercial Code, as enacted in Ohio, a finance company's security
agreement and financing statements, properly recorded, perfected a
secured interest in a liquor license. Since the security agreement,
under the UCC, creates only a security interest and does not attempt to
transfer title, this interest is not contrary to
's policy of protecting the public against unapproved licensees.
Therefore, the government's lien did not have priority over this
security interest, which was recorded and perfected three years earlier.
1511 Nat'l City Bank Bldg.,
, for plaintiff. Herman H. David, 714 Engineers Bldg.,
, receiver and attorney.
ert J. Rotatori, Assistant
, for U. S.
distribution of proceeds arising from Receiver Herman H. David's sale of
the assets of the defendant
's Peppermint Lounge, Inc., the Receiver requests the Court to determine
priorities between creditors. A balance of approximately $12,000 will
remain after payment of state and county tax and utility delinquencies,
Receiver's fees and other
istrative expenses of the receivership. Vying for first right to be paid
from this residue of the sale proceeds are the plaintiff Paramount
Finance Company and the United States of America.
was appointed on the motion of Paramount Finance Company after it
obtained a cognovit judgment for $14,002.95 on
November 12, 1964
against the defendant Cleveland's Peppermint Lounge, Inc. To finance the
purchase of the Ozark Bar the defendant Cleveland's Peppermint Lounge
and its two owners, defendants
ert and Lillian Hvizdos on
August 1, 1962
borrowed $19,839.60 from Paramount Finance Company. Contemporaneously,
's Peppermint Lounge signed a security agreement which granted to
"a security interest in the property described below."
Included were "Ohio Department of Liquor Control D-5 No. 296903
including any transfer or substitution rights thereunder," and an
attached list of "Fixtures." Financing statements, recorded on
August 3, 1962
declared that it covered the following types (or items) of property:
and equipment at
5307 Lorain Ave.
and Ohio Department of Liquor Control License No. D-5 including any
transfer or substitution rights thereunder.
To support its
claim of priority
relies on its security agreement and financing statements.
United States of America
September 15, 1965
recorded a tax claim, thereafter serving the Receiver, which declared
's Peppermint Lounge, Inc. was indebted in the sum of $3,658.92 to the
for taxes due under the internal revenue laws.
urges it is entitled to full payment of its claim by reason of Section
6321 of the Internal Revenue Code of 1954 which states:
any person liable to pay any tax neglects or refuses to pay the same
after demand the amount . . . shall be a lien in favor of the United
States upon all property and rights to property, whether real or
personal, belonging to such person.
indicated in the offer of the purchaser, accepted by the Receiver with
court approval, the Receiver sold "the restaurant and night club
business of Peppermint Lounge located at 5307 Lorain Avenue, Cleveland,
Ohio, for the sum of Nineteen Thousand Dollars ($19,000) which amount
shall include the D-5 liquor permit now issued for the said premises,
together with all of the fixtures, chattels, equipment and other
amendments, the Uniform Commercial Code became effective in
July 1, 1962
. Under its provisions, and using its terminology,
's security interest in the named property attached when the security
agreement was executed (R. C. 1309.15); and this security interest
became perfected when the financial statements were filed and recorded
August 3, 1962
(R. C. 1309.22). The fixtures and equipment of
's Peppermint Lounge everyone agrees is subject to
's perfected security interest. The dispute concerns the D-5 liquor
's perfected security interest in the D-5 liquor permit valid and
prior personal property lien law Revised Code Chapter 1309 (Article 9 of
the Uniform Commercial Code) applies "to any transaction . . .
which is intended to create a security interest in personal property . .
. including . . . general intangibles." (R. C. 1309.02). General
intangibles mean "any personal property, including things in
action, other than goods, accounts, contract rights, chattel paper,
documents, and instruments." (R. C. 1309.01). Is a liquor permit a
It is true
that State, ex rel. Zugravu v. O'Brien, et al.,
130 Ohio St.
23, sweepingly declares in its second syllabus that:
to carry on the liquor business which are issued under the provisions of
the Liquor Control Act are mere licenses, revocable as therein provided,
and create no contract or property rights.
had sought to mandamus the Board of Liquor Control and its Director to
rescind the revocation of their tavern's liquor permits and to reinstate
the permits. Mandamus was refused. The opinion noted that "natural
and artificial persons may engage in the liquor traffic only to the
extent they are permitted to do so." The opinion further observes
that "such a permit is not a property right in the constitutional
sense and, if it may be considered in the nature of property at all, it
is limited in its scope by the same legislative act which gives it
constitutional sense the property right in a liquor permit is so limited
by the Liquor Controal Act that a liquor permit, if revoked, cannot on
that fact alone be reinstated by mandamus. Nevertheless "the same
legislative act which gives it existence", as it has been
istered since the Zugravu decision, recognizes a liquor permit to
be "in the nature of property."
if the Department of Liquor Control finds that "applicants and
proposed locations meet all requirements imposed by law and
regulation," permits may be renewed and transferred to successors
in interest at the same locations. Upon application and approval permits
may be transferred under Regulation 14 in eight different situations.
Section 5, which authorized the Receiver's sale of
's Peppermint Lounge business, including its D-5 permit, provides:
In the case of a receiver having been appointed for a permit holder, to
such receiver and thereafter from such receiver to a person, firm or
corporation, at the same location, when such transfer is in connection
with the bona fide sale of the business and assets of such permit
istered, the Liquor Control Act, though still treating a liquor permit
as a personal and revocable license, has firmly imparted the element of
transferability to each liquor permit. Moreover, it is required that the
permit be transferred "in connection with the bona fide sale of the
business and assets of such permit holder." Thus it is plainly
recognized that transfer of a permit is indispensable to the sale of the
business and assets of the permit holder. Liquor permits are in short
supply, and new permits are impossible to get in some areas. A permit,
transferred as part of the sale of the business and assets, inevitably
enhances the sale price of the business and assets. Hence for some time
now liquor permits have been merchantable and valuable. These are
essential attributes of property.
It is urged,
however, that because of Abraham v. Fioramonte,
158 Ohio St.
cannot obtain a secured interest in the D-5 permit of
's Peppermint Lounge. Reliance rests upon the case's fifth syllabus
which reflects this language of the opinion:
is our conclusion that permits to engage in the business of selling
intoxicating liquors in Ohio are not property such as can be validly
covered by a mortgage, that the mortgage given by Fioramonte did not
cover such permits held by him, and that liquor permits are not property
which can be reached in a proceeding under Section 11104, General Code.
In any event the permits held by him ceased to exist on or about
March 16, 1949
, when he surrendered them.
conclusions of Abraham need further inspection to determine Abraham's
the permit holder, Fioramonte, had surrendered his permit. Abraham, the
mortgagee, sought to foreclose the successor permits in the hands of the
purchaser, Wallace. The proceeds, received by Fioramonte from the sale
of the permits and the business, had been dissipated. Here, on the other
hand, the proceeds of the Receiver's sale of the D-5 permit, fixtures,
and business of
's Peppermint Lounge, is the fund being distributed.
the mortgage covered only the tangible assets. The mortgage did not
include the liquor permit. In the present case the security agreement
and the financing statements expressly named the D-5 permit as part of
the property secured.
significantly the United Commercial Code, adopted since the 1952 Abraham
decision, has outdated and outmoded Abraham's conclusion that
liquor permits "are not property such as can be validly covered by
Prior to the
UCC chattel mortgages operated to transfer defeasible title to the
personal property covered by the mortgage. Any attempt to mortgage a
liquor permit, as security for a loan, sought to transfer title to the
liquor permit. In so far as the mortgage tried to transfer a permit, it
did so without the consent of the Department of Liquor Control. In this
respect the mortgage necessarily was invalid and ineffective. This is
the teaching of Abraham, as this Court reads it.
adoption of UCC a security agreement, coupled with a recorded financing
statement, creates a security interest in, but does not attempt to
transfer, title to the secured property.
's secured interest in the D-5 permit therefore does not represent a
transfer of the D-5 permit. Hence
's secured interest in the D-5 permit did not violate the Liquor Control
Act's prohibition against transferring permits without the consent of
the Department of Liquor Control. Accordingly,
's policy to protect the public against unapproved liquor licensees does
's secured interest.
therefore determined that the D-5 permit of
's Peppermint Lounge constituted general intangible property under
Revised Code Chapter 1309 (Secured Transactions).
's security agreement and financing statements, having designated the
D-5 permit as covered property, perfected a secured interest in the D-5
permit. Under R. C. 1309.25 Paramount's security interest continues in
the identifiable proceeds of the sale of the Peppermint Lounge.
It is similar
reasoning which gives the
standing here to press its tax lien. Repeatedly it has been held that a
liquor permit, though a revocable personal license, has sufficient
qualities of property to be subject to a
tax lien, imposed under Section 6321 of the Internal Revenue Code, supra.
See Boss Co. Bd. of Commissioners of Atlantic City, 40 N. J. 379,
192 A. 2d 584; Midwest Beverage Co. v. Gates, 61 F. Supp. 688 at
691; Golden v. State, 133 Cal. App. 2d 640, 285 P. 2d 49.
In the present
's secured interest in the D-5 permit, senior in point of time to the
tax lien, is senior also as a matter of law.
the Court has been directed to the Continental Bank of Cleveland v.
Raja Enterprises, Inc., Wallace E. King, Receiver, Bel-Meadows, Inc.,
United States of America
, a Geauga County Common Pleas decision, affirmed by the Seventh
District Court of Appeals on
November 23, 1965
. Examination of the trial court's journal entry (printed in a brief of
) reveals that the Court found that:
Continental Bank is a preferred creditor on that portion of the funds in
the hands of the receiver, derived from the sale of the chattels covered
by its security agreement to the extent of their appraised value as
shown by the inventory and appraisement filed herein, excluding the
the Internal Revenue lien of the
, the lien of the Bureau of Unemployment Compensation and the lien of
the Department of Sales Tax of the State of
have priority on the balance of funds held by the receiver to the extent
of said liens.
From the brief
it appears that "the bank concedes that its chattel lien was
limited to the items of furniture and fixtures and other tangibles
listed in the filed inventory and appraisement." Evidently the bank
did not perfect a secured interest in any liquor permit of Raja
Enterprises, Inc. In contrast,
here perfected a secured interest in the D-5 permit. This vital point
differentiates the Continental Bank decision.
Moreover, the Continental
Bank decision upholds the
tax lien on the proceeds of a liquor permit as "a lien . . . upon
all property and rights to property, whether real or personal, belonging
to such person." The Continental Bank case is consistent
with the view that a D-5 permit is intangible personal property, subject
not only to a
tax lien but also to a secured interest as a general intangible under
Chapter 1309 of the Revised Code.
trial court decisions arrive at the result here reached. In Paramount
Finance Company v. S. & C. Tavern, Inc., et al., District Court
for the Northern District of Ohio, Eastern Division, Case #C64-450,
Chief Judge Connell concluded, in part, that:
fund produced by the sale of the S & C Tavern and the transfer of
its liquor license represents the value of the business of the S & C
Tavern, and as such is covered by the final clause of the plaintiff's
security agreement with the S & C Tavern, Inc.
Credit Company v. Ballachino's, Inc., et al., Case #802938 in this
Court, Judge Charles W. White determined, in part:
a matter of law that the term 'general intangible' as defined in Section
1309.01 embraces within such definition liquor permits issued by the
as between the state and the permit holder, a liquor license is a mere
revocable privilege vesting no property rights in the permit holder, yet
as between a permit holder and any other individual such license is
therefore concluded that:
liquor permits involved in this case constitute 'property' within the
term 'general intangible' to which plaintiff's secured interest attached
and was perfected.
with the foregoing opinion the following order shall be rendered:
Herman H. David's application for $3,000.00 in fees, justified and
supported in the record, is approved. Approved also is the Receiver's
report of sale assets. Fees and remaining court costs shall be paid from
the balance of $15,112.37 on hand.
secured claim of Industrial Credit Company amounting to $64.80 is found
to have priority under its security agreement. It shall be paid in full.
(3) The total
remaining fund (being less than $13,147.65, the present stated claim of
the Paramount Finance Company) shall be paid to the Paramount Finance
are noted to the
United States of America
and other creditors listed on Schedule C attached to the Receiver's
application, all of whose claims are found and concluded to be junior to
the claims and indebtedness of the Industrial Credit Company and the
Paramount Finance Company.